Nigeria is Africa's largest proven market for Decentralized Renewable Energy (DRE), yet the market struggles to scale due to several challenges, primarily from the various import duties and associated levies imposed on solar systems. Chibueze Ebii examines the potential impact of import duty and tariff exemptions on DRE products in the renewable energy sector.
Previously, solar panels in Nigeria were categorized under Heading 8541, resulting in their exemption from import duties. However, the recent reclassification of solar panels under Heading 8501 has subjected imported solar panels to import charges, including up to 10% in duties and Value-Added Taxes (VAT). The Nigerian Customs Service argues that this reclassification was necessary because all solar panels entering the country are equipped with elements such as diodes that directly supply power to motors or electrolyzers, thereby warranting the imposition of duties. However, solar energy companies have raised concerns about the justification behind imposing duties on solar panels, as the customs code explicitly states that items classified under Heading 8501 pertain to only DC generators with 'moving parts,' which does not align with the characteristics of solar panels.
But how much does a 5% import duty and 5% VAT on solar panels affect the market? And is there any significant price consequence on solar-PV systems or the revenue of solar companies?
Since 2016, there has been a concerted effort by renewable energy companies and stakeholders to advocate for duty exemption on solar-PV systems. The call for duty exemption extends beyond solar panels alone and encompasses the various components that constitute a complete solar-PV system, such as batteries, inverters, and charge controllers, all of which attract individual import charges. According to industry experts, including Segun Adagu, former President of the Renewable Energy Association of Nigeria, granting zero duty on solar-PV systems and their accompanying components could potentially lead to a significant reduction of up to 25% in the price of these systems. However, in order to prevent potential misuse of this opportunity by importers of unrelated products, the Nigerian Customs Service (NCS) would need to establish a robust system to ensure proper regulation.
The Socio-Economic Benefits
Multiple studies conducted by reputable organizations have consistently demonstrated the socio-economic benefits of expanding renewable energy solutions within a country. As indicated in a 2013 report by the United Nations Environmental Programme (UNEP), the adoption of modern off-grid lighting solutions powered by renewable energy could lead to annual savings of up to $1.4 billion for Nigeria. This significant financial gain would result from replacing traditional sources such as kerosene, candles, and batteries commonly used for off-grid lighting. Furthermore, the Nigerian Rural Electrification Agency (REA) estimates that there exists a substantial market opportunity of approximately $10 billion for mini-grids and solar home systems. By embracing these technologies, Nigerian households and businesses could collectively save an impressive $6 billion annually, according to the REA's projections.
Micro, Small, and Medium Enterprises (MSMEs) play a crucial role in the Nigerian economy, contributing more than 50% to the nation's GDP. The availability of reliable electricity through solar-PV systems holds great significance in enhancing the productivity and income of small businesses in Nigeria, thereby potentially increasing government revenue from taxes. A compelling example is that of Efe Obiuwevbi, a barber who made the switch from a small petrol generator to a Pay-As-You-Go solar-PV system. This transition resulted in a remarkable revenue increase of over 150% for Efe, enabling him to open two additional salon outlets and hire more barbers. The savings from not purchasing petrol or maintaining petrol-powered generators played a significant role in his business expansion. Efe's success story highlights the substantial economic impact that implementing zero duties on solar products can bring by making solar-PV systems more affordable.
In 2019, the federal government allocated approximately ₦305 billion to subsidise petrol importation. Considering the substantial number of MSMEs in Nigeria relying on generators, there is a significant opportunity for the government to save billions of naira if these MSMEs can afford stand-alone solar-PV systems through the implementation of zero duties. These savings could then be redirected to address crucial areas within the economy, fostering growth and development.
The issue of job creation has consistently been at the forefront of political and economic discussions in Nigeria, as policymakers and politicians strive to find avenues for increasing employment opportunities. The renewable energy sector presents a significant potential for job creation in the country. According to UNEP, off-grid solar solutions employ approximately 30 people per 10,000 individuals in rural areas, compared to just one person per 10,000 individuals in the case of kerosene. The solar energy sector holds tremendous potential for job creation, and Nigeria, as Africa's largest renewable energy market, can leverage this opportunity to generate employment opportunities for its citizens. In 2017, the United States reported that the solar energy sector alone created more jobs than the oil, coal, and gas sectors combined. A substantial reduction in the price of solar-PV systems resulting from the implementation of zero duties could significantly drive up market demand, leading to positive effects on the job market by creating a higher demand for solar energy professionals and consultants.
The solar energy sector in Nigeria is already experiencing growth, with a rise in the establishment of renewable energy companies dedicated to providing solutions to customers. The Renewable Energy Association of Nigeria (REAN), founded in 2016, has already registered approximately 70 renewable energy companies in Nigeria and anticipates further registrations in the coming years, particularly in the Pico Solar and Small Home Solar (SHS) Systems segment. Some renewable energy stakeholders have also projected the potential establishment of large-scale manufacturing factories for solar panels and other components, which would only materialize with a significant increase in demand. Currently, there are two solar assembly facilities in the country operated by Auxano Solar and Blue Camel Energy. Suleiman Yusuf, CEO of the Blue Camel Solar Assembly and Training Academy, highlights the need for tariff exemptions for solar components to catalyze market growth and make solar-PV systems more affordable, particularly for rural consumers and SMEs. However, he also emphasizes the importance of establishing a timeline. As the market matures and local manufacturing and assembly capacity improves, especially among domestic companies already engaged in manufacturing and assembly, tariffs will need to be reintroduced to protect the local assembly and manufacturing market and drive economic growth.
Zero Duty in Other African Countries
Rwanda, Burundi, Kenya, Tanzania, and Uganda are among the African nations that have successfully expanded their adoption of renewable energy by implementing import waivers for renewable energy products, including accessories and deep cycle batteries. Kenya, in particular, has witnessed a notable nearly 50% reduction in the price of solar-PV systems, making them increasingly affordable, particularly for rural consumers. Recognizing the surge in demand for solar systems, Kenya introduced duty remission in 2011 for the importation of raw materials used in manufacturing solar equipment, thereby bolstering the production and competitiveness of locally manufactured solar products. Policymakers in Kenya view the widespread adoption of solar systems, particularly in households, as a means to alleviate the strain on the national grid, thereby freeing up electricity supply for the manufacturing sector.
Meeting up to Climate Commitments
While Nigeria may not be the largest contributor to climate change, the significant carbon emissions from millions of petrol-powered generators have a notable impact on global warming. As a signatory to the Paris Climate Agreement, Nigeria has committed to unconditionally reducing carbon emissions by 20%. To achieve a substantial portion of this commitment, Nigeria can turn to the Renewable Energy sector. In its National Determined Contribution (NDC) document, Nigeria estimates that the Renewable Energy sector alone has the potential to offset approximately 31 million tonnes of greenhouse gases annually by 2030. Implementing a zero duty policy for solar energy products could be the most effective strategy to meet this target.
While the Nigeria Customs Service maintains a 10% import duty levy on solar panels, some government agencies and policymakers recognize the economic benefits of a zero duty regime for solar products. In 2015, the Federal Ministry of Power developed two policy documents, the National Renewable Energy and Energy Efficiency Policy (NREEEP) and the National Renewable Energy Action Plan (NREAP), which outline fiscal and market incentives to support the deployment of renewable energy technologies in the country. These policy documents were adopted by the Inter-Ministerial Committee on Renewable Energy and received approval from the National Council on Power and 17 Nigerian government agencies and ministries in July 2016. However, the implementation of these policies to achieve their intended targets has been lacking.
While the Nigerian Customs Service's 10% import duty on solar panels may have economic justifications to generate revenue for the federal government amidst the renewable energy boom in Nigeria, it is important to consider the socio-economic implications of making affordable and accessible power available to everyone through renewable energy. A critical analysis reveals the vital role that a zero duty implementation could play in the economic development of Nigeria, outweighing the short-term revenue gains and fostering sustainable growth through widespread access to affordable power.