Solar Power Gaining Competitiveness In Nigeria As Electricity Tariffs, Diesel Costs Rise – InfraNergy CEO
Dr. Uche Isiugo, the Founder and Chief Executive Officer of InfraNergy, a US-based solar PV and energy storage developer company with operations in Africa, has explained why Nigeria’s solar energy penetration has remained relatively modest despite decreases in cost of solar, improved technology and the huge potential of solar in addressing the country’s power challenge.
Isiugo, who spoke in an exclusive interview with THE WHISTLER, held that utility electricity tariffs in the country will continue to rise until they get close to the actual cost of power being used by consumers, to the extent allowed by regulation.
According to him, discerning businesses and power consumers are now increasingly opting for solar, owing to the unreliable national grid and rising costs in the electricity value chain, driven primarily by gas and diesel prices. The average manufacturing company in Lagos, Nigeria where diesel prices are lowest, paid about ₦220 per litre for diesel in February 2021 to run their generators, but about a year later, they see that diesel now costs over ₦600 per litre. These businesses are already grappling with high production costs and low sales, so we try to help them boost profitability and remain competitive.
He said because of the “artificially low” utility tariffs being offered by electricity distribution companies in the country, Nigerians had in the past, not viewed solar energy as a cost-effective and sustainable energy source, however, utility and diesel cost increases are driving Nigerian businesses to make astute decisions in switching to lower cost solar. By 2020, the global cost of solar electricity dropped by 89% in ten years to become arguably the cheapest source of power, due mostly to huge leaps in technological advancement.
Post-COVID, economic issues and supply chain bottlenecks have contributed to higher costs across all sources of power, but solar power has emerged as a reliable and cost effective complement and alternative to the unreliable power grid and generators, even after accounting for relatively low utility tariffs, which have been supported by government subsidies in gas and power.
Subsidies tend to be a hot button issue where we have sort of a Catch-22 problem: the masses prefer to keep utility costs low, so on one hand, raising the tariffs could lead to strikes and political repercussions, but on the other hand, mounting government debt which helps finance the subsidies and keeps tariffs artificially low, is unsustainable.
According to him, this trend is hurting distribution companies as they are losing money in trying to keep electricity tariffs low.
“The tariffs paid to Nigerian electricity distribution companies are lower than the actual market rate, so they are not cost-reflective. The companies would be able to make more money and pay back their capital if they were charging tariffs that are cost-reflective. So, I think the tariffs ought to be higher and this is inevitable, due to market forces.
Isiugo said the low tariffs, among other issues, affect the electricity distribution companies’ ability to be profitable.
With improved reliability and decrease in cost of solar power over the years, Nigerian electricity distribution companies should view solar companies as potential partners to serve end-customers together. Several business models between the utilities and solar developer companies can be pursued and implemented, which would lead to improved cash flow and profitability for both the utilities and solar companies.
Isiugo added that Nigerians used to be doubtful about the sustainability of solar energy as a source of electricity supply.
“I think people were once dubious of solar being a resilient energy source and we have disabused their minds of that notion, because people who use solar and love it, really love it,” he said.
He explained that this could be because when Nigerians were first introduced to solar seven to twelve years ago, they were deceived by suppliers who sold them cheap, unreliable products at a healthy profit margin, to the detriment of customers.
He said to be fair, due to inexperience, some of these suppliers may have not been well-informed about the varying quality and reliability levels of different brands of solar products. The products would end up malfunctioning after a few years and the customers would be disappointed.
“So, the issue is, as you know, Nigerians drive a hard bargain, so most people who purchased solar some years ago, bought cheap materials and that was likely because the installer wanted to meet a high-profit margin, so they sold customers the cheapest goods in the market and charged them at a price where they could make a profit.
“Because of that, a lot of these systems would stop working in a couple of years and I’ve heard a few horror stories. But I think now, we’re at a certain phase where people who are buying solar are getting higher quality products with solid manufacturer warranties, and they are seeing that it actually works,” he said. Thankfully, solar and battery technology has matured and the largest companies in the world now find solar reliable enough to power their most critical operations, including trillion-dollar companies such as Google, Apple and Microsoft, and large manufacturing companies in Nigeria are now beginning to engage InfraNergy to integrate solar into their operations. We essentially help finance, design, install and synchronize solar with your grid power source and existing generators, which leads to durable cost savings which can be well above 30%.”
He further stated that the biggest competitor to solar energy at the moment are generators, especially diesel generators.
“I think the biggest competitor for solar in Nigeria is diesel generators in general, and we’re moving to a sort of tipping point where in both the short to long run, diesel prices are going to go up significantly, and other fossil fuels including gas will spike in costs and volatility. Thus, subsidies will become too expensive to maintain, and this will lead to profound opportunities for businesses to save costs, avoid price volatility, and improve the flexibility of their power situation by installing solar. With our commercial agreements, InfraNergy enables businesses to lock in cost effective, sustainable power prices over a long horizon, as they consume cost effective solar energy which is generated in their premises.
“Big picture, looking at the oil and gas sector within the energy industry, the oil reserves are not increasing; also, it costs more money to drill for oil and these oil and gas companies don’t have as much access to capital as they once did, so cost of capital will go up.”
“So, we will not only have higher cost, we’ll also have lower quantities of oil reserves which would mean lower supply. That, in theory, means it would make refined products go up in price, over a long 10 to 20 years, as solar adoption continues to grow, and investors get the picture and are quite keen on solar as a result.
“With those market forces occurring, it adds more competitiveness for solar and people would increasingly flock to the solar space to get solar solutions,” he said.
With improved solar technology, InfraNergy offers Energy-as-a-service and Power Purchase Agreements (PPAs) and touts superior power equipment, including solar panels which have a 25-year design life and battery energy storage which comes with a 10-year warranty option.
The company allows businesses pay for a solar-based power service without having to make any upfront capital investment. This takes the form of a subscription for electrical devices owned by InfraNergy or management of a customer’s energy usage. Similar to a software-as-a-service model, businesses avoid capital expenditures like solar, battery and inverter equipment costs and maintenance, and pay only for ongoing service.