Finance still a hard nut to crack

ACCESS TO FINANCE REMAINS a major limitation to the growth of renewable energy adoption in West Africa despite an upsurge in the number of alternative financing options to replace redundant traditional funding.

ACCESS TO FI NANCE RE  MAINS a major limitation to the growth of renewable energy adoption in West Africa despite an upsurge in the number of alternative financing options to replace redundant traditional funding.

This is happening in the face of recorded falling costs of deploying solar energy in homes and businesses, as well as the favourable conditions West Africa has for producing solar energy.

The two major reasons for this, according renewable industry players, are high transaction costs and short term loan and high interest rates. In Nigeria for instance, most solar companies are unable to access adequate and competitive funding.

Segun Adaju, chief executive officer, Consistent Energy Limited and president of Renewable Energy Association of Nigeria, agreeing with this view, told business a.m. that financing is a major hindrance for solar companies especially since most of them are start-ups.

“It is financing in two areas; one for start-ups like us, two years into the business and we are still unable to raise adequate financing to carry out projects, we are limited to our own equity and little funding; and two, finance for the consumers,” he explained.

Implementing renewable energy solutions comes with high transaction costs typically from activities such as technical feasibility studies, financial assessments and other development expenses. As well as these challenges, in most African countries like Nigeria, suitable bank loans for solar systems are increasingly unavailable. This is because local banks only provide short term loans of not more than three years with interest rates that sometimes reach 20 to 25 percent or more.

And despite that the cost of producing solar electricity continues to fall and solar companies are becoming more technically and financially viable, projects are not being embarked on as rapidly as some analysts think they should be happening.

“This is because there is a structural finance gap in Nigeria that prevents many solar projects from having access to finance and thus being realized, despite the obvious cost benefits,” another energy expert noted.

The impact of this is borne largely by businesses and companies, who struggle with unstable or insufficient grid electricity and often have to turn to diesel generators as alternative supply. In Nigeria alone, the cost of electricity is estimated at 30 cents per kilowatts-hour, among the costliest in the world. While this is expensive, for businesses that must stop production without power, it is necessary for them to stay afloat.

However, alternative financing options are springing up, but East African countries are leaving their West African counterparts behind as they deploy different methods of financing to overcome the finance gap in sub-Saharan Africa.

A more viable and scalable method to reach high solar penetration levels used in Kenya is crowd investing. Independent solar power projects ae being financed through this method. It has been argued that traditional financing methods are simply not well suited to the solar market in sub-Saharan Africa, as the expectations of investors often don’t match market reality. Crowd investing, on the other hand, has more flexibility and can be applied to both on- and offgrid projects.

In crowd investing, finance is provided by a crowd of private investors and has worked well for small solar projects. However, with little track record for crowd-financed installations, it is unknown whether the success of crowd investing will work for larger projects. The current trends in the market give a strong positive indication that such milestones will soon be hit.

Another form of funding used in East Africa and also West African countries like Nigeria is for the end customer to directly finance and own the system, usually with some form of cofinancing involved.

An example in Nigeria is the rent to own initiative championed by Consistent Energy Limited. The company offers small scale businesses a rent to own solar power system solution. It is gaining traction in Africa as it is also widely adopted in East Africa. The financial burden is easier on consumers as solar projects are co-financed.

In Nigeria for instance, most solar companies are unable to access adequate and competitive funding