Lower Tax Regime to Attract Investment in Renewable Energy, Says Report

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Goddy Egene

A new report by the Lagos-based financial advisory company, Financial Derivatives Limited has advised the federal government to incentivise the private sector in investing in renewable energy through cheaper financing and lower taxes.

In its latest economic report made available to THISDAY, the company stressed that lending rates in Nigeria – currently at an average of 17.5 per cent – were too high for investors who require capital to start up businesses such as in renewable energy.

The report noted that countries such as China, United States and India, which are leading the renewable energy revolution, offer substantially lower rates.

According to the report, the average commercial bank lending rate in India, for example, was about 9.45 per cent per annum.

In the US and China, the rates are at an average of 4.3 per cent per annum, the report revealed.

“The Nigerian government has made concessions for other sectors, enabling cheaper financing to agriculture and manufacturing in order to encourage their growth.

“While the monetary policy rate is unlikely to reduce lending rates in the near term, the government might consider offering similar lower rates to power sector investors, particularly for those who are investing in renewable energy,” it added.

The report also noted that Nigeria’s installed electricity capacity is 12,522 megawatts (MW), well below the current demand of 98,000MW.

“But the actual output is about 3,800MW, resulting in a demand shortfall of 94,500MW throughout the country.

“As a result of this wide gap between demand and output, only 45 per cent of Nigeria’s population have access to electricity.

“This power deficit has also weighed negatively on business operations in the country,” the report noted.

“Users must seek alternative energy means, primarily through buying gas and diesel-powered generators.

“These alternatives are relatively expensive, and most businesses that use them incur high production costs.

“Besides curtailing domestic business activities, the poor capacity of electricity in Nigeria deters foreign direct investment inflows into the country, as investors are typically weary of high electricity costs and shortages.

“Nigeria’s total electricity mix is largely dominated by non-renewable energy despite a vast potential in renewable sources,” it stated.

According to the report, its exploration and adoption through private investments, offer a probable solution to the power challenges in the country.

The report added that attracting private sector investment into this area demands business-friendly measures such as lower interest and tax rates.

According to the report, electricity generation for Nigeria’s grid is largely dominated by two sources – non-renewable thermal – natural gas and coal, and renewable water or hydro.

“Coal and natural gas make up the largest portion of energy production in Nigeria, while energy generated from hydro is well below potential.

“Nigeria depends on non-renewable energy despite its vast potential in renewable sources such as solar, wind, biomass and hydro.

“The total potential of these renewables is estimated at over 68,000MW, which is more than five times the current power output.

“The exploration of these potentials and the production of renewable energy on a large scale would significantly increase Nigeria’s electricity grid and ease power shortages in the country.

“Electricity created from renewable sources is cleaner, more efficient and more easily replenished,” it added.

It, however, recalled that the federal government had made efforts towards renewable forms of electricity in the country.

For instance, the report noted that in 2006, the Ministry of Environment implemented the Renewable Energy Master Plan (REMP), which was a strategy that aimed to increase the contribution of renewable energy to Nigeria’s total energy production by 2025.

“The plan was produced with the support of the United Nations Development Programme (UNDP).

In 2015, the current administration drafted the Nigerian Renewable Energy and Energy Efficiency Policy (NREEEP), which focused on harnessing alternative energies such as hydro, solar, wind and biomass.

“This policy indicated that hydropower is the most important renewable energy source to be developed to harness the country’s full potential,” it stated.

“Despite these plans, there has been no significant addition of renewables to the national grid. Total power output remains between 3,500MW-3,800MW, with non-renewable sources accounting for 80-85 per cent.

“The government’s inability to achieve its objective is largely due to a weak commitment to the proposed plans. In line with the power sector privatisation objectives, the government could consider luring private investors into the renewable energy space.

“Private investors, as complementary agents in a mixed economy, could overcome the government’s flaws and achieve more significant results if the federal government shows more of a commitment,” it stated.