May 2024

Quick Bite

With consumers becoming creditors and investors, they are likely to be more receptive to the argument for market-based pricing than under the current regime where consumers supposedly have little to lose (and a lot to gain) from artificially low pricing

Financing State Electricity: The Potential Role of Municipal Bonds


Financing State Electricity: The Potential Role of Municipal Bonds 

In our previous issue of The Slice, we discussed the Electricity Act and the potential opportunity to address Nigeria’s lingering energy challenges. In addition to the proposed policies and reforms, a key consideration is financing. A range of options exist for state governments, state-owned utility companies, and private players in the space. This note focuses on the potential role of municipal bonds in harnessing local and international investments for state-based energy projects. 

Munis: What are they?  

Municipal bonds (or “munis”) are debt instruments issued by subnational governments, including local, county and state governments. Municipal bonds are often used to fund key construction projects, including roads, bridges, water, and other utilities. These instruments have played a key role in the infrastructure development of many countries, especially the US, and have provided a fairly safe and reliable investment option for individuals and institutional investors. 

While municipal bonds bear similar characteristics to other types of bonds (periodic interest and face value payment), they are imbued with certain unique characteristics. The most common is their tax status. Municipal bonds are often tax-free. Thus, investors are not subjected to capital gains tax on profit or income tax on interest payments. This has spurred the growth of the instrument, especially among retail investors. In the US, the total outstanding amount for munis is estimated at $4.1 trillion. Out of this, retail investors (individuals and individual-focused mutual funds) account for nearly 61% of subscribers.

A final note on the characteristics of munis is their broad classification. These include general obligation bonds and revenue bonds. General obligation municipal bonds are often raised by subnational governments and backed by the full credit of the government. On the other hand, revenue municipal bonds derive their payment from revenues flowing from a specific project. These could be a power plant, a water treatment plant, or a gas pipeline among others. 

Munis and the State Energy Projects 

The passage of the Electricity Act provided legal backing for state-based electricity projects. However, while the legal hurdle has been addressed and the regulatory frameworks are being designed by individual states, financing still needs to be improved. States are likely to pursue their energy projects by seeking various financing options, including loans, equity infusion by governments, and private sector-led financing. A key addition to these could be a well-developed municipal bond financing market. 

Admittedly, state bonds, which are fairly common in the Nigerian capital market (through FMDQ), could be described as municipal bonds albeit in the form of general obligation bonds. However, specific project-linked municipal bonds remain uncommon in the Nigerian market. If properly developed, they could play a key role in unlocking the Nigerian energy market. The aforementioned characteristics of munis are useful in this regard. 

Foremost, the retail-friendly nature of municipal bonds (low minimum investments and tax-free status) could be harnessed to raise sizeable funds for state-based energy projects. If properly designed, a minimum of 5,000 Naira for a state with an adult population of 2.5 million could raise at least 12.5 billion Naira (nearly $8.9 million). For energy projects that cost between $500,000 and $750,000 per MW, the funding could help construct at least a 10MW plant per fundraising. Combined with further financing from institutional investors (pensions, insurance), the plant capacity could be increased. A 10MW plant could easily power nearly 3,000 homes and small businesses. This is from a single fundraiser. Depending on the economic capacity of the residents, up to 4 fundraisers could be done per year. Barring major shocks to the economy, a state could construct nearly 150MW in a 4-year span; a capacity that should provide adequate power supply to a sizeable portion of a state. 

Source: Solar Reviews and multiple sources 

The above timeline is based strictly on internal investments by retail investors. If a state gets its municipal bond offer right, there is no gainsaying the potential influx of funds from retail investors in other states, local institutional investors, and international funds primarily focused on emerging markets municipal bonds. Thus, the above could be considered a base-level projection. If the opportunity is properly designed and harnessed, the monetary flow and increased generation and transmission capacity could help states quickly reach their stated goals in a shorter time.

Beyond providing ample financing for projects, a retail-investor focus could help address the longstanding challenge of market-based pricing. With consumers becoming creditors and investors, they are likely to be more receptive to the argument for market-based pricing than under the current regime where consumers supposedly have little to lose (and a lot to gain) from artificially low pricing. This new normal is likely to further spur more investments, thus creating a different feedback loop than currently exists.  

Overall, the benefits of this financing regime to governments, individuals, and the energy sector could be significant. However, there are potential concerns to look out for and address beforehand. Foremost, inflation remains a key challenge in the country. Despite the raft of rate hikes undertaken by the CBN, inflation figures continue to increase. Thus, an inflation index-linked interest rate for the bonds might be necessary. This is likely to increase the payout by the borrower to investors. It could form part of the argument for market-reflective pricing to retail consumer-investors. Secondly, investor confidence is critical for a successful scheme. Concerns over potential corruption and misappropriation of funds must be addressed. This might be achieved by creating an independent third-party custodian for the funds combined with strong corporate governance and reporting requirements for the utilities. 


Before now, the key hurdle to captive and state-based energy projects had been the exclusive list. With that hurdle addressed, each state must harness the opportunity presented by the Electricity Act to help plug the 33,000MW gap in the country. A plethora of options exist. However, the municipal bonds opportunity, especially one that converts consumers into investors and creditors, is likely to help create a market-friendly energy market; one that would also make the market more attractive to major infrastructure investors. Our team stands ready to work with subnational governments to help set up this regime. Contact us today at  

Crystal Ball

The new Nigerian administration clocked one on May 29th. It’s been quite a whirlwind of events. On the plus side, forex inflows in Q1 are nearly 136% of total inflows in 2023. Several refineries are lined up for production in the coming months. Nonetheless, inflation remains intractable, the economy hasn’t experienced noteworthy growth, and security remains quite fluid. We continue to watch how ongoing reforms impact the nation. 

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