REVIEW OF THE POWER SECTOR: ANALYZING THE MINI-GRID REGULATIONS, 2023
Over the years, Nigeria has experienced a remarkable paradox, one of acute energy poverty in the midst of plenty. Despite the country’s huge energy resources, including both large and small hydropower and abundant gas reserves, 44.6% of households, according to the National Bureau of Statistics do not have access to grid electricity. The federal government privatized the state-owned Power Holding Company of Nigeria (PHCN) in 2013, in the hopes that the private sector would bring the investment needed to drive the electricity sector and provide much-needed energy to millions of Nigerian households and productive users. However, eight years after privatization, the resulting power generation companies and distribution companies are still struggling to manage the existing infrastructure.
Recognizing the lack of technical capacity for massive electricity development by the present operators of the nation’s electricity grid, the federal government adopted the model of providing financial support to the private sector to deploy renewable and hybrid mini grids to underserved and unserved communities and businesses across Nigeria. In this regard, several initiatives have been launched by various national and international stakeholders. Among the most prominent of these are the National Electrification Project, the Energizing Economies Initiative, the Energizing Education Programme, Nigeria Energy Support Programme, and the Interconnected Mini-Grid Acceleration Scheme. Today, there are over 70 mini grid sites spread across the country’s six geopolitical zones.
The Nigerian Electricity Regulatory Commission (“NERC”), in accordance with Section 226 of the Electricity Act, 2023, introduced the Mini-Grid Regulations in 2023 (“the Regulations”) to enhance the development and operation of mini-grids across the country. These regulations aim to address electricity access challenges, particularly in underserved and unserved areas. The Mini-Grid Regulations introduce key changes to the Nigerian Electricity Supply Industry (“NESI”) and seek to address stakeholders’ concerns regarding the operational landscape between distribution companies and mini-grid operators as well as the generation of electricity from renewable energy sources within NESI.
According to Section 3 of the Mini Grid Regulation 2023 mini-grids are defined as electricity supply systems with a capacity of up to 1 MW, which can operate independently or in connection with the main grid. The regulations apply to mini-grid developers, operators, and stakeholders involved in electricity distribution. This article will discuss the highlights of the regulation and the impact and regulation of the regulation in Nigeria
HIGHLIGHTS OF THE REGULATIONS
The key highlights are as follows
- Licensing and Registration:
According to Section 7 of the Regulations, mini-grid developers must obtain a permit from NERC for systems above 100 kilowatts (kw) but below 1 Megawatt (MW). Systems below 100 kW require registration but are exempt from the full licensing process, simplifying entry for smaller projects.
- Tariff Setting:
The regulations provide a framework for setting and reviewing tariffs, ensuring they are cost-reflective and provide a fair return on investment while being affordable for consumers. Tariffs can be negotiated between the mini-grid operator and the community, subject to NERC’s approval.
- Grid Connection and Integration:
Procedures for integrating mini-grids with the national grid are outlined, ensuring a smooth transition when the main grid expands to areas served by mini-grids. Compensation mechanisms are established for mini-grid operators if their assets become redundant due to national grid expansion.
- Technical and Safety Standards:
Mini-grids must adhere to specific technical standards to ensure safety, reliability, and efficiency. Regular inspections and audits are mandated to maintain compliance with these standards.
- Consumer Protection:
The regulations include provisions to protect consumers’ rights, ensuring they receive reliable service and have access to a redress mechanism. Operators are required to provide transparent billing and clear information about tariffs and services.
- Financial Incentives and Support:
NERC outlines potential financial incentives for mini-grid developers, including subsidies, grants, and access to low-interest loans. These incentives aim to attract investment and reduce the financial barriers to developing mini-grids.
Impact of the Regulation on the National Electricity Supply Industry
- Confirmation and Consent:
According to Section 7(2) the Regulations, distribution companies must, within 15 business days, confirm that the proposed mini-grid investment in a designated unserved area will not impede their network expansion plans or provide written confirmation that the project area is covered within their expansion plans. Failure to respond within the specified timeframe will be construed as deemed consent from distribution company. This amendment is designed to mitigate delays associated with obtaining distribution companies’ confirmation or consent during the mini-grid permit application process.
- Transfer of Mini-Grid Permit and Business:
By virtue of Section 14(1) of the Regulations, the Mini-Grid Regulations introduce a framework for the transfer, assignment, sale, or disposal of a mini-grid permit holder’s permitted business, subject to the prior written consent of the Commission. Permit holders must provide specific documentation and evidence demonstrating the technical capability of the transferee company. This establishes a legal framework for license transfers, especially in the context of mergers and acquisitions within Nigeria’s power sector.
- Limitation on the Multi-Year Tariff Order Methodology:
The regulations provide that registered mini-grid operators may determine retail tariffs and other charges using the MYTO, with limitations that technical losses shall not exceed 4% and non-technical losses shall not exceed 3% according to Section 22(5)(a) of the Regulations. This represents a significant reduction compared to the 2016 Regulations, which allowed a 10% buffer on technical and non-technical losses in accordance with Section 20(3) NERC Mini-Grid Regulations 2016.
- Flexibility in the Determination of Mini-Grid Tariffs:
Mini-grid operators are permitted to enter into agreements with the community (customers consuming not less than 60% of the electrical output of the mini-grid) to determine retail tariffs and charges. These agreements are subject to the Commission’s right to intervene and review the agreed tariffs to ensure equity and fairness according to Section 22(5)(b) of the Regulations. This contrasts with the 2016 Regulations, where the NERC could adjust the tariff if the rate of return for the mini-grid operator exceeded 6%. The new regulations prioritize equity and fairness, empowering mini-grid operators to adapt pricing strategies effectively to local market conditions.
- Expansion of Distribution Companies’ Area Coverage:
According to Section 20(2) of the Regulations, the distribution companies are permitted to extend their network to isolated mini-grids operating under a permit or to integrate their networks with interconnected mini-grids. Distribution companies must issue formal written notice within 12 months before such grid extension reaches the isolated mini-grid.
The regulations mandate distribution companies to provide adequate compensation to permit holders in the event of an extension to an isolated mini-grid. If a distribution company fails to adequately compensate an isolated mini-grid operator, the operator has the right to continue operating the mini-grid without any disruption.
Implications of the Regulation
- Increased Access to Electricity:
The regulations are expected to significantly increase electricity access in rural and underserved areas, improving the quality of life and economic opportunities for residents.
- Private Sector Participation:
By providing a clear regulatory framework and financial incentives, the regulations encourage private sector investment in the mini-grid sector.
- Economic Development:
Reliable electricity can spur local economic development, enabling small businesses to operate more efficiently and attract new enterprises to rural areas.
- Environmental Benefits:
Mini-grids often utilize renewable energy sources, contributing to Nigeria’s sustainability goals and reducing reliance on fossil fuels.
CONCLUSION
The Regulations, represent a significant step towards enhancing electricity access in Nigeria. By providing a structured and supportive framework, these regulations aim to encourage the development of mini-grids, foster private investment, and ensure that consumers receive reliable and affordable electricity. These regulations signify a commitment to attracting investments in the evolving NESI, fostering a more inclusive, collaborative, and adaptable energy landscape in Nigeria. However, careful and responsive implementation is essential to ensure the success of these reforms.
N.B The Contents of this Article does not constitute a legal opinion, should you require specific guidance on the subject, feel free to send an email to info@morgancolepartners.com