25 June 2016, Lagos — It is evident that the renewable energy sector is gaining significant traction across the world. Hardly any week passes without a major headline announcing a new investment in large scale solar installations, ground-breaking innovations plus institutional support such as the one offered by France early this year to invest in excess of three billion Euros in African renewable energy projects. The renewables energy industry is now a key focus for energy policy makers considering its potential impact on energy balance and security.
According to REN21, an international coalition of governments and renewable energy trade associations, $328.9 billion was invested worldwide in solar, wind and other renewable energy sources in 2015 alone. Presently, multi-million dollar renewable energy installations are being developed in different parts of the world and it is envisaged that these benign sources of energy will achieve grid parity with fossil fuel sources within five years from now.
Sourcing and harnessing renewable energy represent an exciting new field that could significantly alter the way we live, especially in countries like Nigeria. A key limiting factor has always been cost, which has been declining over the past decade. It is now an established fact that the leveled cost of electricity (LCOE) generated from a utility-scale PV power plant has fallen by more than 50% between 2010 and 2015.
Debunking the myth
Utility scale PV power projects can now deliver electricity for just under $0.08 US cents per KWh without any financial uplift or support, while conventional fossil fuel oscillates between $0.05 to $0.15/kwh. This is an astonishing shift and even major utility companies are now evaluating the potential impact of this trend on their business long term sustainability and profitability. Concerns have been raised about stranded and underperforming fossil fuel assets reflecting critical value at risk due to developments in renewable energy sources. Recent tenders conducted in Chile, Brazil and South Africa have all reinforced the fact that solar PV power plants can be competitive and that solar energy represents an environmentally clean alternative source of energy. Dubai recently concluded a tender for the construction of a 200MW solar PV plant that was won by ACWA Power of Saudi Arabia in partnership with a Spanish consortium. The contract was awarded to this group with offtake or power output purchased at sub-US$0.06/kwh for a period of 25 years.
Solar energy and indeed other renewable energy sources provide a dependable, cost effective and environmentally safe alternative to fossil fuel and their significance will continue to increase over the coming decades. The price level of below US$0.06 achieved in Saudi Arabia is indeed unprecedented and goes a long way at debunking a widely held view that PV power sources do not represent a financially viable alternative for investors and governments to procure electricity. A range of US$0.08-0.09 has been recorded in India and Brazil. These offer prices demonstrate the tremendous pace of technical, commercial and financial innovations within the PV industry, something unheard of just a decade ago.
On the local front, we all have had our minds abused by the proliferation of low-cost, substandard and technically inferior solar panels and batteries deployed for powering street lights in many parts of Nigeria. Many of these projects implemented at federal, state and local government levels were embarrassing failures. Energy consumers in Nigeria have lost faith in the ability of solar energy to make any meaningful contribution to our current energy mix. I have been asked several times if indeed solar energy harvesting holds any promise, why its unacceptably high failure rate and why is it that they just do not work after a few months? The answers are not far-fetched, notably, importation of cheap sub-standard products and absence of technically qualified practitioners for project implementation. I have seen where a technician connected solar panels directly to the battery without charge controllers. The consequences are obvious, the battery will underperform or expire within a short period.
However, recent developments within the solar industry call for a rethink and for our government to fine-tune its renewable energy policy agenda towards supporting development and deployment of solar PV power across residential, commercial and industrial sectors.
Solar panels generate free electricity through conversion of the sun’s energy that strikes a semiconductor material within photovoltaic cells. This action creates an electric current which can be predicted with reasonable accuracy and the case of input price volatility is almost non-existent as sun radiation is free. A home or corporate PV system performs a number of cost saving functions: It reduces dependence on two main sources of power, the grid (PHCN) and a stand-alone backup power diesel generator. It reduces the amount of power we purchase from distribution companies and our dependence on diesel power generators, invariably producing no air or noise pollution. Solar power systems are modular and residential and commercial owners can add more panels, increase their storage capacity as their energy use increases and their financial resources grow.
Why the slow uptake?
A key factor affecting the acceptance and deployment of solar power is the attendant cost of setting up micro-solar PV roof-top plants, especially for residential consumers. A typical 5KWp system capable of harnessing up to 20kW per day will require at least 20, 250-watt panels for this to be achieved. At current price levels, 20 high-grade solar panels will require an investment in excess of 1.2 million Naira for procurement and installation. Besides, such home system will require a decent sized inverter of 5KVA and above. Charge controllers and batteries will entail an additional capital cost in the range of one million naira plus. Hence, to provide a home solar solution for the average middle-income home will cost in the region of three to four million Naira. This represents a huge upfront cost for the average middle-income earner, who on a second thought would rather invest one to two million Naira to procure a decent size diesel power generator that will probably cost another million or more per annum on maintenance and fuelling. However, a simple cost-benefit/return on investment analysis indicates that solar PV home systems are certainly cheaper to own and operate in the long run when compared to systems that run on fossil fuel such as PMS and AGO. The upfront cost of a solar system might seem steep, but in reality, the relatively low cost of running it and its maintenance free nature in addition to a very short payback period of between 18 to 24 months makes it an attractive proposition.
The need for Government support
The renewable energy industry requires purposeful support from the government to grow. Several proactive mechanisms have been developed and adopted by countries around the world aimed at jump-starting investment in renewable energy projects and innovations. These mechanisms include accelerated tax depreciation and preferential tax treatment as practiced in France, in addition to an acceptable feed-In-tariff (FIT) with a power purchase obligation on the state or local utility. In some cases, such as in Germany, grid operators are obliged to evacuate and transmit every renewable power available with a fixed FIT, guaranteeing acceptable returns on investment. In some cases, all output from renewable sources above 500KW can be sold to a local utility or off-taker at a negotiated price within a framework of a power purchasing agreement (PPA). The United Kingdom has in place what is known as Renewable Obligation (RO) for projects above 5MW and FIT for projects up to 5MW. These are all mechanisms designed to spur activities within the renewable energy space.
Our government certainly has a key role to play within the Nigerian context. In addition to introducing creative and sustainable fiscal terms, I am of the view that the government should facilitate the establishment of a Renewable Energy Development Fund (REDF), to be managed as a purely commercial establishment with the primary objective of incubating and supporting viable renewable energy projects, through provision of development and implementation capital at a single digit interest rate. This fund would be created to support the construction of renewable energy installations spanning solar, wind, mini-hydro and biomass. It is evident that most renewable energy projects can deliver power at sub 10 US cents and as such, it is important to create a framework of arrangement that places an obligation on the newly privatised distribution companies, Transmission Company of Nigeria and the Nigerian Bulk Electricity Trading Company (NBET) to purchase power from these renewable sources where available. This mechanism can further be strengthened through a sovereign guarantee instrument that will provide added comfort to both local and foreign investors.
With the deteriorating power supply situation, the need for a distributed model for power generation, sustained by renewable power cannot be overemphasised. Solar power can provide electricity to support commercial and residential activities even in remote villages and towns. Considering its increasing significance, the government must develop a clear strategy geared towards ensuring that viable renewable energy projects are identified, structured and financed without further delays. The key to this lie in establishing a dedicated renewable energy development fund for Nigeria, managed in line with strict commercial principles.
*Charles Opara-Ndudu is an energy policy analyst and can be reached on firstname.lastname@example.org.