Off-grid operators’ call for partial risk guarantees is asking for the moon

Since Azura Edo IPP was delivered on budget and ahead of project delivery date, every investor in Nigeria’s energy sector including off-grid operators now wants the Azura financing template where the Federal Government provided a sovereign risk guarantee.

The demand for a partial risk guarantee was prominent in the communiqué issued at the end of the 4^th Nigerian Energy Forum (NEF) held on April 9-10 in Lagos, organised by the Nigerian Institute of Electrical and Electronics Engineers.

“Local and international partners must mobilize private investments for renewable energy projects, including off-grid and commercial and industrial captive power schemes, with partial risk guarantees provided by the public sector,” the communiqué signed by Oluwole Adeuyi and John Funso-Adebayo, executive members of NEF.

Nigeria’s off-grid sector is awash with cash and is key sector attracting new foreign direct investment. The European Union formally launched a € 30 Million fund for renewable energy projects in Nigeria at the forum where over 230 participants attended the forum, including representatives of government, energy industry associations, development partners, entrepreneurs, academia and the private sector.

Participants at the conference agreed that with partial risk guarantees, new investments will come into the sector. Partial Risk Guarantees (PRGs), also known as political risk guarantees, cover private lenders and investors against the risk of the government or its agency defaulting on its obligations in a private undertaking

PRGs experts say are designed to provide comfort to investors and debt providers for risks that are beyond their control and that they might otherwise be unwilling to assume. They mitigate risks to produce more competitive loan pricing and enable the financial institutions to reduce their allocation of risk capital in accordance with the rules. PRGs provides a powerful incentive to abide by contractual commitments and undertake policy and regulatory reforms necessary to mitigate performance risk.

Many of the projects, the Nigerian government has executed with international financial institutions have included PRGs with the World Bank such as the Azura Edo-IPP, $500m Calabar gas plant and Seven Energy $112million facility.

Promoters of the Azura IPP presented a watertight project complete with partial risk guarantee from the World Bank and backed the government to a corner. A default could cause reputational risk for Nigeria in the event the Federal Government decides to treat the contract in its usual cavalier manner.

Experts say this is a key reason why the government has been unwilling to grant new PRGs to the power sector especially the off-grid sector where the market is not fully developed. Analysts say the 14 Solar IPPs have stalled because of similar demands from investors to a Federal Government who is highly indebted.

The communiqué also demanded among other things for Improved coordination and collaboration among key energy stakeholders in the public and private sector, development of more efficient power and cooling technologies to reduce energy demand, enable digital energy management, minimize noise pollution and improve cost savings, thereby promoting environmental sustainability.

It also called on renewable energy investors and developers to explore innovations in financial engineering for making bankable projects, minimizing risks of currency depreciation, increasing new connections and creating new jobs in a low-carbon economy. It also called for the creation of a Clean Energy Infrastructure Fund by the Bank of Industry and the Central Bank to empower local operators and competitive regulatory regimes.