Mini-grid regulation in Nigeria – the issues

In countries and regions where there is little grid power penetration, one of the mechanisms employed to improve electricity footprint in remote or rural areas, with small or dispersed population is the mini-grid system. A mini-grid system consists of electricity generation capacity and a distribution network. Depending on the mini-grid policy of each jurisdiction, a mini-grid could be very small, or be up to 10MW.   Typically, a mini-grid provider or operator would provide a bundled product including generation, distribution and revenue collection services. At the heart of a mini-grid system is community engagement and involvement in the provision of the services.

There are four models usually utilised for the implementation of the mini-grid system. The first is the utility model where a large utility, for instance, a Distribution Company (Disco), develops and manages a mini-grid. The second is the private model where an entity, not previously a power sector licensee, builds and manages a mini-grid. This is usually done by small and medium enterprises. The third is the community model where a community assesses its needs and develops a mini-grid. Such community efforts would usually require the engagement of a third party to manage the facilities. The fourth is the public-private model which could be a combination of the three models above. Under this model, a public utility may develop a mini-grid with a private company, while the management of the mini-grid may be left to the community.

OVERVIEW OF THE REGULATION

Permit framework

In a bid to facilitate electrification of areas without grid power, the Nigerian Electricity Regulatory Commission (NERC) has released the Regulations for Mini-Grids (the regulation). The regulation describes a mini-grid as an integrated power generation and distribution systems under 1 MW, supplying electricity to more than one customer and which can operate in isolation from or be connected to a Disco’s  network. 

The regulation, provides for two classes of mini-grid systems namely, isolated mini-grids and interconnected mini-grids.   An isolated mini-grid is one which is not connected to any Disco’s network, while an interconnected mini-grid is connected to a Disco’s network. A permit must be obtained from NERC to construct, own and operate a mini-grid with capacity of more than 100KW distributed power. Mini-grids with less than 100KW distributed power may just register with NERC. 

In applying for an isolated mini-grid permit, Section 7(1)(b) requires the mini-grid developer to confirm that “based on the Distribution Licensee’s expansion plans approved by the Commission the Mini-Grid activities will not interfere with the expansion plans into the designated Unserved area”.  The wording of this provision is not clear about where the applicant will obtain the confirmation. It would be tidier if the regulation clearly stipulates that the applicant should obtain the confirmation from NERC, particularly, because the regulation provides that expansion plans of Discos are approved by NERC. If the applicant is required to obtain the confirmation from a Disco, an unwilling Disco may frustrate a mini-grid project by refusing to give such confirmation, notwithstanding that the proposed project location has no power supply and is not within the Disco’s  five-year expansion plan.

Timeframe for obtaining permits

Under section 10(2) of the regulation, NERC is to issue a permit pursuant to an application for a mini-grid permit within a maximum period of 30 days.   The regulation does not contain any provision on ‘deemed’ grant of a permit where NERC fails, without reason, to issue a permit within the 30-day timeline. Stakeholders may just have to wait and see whether the recent Executive Order issued by the Acting President, which allows deemed grant of a permit, if the relevant regulator has not responded within a specified timeline, would be duly enforced.

Tariffs

Retail tariffs to be charged by permit holders are to be determined using MYTO methodology subject to a limitation of technical losses to a maximum of 10% and non-technical losses to a maximum of 10%. Operators of mini-grids with not more than 100KW distributed power may determine their tariff by an agreement with customers consuming 60% of the electricity output of that the community, subject to NERC’s power to review and adjust the tariff.

Take-over of mini-grids

The regulation allows a Disco to extend its network to an area where there is an isolated mini-grid at any time. Where this happens, the isolated mini-grid may convert to an interconnected mini-grid or transfer its assets to the Disco for compensation to be paid by the Disco. If the permit holder exercises the option to transfer the mini-grid to a Disco it shall receive a compensation based on the depreciated value (including development and construction costs) of the mini-grid plus the revenue generated by the mini-grid, 12 months prior to the transfer.  An isolated mini-grid with distribution capacity of 100KW or less is not entitled to compensation. Therefore such an operator would have to either dismantle and remove its facilities or abandon them.

This valuation method for the transfer of mini-grids, clearly, does not consider future profits or cash flows which will accrue from the mini-grid assets. Investors would prefer a willing buyer willing seller transaction for divestment of their assets. In the alternative, if there must be a divestment a valuation method which will factor in the future revenue for the life of the mini-grid would be fair. The current valuation method is only beneficial to Discos, who may be incentivized to simply wait a few years to test the viability of a mini-grid project and then, swoop in to acquire the project by making it difficult for a lucrative isolated mini-grid to convert to an interconnected mini-grid.  Also, the regulation does not consider instances where the community may prefer to remain on an isolated mini-grid (perhaps because of their reliability, tariff or ownership structure) rather than connecting to the distribution network.

The possibility that a Disco may force a take-over of an isolated mini-grid for compensation based on the valuation method in the regulation, may impede the ability of potential mini-grid utilities from procuring investors who may prefer long term returns on their investment.   

CONSTITUTIONAL AND LEGAL ISSUES

The Concurrent Legislative List (List) in the 2nd Schedule of the 1999 Constitution gives the federal and state government power to make laws on electricity.  Item 13 of the List grants the National Assembly power to legislate on generation and transmission of electricity in Nigeria. Item 14(c) of the List grants the states the power to legislate on generation, transmission and distribution of electricity in areas not covered by the national grid. The rationale behind this was, perhaps, to increase the chances of electrification of remote or rural areas in the country. 

Given the above constitutional provisions, state governments can take the view that although the National Assembly can make laws on electricity generally, Item 14(c) of the List specifically empowers a state to make laws on electricity in areas not connected to the national grid. And, because the concept of mini-grids is for the provision of power for areas outside the national grid, state regulation will be the most appropriate. In the event that a state enacts such a law, it is likely that instead of the NERC’s mini-grid regulation, the state law would be considered applicable.

In any event, given that state governments are closer to rural communities where mini-girds will operate, it is more practical for mini-grid developers to liaise with state regulators in the setting up of mini-grid systems rather than visiting federal regulators in Abuja. State regulation will also open avenues for different innovations and mini-grid models that may best serve the interests of the diverse communities existing in each state. It would also be easier for states or local governments to facilitate negotiations between communities, villages and mini-grid investors in order to structure small scale power generation and distribution arrangements that would be beneficial to all parties.

   

Sina Sipasi, Partner, Oritsemone Awala-Velly, Tobi (Associates) are members of the

ǼLEX Energy Team.

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