Monday 09 April 2018 30 BUSINESS DAY FEATURE New import duty on solar panels: How Nigeria preys on dreams The new 10 percent tariff on solar panels will wreck havoc on Nigeria’s clean energy ambitions, limit energy access for over 85 million people while running aground small businesses, writes ISAAC ANYAOGU. On any given day, Femi Adeyemo, a cofounder of Arnergy Solar Limited is about as calm as a clear evening after a windy rain, but not on March 26. Over the phone, his voice reeked of pain, disappointment oozed out of every pore on his skin, so real, you could feel it. “How could they do this? Just what kind of country is this?” He was reacting to a rash decision by the Nigerian Customs Service to impose a five percent duty and a five percent Value Added Tax (VAT) on solar panels coming into Nigeria. Those affected weren’t informed and the existing regulation was ignored, just a brutal exercise of discretion long starved of reason. Perhaps, if you imported products worth over N40 million after securing funding from an international development agency, when your business model demands recouping investments after two years from retail sales, and dreams of fantastic profits are as sure as a silver rain, you would understand the pain. For many solar operators in Nigeria, this is the reality. The odds are stacked against them to begin with. Solar infrastructure is insanely expensive because batteries already suffer a 20 percent duty. Many people mistrust its efficacy, as shards of failed solar street lighting projects, executed by politicians litter major Nigerian cities. Solar is still the best ruse to raid the public till. Concerns about its reliability during rainy weather and ability to power heavy electrical appliances like air conditioners are real. On the operational side too, upfront cost for constructing a 200kW solar diesel hybrid minigrid can exceed $2million. Annual cost for operation including customer service and overhead can exceed $100,000. Commercial debt for minigrids in sub-Saharan Africa when available, is typically above 15 percent. However, you would think that a country that has over 85 million without energy access and aspires to achieve the United Nations Sustainable Goals on energy will get creative about unlocking energy access for its people. Nigeria has a way of making your worst fears, look like annoying trivia. Grave implications This duty imperils rural folks the most, who are failed by governments that are distant and indifferent. Nigeria’s budding solar market valued at over N18bn according to operators, employing over 10,000 people will grind to a halt. Yet solar panel is exempted from duties according to Nigeria’s HS Codes classification. The Nigerian Customs Service arbitrarily decided to use a classification (85013300) meant for Direct Current (DC) Generators with movable parts rather than the normal 85414000 classification hitherto used for solar panels which attracts zero duty. Consequently, discharge of containers from the ports has been hampered and demurrage charges have risen for our members says Segun Adaju, president of the Renewable Energy Association of Nigeria (REAN), a trade group of operators in the country, at a press briefing organised in Lagos, on March 28. “This has grave implications for Nigeria’s quest to improve the ease of doing business and deepen Solar panels attract zero duty in Nigeria energy access for over 70million people with inadequate access to power,” said Adaju. This new tariff will accelerate value destruction within the industry, cause prices to rise to uncompetitive levels for rural dwellers and negates Nigeria’s clean energy ambition. “This arbitrary imposition of import duty will destroy our business model. We have modelled costs based on the absence of an import duty only for our products to arrive and suddenly we are slammed with 10% import duty. How do we recover this cost from customers paying less than N300 a day for power?” said Adeyemo. Last year, I visited farming communities in Kaduna and Abuja and saw first-hand the revolution in energy access for rural folks through solar energy. In Baawa and Kadabo communities, in Makarfi Local government area of Kaduna State, Innotech 18 Meter Tunnel Solar Dryer acquired by Habiba Ali, with support from Power Africa partner, the U.S. African Development Foundation (USADF), helps pepper farmers dry their produce in half the time it normally takes, saving them 40 percent of products that would have been wasted from weather and rodents. “First and quite importantly is that these dryers save time, saving them 2.5 days of the 5days it would normally take to dry the peppers. This has ensured that they get their peppers on time to get to the market and they do a better bid because they now have cleaner peppers ensuring they sell at a 20% premium,” Ali said. In Lagos, entrepreneurs like Femi Oye, through a revolutionary solar-powered kiosks strategically located around markets help traders reduce waste of fresh vegetables and fruits. The solar powered refrigerator is capable of extending the shelf life of foods and vegetables from 2 to 21 days. These new tariff will reverse these initiatives by young people motivated to solve practical problems, which their leaders binging on the common patrimony cannot remember. Over the last six months hundreds of containers of solar panel have entered Nigeria and the Nigerian Customs smells blood. “The import duty waiver on solar panels that the Nigeria Customs is undermining should only be the first step of what should be a comprehensive supply and demand side fiscal incentive policy to unlock the renewables sector in Nigeria. The incentives need to be more comprehensive and yet instead they are being rolled back,” Wiebe Boer, CEO of AllOn, an impact investment firm in the off grid space. Olateru Soji, on social media condemned the move too, “Why should 0% duty on solar in a country like Nigeria with an energy crisis even be up for debate? If we’re serious about any form of economic growth the Customs must reverse itself on this ridiculous duty increase.” Through the #NoToDutyOnSolar, thousands of Nigerians expressed their frustration with the decision. But popular outrage should have been unnecessary to convince the government that you don’t pull out a seedling to see how the roots are coming on. Arnergy like other operators have been unable to clear their containers of solar panel since January. The response from the Nigerian Customs Service employs the same logic you need to convince a hungry man that sniffing through a soup kitchen will satisfy his craving for food. “Solar panels is in 8501 called DC generator. It is anything that generates DC and 8501 talks about
Monday 09 April 2018 C002D5556 BUSINESS DAY FEATURE 31 generators and other generating sets. Generating sets are 8502. Solar panels are made up of minute photovoltaic cells and photovoltaic cell put together can be used as a signal and they can also be used for power. “Where they are used for signal, it is 8541 but where they are used for power generation, they are in 8501, the difference between these two is that 8541 does not have a bypass diode, while 8501 has a bypass diode,” said Anthony Anyalogu, head of classification at the Nigerian Customs Service. “What is a bypass diode? It makes it to have a constant energy wavelength, without a diode, it does not have a constant energy wavelength and you cannot use it for power because if you put your bulb on, it will be shaking but that of 8501 because of the bypass diode, can have a steady current. This is the technical version, shorn of all the verbiage; it effectively puts solar panel in the same class as diesel generators simply because the result of its activity is power generation. Joseph Attah, Customs PRO, in response to media questions gives the nuanced version, equally suffering a deficit of reason. “Government in a bid to support the power sector brought a policy that says solar panels which are under HS code 8541 attract zero percent duty but when you bring solar panels that have other systems they have components when it becomes a set having the electrons, the diodes. It will no longer be under 8541, it will be under 8502 and 8502 attracts five percent. This is what some of them don’t appear to understand.” Adeyemo and other operators disagree. “Solar panels are not mechanical components with moving parts, besides the Customs has always isolated other components and charged duties without objections from our members,” he said shortly before the press conference. Adaju counsels that even if the Nigerian Customs Service wants to reclassify import codes, it should notify the public and give operators time to adjust their business plans. However, Anyalogu insist this is standard practice in America, Europe and other parts of the world. But checks show that the United L-R: Femi Adeyemo, co-founder/CEO, Arnergy; Vera Nwanze, MD, Azuri; Dotun Tokun, MD/CEO, Solarmate Engineering Ltd; Chuks Umezulora, co-founder/COO, Auxano Solar Nigeria Ltd, and Segun Adaju, chief energizing officer, Consistesnt Energy, at a press briefing on imposition of import duty on solar panels in Lagos, on March 28. States and Germany give their citizens a rebate for using solar. In many African countries including Kenya, Tanzania and Ghana, solar panels are duty free. “In my experience working across several African countries, solar panels have always been duty free. In Ghana it is not only duty free but is given priority clearance at the ports,” said Vera Nwanze, general manager of Azuri Technologies. An analysis of the returns from investments in solar mini grids show that operators can make up 12.5 percent returns. Commercial banks offer loan facility at 22 percent interest and the imposition of this new tariff could wipe off 50 percent of their revenue due to high prices and consequent slow demand growth. Meanwhile the Federal Government sells 5 year bonds at 13.5 percent. You would have to be charity to think of investing in the sector now. “I think the government should just come out and tell us they don’t really want this solar thing, so we can decide what next, maybe to open a bakery may be better now,” says Adeyemo. Nigeria’s clean energy drive threatened In 2016, Nigeria signed the Paris Accord which sought to cut carbon emissions by reducing dependence on fossil fuels and ramping renewable energy adoption. To this end, Nigeria issued debut Green bonds to meet its Paris Nationally Determined Contributions (NDC). It realised N10.69 billion in 2017 and the ministry of environment is now targeting the issuance of N150 billion green bonds this year. Nigeria seeks to generate 30% of its power through renewables by 2030. To this end, pragmatic policy like the mini-grid regulation was released in 2016 by the Nigerian Electricity Regulatory Commission (NERC), which makes a permit optional for an operator that distributes up to 100kW but demands permit for installed generation capacity above 1MW. It will also allow investors to generate, transmit and distribute power to willing buyers at market price. The regulation was specifically designed to fast-track electrification in areas without any existing distribution grid and provides access to power to areas poorly served or with non-functional distribution grid. Investors are only beginning to map out investments in mini grids and strategizing on how to develop them economically before the Customs came up with a duty on solar panels. Last year, Nigeria granted solar panel manufacturing pioneer status to encourage the sector and has a National Agency for Science and Engineering Infrastructure (NASENI) that is supposed to be producing solar panels, even though it is poorly funded, but this seems to signify intent to drive the sector. This new import duty is at variance with these goals. While increased revenue appears to be the motive behind this Customs regulation, it cannot be done in a way that undermines this nascent sector. “Instead of short sighted import duties which undermine sound Federal Government policy, Nigeria Customs should consider how much duty they can collect from imports for a far more productive economy in five years with up to $10 billion of mini grids and 10 million solar home systems operational and driving economic growth,” said Boer. Growing local capacity can’t be the reason Nigeria currently does not have capacity to manufacture solar panels but does limited assembly in volumes that cannot meet up to 10% of market demand by only two operators – Lagos based Auxano Solar and Blue Carmel Energy Ltd based in Kaduna. “Locally, we don’t even have capacity to assembly enough panels to meet demand. Nigeria cannot live in isolation in comparison with other West African countries, imposing this kind of tariff will only move investments to other countries,” said Chuks Umezulora co-founder of Auxano Solar Nigeria Limited. Morocco provides a teaching lesson on how a responsible government develops clear strategy to diversify its energy source. In 2009, it adopted a national energy strategy to improve Laws were enacted to permit for auto-generation of electricity though renewable energy installations by industrial clients up to 50 MW. Another renewable energy law allows energy developers to invest in renewable energy projects and sell the electricity to a chosen client – even for export – on the basis of a negotiated contract. “Opening up the medium, high and very high voltage levels for private power producers this law brings about competition in electricity production, though some developers complain about slow authorisation procedures, particularly in terms of technical approval through ONEE. Also, a decree is still missing (and currently under preparation) which is required for projects on the medium-voltage level,” said energypadeia. Morocco has launched one of the world’s largest solar energy projects costing an estimated $9 billion. The aim of the project is to create 2,000 megawatts of solar generation capacity by the year 2020. The Moroccan Agency for Solar Energy (MASEN), a public-private venture, has been established to lead the project. Meanwhile, Nigeria is reversing gains already made with this new duty. It will increase acquisition cost of solar panels and make other African markets attractive for new investments. East African countries are already miles ahead of Nigeria in terms of solar adoption attracting millions of dollars in new investments. Some of the operators have confirmed that their partners are now negotiating exit from Nigeria. “Since this new duty, I have had two discussions with partners who are asking about how we could enter the East African market,” Ernest Akale, Abuja-based solar energy operator says. REAN is urging the Federal Government to take control of the situation immediately and instruct Thousands of Nigerians shared the message on social media security of energy supply and affordability, while also addressing environmental and safety concerns. The strategy sought to reach these goals by diversifying energy sources, optimizing the electricity mix, increasing local production particularly from renewable sources, promoting energy efficiency, and advancing regional integration according to an online energy resource. It was implemented through energy sector reforms, including legislative changes, increased transparency and competition, as well as capacity building. the Nigerian Customs Service to immediately stop the imposition of this duty on imported Solar Panels. “We also urge the Federal Ministry of Finance to establish a dedicated task force for Renewable Energy and Energy Efficiency within the Nigerian customs that will fast track screening of RE and EE components coming into the country and streamline the cumbersome importation process. This task force will also ensure that the correct HS codes and Federal Government incentives are applied to imported RE and EE goods,” Adaju said.