Nigeria to launch $750m solar subsidy program

From the newsletter

Nigeria is planning to launch this month the $750 million Distributed Access through Renewable Energy Scale-up (DARES) program. The initiative is backed by the World Bank and aims to benefit over 17.5 million Nigerians and replace more than 280,000 fossil-fuel-powered generators with standalone solar systems.

• The Nigerian government is speeding up its electrification efforts with a target of achieving universal electrification by 2060. It plans to install 30 GW of capacity by then, with 30% from renewables.

• To achieve this goal, both grid extension and decentralised systems need to be implemented in the locations where they are best suited.

More details

• The project will be led by Nigeria's Rural Electrification Agency (REA) in collaboration with the Federal Ministry of Power. The project is designed to build on the existing Nigeria Electrification Project (NEP). It intends to drive large-scale deployment of solar-powered mini-grids and standalone solar home systems. It will be a focal point for coordinating and financing all off-grid electrification efforts in the country.

• Of the total $750 million budget, $410 million is allocated for solar hybrid mini-grids, $300 million for stand-alone solar systems and $40 million for technical assistance. The selection of companies to participate in the project will follow strict guidelines to ensure the quality of products. Companies that establish local manufacturing or assembly facilities, create workforce training programs, and prioritise affordability will have a competitive advantage in the bidding process.

• The subsidy program is a welcome move for Nigeria, which has one of the largest populations (90 million) in the world without electricity access. The subsidy promises to bridge the affordability gap, making essential services like electricity accessible to low-income households. 

• However, Nigeria's past experiences paint a starkly different picture. Subsidies have failed to make the designed impact. For instance, fuel subsidies, which were designed to cushion consumers from the impact of rising oil prices, became a drain on public finances. It ended up benefiting wealthy elites more than the intended beneficiaries. The government had to do away with it in 2023.

• The power sector is no exception. Past attempts at subsidising electricity tariffs have resulted in unsustainable financial burdens on the government. This has hindered investment in critical infrastructure and perpetuated the cycle of unreliable power supply. 

• Subsidies, if not well implemented, end up being a burden to governments and a waste of resources. It again cultivates a dependency culture, which ultimately hinders sustained progress. Government officials, on the other hand, manipulate the system for personal gain, jeopardising the overall project's success. Due to loopholes in government policies, these individuals often evade prosecution.

• This does not imply that subsidies are inherently ineffective. In well-regulated and transparent countries, they can serve as valuable tools. For instance, in Kenya and Rwanda, targeted subsidy programs have been instrumental in expanding rural electrification. 

Our take

• The project target of connecting 17.5 million people will roughly mean getting 19.4% of the unconnected population access to electricity. However, previous subsidy program failures are a caution to consider. The success of this initiative hinges on robust governance and strict oversight. Without these crucial elements, the program risks replicating the failures of past subsidy schemes, where corruption and inefficiency undermined intended benefits. 

• The focus on decentralised solar solutions is the best strategy for reaching underserved communities. There's no doubt. However, the program's reliance on subsidies as the primary driver of adoption raises questions about long-term sustainability. Subsidies should only be used as a temporary catalyst for adoption.

• For Nigeria to fully succeed, it needs to promote local manufacturing. The program has these intentions, but its implementation is key. The program should be designed to transition away from subsidies over time to create a competitive and resilient renewable energy ecosystem.