Why renewable energy companies rely on debt financing

For service companies in Nigeria, Nigeria’s population of 200 million is an advantage.

But that 200 million should be followed by an asterisk at the end, because that doesn’t exactly translate to a thriving consumer base.

It’s easy for companies that provide off-grid energy services to get confused. Over 40% of Nigeria’s 200 million people live without grid access. In addition, the electricity supply for those who have access to it is not excellent, thanks to the deplorable state of the network. It is therefore easy to assume that providing alternative energy sources to Nigerians would be a definite winner. But not quite.

Some takeaways:

  • Renewable energy startups raise more debt financing than startups in other sectors. One of the main reasons is that renewable energy solutions are capital intensive and high risk.

  • When we look at who funds renewable energy startups, whether through equity or debt, we find that much of the funding comes from or is backed by development finance institutions (DFIs), corporate in the energy sector and peer-to-peer lending platforms.

  • But renewable energy startups in Africa have fewer financing options than those in developed countries. While support from DFIs is key to attracting more private sector financing, it is important to reduce the risks associated with financing African renewable energy startups.

The major problem is that Nigerians are poor and those without access to the grid live in the poorest parts of the country, which are mostly rural areas. For people who live in urban areas, renewable energy providers must compete with generators for commercial and industrial consumers and low-income retail consumers. This poses a big problem for renewable energy companies: slow-growing revenue when their capital is tied up in receivables. It also doesn’t help that renewable energy solutions are capital intensive, especially in the short term.

The road to entrepreneurial success in Nigeria is bumpy and renewable energy companies are not exempt. This is especially true

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Carol M. Barragan