Regulations and Business Models for Energy Access in Nigeria

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This article is written by Charlotte Remteng, Muhammad Bello Suleiman, Chiamaka Maureen Asoegwu and Chysom Nnaemeka Emenyonu as part of the requirements for the Open Africa Power Fellowship Programme 2021. It is a sub-section of the publication, Country Project Nigeria.

Nigeria Energy Situation

Specific regulation and business models for each electrification mode, cooking, and other energy access-related activities. Successes and shortcomings.

The government of Nigeria currently targets a 100 percent electrification rate by 2040, and off-grid energy will play a vital role. The electrification rate currently stands at 45%, with higher access in urban areas (55%) compared to rural areas (36%). According to the USAID fact sheet (https://www.usaid.gov/powerafrica/nigeria), while the country has an energy generating capacity of 12,522 MW, 20 million households remain without energy access. Extending on-grid connections will continue, but it will be timely and costly, particularly for rural and sparse populations. Off-grid energy, however, presents a viable alternative, and standalone systems are particularly well suited to reach the hardest-to-reach customers. Specific regulations and business models are necessary for Nigeria to achieve universal access to electricity.

Grid Extension

The Power Sector Recovery Programme (PSRP), an off-shoot of the Electric Power Sector Reforms Act (EPSRA), is a series of policy actions, operational, governance and financial interventions to be implemented by the Federal Government of Nigeria over the next five (5) years to reset the Nigerian Electricity Supply Industry for future growth.

The objective of the Power Sector Recovery Programme (PSRP) is to renew Nigeria’s economy by rebuilding a functioning, fair power system through:

⮚ Restoring the sector's financial viability.

⮚ Improving power supply reliability to meet growing demand.

⮚ Strengthening the sector's institutional framework and increase transparency.

⮚ Implementing policies that promote and encourage investor confidence in the sector.

⮚ Institutionalizing a contract-based electricity market.

Key Deliverables for the PSRP are:

⮚ Dimensioning Accumulated Deficit (2015, 2016) and Future Shortfall (2017-2021)

⮚ Developing Mechanisms for Settlement of Accumulated Debt

⮚ Developing Interventions to Minimize Subsidy Going Forward

⮚ Restoring Sector Financial Viability

⮚ Ensuring DisCo Loss Reductions

⮚ Identifying Funding Sources

⮚ Addressing Infrastructure Gaps

⮚ Addressing Gas Pipeline Vandalism

⮚ Enabling Electricity Market Business Continuity

⮚ Developing a Communications Strategy for Stakeholders

However, with the PSRP, there were issues with achieving the aim of the program, which includes:

  1. Monitoring:

Metering: various metering plans have been birthed and executed without any attendant positive results to show. From MAP to FGNMP, yet metering rate is approximately 50%. This invariably affects the amount of commercial loss that is currently plaguing the entire value chain.

Projects: A lot of projects that were handpicked for technical infrastructure upgrades were either not done at all or incompletely executed. For example, the Nigeria Integrated Power Projects (NIPP) across electricity distribution networks were highly substandard without necessarily adding measurable value or helping with technical loss reduction. "A minimum of 4,000 MWh/h must be guaranteed and distributed daily from 2017 to ensure the stability of the grid", unfortunately, we have seen generation hit as low as 3,000 MWh/h.

  1. Implementation of policies:

Non-cost reflective tariffs: Part of the drive for privatization was an understanding that tariffs would reflect the 'end-user tariff trajectory' and that agreement would be made regarding tariff adjustments throughout the period. Only in July 2020 did the discos get the first tariff review, which is still not cost-reflective, but promises to transition to cost reflectivity by 2022. Tariff does not reflect economic realities and hence leading to the issue of cash liquidity in the market.

Ministries, Departments, and Agencies (MDAs) Debts: Well over $200 million is owed by ministries, various federal government departments, and agencies across the sector. Combined with a lack of effective governance and enforcement of rules and policies, the challenges have been reinforced. The PSRP was supposed to completely net off the MDA debts, however, only about $26 million was purported to have been paid off (Guardian Newspaper, 2018).

  1. Enabling Environment:

Exchange rate: The continuous rise of the USD annexed to Naira continues to pose a huge threat to the availability of much-needed foreign exchange to drive the needed investment in the sector.

Inflation: with inflation also comes the need for adjustments in various economic factors in purchasing power of electricity consumers.

Other Economic policies: Policies that affect the importation of equipment, and resources needed to cheaply improve the infrastructure of the sector are still sorely lacking.

Decentralization of the Sector: Nigeria still currently has a poorly diversified energy mix where the majority (85%) of installed capacity is fuelled by gas and still operating in the transitional electricity market (TEM), as against the Final Market, with bilateral contracts between electricity buyers and sellers at all levels, and a central balancing mechanism through the creation of a spot electricity market and a more efficient energy mix.

Microgrids

NERC Mini-Grid Regulation (2017) stipulates regulation is limited to distributed power of up to 1MW. Before NERC issuing the regulations, the generation of electricity within the threshold of 1megawatts (MW) and distribution within the threshold of 100 kilowatts (KW) in aggregate at a site was more or less unregulated, with no framework for issuing a permit or registration. But the introduction of the Regulations has brought more form and definition to this promising aspect of electricity generation and distribution.

The Regulations provide for two types of mini-grids, namely, the isolated mini-grid and the interconnected mini-grid. The isolated mini-grid is a mini-grid that is not connected to any distribution network and is to be utilized in an unserved area, that is, an area within a Distribution Licensee's Network without an existing distribution system. The isolated mini-grid is further divided into a mini-grid with less than 100KW and a mini-grid with more than 100 KW but less than 1MW. The Regulation further makes a distinction between isolated mini-grids that is less than 100KW and a mini-grid that is more than 100KW but less than 1MW. An operator of a mini-grid that is less than 100KW can opt for either a registration or a permit, however, for economic expediency, a permit is desirable as it confers on the operator a right to compensation where a Distributor Licensee extends its network operations to an isolated mini-grid operated under a permit. If a Distribution Licensee extends its operation to an isolated mini-grid operated under a permit, the Regulation provides the operator with two options: 

    I.         the mini-grid operator may convert the isolated mini-grid into an interconnected mini-grid; or

  II.         Transfer all assets the isolated mini-grid operator does not want to remove from the mini-grid system to the Distribution Licensee in return for compensation.

These options serve as a buffer or incentive to operators and help minimize any form of loss to operators as it entitles them to compensation or an opportunity to scale up to an interconnected mini-grid should a distribution licensee encroach on the mini-grid operator's site.

The interconnected–mini-grid, as the name implies, is connected to a Distribution Licensee's network and is to be deployed in an underserved area, referring to an area with an existing but poorly supplied or non-functional distribution system. Going by the definition of an underserved area, any area in Nigeria with intermittent power supply might as well qualify for the installation of an interconnected mini-grid.

Where a Mini-Grid Developer desires to operate an interconnected mini-grid, the Regulations require that such Mini-Grid Developer enters into a tripartite contract with the community and Distribution Licensee to construct, operate and/or maintain an interconnected Mini-Grid in an Underserved Area. The Tripartite contract only becomes binding on all parties upon the approval of the NERC.

Operating mini-grids provide energy competitively compared to the alternatives of the grid and diesel-powered self-generation. In Bisanti, GVE charges a price of NGN208 per kWh (US$0.58 per kWh). The grid provides power at a lower price (between NGN4 and NGN24 per kWh in 2015 for Abuja DisCo). However, supply from the DisCo is very unreliable, with less than three hours of supply per day in the connected village closest to the GVE mini-grid in Bisanti. Another mini-grid developer intends to charge a price of NGN140 per kWh in another location (US$0.39 per kWh). According to customers interviewed during field visits, diesel self-supply is much more expensive, at around US$50 per month, compared to an average household bill between US$3 and US$6 per month with the mini-grid.

Most mini-grid customers include both households and businesses. Economic activity is one of the key parameters when choosing a site.

Mini-grids use a limited array of business models. The main commercial solutions used by operators are:

● A combination of smart prepaid meters together with scratch cards, and a connection fee paid once. (ECREEE (2016). In Vincente, customers purchase credit from the local GVE representative. The representative then requests a code from GVE’s staff, which the customer inputs in its meter. The meter is credited with the amount of energy purchased.

● The Pay-As-You-Go (PAYG) model using a mobile phone, particularly for solar systems. Arnergy, through its ‘solar rental system’, allows customers to pay a daily fee of NGN50 (US$0.14) for a ‘tier 2’ service. (Medium (2016),

● Cross-subsidies. For example, in Tunga Jika, Nayo charges a higher tariff to business customers (a market and mills for agro-processing and offers an upfront subsidy for connection and

● bulbs to residential customers.

Stand-Alone Systems (SAS)

The SAS sector is nascent and fast-growing, and stakeholders have committed to its rapid expansion. The Nigerian government looks to add 5 million new solar connections through the solar home system and mini-grids by 2023 under the 2020 Economic Sustainability Plan, reaching 25 million people (NESP, 2020). This builds on a young and growing sector, comprised of international companies that have established traction in other markets for example BBOXX, Lumos, Zola Electric, d.light, Azuri, and Oolu and often smaller but established local companies such as Sosai Renewables, Arnergy, Blue Camel, Consistent Energy, and ColdHubs, among others. Combined, these companies have an annual revenue potential of USD 1.2 billion, presenting opportunities for both private and public investments (REA, 2019). The target beneficiaries are people in off-grid locations or underserved customers that have inefficient and unreliable energy access.

Stand-alone solar photovoltaic (PV) systems offer a viable option in areas where mini-grids are not sustainable. Several relatively well-established solar PV companies are now operating in Nigeria, utilizing cash sales and pay-as-you-go (PAYG) business models. For these companies to grow rapidly they must fund an ever-increasing amount of stock in the supply chain and invest substantial amounts in building their 'soft infrastructure' to reach and serve new customers.

Key regulatory challenges include:

- 25 percent combined import duties and value-added tax (VAT) on imported solar components (which is transferred as an additional cost to customers); streamlining mobile payment systems; and ensuring high product standards.

Key financial barriers include a lack of access to local currency loans for operating expenses and hard currency loans for capital costs.

Limited or poor implementation of SAS-specific regulation has failed to provide sector actors with the confidence necessary to enter the market.

Unfavorable fiscal policy for solar components increases product prices, reducing affordability and hence market penetration

Current consumer payment platforms from financiers are not easily accessible to rural communities, due in part historically to regulation. Up until 2018, Nigeria’s Regulatory Framework for Mobile Payment Services (2009) excluded mobile network operators from providing mobile financial services, despite Nigeria’s relatively high mobile phone penetration rate of ~87 percent (Shell, 2018)

Renewables

From a policy perspective, policies made by the Government relating to renewables and incentives available therein are encapsulated in the National Electric Power Policy (NEPP), and the National Renewable Energy and Energy Efficiency Policy (NREEEP). Incentives include;

● Free Custom Duties for two (2) years on the importation of equipment and materials used in renewables and energy efficiency projects

● Allows for project developers to obtain soft loans and special low-interest loans from the Renewable Electricity Fund for renewable energy supply and energy efficiency projects.

● Advocates for the Government to ensure that an appropriate economic instrument is put in place to allow generators of renewables to obtain preferred pricing and rates as they sell.

● Tax incentives to manufacturers of renewable energy and energy-efficient equipment and their accessories. Incentives include: (i) five-year tax holiday for manufacturers from date of commencement of manufacturing; (ii) five-year tax holiday on dividend incomes from investments in domestic renewable energy sources.

Energy efficiency

The National Renewable Energy and Energy Efficiency Policy (NREEEP) were approved in May 2015. The policy placed a high premium on energy efficiency and conservation as a means of improving overall access to modern energy service, the policy also recognizes energy efficiency as a resource that could be traded in the electricity market. So far several ministries, departments, and agencies (MDAs) of federal and state governments in Nigeria are beginning to be involved in various aspects of energy efficiency and conservation. Key MDAs active in promoting energy efficiency and conservation include the Ministry of Power, Works, and Housing, Ministry of Environment, Ministry of Industry, Trade and Investment, Standard Organization of Nigeria, Nigeria Electricity Regulatory Commission, Energy Commission of Nigeria as well as the University of Lagos – National Center for Energy Efficiency and conservation (NCEEC).

According to the SE4ALL Agenda Nigeria, there is no real business model that currently exists for Energy Efficiency, business strategies should encourage and allow private sector participation.

Clean cooking

There is no standalone policy for clean cooking in Nigeria, however, there are policy guidelines that affect clean cooking in several official documents. One of such is promoting the domestic utilization of gas, among others, by encouraging indigenous manufacture of gas cylinders and other accessories and building gas filling stations to support the adoption and use of LPG. It specifically seeks to create one million jobs through the conversion of 30 million homes from dirty fuels to LPG and includes the removal of a 5% value-added tax. (COVID-19 stimulus plan; Nigerian Economic Sustainability plan 2020). The National Energy Policy, 2018 emphasizes the efficient utilization of energy resources for sustainable national development with the active participation of the private sector. It calls for the promotion of efficient biomass cookstoves and other fuels and technologies for cooking. The National Biofuel Policy, 2007 pledges to expand private-sector investments in the domestic production of biofuels, with the government creating an enabling environment for the achievement of 100% domestic production of biofuels consumed in the country by 2020. The Renewable Energy Master Plan (REMP), 2004 and 2012 set targets for the use of clean biomass technologies for cooking. National Renewable Energy Action Plan (NREAP), 2016, targets 100% clean-cooking-fuel coverage by 2030 by providing improved cookstoves (59%), efficient charcoal production (7%), and modern fuel alternatives for cooking including LPG and ethanol gel fuel (34%). The policy and regulatory framework on clean cooking call for the development and adoption of national cooking policies, strategies, and targets aim at reaching market transformation towards modern and alternative fuels and efficient devices to reduce health and environmental impacts of traditional fuel use on the people.

References

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