Renewable Energy: Making a business case in an emerging economy

Proem

Renewable energy is energy collected from resources which are naturally replenished on a human timescale such as sunlight, wind, rain, tides, waves and geothermal heat. According to energy experts, Renewable Energy (RE) has contributed about 19 percent to the world’s global energy consumption and 22 percent of total electricity generation. The paradigm shift from conventional to unconventional sources of energy has been seen as a cost-effective development solution for developed and developing nations including Nigeria. Particularly, resulting from the changing energy landscape, the decreasing price of renewable energy, and the often remote location of the majority of people without access to electricity, Nigeria may find renewable energy as an effective and more reliable energy source.

A global energy revolution in the making

The demand for electricity is constantly rising due to a growing global population and a corresponding increase in the wealth of developing nations. This is even more pronounced when one considers the estimated number of people who currently do not have access to electricity. Nations cannot continue to rely on the conventional methods of generating electricity as they have been adjudged unreliable and have huge environmental side-effects. For example, coal. According to the World Coal Association, coal accounts for 41% of the electricity produced today but its alarming pollution level (air and water pollution during mining and air pollution during burning) and sometimes, sullen circumstances for miners makes it easy to conclude that coal-sourced electricity is an unsustainable source of electricity.

According to REN21, there has been a rising awareness across the globe that renewable energy is critical not only for addressing climate change but also for providing energy access to the billions of people still living without modern electricity. In recent times, renewable energy has expanded significantly in terms of capacity installed and energy produced, with renewable energy investments in the power sector outpacing net investments in fossil fuel power plants. The most rapid growth and the largest increase in renewable capacity occurred in the power sector and was dominated by three technologies: wind, solar photovoltaic (PV), and hydropower.

The paradigm shift

Recognizing the beneficial effects of putting Nigeria on a path of sustainable energy, the Nigerian Electricity Regulatory Commission (NERC) has set a target of 2000MW from Renewable Energy (RE) sources by 2020. This figure represents 10 percent of the total estimate of power expected to be generated in the country by the year 2020. The aim is for Nigeria to generate 1000MW by the end of 2018 and 2000MW by the end of 2020. However, considering that RE technologies are generally known to be relatively more expensive than conventional sources of generating electricity, the NERC has introduced the Renewable Energy Feed-In-Tariff (REFIT) mechanism to stimulate investment in RE electricity generation.

The Feed-in-Tariff Regime

A Feed-in-Tariff (FiT) is a price-setting policy usually implemented by Governments to stimulate investment in RE generation projects. Price-setting policies reduce cost and pricing related barriers by establishing favorable pricing regimes for RE Generation companies. The Nigerian version of the FiT attempts to achieve the foregoing objectives as well. The FiT Regulations (the regulations) recently approved by NERC provides details as to how the FiT regime would operate.

The NERC FiT regime guarantees a purchase price over a fixed duration for different priority technologies, ensuring appropriate return on investment for the developers. However, only projects between 1MW and 30MW and which are connected to the transmission and or distribution system can take advantage of the FiT. Off-grid power projects are not included in the arrangement. The renewable energy technologies covered in the scheme are: solar, wind, small hydro, and biomass sources. The capacity cap for each renewable technology covered is: Solar – 387, Wind – 412MW, Small Hydro – 675MW, Biomass – 526MW.

Limiting the scope of the renewable technologies is occasioned by the stimulus its initial phase (first phase) focuses on primarily. Future phases may add more technologies and incentives for RE projects in different geographical areas. In the same vein, capacity caps have been placed so as to avoid high increases in electricity prices which could have negative socio-economic impacts on the country’s poor and on industry.

The FiT policy regime is subject to review every three years due to changes in technology from the date of publication. However the review may be undertaken earlier than three years in exceptional cases. In any case, any policy changes made during such reviews shall only apply to RE power plants that are developed after the revised guidelines are published. In other words, investors are guaranteed that the conditions upon which they invested would not be changed haphazardly prior to them recouping their investments.

The business case

According to the provisions of the Regulation, the Nigeria Bulk Electricity Trading Company (NBET) will be obligated to procure 50 percent of the generated capacity requirement while the Distribution companies will be obligated to procure the remainder 50 percent. Although, under the FiT regulations, the RE generators will be responsible for connecting their plants physically to the nearest point of the electricity distribution network. This shouldn’t affect their bottom-line as the tariffs already have, incorporated into them, a standardized allowance for interconnection costs. Also, the off-takers (NBET and the Discos) shall guarantee priority purchase and distribution of all electricity supplied by the RE generators As such, under the FiT regime, the RE investors are guaranteed a return on investment (RoI) over the term of the Power Purchase Agreement signed with the Off-takers; the term is put at 20 years.

The Regulations provide that a full tariff review will take place every year for the first five year period of implementation and every three years thereafter but the resulting tariffs will only be applicable to new projects. Thus, the tariff applicable at the time a PPA is signed is the fixed value which will apply over the 20 year life of the PPA subject to adjustments being made from time to time to reflect the dollar-naira exchange rates. Also, the O & M component of the tariff will be subject to semi-annual indexation using the Nigerian Consumer Price Index. At the end of the 20 year period, the RE generators will be required to negotiate tariffs under market conditions at the applicable time.

Conclusion

The FiT are a very welcome development for two reasons: one, they help to encourage the diversification of energy sources bringing about a more reliable supply of electricity. Two, which is more important, in light of the Paris Agreement on climate change, they serve to kick start the growth of a renewable energy sector in Nigeria. The case for the increased use of RE as a source of power cannot be overemphasized. The rapid development of renewable energy and technology diversification of energy sources would result in significant energy security and economic benefits. Anyone who has been monitoring the energy industry globally will know that the future of the sector lies in a successful deployment of renewable energy technologies. It is good that Nigeria has identified this opportunity and is presently taking advantage of it.

Tolulope Aderemi is a Partner within the Energy & Natural Resources Group at Perchstone & Graeys, a leading commercial law firm in Nigeria, with especial competence in Energy & Infrastructure, Banking & Finance, Dispute Resolution and Corporate & Commercial Law.

Tolulope Aderemi and Olatunji Oginni

Olatunji Oginni is an Associate within the Energy & Natural Resources Group at Perchstone & Graeys.