Financing the ETP

Global warming is a crucial challenge due to its devastating environmental consequences. It has resulted in food insecurity, flooding, population displacement, and desertification. Experts have reported that Nigeria loses $100 billion yearly in GDP to climate change. To curtail these effects, Nigeria established the Energy Transition Plan (ETP). However, sustainably financing Nigeria’s clean energy transition poses a formidable challenge.

Implementing the transition to clean energy requires trillions of dollars. The International Renewable Energy Agency estimates investment needs of $35 trillion by 2030 for a successful energy transition. In Nigeria’s case, the federal government is cash-crunched to execute the transition successfully. Nigeria’s energy transition office disclosed a budget of $410 billion to finance and implement the ETP, which translates to $10 billion annually.

 So far, the federal government has secured only $3.6 from its $10 billion yearly financial requirement to achieve its targets of net-zero emissions by 2060. The flow of private equity is needed to offset this capital deficit of $6.4 billion. The ETP’s pioneering nature creates a profitable market to attract investors, which Nigeria should leverage to advance its progress towards the global 1.5⁰C target. Nigeria may adopt the below-listed viable finance models to ensure an effective transition to clean energy.

Blended Financing: Netting Private Investors

To keep the 1.5⁰C trajectory reachable, nuanced systemic financing models must occur in less than 37 years. Achieving this requires significant private equity with an increased reliance on debt and equity finance. Experts have heralded blended financing as a development finance model that pulled in more significant private capital in Sub-Saharan Africa, attracting 61% of global concessional funding in 2020. Blended finance is a mix of commercial finance – loans from development banks or financial institutions – and catalytic funds – grants from public organizations, e.g. philanthropic organizations, to increase private investment in sustainable development.

The federal government’s current economic strategy includes several fiscal incentives, such as tax holidays for independent power generation companies and sector regulatory reforms. These reforms have helped lower the cost of capital and attracted private investment in renewable power to an extent, but they have not been sufficient. Thus, the government should leverage the role of blended finance to augment investment.

Catalytic funds from public resources and international aid donor funds are limitless, making blended finance a critical tool. Development partners and private equity funds can aggregate resources to invest in a series of development projects, from early to operating stage projects, that mitigate the impacts of climate change. The blended finance model creates diversified portfolios for emerging market private sector investors to spread risk and create better-performing portfolios. For example, inflation-linked asset classes such as infrastructure act as a risk buffer and provide a viable alternative to traditional government-backed securities, which have been unsuccessful.

However, as with any foreign direct investment, currency, policy and scale risks pose investor barriers. This is why Nigeria must undertake and publish a sound report focused on aggregating and harmonizing the nation’s framework for investment to attract investors, developers and stakeholders’ confidence. The blended finance model can mitigate the risks of pioneering renewable energy projects, ease the transition to cleaner energy and support Nigeria’s off-grid infrastructural plans, such as the 13GW of off-grid solar PV capacity by 2030.

Nigeria needs an influx of private equity to sustain its commitment towards limiting global warming to 1.5⁰C. Adopting flexible financial models, such as blended financing, is one way the government can create an enabling environment to attract domestic and foreign investors.