Investment attractions in Nigeria’s draft mini-grid regulation
In the Nigerian power sector, the GENCO-NBET-DISCO-Last Mile Consumer power supply model is yet to prove its commercial viability. It has not delivered on the ultimate goal; which is the provision of reliable and affordable power to Nigerian businesses and households. Reliable power provision in Nigerian will require one or all of; reworking the model; replacing it or augmenting with alternative systems.
There are two energy access models which promises to be capable of supporting or replacing that model and they are the off grid energy access system and the mini-grid system.
In 2016, the Nigerian Electricity Regulatory Commission (NERC) published a draft regulation for Mini-Grid development and operation in Nigeria. The model itself as well as NERC’s framework for supporting it, seems very promising. However, what are the core features of this regulation and what are the investment and operational dynamics?
Mitigated risks
Political and operational risk assurance has been a major concern for energy investors in Nigeria. Government’s failure to review the electricity tariff according to the MYTO plan (arguably for political reasons) is one of the culprits in the financial challenges facing the sector. NERC’s 2016 Mini Grid Regulation will mitigate this through;
• An obligatory and first stage tariff agreement between the mini grid operator and the benefiting community (in the case of an isolated mini-grid)
• A tripartite contract between the mini-grid operator, the community and the distribution licensee (the DISCO) (in the case of an interconnected mini-grid).
According to the draft regulation “It will minimize major risks associated with mini-grid investments such as sudden tariff changes, as tariffs would have been agreed in advance by the relevant parties” In Addition, cost reflective retail tariff will govern the entire operation.
Similarly, since mini-grid permits and contracts are not indefinite or long term in nature (maximum 5 years with options for renewal), the operator’s assets require some form of financial security in the event of main grid expansion. Thus, the regulation provides for a fair compensation mechanism and exit plan for the operator following the arrival of the main grid. Specifically “an Isolated or interconnected mini-grid asset (>100Kw distributed power and 1MW inst. capacity) which the operator has paid for using equity and debt and which he leaves behind shall be purchased by DISCO for 100 percent of the depreciated value”
Some investment attractions
Investing in Mini-grids will be an attractive investment, especially where the adopted generation technology is a viable renewable source such as solar power. While the regulation seeks electrification for both “un-served and underserved areas”, investing in underserved areas seems very promising especially where there is sizable, commercial, electric power consumer base.
Mini-grid operators/investors that form strategic relationships with the distribution licensee will have more viable and profitable ventures in the form of interconnected mini-grids;
“Underserved areas” have existing but poor performing grids “bad grid”. But it is reasonable to assume that the community (especially if it has commercial consumers) has an existing appetite for reliable power supply.
Since the regulation anticipates that the tariff will be higher than the prevailing grid tariff but lower than any electricity supply of same quality generated from alternative source, it can be said that only consumers in real need of power and who are already accustomed to paying for electricity in some way would be more open to paying a premium. Compared this to customers in “un-served areas”.
Mini-grid operators who, in addition, have the maximum allowable installed generation capacity of 1MW will also benefit from a strategic relationships with DISCOs since the tripartite agreement also accommodates opportunities for mini-grid operator to sell power to end user consumers and the main grid alike. As well as, purchasing power from the main grid; all at tariff and transaction conditions predetermined in the contract.
In spite of the relatively small maximum allowable generation of 1MW under this regulation, mini-grid developers that optimize this especially in several clusters can help augment DISCOs power supply through the possible sales of excess capacity under favorable tariffs in a win-win situation.
CHIJIOKE MAMA
*Chijioke MAMA is an Energy Research Analyst, Doctoral Researcher and Founder of EnergyDatar |chijioke.mama@yahoo.com