Nigeria’s energy transition represents both a critical development imperative and a complex financial challenge. With 39.5% of its population lacking electricity access and grid capacity meeting only 17% of demand, Nigeria is confronted with a dual crisis of energy poverty and climate vulnerability. The transition to cleaner energy sources aims not only to meet global climate commitments but also to ensure energy security and economic sustainability. However, financing this transition is daunting, requiring an estimated $10 billion annually until 2060.

Nigeria’s energy sector is heavily reliant on fossil fuels, with oil and gas accounting for about 90% of export earnings and 50% of government revenue. This dependence is increasingly unsustainable due to global climate policies and environmental degradation. Nigeria has committed to achieving net-zero carbon emissions by 2060 under its Energy Transition Plan (ETP), which outlines targets for renewable energy expansion and emissions reduction. Yet, current funding flows are well below half of the annual target, resulting in an over $5 billion deficit. Multilateral institutions like the World Bank and the African Development Bank (AfDB) provide less than $1 billion annually, while private investments are deterred by currency risks and policy instability. This funding gap jeopardises Nigeria’s ability to meet its Nationally Determined Contribution (NDC) targets, including a 47% emissions reduction by 2030 and bridging it demands innovative financing mechanisms, strategic partnerships and policy alignment, as well as lessons from global precedents.

Energy Access and Infrastructure Deficits

Nigeria’s electricity grid, with a capacity of 5.3 gigawatts (GW), pales in comparison against a 30 GW demand, and is reflective of decades of systemic underinvestment. The chronic power shortage cripples businesses, hinders industrial growth, and diminishes the quality of life for millions. In 2022, it was estimated that c.90 million Nigerians resorted to the use of polluting generators, incurring a staggering annual expenditure of nearly $22 billion on fuel. Simultaneously, gas flaring – despite a 2030 phase-out pledge – wastes $500 million yearly in potential revenue and emits 15 million tonnes of CO₂ equivalent – a paradox that underscores the misalignment between fossil fuel dependence and climate commitments.

Renewable Energy Potential vs. Implementation Delays

Despite having one of the highest solar irradiation levels globally at an average of 5.5 kWh/m²/day, Nigeria’s solar capacity remains largely untapped due to bureaucratic bottlenecks and regulatory complexities. Solar mini-grids account for less than 1% of household energy usage. Large-scale initiatives like the “10 GW Solar Initiative,” launched in 2016, have made minimal progress due to regulatory delays and exemplify the challenges in translating ambitious plans into tangible outcomes.

Economic Impact: Stranded Assets and Green Growth Opportunities

Nigeria’s fossil fuel-dependent economy faces mounting risks from global decarbonisation trends. Up to $15 billion in oil and gas infrastructure globally, including offshore platforms and refineries, risks becoming stranded by 2030 as renewable energy costs undercut hydrocarbons. The challenge of asset obsolescence is further exacerbated by escalating climate-related losses. The increasing frequency and severity of flooding events have driven associated costs to alarming levels. The devastating 2022 floods, which affected over 33 states across the country, displaced more than 1.4 million people, and caused damages estimated at $7 billion, emphasises the urgent need for climate adaptation. Critically, with insured losses representing less than 5% of this total, the burden falls disproportionately on public budgets, placing significant strain on national resources. The ND-GAIN Index ranks Nigeria as Africa’s second-most climate-vulnerable nation, projecting a 20% decline in crop yields by 2050 if adaptation measures lag.

Conversely, green energy investments offer transformative potential. Scaling decentralised solar mini-grids could unlock 5% GDP growth by 2030, electrifying 30 million households and creating 250,000 jobs in installation and maintenance. Nigeria’s 1,000 km² mangrove forests, the largest in Africa, represent a $500 million annual carbon credit opportunity through blue carbon projects[. In addition, methane capture from landfills and agricultural waste could generate 200 MW of biogas capacity, displacing diesel imports worth $2 billion annually. These opportunities hinge on redirecting capital from high-risk fossil assets to renewables, leveraging Nigeria’s solar irradiation and youthful workforce to build a competitive green economy.

 

Global Case Studies: Lessons from Regional Peers

South Africa’s Carbon Tax (2019 – Present):

South Africa implemented a carbon tax in 2019 to fulfil its commitments under the Paris Agreement, initially set at $7/ ton of CO₂ and increasing to $10 by 2024. However, extensive tax-free allowances – ranging from 60% to 95% for key sectors like mining and manufacturing – significantly diluted its effectiveness, resulting in an effective rate of only $0.4 per ton. While the tax led to a 12% reduction in emissions from energy sectors, it also highlighted equity challenges, as low-income households spent a disproportionate share of their income on energy. Key lessons for Nigeria include capping exemptions to enhance fiscal and climate outcomes while ensuring that revenue is reinvested in renewable energy initiatives.

Kenya’s Green Bonds (2019 – 2024):

Kenya launched its first sovereign green bond in 2019, raising $44 million for sustainable student housing projects that incorporated solar panels and rainwater harvesting systems. Backed by a 50% partial credit guarantee from GuarantCo and certified by the Climate Bonds Initiative, this bond aimed to catalyse further investments in renewable energy and climate resilience. However, operational challenges such as lengthy project approval processes and currency risks associated with dollar-denominated bonds have hindered uptake. Kenya’s experience underscores the importance of local currency financing and streamlined regulatory frameworks, providing a valuable model for Nigeria to attract diaspora investments while prioritising renewable energy projects.

Challenges in Implementing Proposed Solutions

Implementing a carbon tax in Nigeria presents significant economic challenges, with projections from the EfD Nigeria Study indicating a potential 1.2% reduction in GDP growth annually. The effectiveness of such a tax is further constrained by weak tax administration, particularly in the informal sector, where enforcement mechanisms are limited and the risk of tax evasion remains high. In addition, while diaspora green bonds offer a promising avenue for climate finance, investor scepticism persists due to Nigeria’s history of fiscal mismanagement and macroeconomic volatility, raising concerns about credibility and long-term returns.

Recommendations for a Just Transition

To bridge the funding gap, we believe that Nigeria must prioritise public-private partnerships (PPPs) backed by concessional finance. The NNPC-Shell Solar Project, targeting 5 GW by 2030, could be scaled using the African Development Bank’s Climate Action Window, which offers loans at 1% interest over 25 years. This would mobilise $2 billion annually by 2026 for decentralised solar infrastructure. Concurrently, diaspora green bonds could tap into Nigeria’s substantial annual remittance inflows, estimated at $20 billion. By creating attractive investment opportunities for the Nigerian diaspora, these bonds could provide a dedicated stream of funding for clean energy projects, while also fostering greater engagement with the country’s development.

To mitigate regressive impacts, exemptions for SMEs and subsidies for LPG adoption are essential. Regulatory reforms must follow, including amendments to the Electricity Act 2023 to mandate state-level renewable purchase obligations (RPOs) and streamline mini-grid permits to under 30 days. Aligning gas flaring penalties with the World Bank’s Zero Routine Flaring initiative – increasing fines from $2 per thousand cubic feet (Mcf) to $3 (Mcf) – would further align fiscal policy with climate goals. Finally, implementing a carbon tax on oil and gas firms, similar to South Africa’s levy of $10/ton of CO₂, could generate substantial revenue to fund the ETP. This approach would not only internalise the environmental costs of fossil fuel consumption but also provide a dedicated source of funding for investment in renewable energy technologies and energy efficiency programs.

Conclusion

Nigeria’s energy transition is not merely a climate obligation but an economic necessity. By adopting initiatives similar to South Africa’s equitable carbon pricing, and Kenya’s diaspora finance innovations, we believe Nigeria can convert its solar and carbon assets into engines of inclusive growth. However, success hinges on transcending bureaucratic inertia and strategically leveraging global climate finance mechanisms. We believe the aforementioned could halve Nigeria’s funding gap by 2030, powering a greener and more resilient future.