While prices of solar equipment are falling, the sector still remains a capital intensive one. This is mostly so for mini-grid and large scale projects. Access to financing is therefore very important for companies to meet the demand for clean energy and grow their business. This is even more crucial for companies who use flexible payment options including the Pay-As-You-Go model.
Banks remain an important source of funding for local businesses and project owners. Mini-grid developers and other renewable energy players are looking to local banks to fund their projects but are not getting the kind of support they desire. While very few Nigerian banks have a policy on renewable energy, some of the ones that do have some concerns (which we’ll look into in a bit) that have slowed investment into the renewable energy sector.
What Funding Options Exist?
The funding options that currently exist include grants, debt financing and equity. Most of the debt financing clean energy stakeholders in Nigeria get are from international banks and there is the challenge of fluctuations in foreign exchange rate. This makes naira-denominated debt financing more attractive. However, high interest rates and short terms are two factors that discourage stakeholders from seeking loans from banks. As one mini-grid developer said during an energy financing event, “No bank is willing to do more than 5 years. Developers need 10 – 15 years”. I discussed with a number of bankers in order to understand why this was so. They expressed that they were eager to fund the sector given the growing demand for an alternative to Nigeria’s power woes and its social impact. There are however a number of challenges, mostly unique to the sector.
As regards high interest rates and short term funding, one banker told me they were looking to provide longer term funding to stakeholders in the sector. The term of funding, according to him, depends on how those funds were sourced. “Interest rates are a function of the inflation rate in the country. Once inflation rate drops, interest rates will definitely drop,” Ken Chukwu*, a banker I spoke with told me. Other notable funds for the clean energy sector in Nigeria include the Bank of Industry’s 1 billion naira investment. The Central Bank of Nigeria is also planning a 1.5 Billion Naira fund for the off-grid energy sector.
Some of the bankers I spoke with told me that they are trying to learn the ropes as renewable energy in Nigeria is a relatively new industry. The limited knowledge of the sector means that they have to depend on international partners in order to understand it and also employ international funding models. These bankers confirmed that they were looking into developing local financial models. They typically depend on some international development agencies to act as guarantee in order to fund the clean energy sector. These organization have experience funding and consulting for projects in other parts of the world. The guarantee provided by these organizations includes counterpart funding among others. “It is typically provided in different forms,” James John* who works in the SME Liability Unit of a bank told me.
Since there’s competition for funds and the clean energy space is a long term industry, banks typically give out money to other industries that require short term funding. They do this when they consider that they really do not understand the industry and have no way to cushion the risk.
Technical Experience And Risk Profile
“A number of people come to us and expect us to fund their project 100% without any commitment from their own end,” said Olu Phillips* another banker I spoke with. “The issue is not funds, funding is available,” Olu added. “The issue is getting the right people with the right risk profiles and technical experience to give the funds to,” Olu concluded. According to him, some of the borrowers who approach them have no experience in the sector and have not developed any mini-grid project before. A number of them do not have credit history and the required skills and hence get turned down. Some of the ones who do have the experience do not want to bring any equity to the table but expect to get funding. As an answer to the skills gap, some banks (though few) are investing in capacity building initiatives for players in the clean energy space.
Payments and Metering-Related Issues
One of the major conversations that the bankers I spoke with confirmed they usually have with clean energy project developers is how payments will be collected from consumers. Nigeria doesn’t yet have the mobile money success story that Kenya has and hence receiving payments especially from those in rural regions, who are typically unbanked, remains a challenge. Questions around how consumers will renew their energy credits and pay for the energy they consume is one that stakeholders are working to tackle. Thankfully banks already provide USSD based services which some of the consumers can use but the reach is limited. Telcos have also not cracked mobile money in Nigeria although there are startups like Paga who are quickly growing to cater to the unbanked and offline consumers. It only seems like a matter of time before the issue of payments collections is out of the way.
Another challenge is the issue of meter tampering. Ken Chukwu recounted a project where the developers couldn’t break even because consumers where tampering with the meter. One consumer connected his AC to the mains and left the other appliances which meant he was paying far less. Meter tampering is a problem for developers and consequently one that bankers have to consider when looking to fund a project. However, the problem is one that will soon cease to exist as there are now smarter and tamper-proof meters.
There are other risks that banks consider like what would happen when a project fails? Banks rely on guarantee from international development organizations to de-risk the projects they fund. A number of banks have also been cautious about giving money to the clean energy sector due to the exposure they currently have from financing the acquisition of power assets a few years ago. A number of them are yet to recover some of the money back.
While there are very few banks in Nigeria actively developing a policy on renewable energy, those who are doing so are having to deal with issues like limited knowledge of the sector. Others issues include finding borrowers with the required technical expertise and also specific issues like payments collection and meter tampering. As knowledge of the clean energy sector continues deepens and the macro-economic situation improves, there’s the hope that more banks would be willing to fund the sector.
*Not their real names. The bankers have asked to be anonymous as they do not have an official mandate to discuss the issues.