How Nigerian energy companies can access funding from DFIs – Maduekwe
Monica Maduekwe is a sustainable energy specialist with vast experience in renewable energy, energy efficiency, gender mainstreaming, resource mobilisation and project development. Co-founder of PUTTRU, a tech company, which is pioneering resource mobilisation digitally for energy companies in Africa, she shares insights on the energy market in this interview with OBINNA EMELIKE. Excerpts:
Green energy is at the centre-stage today, where are African countries in the new transition?
The western world is gradually shifting to green energy and so is the African continent, according to data made available by the International Energy Agency (IEA), a global authority on energy. Looking at the IEA data on energy sources used in generating electricity you will see that, as of 2018, 20% of all electricity generated in Africa came from green sources, these are biofuels, hydro, geothermal, wind, solar photovoltaic and solar thermal. Actually, we are doing better than the United States of America, where 2019 data from IEA show that only 18% of all electricity generated in the U.S came from biofuels, waste, hydro, geothermal, solar PV and solar thermal. So, the African continent is not doing badly in the energy transition space, especially when you look at the average annual growth rates of new renewable energy sources in Africa’s electricity generation mix. Solar PV for example has grown at an annual average rate of 49% from 2000 to 2018, followed by wind at 26% and geothermal at 15%, while conventional renewables like hydro grew at 3% during the same period, according to IEA’s data.
This is in tune with what is happening in the rest of the world, meaning that these sources of energy are attracting funding towards realising them. We cannot separate this result from the policies and regulatory frameworks enacted by African governments to encourage investments in these energy sources.
What steps should be taken to close Africa’s energy gap?
To close the energy gap, African countries need to mobilise financing at an accelerated rate and at an affordable cost. Let us take the power sector for example where foreign investment and government participation, either in a public-private-partnership (PPP) or as the bulk buyer of the electricity generated, is common in projects. What we see is that the financing costs of energy projects in Africa tend to be extremely high compared to other regions. And this is due to the perception of being a high-risk environment for foreign investors. It is important to address information asymmetry on both sides – the government and investors, whether foreign or domestic. The government can do this by objectively and systematically taking stock of the risks relevant to their countries, assessing them based on past occurrences and likelihood of them occurring, quantifying these risks, and taking measures to address risks naturally allocated to the government.
Considering our natural endowments and environmental challenges, what energy model, in your view, is best for West Africa?
West African region is rich with both renewable energy and non-renewable energy resources and the region needs to harness both of these resources towards addressing the energy challenges. Technologies like carbon, capture, use and storage (CCUS) and hydrogen are gathering steam globally as solutions for cleaner industries in the face of a continued utilisation of fossil fuels. The best energy model will be one in which countries design, develop and mobilise financing for energy projects, in conjunction with developing and mobilising financing for industries or commercial zones. This will be an integrated energy planning model that goes beyond simply considering energy projects or the energy sector as a silo. Countries have pursued their energy ambitions with the expectation that by increasing energy access, businesses, industries, and the economy will automatically benefit from these improvements. This has resulted in the concentration of energy projects for an urban population. Moreover, given the challenges pertaining to the small size of our economies, small capital markets, larger rural population, and poverty rates, and the perceived risks associated with Africa’s market, attracting affordable financing for universal energy access has been a challenge for us. In order to ameliorate some of these issues, energy planning and urban planning need to be integrated in order to create a base of consumers considered as anchor consumers. By designing projects around these anchor consumers, energy companies are certain that the electricity will be sold and paid for. This is a form of payment guarantee. Moreover, by choosing to develop a chain of industries (or commercial zones) as your anchor consumers, countries are able to simultaneously create jobs, increase employment rates and household income as well as bring economic development to communities that have been considered as low-income, agrarian communities.
PUTTRU’s new report, ‘3 Must-Haves for Energy Projects to Attract Investment in Africa’, says DFIs are willing to fund energy projects, how accessible are these funds to African companies?
Most energy entrepreneurs choose lack of access to finance as their primary challenge. Yet, they probably have seen several reports, including PUTTRU’s report, saying that financing is largely available. It is true that capital for financing energy projects is available. However, you will hear financiers talk about the lack of bankable projects to finance. So, both statements are true, from the entrepreneurs’ side and from the financiers’ side. The question now is what is behind this disconnect? It starts from the companies: how prepared are they to receive external financing – measured by how much of the financiers’ expectations they (these companies) are aware of and are able to meet. In our report, our 3 Must-Haves focus largely on project finance (or non-recourse finance). However, whether the company is interested in securing financing through project finance or corporate finance (raising financing from your balance sheet), the energy company, its operational and financial position, will be looked into by financiers to determine if the company can access these financing facilities.
While there are basic things that must be checked off for an investment opportunity to be considered bankable, at the end of the day what is considered ‘bankable’ depends largely on the risks appetite of the financier considering your investment opportunity. PUTTRU therefore prepares companies to be ready for external financing by conducting this due diligence before companies are presented to financiers that are a good fit to the company seeking financing.
How impactful is political instability in Africa on decisions by foreign investors to commit their funds here?
Foreign investors want to know that regime changes will not impact negatively on their investment by way of abrupt government policy changes or insecurity, for example. In our report, we discuss how political halo-effect and project framework could weaken the likelihood that regime changes will affect a foreign investor’s interests. With real-life examples of projects that have applied this, we show how having certain kinds of project partners in your project could buffer your project’s interests against undesirable political risks as well as by designing your project environment to ensure that whatever issues faced by the external environment remains external. Furthermore the 3 Must-Haves report covers the ongoing effort by African governments to rollout cross-border energy projects. Cross-border projects go beyond a single government to include the participation and commitments of other governments and the regional economic communities, such as the Economic Community of West Africa (ECOWAS), thus discouraging a unilateral decision from one government to change the dynamics of the project. Effective ways of addressing political risks do exist, for national and cross-border projects.
Could you share the story of what led to the formation of PUTTRU?
Over my decade long experience in the ECOWAS Centre for Renewable Energy and Energy Efficiency (ECREEE) and the opportunities this gave me to engage with African and international stakeholders, I observed that two qualities will play a more prominent role in choosing winners in the global economy in the coming years: data and artificial intelligence; having ‘inter-disciplinarity’ as a mindset and as an approach to problem-solving. Our strong belief in the role these two factors will play in the future is the reason why we created this company and are investing our own finances to develop these two points. Our ultimate goal is to position Africa for success in the years to come. More than a technology company, PUTTRU is a collection of likeminded people who are passionate, creative problem-solvers and are eager to channel their innate capacity for bringing new solutions to persistent and complex problems towards unlocking investment in Africa’s energy sector. Our vision for Africa is to have an energy market that is able to meet its current and future energy demands in a manner that ensures sustainable development. And this will take the presence of a sufficient number of financially sound energy companies able to continually attract financing for business expansion as needed. In line with this, PUTTRU has an advisory support arm where we conduct business due diligence on energy companies to ascertain their readiness to receive external financing. In addition, we have developed a checklist through which energy companies can rapidly assess themselves. The document is free and available in French and English at www.puttru.com.
What other challenges are confronting the energy market aside funding?
In my opinion, the inadequate development of the three points I am about outlining. These are: Cohesion: having a well-integrated energy market in planning and operations; Coordination: smooth and efficient operationalisation of the market, from the national to the regional and now, continental market, as well as, Streamlining: simplification and transparency of processes for all market participants, making it easy for market participants to enter and exit the market. Let me start by saying that our governments, at the sub-regional level (Regional Economic Communities like ECOWAS, and others) and continental level (African Union) recognise the importance of these three factors and have worked for years to achieve them. Using ECOWAS for example, we have regional energy policies developed by ECREEE which help to bring all the Member States at the same level of aspiration for the purpose of bringing about institutional and structural changes towards attaining these aspirations. In addition, ECOWAS also the West African Power Pool (WAPP) and ECOWAS Regional Electricity Regulatory Authority (ERERA) to support Member States to pool their energy resources towards meeting regional energy access and energy security goals. At the continental level, the African Union Commission (AUC) recently launched the African Single Electricity Market (AfSEM), among others. While we have these impressive developments on paper, many market players will agree that the situation is quite different on the ground – specifically relating to the slow pace at which these incredible institutional innovations are achieving the desired results.
Could you offer an overview of the energy situation in the continent today?
One could argue that the energy situation in Africa has seen improvements over the years, if one was judging by the intensity of activities such as the presence of energy-related policies and regulatory frameworks, project development and procurement activities. However, if we are to judge by data on how these activities are translating into the population’s access to energy services, what we see is that these improvements are being offset by Africa’s population growth. Looking at World Bank’s online data on the percentage of sub-Saharan Africa’s population having access to electricity in 2011 compared to the latest available data, 2019: for 2011 the figure is 35% of SSA’s population and 47% by 2019, this represents a 34% increase for energy access, with SSA’s population growth following closely behind with a 27% increase. World Bank’s data for Nigeria, for the same 2011 and 2019, actually report a decrease in the population having access to electricity: in 2011 this was 55.9% of the population and for 2019 55.4% of the Nigerian population, whereas total population from Nigeria grew from 162 million in 2011 to over 200 million by 2019.