Giant of Africa: Financing Nigeria’s energy transition goals

At COP-26 in Glasgow, Scotland, President Muhammadu Buhari pledged that Nigeria would achieve carbon neutrality by 2060 – 10 years after the ‘deadline’ of the Paris Agreement and after most developed economies. Nigeria joined several emerging market leaders in taking a firm but controversial position behind the idea of ‘common but differentiated’ paths that take account of varying local contexts.
At the same conference, Nigeria began to publicly unveil its Energy Transition Plan which detailed an analytical and evidence-based transition pathway.

The President’s speech included two key points. First, he stressed that productive energy access – the provision of energy to power productive activities across sectors like agriculture, commerce and I.T. – must be a key part of the transition and that natural gas will enable this. Second, he called on developed nations to deliver on their promise of providing $100 billion yearly to support emerging economies, stating that Nigeria will require sustained technical and financial assistance.

Nigeria set the pace for others to follow by being the first African country to publish a holistic energy transition plan and announce a net zero commitment based on it and hoped that the signal would attract foreign investors.

The outcome so far has been below expectations.

Nigeria’s Energy Transition Plan (ETP) covered several sectors, including Power, Transport, Oil and gas, Cooking, and Industry, and aimed to achieve universal access to energy by 2030 and carbon neutrality by 2060. It also aimed to create up to 840k jobs and was estimated to cost $1.9 Trillion. This includes $410 billion above projected business-as-usual spending. To kickstart execution, the government sought to raise $10 billion by COP27, predominantly from the private sector and identified a $23 billion investment opportunity that was shopped to international financiers including development banks, governments, and private investors.

By COP27, only $3 billion had been publicly committed by the World Bank and the US Export-Import Bank.

Investment risks: real or perceived?

Emerging markets and developing economies (EMDEs) are often characterized as being high risk due to a variety of issues such as inconsistent political will, corruption and foreign exchange risk. In addition to these, and for Nigeria specifically, two big bones of contention were the presence of the fossil fuel subsidy and the spread between the official and ‘black market’ exchange rates to the USD. The fuel subsidy has since been removed under President Bola Tinubu in 2023, but this has significantly impacted the cost of living and people’s willingness and ability to pay for energy products and services. The central bank has also floated the Naira under the new Administration, which led to a 40% devaluation between the end of 2023 and mid-February 2024. Many argue that both policies will be beneficial in the long run, strengthening the Naira and supporting a diversification of the economy.

Convertibility and capital controls have long been cited as a big fear for international investors as well, as they relate to foreign exchange risks. In simple terms, investors worry about their ability to take money out of the country following an investment.

Stabilizing the currency in the medium term

Beyond policies aimed at accelerating the energy transition, it is important that the government focuses on stabilizing the currency to create the right enabling environment. The certainty of payment timelines and valuations plays a major role in unlocking commercial financing for infrastructure, and a stable currency will contribute to attracting foreign commercial investors. It can also unlock other creative ways of financing like securitization of energy assets through access to international capital markets. Increasing local manufacturing for exports will improve Nigeria’s trade balance and increase dollar supply. Nigeria can position itself as a regional hub for the manufacturing and assembly of various clean energy technologies to support Africa’s energy access and transition objectives, while powering productivity in other sectors like agriculture.

Reallocating subsidy savings and creatively co-investing with MDBs

The government can allocate some of its $9.5 billion subsidy savings annually in the short term towards taking first-loss junior equity positions that cover the earliest stages of project development. Multilateral Development Banks (MDBs) may also take on these equity positions as co-investors, in addition to providing guarantees. One possibility could be that the subsidy savings are used as collateral by an MDB to provide the guarantee. Project development equity financing will be key to taking the early-stage risks and turning the energy transition plan into a pipeline of bankable projects that will attract private capital. One challenge will be getting the MDBs to lower their risk thresholds and co-invest alongside the government/provide guarantees. Calls for MDBs to rethink how they can be most catalytic are growing; however, it is not as straightforward as one might imagine. MDBs also face risks of credit rating downgrades with greater risk exposure and reduced liquidity buffers, which will impact their ability to borrow and lend cheaply to developing economies. A multi-stakeholder approach that finely balances multiple objectives must be adopted in reviewing these MDB policies, and the banks like the World Bank and AfDB can leverage their experience navigating project risks in countries like Nigeria to define new and tailored instruments. The Nigerian government should leverage platforms like the upcoming COP29 to continue to advocate for these reforms and build allies with the shareholder governments that can influence policy decisions at the banks.

Developing a local currency thematic bond market

In addition to mitigating forex risks to attract foreign investors, the government should also seek to mobilize local capital towards the annual $10 billion target. Thematic bonds offer a proven pathway for mobilizing capital from local sources to finance the transition, and the government can stimulate demand from local investors by enacting ESG mandates. The federal government already has experience issuing green bonds following its first issue in 2017 which served as a pilot to a foreshadowed NGN 150 billion green bond programme. However, the market has yet to truly take off with sustained momentum due to the lack of a clear long-term framework for project scoping, development, and financing. Setting up a green bond taxonomy will have long-term benefits in this regard and will create a framework around which the government can pass other enabling policies such as reduced taxes for green bond investors. MDBs can support by helping with the creation of the taxonomy, while also making local currency guarantees available as previously described. Other EMDEs like India and Mexico have benefited from establishing a green bond taxonomy or framework that allows the private sector to scope potential projects and attract capital to them. The Nigerian government should develop a proper green bond taxonomy and sequentially issue use of proceeds (UoP) bonds to finance projects being developed in line with the energy transition plan. Developing a strong pipeline of bankable projects at scale will also enable the government to issue the bond at a greater benchmark size than previous issues which were relatively small in size. This will feed into the government’s broader blended finance approach as junior first-loss equity and debt raised from bonds is complemented by risk-mitigating tools from MDBs such as guarantees and risk insurance to mobilize both local and foreign capital for Nigeria’s energy transition.