Nigeria’s green energy space has received a significant boost thanks to a new memorandum of understanding signed by three institutions establishing the country’s first green energy fund.
Africa’s most populous nation’s first Green Energy Fund (GEF) programme backed by Vetiva Capital Management Limited (“Vetiva”), Climate Finance Advisory Limited (CFAL) and the African Guarantee Fund West Africa (AGF) seeks to leverage available public and private sector credit funds to facilitate access, and flow of flexible finance to eco-friendly energy projects.
“The signing of this MoU is another important step in facilitating flow of funding towards bankable, commercially viable and environmentally friendly energy projects in Nigeria” Damilola Ajayi, group executive director at Vetiva said.
The Fund’s primary focus will be on bankable, commercially viable and socially responsible renewable or clean energy generation and distribution.
Funding options that currently exist include grants, debt financing and equity. Most of the debts financing clean energy developers 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. But, high interest rates and short terms are two factors that discourage players in this space from seeking loans from commercial banks.
“Our aim is to grow the fund to $100 million in the next two to three years. Some local sources of our finance will be the intervention funds sitting at the Central Bank of Nigeria, the Bank of Industry and the Development Bank of Nigeria at interest rates of between 9 percent and 12 percent,” Jubril Adeojo, director and chief investment adviser at Climate Finance Advisory Limited told BusinessDay. “Commercial banks have been slow to fund such projects because of the kind risks involved.”
To de-risk financing for green energy projects in Nigeria, the AGF has agreed to provide 50 percent partial risk guarantee to enable green energy project developers access up to 10 years long-term local currency concessional loans to implement their green projects. The green energy projects that qualify are captive power and mini-grid power projects where renewables and gas are preferred sources of energy.
In 2016, AGF introduced a Green Guarantee Facility geared towards increasing financing for climate change mitigation and adaptation projects. “In line with this, AGF West Africa is pleased, to be part of this tripartite partnership as a partial guarantor to enhance access to finance for climate and green growth-oriented SMEs in Nigeria and West Africa at large” Adidja ZANOUVI, managing director of AGF West Africa, said in a press statement.
Experts say Nigeria needs two key reforms to incentivise the private sector to invest in renewable energy: cheaper financing and lower taxes. Lending rates in Nigeria (currently at an average of 17.50 percent) are too high for investors who require capital to start-up businesses such as in renewable energy.
Countries such as China, the United States of America and India, which are leading the renewable energy revolution, offer substantially lower rates. The average commercial bank lending rate in India, for example, is about 9.45 percent per annum. In the U.S. and China the rates are at an average of 4.30 percent per annum.
