May 16, 2017

Mini Grids; Does the new regulation depict a bright future for Nigeria | Okezi Okah-Avae


Introduction
The Federal Government of Nigeria (“FG”) has long since declared its intention to solve the country’s perennial electricity problem. However, the conclusion of the first phase of the privatization of the power sector in November 2013 has not exactly led to the uninterrupted supply of power once promised to the populace. Between 50-55% of approximately 180 million Nigerians do not have access to grid electricity, while the 45-50% of Nigerians who are actually connected to the grid especially in urban locations, are largely in darkness. Furthermore, not only are these Nigerians enduring crazy, unrealistic bills but also have no choice other than to spend excessive amounts on electricity generation sets.


Nigeria would require more than 160,000MW to achieve its desired electricity generation capacity. The FG estimates that by the year 2020, the country's generation capacity would be in excess of 40GW (40,000MW), and the energy mix will constitute 69% thermal generation; 17% hydro; 10% coal; and about 4% of renewable.

The on-grid challenge
On-grid generation refers to a system of power generation evacuated through the national grid to off-takers which may be the Nigerian Bulk Electricity Trading Company Plc (“NBET”) who through vesting contracts supplies the power to the power distribution companies (“Discos”); or directly to Eligible Customers, as may be declared by the Minister of Power, Works and Housing, Babatunde Fashola.

However due to certain challenges highlighted below, Nigeria has witnessed an alarming rate of frequent collapse of the power grid. It is gathered that the most recent system collapse was due to frequency constraints on the grid. Figures by the Transmission Company of Nigeria showed that power generation dropped significantly from 3,222.5 MW on April 26, 2017 to 113.6 MW on April 27, 2017. This, according to industry sources, is despite the increased gas supply to the power plants following the ‘stability’ in the Niger Delta region.

Further, it was reported in early April 2017 that there was a prior collapse of the national power grid on April 9, 2017 resulting in the drop in generation from 3,069.5MW to just 108.7MW. However, this moved up marginally to 240MW the next day. Heavy rainfall at three transmission stations is ascribed to have led to load reduction which prompted high frequency in the system, subsequently triggering the collapse of the electricity grid.

Most of the power consumed by Nigerians is actually on-grid power which the Discos supply to these consumers. In addition to the above stated reasons for the collapse of the power grid, on-grid power generation has had other (and notable) constraints, some of which are identified below:

   a)    Unavailability of Gas: About 85% of installed generation capacity is thermal. Despite Nigeria’s large gas reserves, production has been significantly low. Gas constraints is said to reduce the power generation capacity by 1,995MW, and reasons for this include uneconomical gas prices; gas pipeline vandalism; insufficient gas infrastructure; and uncertainty in regulation and fiscal policy for gas, amongst others.

    b)    Inadequate Transmission Infrastructure: Out of a total installed capacity of 12,522MW, the existing transmission system is only capable of delivering about 5,300MW. A major reason for this is Nigeria's current weak transmission infrastructure which is mostly radial. This means that it's a single path of transmission with a power source at one end. Thus any fault in the path could potentially lead to a collapse of the transmission network. The Transmission Company of Nigeria plans to upgrade the transmission system to a capacity of 11,000MW by 2020 (subject to adequate funding and completion of projects planned for implementation); however, the transmission infrastructure in its current state is unable to accommodate the estimated increase in generation by 2020.

c. Liquidity Issues: Since the privatization of the power sector in November 2013, the Nigerian Electricity Supply Industry has faced with liquidity issues resulting from non-cost reflective tariffs. The Discos have found it difficult collecting sufficient revenue to pay their power bills which should sustain the rest of the value chain that includes the Gencos, gas suppliers and service providers. This has led to a cash crunch in the market and a clear disincentive to investment in additional generation or capital expenditure for the Discos.

d. Nigerian Integrated Power Project (NIPP) Privatisation : The privatization process of NIPP plants should have had the capacity to add close to 4,775MW to the grid. Unfortunately, issues such as non-availability of gas; non-completion of some of the NIPP plants; and inadequate gas and transmission infrastructure had hampered this development. Furthermore, the current liquidity issues, and the lack of government credit enhancements in the present circumstances, have not given potential investors the confidence to invest in the acquisition of the assets. Access to funds from Nigerian Banks is limited, and the alternative is international funding which would be subject to more scrutiny by international banks.
Given the above, it is imperative that whilst the issues are being resolved, we should look at viable solutions for increasing generation that would hopefully be somewhat isolated from some of the issues raised above.

Mini-Grid Solutions
In recent years, Nigeria has been at the forefront of promoting a cleaner and more modern energy in Africa. The regulatory space around solar power investments in Nigeria has also seen some transformation, which has served as an incentive for the recent growth in both off grid and on grid solar power developments. However, there is still so much to achieve in this space but the willingness of the FG and policy makers to further develop the space is evident and noted.

It should be noted that off-grid technological solutions mainly mini-grids that can power communities without access to electricity (unserved), as well as provide reliable power supply to under-served urban centers, metropolis and housing are being blocked by regulations that seem to place them and the Nigerian consumers, at the mercies of Discos.

According to the Nigerian Electricity Regulatory Commission (“NERC”), power distribution firms, otherwise known as Discos, will soon begin the development of mini-grids to augment electricity supply to households, businesses and institutions in the country.

A mini-grid is any electricity supply system with its own power generation capacity, supplying electricity to more than one customer and which can operate in isolation from or be connected to a distribution licensee’s network. Within the regulations, the term mini-grid is used for any isolated or interconnected mini-grid generating between zero kilowatt and one megawatt of generation capacity. In accordance with its power to make regulations, the NERC is currently working on a new mini-grid regulation with the main objective of accelerating electrification in areas without existing distribution network (also known as unserved areas) and areas with an existing but poorly electrified or non-functional distribution grid (also known as underserved areas) by attracting participation of private sector, communities and non-governmental organizations in achieving nationwide electrification. It is imperative to point out that the NERC intends to use the draft Mini Grid Regulation to attract investments into mini-grids without hampering the operational successes of the Discos. After a comprehensive review of the draft Mini Grid Regulation, the question of whether the proposed regulation shall work for investors’ spring to the mind of the writer of this article. 

The Mini Grid Regulations & Some of its Technical Issues
The proposed regulation will provide massive investment opportunities for current and potential mini grid power providers, solar power companies in particular, as Nigeria has a serious resource advantage in that area. According to industry experts, the regulation shall sought to minimize major risks associated with mini-grid investments such as sudden tariff changes and stranded mini-grid operator investments due to extension of main grid.
Engr. Chinedum Ukabiala, the Deputy General Manager at NERC and the Head of Renewable Research and Development (RRD), suggested that the strategic gains of the Mini Grids Regulation to market players are that there is the opportunity to start a small business in electricity generation and distribution and then expand to bigger utility companies with the expected benefits of improved revenues and returns. He believes that it is easier and simpler to start a small business than large scale businesses in the electricity industry and this is more so when the regulation will be light-handed.

Late 2015, NERC invited inputs from the general public whilst preparing the first draft of the Mini Grid Regulation. Subsequently, NERC issued a statement which said “The regulation seeks to minimize major risks associated with Mini-Grid investments such as: (1) Sudden tariff changes, as tariffs would have been agreed in advance by the relevant parties; and (2) Stranded Mini-Grid operator investments due to extension of main grid (into mini grid geographical locations). In such cases, a fair compensation mechanism would be applied for Mini-Grid operators that choose to exit.” 

It is expected that the Mini Grid Regulations should aid in the improvement of the state of power access in rural Nigeria while simultaneously providing an opportunity to deploy more renewables such as solar instead of fossil-sourced power. Additionally, the possibility of having these mini grid projects completed in record time, relative to delays in main grid expansion also provides an opportunity for rapid power-induced economic development/industrialization in rural areas. Licensing burdens would predictably also be reduced drastically or completely removed. Further, a flexible tariff structure that is not over-regulated but would guarantee returns on investment would be implemented. The Mini Grid provides a policy also make recommendations to the Federal Government of Nigeria for specific incentives and, especially, for Solar. It will remove exclusivity to the geographical area of the (current) distribution companies.

The manufacturing sector in Nigeria, which has long suffered due to lack of steady power supply from the grid, should be a key benefactor of this Regulation. Already many manufacturing hubs and organizations in Nigeria have been reliant in one way or another on a certain form of mini grids, for example a shared power plant and/or on-premise captive sources. However, the economics of procuring power from these sources cannot be as advantageous as commercial and third-party controlled distributed sources, where power providers will benefit from the economies of scale in supplying several consumers, as well as the improved efficiencies of hybrid mini grid systems (such as Solar/Diesel hybrids). These and several other incentives will be cascaded to the connected mini grid consumers. Thus as the regulation for mini grid owners/power suppliers become better, consumers in turn receive more reliable and affordable power.

In spite of this and several other already completed reforms in the solar space in Nigeria, there seems to be calls for more to be done, especially when one compares Nigeria with some other solar markets in Africa. For example, while the importation of solar panels enjoys free import tariff in Nigeria, to bring in other components such as batteries used in setting up a solar power plant is subject to an unfair tariff and Value Added Tax (VAT). Kenya is a good example where the Energy Regulatory Commission (ERC) has zero-rated the import duty and removed Value Added Tax (VAT) on renewable energy equipment and accessories including solar.

The Mini-Grid Regulation would drive new and improved investments in energy supply solutions to rural communities in Nigeria. Apart from achieving deployment of renewable energy sources, this regulation would help cut deficit in power supplies in rural communities. At the time of writing this article, the new regulation is still undergoing public consultation.

According to the regulation, a mini-grid developer who intends to distribute power larger than 100kW from the isolated mini-grid is required to apply for a mandatory permit through NERC. However, if the generation capacity of the power station installed is larger than 1MW, the plant is not a mini-grid under the proposed regulation and other regulations apply. In order to encourage mini-grid development in Nigeria, it is imperative that cost-reflective retail tariffs should be utilized which is the intention of the regulation. It is the aim of the tariffs to be higher than current electricity distribution company’s retail tariffs.

Private sector funding will play a key role in closing power supply gaps in the country and this will not come unless the private investors are sure of favorable return on their investment. NERC intends that the regulation takes measures to de-risk investment in power supply infrastructure to attract necessary financing. The NERC‘s strategy is to use regulatory instruments to promote not only the conventional sources but also all options for sustainability including: energy efficiency, renewable energy, clean coal technology, rural electrification, mini grid and distributed generation.

However, in spite of NERC’s intentions to put in a regulatory framework to attract renewable energy based power and promote sustainable energy economic growth, the proposed mini-grid regulation puts mini-grid operators at the mercies of Discos, while ignoring and denying the Nigerian customers the choice to access reliable power supply. For instance, Section 7(1)(b) of the Regulation requires that there must be confirmation of the Disco’s expansion plans which have to be approved by NERC to ensure that the mini-grid activities will not interfere with the expansion plans into the designated Unserved Area of the Disco before a permit to construct an isolated mini-grid can be granted. There is need to clarify that the mini-grid developer does not need to seek the confirmation of the distribution licensee’s expansion plan; rather, they have to simply obtain the approval of NERC. The Regulation should clarify the frequency and protocol for the Distribution Licensees to submit their expansion plans to the NERC. This writer further recommends that the Regulation should clarify the frequency and protocol with which the Distribution Licenses are required to submit their expansion plans to NERC as it is assumed that the Regulation assumes that Discos would submit their expansion plans on their own volition. The Regulation does not ensure that the Distribution Licensee has the resources to back up its expansion plan and does not deprive a community their inalienable right to power supply that could have been met by a mini-grid developer. Alternatively, the Regulation should stipulate stringent penalties for a Distribution Licensee that does not deliver on its published expansion plans.

Furthermore, according to Section 7(1) (c) of the Regulation, the applicant must obtain a written consent of the Disco of the intended area where the operational period of the mini-grid developer within the five year expansion plans of the Disco.

It is the opinion of the writer of this article that according to both Sections 7(1) (b) and (c), in order for the end user (either underserved or unserved) to have access to reliable electricity, via the mini-grid, they must not only have a written consent from Discs approving this, but they must also have access to the five (5) year expansion plans of the Discos, which must have been approved by NERC.

The writer envisages some likely problems which may arise a direct result of the foregoing. Firstly, what exactly are the expansion plans of the Discos? In a situation where the Discos have come up with these plans, it would be helpful if these plans have already been delivered to NERC for its approval. Further, if indeed the expansion plans are with NERC, then why is NERC not making their plans public and taking full responsibility for its implementation, so that the Nigerian public can know when they can realistically expect access to steady electricity?

In addition, one wonders what would happen if the Discos are unable to execute their plans after five years having denied Nigerians access to electricity as well as the intended investments by the mini-grid operator; as the new regulation neglected to provide any sanction or penalty for such failure. It should be recalled that the disclosure of the expansion plans of the Discos was a part of the criteria during the handover of the Discos to the successor companies. However, till date Nigerians are yet to see the plans.

It is suggested that Section 7(1) c should clarify that a written consent from the Distribution Licensee is only necessary if a mini-grid developer chooses to develop in a location that is already part of the published expansion plans of a Distribution Licensee. In addition, where a mini-grid developer needs to seek the consent of a Distribution Licensee, the regulation should make it clear that the latter has to respond to the consent request within 30 days. The mini-grid developer may assume consent in the event that the consent is not received within the stipulated period.

Further to Section 7(1) (d) of the proposed regulation electricity consumers in underserved areas cannot independently chose to set-up their own isolated mini-grids. For example, an estate would not be able to decide on its own to seek isolated mini-grids for supply of electricity in place of an incapacitated Disco due to the fact that the estate is in an unserved area (i.e. off-grid).

According to Section 7(1) (g) of the Regulation, Mini-Grid developers are expected to ensure that “all necessary land for construction and installation of all assets has been acquired and all necessary permits have been granted to the Mini-Grid Developer”. This provision assumes that the investor would have acquired all the land and assets prior to securing the approvals. Although it is understandable for NERC to insist on screening out investors who may not have the prerequisite technical and financial capacities, it is important that it does not douse the interest of potential investors. It is advisable for NERC to balance the need to select credible investors with realistic demands from investors. A number of the investors may need to first secure the approvals to unlock the resources required to acquire the land and other assets. Many of the financial investors may not wish to expend significant resources if there is a risk that the approvals may not be obtained. NERC should issue the approval once the investor is able to demonstrate their financial and technical capabilities. For instance, in lieu of full payment for the land, NERC may accept evidence of an option on the land and assets. The Regulation should require investors to show that they have acquired land rights.
Section 17 (1) provides for compliance to all existing environmental laws by Mini-Grid Operators. The Regulation does not state explicitly if an Environmental Impact Assessment (EIA) is necessary for all scales of mini-grid operations especially considering the cost of these studies. It is the opinion of the writer of this article that to safeguard against environmental hazards (such as improper solar battery disposal), there should be a requirement for Mini-Grid developers to register with the Federal Ministry of Environment. Furthermore, the FG should stipulate and enforce the product standards for the various components used in the mini-grids (batteries, panels, wires, etc.) and enforce a disposal programme that safeguards the environment.

Pursuant to Section 10(2) of the Regulation NERC is required to issue a permit pursuant to Section 7 or Section 8 or approve a Tripartite Contract pursuant to Section 9 to an applicant within a maximum period of 30 days from the date of receipt of complete documentation. This Regulation fails to provide for any stipulations (or penalties) to ensure NERC meets the 30-day timeline. It is recommended that should a response not be received from NERC within the prescribed 30 day period, the integrated mini-grid developer should deem the tripartite contract approved.

Regarding inspection of accounts, Section 13(7) and Section 13(8) of the Regulation pertains to the inspection of accounts for the purpose of adjustment of tariffs and ascertaining depreciated value as request by Mini-Grid Operator and inspection of accounts for the purpose of adjustment of tariffs and ascertaining depreciated value as requested by the Community. Both sections suffer from lack of clarity as to how the amount referred to in Section 13(7) shall be computed and as to how NERC shall pay the Community a fee in the event of the Community requesting to inspect the accounts. It is suggested that the requisite clarity should be provided in the aforementioned sections to eliminate any future disputes or misunderstanding amongst stakeholders.

Another attempt at prevention of dispute can be found in Section 20 (2) which pertains to determination of Tariffs and Other Usage Charges. Here the Regulation stipulates that interconnected mini-grid operators shall pay the Distribution Licensee a usage charge that shall be agreed upon between both parties and NERC. However, where the Interconnected Mini-Grid Operator and the Distribution Licensee are unable to agree on the usage charges, the methodology described in Annex 8 shall be applied as a guideline. The next logical question is whether Annex 8 provides clarity on the methodology for calculating usage charges for interconnected min-grids or if such could lead to disputes? The Regulation should be more explicit (preferably with a formula) on how the usage charges should be determined. Lack of clarity may likely result in disputes. Furthermore, Annex 8 should provide clarity on how disputes should be resolved in a cost and time efficient manner.

Although the opportunity for mini-grids to come to fruition is commendable, it is important that NERC provides policies, laws and regulations that would protect and improve the lives of Nigerian citizens. There should be avenue for increased competition and innovation to achieve this. There should provisions in the proposed regulation that would compel the Discos to disclose publically their five (5) years expansion plans, as well as review the mini-grid regulation to reflect the interest of the Nigerian electricity consumer at the core. This is can only be guaranteed when the Nigerian energy consumers are availed the opportunity of choice.

It is encouraging to note that the Regulation already seeks to minimize major risks associated with mini-grid investments such as sudden tariff changes and stranded mini-grid operator investments due to extension of the main grid to cover the mini-grid area. This basically permits a fair compensation mechanism that may be applied for mini-grid operators that choose to exit at any time.

The 2016 Mini-Grid Regulation adds to the growing list of draft and approved policies and plans for the renewable energy market in Nigeria. The increased activities in the off-grid renewable energy market (signaled by the increase in policy documents) are encouraging; however, investors need clarity on the approved policies and plans for the sector. There is need for an integrated and comprehensive national electrification plan that harmonizes the various plans. The national electrification plan should consider the various regions viable for mini-grids. It should delineate the areas that are best served by on-grid distributors. Several factors should be considered in creating this plan including cost effectiveness, natural resource availability, and the infrastructure capacities of the Discos. Furthermore, the plan should integrate the various resource plans that have been developed by Discos, government and development agencies in the power sector. The resource should be public and easily accessible.

Conclusion
The Draft 2016 Mini-Grid Regulation lays the groundwork to the emerging frontier in Nigeria’s electricity supply industry. Given the current state of grid power in Nigeria, an alternative is needed to provide electricity to the over 100 million Nigerians who do not have access to grid power. Mini grids have revolutionised other smaller countries in Africa, Asia, and South America and there are promises and lessons to be learned from those experiences. At the time of writing this article, NERC has reiterated its optimism that the draft Mini Grid Regulation will become law in the first quarter of 2017. Stakeholders’ views have been taken and deliberated upon. It is the wish of the writer of this article that NERC may consider the recommendations made here in to achieve the progress and development of Nigeria’s power sector.


OKEZI OKAH-AVAE 

Okezi is an Energy & Natural Resources, Senior Associate at Bloomfield Law Practice


 Photo Credit - www.youtube.com 
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