A Bright Outlook for Solar Mini Grid Regulation in Nigeria

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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.

Ambiguous and unfriendly regulations have been the typical hurdle in some power sectors across Africa. The recent movement for the promotion of cleaner and more modern energy in Africa has led to significant reforms in several markets, Nigeria being one of them. 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. The work is far from complete but the willingness of the Nigerian government and policy makers to further develop the space is evident.

One of the most recent and ongoing policy reforms in this direction is the Mini Grids Regulation, the draft of which has been shared by the Nigerian Electricity Regulatory Commission (NERC). NERC stipulates “The object of this regulation is to accelerate electrification in areas without an existing distribution network (“unserved areas”) and areas with an existing but poorly electrified or non-functional distribution grid (“underserved areas”) by attracting (the) participation of the private sector, communities and Non-Governmental Organizations in achieving nationwide electrification.”

Given the poor state of power distribution infrastructures in Nigeria and the illiquidity that several of the 11 Distribution Companies in Nigeria are facing, the so-called “unserved” and the “underserved” areas collectively make up a very significant community of power consumers in Nigeria. This provides 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.

“The regulation 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 main grid.”

Engr. Chinedum Ukabiala, the Deputy General Manager at NERC and the Head of Renewable Research and Development (RRD), indicates 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 adds 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.

Renewable energy such as solar is best positioned to leverage the improvements in mini grids regulations, given its scalability, ease of deployment and abundance in Nigeria. While inviting inputs from the general public (late in 2015) on the first draft of the regulation, 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.” Once implemented several of the risk concerns of market actors would be addressed, spurring investor confidence and further investment.

“The possibility of having 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.

The poor state of power access in rural Nigeria will undoubtedly improve due to such regulations 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. Engr. Ukabiala says  “concerning the incentives from a regulatory perspective: licensing burden will be drastically reduced or completely removed; a flexible tariff structure that is not over-regulated but guarantees return on investment will be implemented; the policy will 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”

“As the regulation for mini grid owners/power suppliers become better, consumers in turn receive more reliable and affordable power.”

This regulation will also benefit the manufacturing sector in Nigeria which is seriously struggling with epileptic power supply form the main grid. Most 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, some market players believe that the proposed mini grid regulation and earlier regulations are commendable but inadequate.  Femi Adeyemo is the Founder and Managing Director of Arnergy, a mini-grid and small household solar company in Nigeria. He says ”there are incentives for market players like us but more has to be done. This is especially true when you compare 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.

Since there are very serious gaps in the local manufacturing capacity of solar components, most of them are unavoidably imported. Market players will therefore like to see improvements in solar component import tariffs and VAT as well as the way they govern solar power businesses in Nigeria. The outlook remains positive nonetheless, as the Nigerian government works to ensure that abundant renewable resources such as solar are given the chance to be optimally developed in a country with worsening and now worrisome levels of energy poverty.

Source: Solarplaza

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