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Reducing the affordability gap: The missing link to increasing adoption of off-grid solar energy

Although the past half-decade has seen a spike in awareness and purchases of off-grid solar products to solve the lack of energy access for the estimated 77 million Nigerians that are unserved or underserved by the grid – ownership of these products has remained elusive for many due to their inability to afford high quality products.

Affordability is not solely about providing financing for end users. Often, product prices remain high because of import duties and value-added tax (VAT) levered on these goods. In Nigeria, VAT and import duties ranging from 15 percent to 40 percent for stand-alone solar (SAS) products, are passed on to customers in the final retail cost of SAS products, and inevitably hamper the ability of low-income households who are most affected by energy poverty to be able to afford them.

While the off-grid sector and many governments across Africa recognise the need for tax exemptions for SAS products to improve their affordability and hence reach more end users, in Nigeria, it was difficult to make a compelling case due to the lack of contextual evidence to support this.

The Africa Clean Energy Technical Assistance Facility (ACE TAF) programme, a four-year programme funded by the United Kingdom Department for International Development (DFID) and implemented by Tetra Tech International Development aimed at increasing adoption of SAS products evaluated the tax policy in Nigeria by conducting an impact assessment on VAT and duty levied on SAS product.

The result of the analysis demonstrated the beneficial impact of tax exemptions on achieving energy access objectives, while limiting the longer-term impact on national revenue generation from taxes collected from the SAS sector.

This assessment also provided qualitative and quantitative evidence for the government to evaluate the incentives and their impact on revenue as well as the impact on Nigeria’s energy access objectives. These incentives improve the affordability, and thereby stimulate the off-grid solar market to achieve greater uptake of SAS.

In addition, ACE TAF developed an Importation Guide to provide clarity on the importation process for solar energy technologies and to increase transparency of the importation process for all stakeholders.

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Specifically, it addresses the challenges faced by solar companies in terms of the opacity of the importation process. This became critical as the lack of clarity caused solar companies to pay varying import duties making it difficult for them to accurately predict how to plan for these duties.

Finally, in collaboration with the Rural Electrification Fund (REF) under the Rural Electrification Agency (REA), the ACE TAF programme developed the Nigeria Stand-Alone Solar Investment Map. The map describes the public and private sector SAS investment landscape in Nigeria for stand-alone solar products and, the market opportunity, financing deficit, impact of the Covid-19 pandemic, and guidance for foreign and local financiers/investors.

This information has played a key role in increasing the flow of financing into the SAS sector in Nigeria, which stood at around $227 million from a wide range of investors as of February 2021. It has enabled SAS companies to gain increased access to innovative financing, enabling them to create business models that make their products more affordable to potential customers.

Nigeria has set a goal of 100 percent national electrification by 2040 with at least 5 percent of energy access coming from SAS products. The expected contribution from SAS products speaks to the commercial attractiveness of Nigeria’s SAS markets. The effect of these ACE TAF activities will help customers who are energy-strapped and in dire need of such products to be able afford them, and hence increasing energy access for all communities and the country.

Agbaegbu is the Nigeria country manager, Africa Clean Energy Technical Assistance Facility