There’s demand for renewable energy among Nigeria’s middle-class
Grid output has barely improved despite longstanding privatisation initiatives. The urban middle-class is largely underserved and the government wants to incentivise off-grid supply. A number of companies are stepping into the supply gap with renewable options. However, macro risks stand between companies and their potential customers.
Main Findings – Gaps, reforms and macro-risk
The supply gap is large. A World Bank survey published in April this year, suggests that 78% of Nigerians get less than 12 hours of electricity from the national grid in a day. Despite privatisation reforms introduced in 2013, the government’s untargeted subsidies and price-fixing have deterred electricity firms from improving their service for those who can afford to pay for stable grid supply. The result is that output still hovers around 4,000MW, and outages occur every day including the commercial capital Lagos where many households rely on generators.
The Buhari administration has introduced policies intended to support and otherwise incentivise the sale of solar equipment to homes with unreliable supply from the grid. For example, the Output Based Fund established in 2019 to subsidise companies in this business and in July 2020, proposing a USD600 million stimulus plan to have installed solar systems in five million homes that are not yet connected to the national grid by 2023.
Rensource and Lumos are two firms that have provided solar home systems since 2016. Backed by CDC Group, Lumos sells 80W and 160W units to mostly low-income customers outright or in monthly instalments. Rensource, in IETP’s portfolio, at first primarily targeted the urban middle-class seeking stable electricity. Now it mainly develops small plants for medium-sized businesses and for open markets such as Sabon Gari in northern Kano. It is said to serve more than 10,000 shops in Sabon Gari in collaboration with the Rural Electrification Agency.
Rensource’s pivot to C & I (Commercial and Industrial) should be understood in the context of high upfront costs of a solar home system, local spending power and price sensitivity. A 2.5KW system costs about USD3,600 here in Lagos, and buyers usually have to pay out of pocket. Further, upfront and maintenance costs have risen sharply in the last five years because inputs are largely imported and the currency has depreciated. The naira has been devalued from NGN165 per dollar to NGN410 since 2015.
Producers and resellers are wary of credit risk – and also inflation. And although Nigeria introduced the Bank Verification Number (BVN) in 2014 to ensure that everyone who owns a bank account can be identified and there are three credit bureaus in the country, credit rating is not used widely in use. Also, with inflation at 18% and the foreign exchange regime unstable, competitively pricing a solar home system on credit is challenging.
Outlook – Solve for affordability and scale
Nigeria’s naira remains prone to volatility in crude oil earnings. Reforms to raise confidence in the currency will be applied piecemeal under current central bank leadership and unemployment stands at 33% despite Central Bank of Nigeria and finance ministry emergency measures. Meanwhile, as the government struggles to fix the grid, households and businesses will continue to depend on other sources for their electricity at considerable scale. Solving the customer affordability question will produce clear winners in this fragmented market.
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*Photo credit: Karsten Wuerth, Unsplash
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