Results-Based Blended Finance for Mini-Grids: Nigeria

Overview

Nigeria is demonstrating how blended finance incentives can potentially boost investment for off-grid solutions. Electrification rates have been almost flat for a decade in Nigeria, with the national average reaching just 55% in 2020 from 48% in 2010. Nigeria falls behind similar countries in Western Africa for progress in rural electrification because of the country’s large geographical size and widespread communities.

To improve rural electricity access, which sits around 27%, the World Bank, African Development Bank, and Nigerian Rural Electrification Agency in 2018 launched the Performance-Based Grant program, which can be paired with private capital to support the deployment of solar-hybrid mini-grids. It offers grants to mini-grid developers of $600 per connection on a first-come, first-served basis, with a minimum total grant request of $10,000 per mini-grid and a total concessional program budget of $48 million.

Eligible projects are solar and solar hybrid systems in unserved and underserved areas that have a generation capacity of no more than 1MW. Each project is required to have a backup technology for service reliability, which varies project to project and can include fossil fuel technologies. Even so, projects are required to have at least 70% of generation sourced from solar, to ensure that electrification uses renewable energy resources.

Impact

The results-based design of the program compensates developers once the mini-grid is complete and meets reliability criteria. Developers can access 40% of the grant when materials arrive at the construction site, 40% on commissioning the mini-grid, and 20% when the project provides reliable electricity to consumers for 90 days. This means developers must raise the rest of the upfront capital on their own, usually from local banks. As the program becomes more established and efficient, the number of participating investors is likely to increase, which will speed the electrification process in Nigeria.

The program appears to be building momentum for investment. The grants are being used to support 14 mini-grid developments that look to be completed by late 2023. In October 2022, Engie Energy Access and CrossBoundary Energy Access announced a joint agreement to finance a $60 million portfolio of mini-grids in Nigeria – the largest mini-grid project finance transaction in Africa to date – using a blended finance approach to bring electricity access to 150,000 people by 2026.

Nigeria had previously attempted to incentivize renewable energy mini-grids using upfront grants, but developers often failed to deliver projects in a timely manner. Results-based incentives should however be carefully designed to minimize administrative burdens on developers. For example, Nigeria has a digital platform to allow mini-grids to be remotely metered to prove their reliability, rather than relying on manual verification from independent agents.

Opportunity

Even as Nigeria’s electrification program works to make the Performance-Based Grant program more investor-friendly, there remains room for improvement. Developers have cited government bureaucracy limiting the program’s effectiveness, particularly because slowed paperwork delays the ability of developers to provide reliable electricity to customers. There is limited uniformity in local inspection requirements between sites which can complicate compliance for developers and slow development.

Similar programs could be implemented in other African countries – and other emerging markets – where main-grid expansion is less economic than off-grid solutions. This could include countries with sizeable and widespread rural communities, such as Burundi and Uganda.  Four other countries in Sub-Saharan Africa have implemented similar funding schemes, namely Ethiopia, Burkina Faso, Togo, and Mali. These results-based financing schemes are proving more effective than traditional financing schemes in most countries.

Source

BloombergNEF and Bloomberg Philanthropies report: Scaling-Up Renewable Energy in Africa, The World Bank Group