By Ayodele Oni, Partner and Chair of the Energy Practice Group at Bloomfield Law Practice, Nigeria.
Research has shown that there is a strong correlation between economic growth and availability of affordable electric power. With Nigeria recently regarded as having the highest number of the poorest people in the world together with the very poor availability of electric power, we may be in more trouble than we actually realize. Unless the steps being taken by the current administration continue and are expanded to address issues related to the grid. This is because, it is widely agreed that mini-grids and off-grid solutions, alone, are not a sustainable solution to the challenges currently being faced in the power sector, which is inextricably linked to the overall level of poverty in Nigeria.
It is the writer’s view that the current administration is performing admirably well with respect to encouraging off-grid and mini-grid solutions with policies geared towards encouraging renewables. It should also be noted that the last administration laid a good foundation for much of what we see now. Structures that were put in place range from the actual privatization in the power sector to other crucial policies and initiatives such as setting up a bulk trader, providing sovereign support to eligible power projects, and issuing useful rules and regulations.
The Nigerian Situation
Research commissioned by Shell Petroleum Development Company (popularly just referred to as Shell), suggests that several millions of people across Nigeria still do not have access to affordable electric power. With Nigeria having a population of approximately 200 million people, over 120 million are either not connected to the electricity grid or receive less than four hours of power supply from the national grid each day. In fact, constructing a national grid which extends to the entire power grid remains a national aspiration that might take decades to achieve. This is due to lack of infrastructural development such that as population grew in geometric proportions, there was either no corresponding infrastructural development or in most dire cases, none at all.
Despite the widening gulf between infrastructure required for electric power generation via the national grid and the demand for electricity, the demand for electric power has continued to grow substantially. Inability to meet the power needs of many businesses has meant that Nigeria’s neighbours, especially Ghana (which has a much better electric power supply situation), have gained more corporate citizens with many former Nigeria-based businesses relocating there.
A lot is spent per person per kWh on generating their own electricity for their energy needs. In fact, market research suggests that people who live in rural Nigeria pay approximately N250/kWh for small generating sets which use premium motor spirits (in particular) to meet their electric power needs.
Filling the Gap and Making a Business Case
Having stated above that self-generation, especially with premium motor spirits (popularly referred as petrol) is quite expensive and almost ten times the actual tariff of grid-generated electric power, current policymakers in Nigeria with the support of private sector appears to now see that mini-grids can fill the gap between self-generation which is almost ten times more expensive than grid-power and the expensive grid extension projects which could end up being uneconomical.
The huge population in Nigeria and the modest purchasing power could make it even more attractive to build or develop mini-grids especially since a reasonable business case can easily be shown in terms of having people see that they cut at least half of their current N250/kWh bill on electricity.
There is really a large market for the underdeveloped mini-grid market to service. The writer is currently advising an international investor that confirms that there is over $8 billion (approx. N3 trillion) market for mini-grids in Nigeria.
In Nigeria, at least by virtue of the legal and regulatory regime, there are two broad types of mini-grids:- the Isolated Mini-grid and the Interconnected Mini-rid which is connected to an electricity distribution company, which serves as a conduit. Whilst an isolated mini-grid develops its own distribution facilities, an inter-connected mini-grid uses the existing facilities of an electricity distribution company to distribute the electricity. Isolated mini-grids may remain that way or convert to interconnected mini-grids by connecting to available distribution network. Very often, mini-grids are deployed in remote areas as a more cost-effective and less expensive means of electrifying rural area instead of very costly grid expansion projects especially where those rural areas have less economic activities such that the cost-benefits analysis shows a deficit of benefits to the cost (at least, from a purely economic stand-point).
The challenges with grid extension alongside current government policy which encourages off-grid power supply make off-grid alternatives such as mini-grids homes systems which are yet to fully penetrate the rural market, attractive. It is also the case that as a result of poor grid power supply, domestic and commercial consumers spend an estimated research has shown that up to 64% of people living in rural areas and who spend 70 cents to 1 dollar per kWh on small generating sets for their electricity needs are better served via off-grid means such as micro-grids and solar homes systems at rates up to 60% of the cost of using small generating sets run on fossil fuels.
Many business owners list electricity supply challenge as their most significant impediment to doing business in Nigeria and research has further shown that nearly US30 billion economic loss is suffered annually from poor power supply in Nigeria. Considering the reducing costs, interest of development finance institutions and several donor agencies, mini-grids appear to provide an alternative to the costly grid expansion projects and a relatively quick fix to the rural electrification challenge. It must be said that the rural electrification agency (“REA”) is not doing badly, in this respect. Such projects can provide more cost-effective options to the grid and small generating sets and provide viable opportunities for investment and the development of the economy.
In addition to the case made above, rural consumers already spend so much on self-generation of electricity and can therefore pay for mini-grid and other cheaper off-grid options, provided that they can be shown that those are cheaper options for them. Based on research by GIZ of Germany, there are already 30 solar mini-grids with a total installed capacity of 1mw serving 6,000 customers. The Nigerian mini-grid market is estimated to have the potential of N2.8trillion (approx. $8 billion) in annual revenues.
The market is still nascent in Nigeria and in the writer’s view, there is no better time to get involved in the market and reap the possible benefits of investing early and being amongst the first investors in this space.
Structuring Mini-grid Projects in Nigeria
It is important at the onset for an ideal location to be selected to reasonably ensure the financial viability of a mini grid project. A relatively densely populated area (for economies of scale purposes) with significant (socio-economic) activities and reasonable ability to pay is also crucial. Another important step is to continuously engage the relevant community and to carry them along. It may be important to involve the representatives of the community.
It is also pertinent to look at the use of innovative financing techniques, such as lease structures. With this also comes the need to leverage technology especially mobile payment systems which a lot of financial technology businesses offer. If the relevant mini-grid is interconnected, it is important that the relevant distribution company is carried along. With respect to the community and the distribution company (if an interconnected mini-grid), relevant documentation should be signed. The writer has substantial experience providing support to some of the world’s leading energy companies developing such projects in Nigeria. Data-sharing, cost-reduction programs are also quite crucial in ensuring an efficiently developed and run project.
The process of developing such projects is in three parts – project development when a lot of what has been mentioned above will be done and such activities will include the identification of the requisite site together with assessment, design of the system and planning. It is germane that an energy audit is part of the mix. The construction phase includes the procurement of necessary equipment, installation and commissioning. The foregoing occurs before the operations period which could last for several years. During operations, there will be plant maintenance and monitoring, equipment repairs, metering, billing and collections together with the commissioning and necessary integration with the customers’ facilities.
Temporary Political Gains and Thinking Long Term
As mentioned above, the federal government (especially through the REA) is not doing badly in its effort to electrify areas which almost have no coverage in terms electric power supply and in particular, some measure of success is being achieved especially by the REA in connection with mini-grids and other non-conventional rural electrification technologies. The problem is that, in a number of cases, the government can be rightly accused of creating some form of creeping/ economic expropriated of the rights of investors- particularly the distribution companies.
Another challenge is that the country cannot industrialize through mini-grid and other off-grid technologies as these will be too expensive to be competitive and cannot also ideally match the volume of electricity needed. Thus, it is crucial that attention is given to the on-grid system and the attendant wholesale and retail markets. Nigeria cannot truly achieve industrialization and be competitive in the global market, through pockets (even if several) of mini-grids and other solutions, such as solar homes systems alone. There is need for a strong mix such that there is power generated from large hydro plants, large thermal power plants using fossil fuels, especially mostly clean fuels such as natural gas, (and maybe clean coal technology and when the Nigerian market matures, nuclear fission.
The reality is that mini-grids only extend access to electricity access and cannot ideally power industrialization or achieve what government seeks to do without paying corresponding attention to on-grid power supply. Maybe we could even practice ‘energy federalism’ where we could have solar mini0grids for certain areas in the North which are taken off-grid and use coal for far flung places in the East so that there is then maybe enough capacity on the grid for large industrial users. Hence, to adequately power Nigeria and its quest for industrialization, there is need to, whilst advancing off-grid, pay attention to high capacity transmission and the relevant distribution networks.
It is pertinent that policy formulation and implementation are not only for the short term but should be and be seen to be for the long term whilst also attempting to solve the immediate problems. Thus, mini-grids, solar homes systems and small-scale renewable energy solutions should complement the grid from which large-scale bulk power is transmitted rather than such being a substitute for the national grid. In taking steps for the long-term, it is germane that all stakeholders are carried along such that the current off-grid policy is not just considered as some form of cherry-picking which gives a sense of the expropriation (indirect or economic) of the franchises of the electricity distribution companies.
It is the writer’s view that the Ministry of Power (as embodied by the Minister of Power) needs to keep the dialogue open so that there are more stakeholder engagements such that the current gains from a mini-grid/ off-grid perspective are not only temporary as there is nowhere in the World that people live solely or almost solely on mini or micro grids or largely on off-grid solutions. That simply isn’t sustainable so we do need a mix of off-grid and large on-grid to achieve much success. Thus, it is germane to have an integrated development strategy, that details both on-grid, off-grids, mini-grids and other technologies.
It is clearly the case that there is a good business case for investing in off-grid projects, but from a strategy point of view, it is critical that the development of Nigeria’s power sector is integrated and collaborative. This ensures longer lasting results and not just short-term political gains. It is also germane that local governments and the state get more involved in supporting off-grid projects. The writer believes that they should actually collaborate with the REA. The nutty issue of duties being paid on certain solar equipment may also need to be reviewed.
There are indeed opportunities for more electricity access with the resulting effect being the reduction of poverty. It is crucial that everything is done to remove the toga of Nigeria being the poverty capital of the world and the steps to be taken should be sustainable steps.