Can Africa build its local solar industry?

From the newsletter

LPV Technologies, a local solar energy company, has started manufacturing solar panels, making it the third such company in Nigeria. It has an annual production capacity of 100 MW, bringing Nigeria's current total capacity to 200 MW. The government also has a 1,200 MW solar module assembly plant in the pipeline.

• Solar panel manufacturing isn't new to Africa. Egypt, South Africa, and Ghana have been producing solar panels, but currently only meet a small portion of the overall demand.

• Nigeria presents a unique case for localising manufacturing. They have a large population without access to electricity, which presents a big domestic market. This is an advantage for manufacturing plants to achieve economies of scale. But can they compete with Chinese giants on prices?

More details

• Nigeria leads globally in terms of population without access to electricity. This is a boon for local solar manufacturing but also a challenge in terms of meeting their demand, given the current production capacity of 200 MW annually, which can't meet the demand.

• The government is pushing for local manufacturing, and the private sector as well. But the government is mainly targeting rural electrification with solar home systems. It has received funding of $750 million from the World Bank and plans to set up a 1,200 MW plant for this initiative.

• Several other African countries are pursuing similar goals. Ethiopia recently established a solar manufacturing plant with a capacity of 10 MW annually. However, many of those who started localising manufacturing have struggled to make significant progress. For example, Solinc East Africa closed down its operations in Kenya due to intense competition from cheap Chinese imports. South Africa, in an effort to protect its local manufacturers like ARTsolar, introduced a 10% import tax last year. Despite this measure, local production has not yet scaled up enough to meet even the current domestic demand, let alone generate exports.

• Other countries like Ghana and Botswana, despite having local manufacturing, have focused on meeting only residential demand, with their panels designed for small-scale use. A few African companies, like South Africa's ARTsolar, have focused on solar panels suitable for commercial-scale projects.

• For countries that have succeeded in localising solar manufacturing, like China, it shows that it takes more than just setting up the plant. The Chinese government provided these companies with huge subsidies and support for global expansion, which allowed them to benefit massively from economies of scale.

• For Africa, it is not too late. Strong policies are needed to support the industry. The first would be to subsidise local manufacturing and then restrict imports through heavy taxation. However, this appears simpler on paper than it actually is. More needs to go into supporting the sector, such as skills development and technology transfer. Currently, African skills have been focused on the maintenance of the technology rather than innovation.

• In Nigeria's case, the current policy framework favours imports. Solar panels imported still enjoy exemption from import duty. At the launch of its operations, LPV Technologies strongly advocated for the implementation of a zero-import policy on solar panels. They argued that the current policy landscape creates an uneven playing field, as imported solar panels can enter Nigeria duty-free, while local manufacturers face duties on the majority of the components required for production. This discrepancy puts domestic manufacturers at a significant competitive disadvantage.

Our take

• The Nigerian government should first move to subsidise its solar manufacturing before amending the import policy. This is to ensure consumers aren't denied the opportunity to purchase solar products. However, competing with established Chinese companies will be a tall order.

• It's a tricky balancing act between the needs of the people and the needs of the government. People need electricity, and governments need revenue. Local manufacturing will demand significant subsidies if it is to be viable. However, many African governments are burdened by substantial debts and cannot afford this. They could choose to bear the cost now and reap the rewards later. The benefits of localisation would be plentiful across the supply chain.

• However, African countries' education systems haven't focused much on research and development. Their youth have been trained to be primarily involved in the repair and maintenance of most available technologies. This will be a challenge if they were to fully localise the entire solar supply chain, unless they partner or outsource some aspects.