An extract from The Renewable Energy Law Review, 3rd Edition

Renewable energy project development

i Project finance transaction structures

The privatisation of Nigeria's power sector and the acquisition of power assets worth US$3.3 billion was largely funded by local banks through corporate finance structures with guarantees required from the sponsors' existing businesses. However, Nigeria has yet to record a project financed renewable energy project. To date, the 459MW gas-fired Azura-Edo project remains the first and only successful project-financed greenfield power project in Nigeria.

Notwithstanding the above, we note that CrossBoundary Energy Access (CBEA), Africa's first project financing facility for mini-grids, has announced its launch, with funding commitments from the Rockefeller Foundation and Ceniarth. CBEA is expected initially to invest US$16 million into mini-grids serving 170,000 people, providing first-time power to homes and businesses. The focus is on markets with supportive mini-grid regulatory frameworks, such as Tanzania, Nigeria, and Zambia.

Principal documentation for renewables project finance

Bankability under project finance is largely dependent on proper risk allocation as provided in the suite of agreements to be executed at each stage by the project stakeholders. A broad overview of the agreements and project documents negotiated and executed under the Azura-Edo deal, and the counterparties concerned, is provided below.

Property and land documents

Under the Azura-Edo project, the following property documents were executed between the Edo state government and Azura Power in conjunction with the relevant host communities: Certificate of Occupancy (C of O), Deed of Assignment or Deed of Lease.

Power purchase agreement

A PPA was concluded between NBET and the Azura-Edo IPP.

Finance documents

Some of the finance documents executed under the Azura-Edo project include: security documents such as an account charge agreement; intercreditor agreements; hedging agreements; subordination agreement; accounts agreements; DFI loan agreements; local bank loan agreements; common terms agreement; claims cooperation agreement; and mezzanine loan agreement.

Credit enhancement facilities

A standby letter of credit (LC) was provided by NBET backed by a series of World Bank PRGs provided by the International Bank for Reconstruction and Development (IBRD).

IBRD also provided political risk insurance cover, which was also contemplated under the insurance cover provided by the Multilateral Investment Guarantee Agency (MIGA).

Other credit documents and agreements executed under the Azura-Edo deal include:

  1. project agreement (debt mobilisation) between IBRD and the Azura-Edo IPP;
  2. PRG (debt mobilisation) between IBRD and the lender's agent (Standard Chartered);
  3. indemnity agreement between IBRD and the federal government;
  4. project agreement (letter of credit) between IBRD and Azura-Edo;
  5. reimbursement and credit agreement between JP Morgan (LC issuing bank) and NBET;
  6. MIGA host country approval between the federal government and MIGA; and
  7. NBET cooperation agreement between IBRD and NBET.
Operations and maintenance agreement

An O&M agreement was concluded with the O&M contractor.

Engineering, procurement and construction contract

An engineering, procurement and construction (EPC) agreement was concluded with the EPC contractor.

Original Equipment Manufacturer Agreement

An original equipment manufacturer (OEM) agreement was concluded with the manufacturer.

Put–call option agreement

The PCOA sets out the terms and conditions by which the investor may sell its interest or shares in the project company to the federal government in the event of a government or investor default under the PPA with NBET. In the Azura-Edo deal, the PCOA was entered into between the federal government, NBET and the Azura-Edo IPP.

Direct agreements

Direct agreements give the lenders the right to step into the shoes of the sponsors where there has been a default. It allows the lenders an opportunity to cure any defect that might occur as a result of an action or inaction of the project sponsors. This will typically include: a PPA direct agreement; an O&M direct agreement; an EPC direct agreement; and a PCOA direct agreement.

Tenor of renewable energy projects

There is currently no industry standard for the term of a debt for renewable energy projects in Nigeria, particularly as there is no recorded project-financed renewable energy project. Commercial bank loans are typically short-term loans of three to seven years, except in the case where credit enhancements have been provided to give comfort to the banks, as was the case in the Azura-Edo deal. The Azura-Edo deal was financed with loans from a range of DFIs, local banks and multilateral agencies. In contrast to commercial bank loans, DFIs typically provide long-term financing for a period of 15 to 20 years.

Principal participants in project finance transactions

Within the Nigerian context and using the Azura-Edo project as a benchmark, the participants in a traditional project finance structure will include the following:

  1. the project sponsor, who typically would be the initial promoter of the project and could be an individual, a company, a state or a combination of these;
  2. co-sponsors, who will typically include bigger project development companies with deeper pockets, more technical experience and access to financing who would join the project at certain stages of the project (depending on their risk appetite); for example, the Azura-Edo project had a total of five sponsors;
  3. the lenders, who, in a syndicated lending, would include lead arranger, security trustee and facility agent;
  4. DFIs and export credit agencies;
  5. guarantors (e.g., MIGA, World Bank);
  6. advisers, including technical advisers, legal advisers, financial advisers, tax and audit and environmental impact advisers;
  7. the state or federal government, as applicable;
  8. the TCN;
  9. contractors (EPC, OEM and O&M);
  10. offtakers (NBET in this instance); and
  11. insurance companies.
Institutions involved in the financing and offtake of renewable energy projectsFinanciersCommercial banks

The commercial banks involved in the Azura-Edo project include Standard Chartered Bank, Siemens Bank, Stanbic IBTC Bank, Rand Merchant Bank and First City Monument Bank. However, we have noted that the commercial banks are hesitant about funding renewable energy projects and we have yet to see any funding structure involving a commercial bank for such projects. We are also aware that some projects may utilise Islamic finance models in their financing structure.

DFIs

The DFIs used in the financing of the Azura-Edo project include Africa Finance Corporation, FMO, Infrastructure Crisis Facility – Debt Pool, and CDC Group. It is important to note that the IFC and FMO are currently involved with a few of the 14 solar project developers.

Offtakers

Several institutions purchase and use renewable energy, mostly as an alternative source of power. For the supply of power on-grid, the offtaker is NBET. As Nigeria's renewable energy market has yet to be fully developed to accommodate the injection of power from distributed renewable energy sources, most projects that adopt renewable energy operate hybrid systems with power from renewable energy sources serving as backup to grid or diesel generators. This is typically the case with respect to commercial banks that use solar to power ATMs, or petrol stations that use solar to power their dispensers. Furthermore, residential offtakers, as well as businesses and MSMEs in the service industries, including small health solution centres, tailors and salons, make up a high percentage of the offtakers that utilise solar energy in Nigeria. In Nigeria, unlike in other countries, there is no market for renewable energy credits.

Distributed and residential renewable energy

Distributed renewable energy generation is the most common method of renewable energy deployment in Nigeria, with solar energy being the most prevalent source of renewable energy utilised. The distributed renewable energy providers in Nigeria offer various options for power supply, which entail different ownership structures:

  1. Outright purchase: energy consumers may acquire the solar energy equipment by outright purchase and install it on their sites for their use. In this case, the electricity consumer takes full ownership of the equipment.
  2. Lease to own: renewable energy providers also offer lease-to-own schemes that allow the electricity consumer to pay for the equipment over a period while continuing to use it. Ownership remains with the renewable energy provider until payment is complete and it then passes to the electricity consumer.
  3. Subscription (power as a service): in this arrangement, the solar equipment is installed on the electricity consumer's site; however, there is no transfer of ownership. Instead, the consumer merely pays a subscription fee to use the equipment. Ownership remains with the energy provider.

The current trend in the Nigerian market is for small-scale solar systems that can be used to either supplement grid power or generators. Companies such as Arnergy Solar, Daystar Power Energy Solutions and MTN Lumos are prominent participants in this space. New entrants to the market such as Rensource, who provide subscription-based power from solar, are expected to help grow Nigeria's renewable energy market by providing highly competitive prices and flexible power solutions that can be tailor-made to meet the needs of both businesses and residential offtakers.

Non-project finance development

Apart from project financing models, other non-project finance structures have been explored for developing renewable energy projects globally. One such structure is crowdfunding, which has helped support a number of projects in Africa, some of which are in Nigeria. While crowdfunding is currently not permitted in Nigeria, developers have been able to take advantage of foreign crowdfunding platforms to finance local projects. A good example of these platforms is Bettervest GBMH, a German company that has publicly expressed interest in the financing of renewable energy projects. Through Bettervest, SOSAI Renewable Energies Company, an indigenous company, has been able to raise almost €450,000 in three investment rounds from over 800 investors around the world. Also, Havenhill Synergy Limited, in addition to its US$50,000 grant from the USADF, is seeking to raise additional funding using Bettervest for up to 69million naira to undertake a solar mini-grid project in Kwaku, Abuja.

Investment funds have in recent times been explored to finance renewable projects in Nigeria. CrossBoundary Energy, Africa's first dedicated fund for commercial and industrial solar, falls within this category. Renewable energy developers have also benefited from grants provided by DFIs in Nigeria, such as the Bank of Industry, and international DFIs such as the UK DFID and the African Development Bank, which recently approved a US$25 million investment fund for renewable energy projects in Nigeria and West Africa.

Also, in 2019, SunFunder, provided US$4 million in debt funding to Daystar Power Nigeria Limited to scale up its business of providing renewable energy solutions to businesses in Nigeria.

Commercial banks such as Sterling Bank Plc have dedicated certain funds for the purpose of financing and facilitating renewable energy growth in Nigeria. Sterling Bank has developed a trading platform, 'Imperium', with the aim of connecting customers with renewable energy providers to ensure more stable electricity for these consumers. In addition, the bank has expressed its commitment to providing financing for long-term renewable energy projects with the aim of providing access to electricity for businesses and communities. In this regard, Sterling Bank partnered with Zola Electric, a for-profit social enterprise, to make distributed renewable energy accessible to Nigerians businesses and households in need of a constant and clean power supply.

Another financing model that has recently been adopted in Nigeria is the use of early risk financing and construction financing for initial-stage funding in renewable energy projects, usually up until the commercial operation date. For example, Renewvia Energy Africa, seeking to raise about US$350 million for its Africa-focused renewable energy project has executed a partnership agreement with Dream Projects Incubator, which will provide a portion of the required financing as capital investment in Renewvia Energy Africa.

Furthermore, the federal government has taken to providing financing for renewable energy projects in Nigeria; for example, through the 10 billion-naira green bond issued to support the Energizing Education Programme implemented by the REA (see Section I.ii). Also, as at October 2019, the federal government, through the REA signed grant agreements with seven renewable energy investors under the World Bank funded NEP for output-based funding and performance-based grants with respect to the funding of solar-hybrid projects.