Nigeria considers subsidy to clear entry hurdles to rural electricity investments

*Prioritises renewables for rapid rural electrification

Nigeria has said it will grant some kind of entry-level subsidy to ease the initial troubles of companies willing to invest in its rural electrification program.

It explained in a document – the Rural Electrification Strategy Implementation Plan (RESIP), which outlined the strategy the government would adopt to provide electricity to rural folks, that the subsidy would come from a funding pool – Rural Electrification Fund (REF) expected to be sequestered to support rural electrification.

“Based on the low rate of electrification in Nigeria, it is clear that the rural electrification targets will not be met if the matter is left to the market alone. While there is obvious interest in rural electricity service and, presumably, some willingness to pay, albeit at an undetermined level, a number of barriers have stood in the way of those who would provide such services.

“Subsidies towards the initial capital costs associated with establishing rural electrification schemes will be granted in order to lower the economic barriers to entry. These will be offered by the REF as capital grants based on an allocation method that is transparent and competitive,” said the document developed by the Rural Electrification Agency (REA).

Unambiguous management process

Considering past negative conversations on subsidy administration in Nigeria, and how it had been corruptly applied, the document explained there would be a clear process for administering the fund once in operation.

It suggested that undue preferential treatment in applying the fund would perhaps give way for best practice and economic sense.

According to it: “Developers will select their projects and then apply to the REF. The REF would support those that offer the best value and score most strongly against the other REF selection criteria, as required by the EPSRA 2005.

“All legal persons, corporate or otherwise with mandate to execute rural electrification activities will be allowed to compete for REF without discrimination. Subsidies for rural electrification, in this case, will also be used as tools for social justice.”

“To make the Rural Electrification Fund work well, the key features shall be: clear policy guidelines within which the Fund must operate, particularly the criteria for selecting between applications; transparent procedures for the operation of the fund and its bidding process; and proper accountability of the Fund e.g., independent audit, proper monitoring and reporting procedures,” it further stated.

Justification for entry-level subsidy

Clarifying its reasons for initiating such entry-level subsidy, the document noted that the government was concerned about the electricity supply gap between rural and urban Nigerians, hence, a means to quicken a bridge in the gap.

It said as much as 70 million rural folks are without electricity in the country, adding that an entry-level subsidy for power production should be able to spur investments in rural electrification.

“The FGN has identified alleviating poverty and addressing the needs of rural populations as a matter of equity. Currently, rural Nigerians do not enjoy, to the same extent, the infrastructure services available to urban residents of Nigeria. Thus, improving access to electricity services in rural Nigeria, through initial capital subsidies to RE schemes, is also intended as a means to improve the quality of rural life and stem the tide of rural-to-urban migration,” the document added.

It explained: “This rural electrification strategy while striving to achieve federal government goals, shall: promote a full menu of rural electrification options – grid and off-grid (mini-grid and stand-alone) from thermal and renewable; ensure close co-ordination of rural electrification expansion with economic development objectives; encourage states, local communities and businesses to develop and contribute financially to rural electrification, and; facilitate the entry of new market participants and continued development of local rural electrification ventures whose activities may include the production, installation, operation, maintenance, and distribution/sales of equipment, systems, and services related to power supply in rural areas.”

According to it: “Through the REF, the FGN will provide grants towards the initial capital costs of qualified rural electrification schemes. Such subsidies will be offered to rural electricity projects that promote the objectives of the FGN’s approach to rural electrification. Funding will be provided to selected projects upon completion of certain requirements in accordance with international best practice.”

It further noted that: “The process for selecting and awarding projects to receive funding will be designed to maximize transparency, efficiency, competition, and sustainability in the funding process and within the projects themselves. The subsidy grants will be applied to the initial start-up costs of rural electrification schemes, which have been a known barrier to entry.

“By subsidizing the cost of establishing rural electrification scheme, the FGN will encourage participation by a broader range of potential service providers, including community-based organizations, private sector entities, NGOs, and others, who may have been excluded in the past due to high start-up costs. By providing such support, the FGN is also hoping to mobilize matching financial contributions to rural electrification scheme.”