Part 5: Renewable Energy to the Rescue
The Making and Evolution of an Electricity Market: Unpacking the Nigerian Electricity Bill, 2021
In the fourth part of the multi-part series that unpacks the Electricity Bill, 2021, the licensing framework as expanded within the Bill was highlighted alongside the implications for the industry.
In this fifth part, the long overdue incorporation of renewable energy development within the Bill is highlighted alongside the implications for the industry in terms of the ability to attract the much needed investments into NESI or otherwise, in a bid to educate readers on the process, evolution and dynamics of electricity markets.[1]
Commendably, the Bill seeks to stimulate the contribution of renewable energy to Nigeria’s energy mix. This is long overdue, considering that Nigeria ranks significantly well in terms of its renewable mix dynamics and its potential to attract investments in clean energy technologies into the country. The country’s wind potential is around 0.01%, solar potential amounts to about 0.08%, while hydro constitutes a significant share at 18.40%, brining the total contribution of renewable energy in the fuel mix dynamics to an estimate of 18.49% with significant available potential in the country.
Furthermore, at present, the legal and regulatory framework promoting off-grid investment in the country can be termed as being lean; with the framework encapsulated in limited policies and regulations such as the Nigerian Electricity Regulatory Commission (NERC) Mini-Grid Regulation, 2018, National Renewable Energy and Energy Efficiency Policy (NREEEP), 2015, etc., with scope for renewable energy investment incentives limited to areas such as the promotion of renewable energy use, feed-in tariffs for renewables, gender integration, etc. Commendably, the Bill makes provision for tax incentives to promote and facilitate the generation and consumption of energy from renewable energy sources in accordance with the provisions of the Nigerian Industrial Development (Income Tax Relief) Act and/or other fiscal policy framework(s).
It is therefore a positive step in the right direction for the Bill to recognise and significantly provide for the development and deployment of renewable energy in Nigeria’s energy mix, unlike the current Electric Power Sector Reform Act (2005), that makes no reference to renewable energy development. Specifically, the Bill seeks to provide a framework for the improvement of access to electricity in rural, unserved, underserved, peri-urban and urban areas, via the use of renewable energy off-grid and mini-grid solutions; promote indigenous capacity in technology for renewable energy sources through a framework for local content in the Nigerian electricity supply industry, etc. In addition, State Governments are encouraged by the Bill to exploit renewable energy sources for the electrification of areas within the State. On a country-wide scale, the Bill provides for the recognition and incorporation of renewable energy sources in the National Electricity Policy and Strategic Implementation Plan.
The Bill makes provision for the Minister of Power in collaboration with the Ministry of Environment, to harness opportunities offered under clean development mechanism and other mechanisms including, but not limited to, carbon credit trading, renewable energy certificates, to promote the development and exploitation of renewable energy sources. For such mechanisms to thrive and yield the expected benefits, the necessary systems and processes must be in place such as: a well-functioning market, an effective trading system/platform, the necessary robust infrastructure, institutional know-how and capacity, etc.
The Commission is to stipulate Renewable Generation Obligations (RGO) for compulsory adherence by Generation licensees to promote electricity generation from renewable energy sources and reduce greenhouse gas emissions in residential areas. The RGO obligation is to be met by such generation licensees either generating electricity from renewable energy sources or purchasing renewable energy or any instrument representing renewable energy and selling such energy alongside electricity generated from non-renewable energy sources. In granting generating licenses, the Commission is to promote embedded generation, hybridized generation, co-generation, and the generation of electricity from renewable sources such as solar energy, wind, small hydro, biomass, and such other renewable sources defined in the Bill.
This envisages the integration of renewable energy into the grid (for on-grid generation). Such integration will require key preliminary considerations such as the structure of the transmission grid and network and the receptivity of the grid to renewable energy sources. The transmission network structure of a country’s grid can either be a looped structure or one that is radial in structure. A looped structure is one that is multi-directional and in different paths, thus allowing for better management of the grid, improved reliability, and improved quality of service, as existent in for example, Eswatini, Senegal, Niger, Botswana, Zimbabwe, South Africa, etc. A radial structure on the other hand allows for only one directional power flow which is unreliable and contributes to a high number of system collapses, as existent in for example, Cameroon, Burundi, Angola, Nigeria, etc. For renewable energy sources to be effectively fed into the grid for systems with radial structures in particular, network upgrades will be required which will entail significant funding requirements. By the provisions of the Bill, the cost of upgrading the transmission or distribution system is to be shared equally between the operator of the transmission or distribution system and the generator of electricity from renewable energy sources. The costs associated with connecting installations to the metering point is to be borne by the generator of electricity from renewable energy sources. The Commission is to issue commercial and technical regulations for connectivity to the grid.
The Bill augments the existing powers of the Rural Electrification Agency with the addition of the management of renewable energy development to establish a new agency to be known as the Rural Electrification and Renewable Energy Agency (REAREA), to replace what is envisaged to be the extant Rural Electrification Agency (REA). Among the wide powers of the REAREA, the Agency is to actively promote the development and ensure the implementation of Government policies relating to rural electrification, renewable energy, and energy efficiency. Specifically, the Agency is to provide the framework that will support the development and utilization of renewable energy sources and an enabling environment to attract investment in renewable energy sources; the promotion for the productive use of renewable energy; the diversification of supplies to safeguard energy sources, improved access to electricity through the use of various renewable energy technology sources; the building of indigenous capacity in various technologies for renewable energy sources; public education for renewable energy production and consumption, etc. it is important that any framework that is developed also looks through the gender lens, in order to mainstream gender related considerations in encouraging the productive use of energy from renewable energy sources. It is also important for institutional capacity to be developed, for the Agency to achieve its intended objectives as enshrined in the Bill.
The Bill also establishes the Rural Electrification and Renewable Energy Fund (REREF) to support rural electrification and renewable energy development. Contributions to the fund are to be paid by eligible customers and licensees at a rate not exceeding 5% of the cost of electricity procured by eligible customers from non-renewable generators or any other rate determined by the Commission.
The Bill makes provision for a simplified licensing procedure and fees regime to renewable energy service companies for the provision of electricity to consumers from renewable energy sources. The Commission is to develop light-handed measures for awarding renewable electricity concessions for generation, distribution of electricity within 10MWs, generating electricity exceeding 1MW and distributing electricity above 100KW in aggregate at the site.
Feed-in-Tariff rates are to be determined by the Commission considering factors such as the technology deployed for renewable energy generation, location of the generation facility, construction/commissioning/operation and maintenance costs, reasonable rate of return, etc. The Feed-in-Tariffs are to span for a period of 10-15 years and will be renewed every 2 years. The price differential between the purchase price of electricity generated from renewable energy sources and the price of electricity purchased from other sources will be take into consideration by the Commission in setting the tariff rates. The Commission is also responsible for the introduction of feed -in tariffs for all small hydro schemes, all biomass co-generation power plants, solar and wind-based plants irrespective of their sizes with a term of up to 20 years to guarantee buyers under standard Power Purchase Agreements and provide return on investments.
It is important that there is an avoidance of overlap functions between the powers of the Commission and the REAREA.
A key provision in the Bill is the requirement for licensees, contractors or sub-contractors or other entities undertaking operations in the renewable energy sub-sector to ensure the inclusion of local content as part of their operational activities. This is pertinent to encourage the development of local man-power, capacity and know-how as the renewable sub-sector progresses along growth paths.
Concluding Remarks
The full scale recognition of the need to harness and develop the country’s renewable energy capacity as part of the contribution to the overall fuel mix is a long overdue but welcome development in the industry. Nevertheless, the integration of renewable energy into the grid will need to factor existing network and funding constraints, which can only be overcome with the right enabling environment to attract investments into the renewable energy sub-sector. The right enabling environment is also a pre-requisite for off-grid investments to thrive, given the interrelated and interlinked nature of the electricity value chain.
Key Takeaways
Ø The legal and regulatory framework promoting off-grid investment in the country needs to be robust and it also needs to align with investment law provisions. There is therefore a need for well-designed long-term legislation and enabling framework for the deployment of renewable energy technologies to guarantee investment security.
Ø The Bill recognises the need for an enabling framework for the efficient and sustainable production, conversion, distribution, marketing, and utilization of renewable energy. Mere recognition is not sufficient, as there needs to be clear actionable plans and instruments in place for an enabling framework that will bolster and attract investments into the sub-sector.
Ø Financial and non-financial incentives must be made available to secure investor confidence to boost renewable energy capacity in the overall energy mix.
Ø Any form of carbon trading to promote the development and exploitation of renewable energy sources as envisaged in the Bill will require the necessary systems and processes to be in place such as: a well-functioning market, an effective trading system/platform, the necessary robust infrastructure, institutional know-how and capacity, etc.
Ø Key preliminary considerations must be addressed before a successful integration of renewable energy into the grid can take place, which include the structure of the transmission grid and network and the receptivity of the grid to renewable energy sources, amongst others.
Ø It is important that any framework that is developed by the Rural Electrification and Renewable Energy Agency, to support the development and utilization of renewable energy sources, also looks through the gender lens, to mainstream gender related considerations in encouraging the productive use of energy from renewable energy sources. It is also important for institutional capacity to be developed, for the Agency to achieve its intended objectives as enshrined in the Bill.
Ø It is important that there is an avoidance of overlap functions between the powers of the Commission and the REAREA.
Ø The development of light-handed measures for the award of concessions and the removal of licensing barriers through simplified procedures to renewable energy companies is a welcome development, in so far as the laid down licensing procedures are adhered to by the regulator and applicable agency, to avoid any possible occurrence of arbitrary grant of licenses. Simplicity should not displace process efficiency.
[1] Electricity markets in the context of this brief speaks to the sector view as a whole, as opposed to the trading of electricity which exists as an activity within the sector.