Many local providers of Stand Alone Solutions, such as SME solar solutions and solar home systems, have had their fare share of difficulty in gaining access to finance. Reportedly, this is due to the low investment appeal of these particularly small-sized projects to energy financiers, banks and other providers of capital. This article highlights “scale” as a major challenge hindering access to finance, while also proposing an innovative approach to overcoming this challenge.
Stand Alone Solutions, as some have said, hold the future for creating access to electric power for lives and livelihoods in rural Africa. As far as powering small communities, scattered, dispersed homes and agro-based settlements in rural and suburban Africa is concerned, it may be theorised that stand alone solutions make more socio-economic sense than mini-grids do. Generally speaking, decentralised electricity will create decentralised access to power. This will in turn generate decentralised pockets of economic and business opportunities, thus creating “decentralised” wealth across Africa.” Solar home systems are also easy to set up and deploy, and may actually face lower security risks compared to mini-grids.
Like mini-grids, Stand Alone Solutions (SASs) are also on the rise in Nigeria. This can be seen in the growing number of foreign and local Nigerian RE companies with specific focus on the Nigerian market for SME solar solutions and solar home systems. SASs are making so much impact that they can be seen, for example, crowning hundreds of rooftops in Nigerian business centres and residential areas in cities such as Lagos, Port Harcourt and Abuja. In fact, in sub-urban and rural areas lacking access to the national electricity grid, and where the costs of setting up a mini-grid is not worth the market size, SASs – particularly rooftop solar – are also beginning to gain popularity. As such, more people are having increased access to electricity for longer hours than they would; and productive ventures hitherto unserved are now able to meet some of their electricity needs. Thankfully, more small and micro home-based businesses are also being powered; and better lives and livelihoods are being supported not only in urban, but in peri-urban and rural Nigeria.
However the spread of SASs, this movement beyond metropolises, it must be noted, is still infinitesimally small. In recent conversations with local RE companies and entrepreneurs, the difficulty of sourcing financing for their businesses is often cited as the primary factor militating against further spread in the adoption and use of these systems beyond the gates of the country’s urban centres. The reality is that: with high capital and equipment costs, and stringent or sometimes, non-existent financing conditions, costs are passed on to the last mile consumer, and this is reflected in the prices of SAS gadgets and appliances. This makes the prices unattractive to many consumers, leading to poor patronage, low profits, and in turn unattractiveness to local financiers such as banks and equity providers. This is true whether in rent-to-own situations, pay-as-you-go (PAYG) or even outright purchases; to a greater or lesser extent.
Indeed, compared to mini-grids, SASs have gotten far less attention from local financial institutions. Nigerian-based commercial banks as well as international organisations have often found it more appealing to provide funding for relatively larger scale developments, such as mini-grids, or sometimes – to the dismay of decentralised power advocates – projects in the already quite saturated and inefficient on-grid space. In fact, the ever growing level of support for the emerging mini-grid regulation, and the high level of anticipation regarding the release of the regulation continue to affirm the preference for min-grids above SASs in various financial quarters.
Quoting one senior finance executive, the Head of Energy Sector Investments at a leading commercial bank in the country, who commented on the investment outlook for rooftop solar and other stand alone solutions in Nigeria, “the decision to or not to invest is really a matter of scale.”
In order to be able to access greater streams of finance, offgrid and decentralised renewable energy projects must be financially attractive, scale-wise. Often times, the situation is that, developers approach banks with projects such as SASs, at a scale too small to make financial sense to a bank operating in hundreds of millions of naira – a challenge sometimes compounded by the bank’s incompetence at de-risking RE projects. With this in mind, it becomes needful for developers to scale up the volume of projects for which they pursue funding.
Granted, in a nascent RE market like Nigeria’s, it can often be difficult for offgrid entrepreneurs to have an ever-present huge stream of prospective customers for SASs. This weak demand for RE solutions for homes and businesses is also exacerbated by competition from fellow developers, thus creating a fragmented pool of projects here and there for which different developers seek funding; usually from different commercial banks who often turn down such requests for finance, because only little returns are envisaged.
Truly, this situation of scale and project fragmentation exposes a gap in a young and growing market. But it also reveals an opportunity for collaboration. If they indeed yearn for greater access to finance for their projects, developers and providers of micro- and small-sized (home, office or SME) solutions will inevitably need to collaborate. Such collaboration would need to be done at a level higher than the market is currently witnessing, since a number of commercial bank have alluded to the problem of “scale”. Indeed, this calls for a culture of aggregation in which dozens of smaller projects, especially those scattered within the same neighborhood or local community are aggregated and consolidated into one bigger project in an investment pitch to a given local financier – rather than multiple, fragmented projects pitched separately to different banks.
At a time when the industry is seeing the formalisation and institutionalisation of the recently established Renewable Energy Association of Nigeria (REAN), there is no better moment to create an industry platform, on which several bit-sized projects – for which funding is required – may be registered by individual developers, and thereafter aggregated into a project of larger scale. Definitely, this approach/model will not be void of initial challenges. Clearly, it would call for innovative and prudent allocation and disbursement of funds received; a binding legal mechanism for ascertaining that project terms are followed by all concerned developers as dictated by, or agreed with fund providers; as well as a well thought-out framework for ensuring that debts and loans are paid back by all parties as at when due. With such aggregation platforms in place, competence on the part of project developers, convincing business cases, and providing that other conditions are met, access to loans and capital for standalone RE solutions promises to be less of a hassle in Nigeria
What are your thoughts on project aggregation and financing? What policy or regulatory bottlenecks are envisaged? How may the industry go about solving them? Let’s hear from you.