Investment Opportunities Under the New Regime of the Electricity Sector

The Nigerian electricity market is on the brink of transformation with the enactment of the new Electricity Act 2023, which replaces the Electric Power Sector Reform Act (EPSRA) of 2005. This legal overhaul is designed to foster a more competitive, decentralized, and sustainable electricity market. Nigerian Electricity Regulatory Commission (NERC) has been creating and enforcing policies in the light of the new electricity regime in Nigeria. The framework opens the door to a myriad of investment opportunities for both local and international investors. We will be examining successful case studies from around the world, investors can glean valuable insights into how they can capitalize on these new opportunities in Nigeria’s evolving energy landscape.

Introduction of a Competitive Electricity Market

The new legal framework introduces a competitive electricity market, allowing multiple players to enter the generation, distribution, and trading segments. This shift aims to dismantle monopolies and foster a vibrant, competitive market that encourages innovation and efficiency.

1.1 Investment Opportunities:

1. Generation and Distribution: Investors now have the chance to become independent power producers (IPPs), electricity traders, or distribution companies. The competition incentivizes better pricing and service quality, creating a more dynamic market.

 

1. Strategic Acquisitions and Partnerships: With the market opening up, investors can pursue strategic acquisitions or partnerships, targeting underperforming assets or new entrants seeking to scale up.

Case Study: Enel (Italy)

Overview: Enel, originally a state-owned utility, successfully transitioned into a competitive market after Italy deregulated its electricity sector. The company expanded its operations globally, tapping into new markets and diversifying its energy mix to include renewables. By an article published on the website of the company, they spoke extensively on the importance of deregulation and how it propelled them into the dawn of a new age and also at the peak of the energy sector in Europe^[1]

Benefit: Enel’s ability to adapt to a competitive market allowed it to become one of the largest energy companies in the world, with a strong presence in over 30 countries. The company’s diversification into renewables has also positioned it as a leader in the global energy transition, providing a stable revenue stream and enhancing its market reputation.

Decentralization and Sub-National Electricity Markets

The new framework permits state governments and private entities to generate, distribute, and regulate electricity independently of the national grid, especially in areas not covered by it. This decentralization is crucial for extending power to both the unserved and underserved regions in the Nigerian electricity market. The NERC drawing from the provision of the Electricity Act and the amendment of the 1999 Constitution removing Electric Power from the exclusive list, has been authorizing states to embark on state electricity policies upon reaching and meeting certain statutory requirements. Thus far, 12 states have been given this authority with Lagos State being one of the said states.

2.1 Investment Opportunities:

1. Regional Power Projects: Investors can partner with state governments to develop decentralized energy projects, such as mini-grids, that supply power to rural or underserved urban areas, thereby expanding the reach of electricity and capitalization of same.
2. Localized Renewable Energy Solutions: Investment in solar farms, wind turbines, and small hydroelectric projects tailored to specific regional needs can reduce reliance on the national grid and enhance energy security.

Case Study: Husk Power Systems (India)

Overview: Husk Power Systems operates mini-grids in India, providing off-grid communities with reliable and affordable electricity. By utilizing biomass and solar energy, Husk has created a sustainable business model that caters to the energy needs of rural populations.

Benefit: Husk Power Systems has successfully scaled its operations, attracted significant investment and expanded its services to multiple countries. The company’s focus on decentralized energy solutions has enabled it to play a key role in rural electrification, improving livelihoods and contributing to local economic development

Emphasis on Renewable Energy and Sustainability

The new legal framework strongly supports the development of renewable energy, offering incentives such as tax breaks, grants, and subsidies. This emphasis on sustainability aligns with global trends and provides a fertile ground for investments in solar, wind, hydroelectric, and biomass energy projects. Nigeria has a large and untapped green energy source that ought to be capitalized on and converted to energy.

3.1 Investment Opportunities:

1. a) Renewable Energy Projects: Investors can leverage government incentives to develop large-scale renewable energy farms or smaller, localized projects that contribute to the national grid or decentralized networks.
2. b) Green Finance and Carbon Credits: Opportunities abound in green finance mechanisms like green bonds and the carbon credit market, where investors can develop projects that reduce emissions and earn tradable credits.

Case Study: Ørsted (Denmark)

Overview: Ørsted, formerly known as DONG Energy, transitioned from a fossil fuel-based energy company to a global leader in offshore wind energy. The company’s strategic shift towards renewables was supported by Denmark’s favourable regulatory environment and commitment to sustainability. This is also in line with all the aforementioned case studies

Benefit: Ørsted’s focus on offshore wind has not only made it a world leader in this sector but also significantly boosted its market value and investor confidence. The company’s success in renewables demonstrates the potential for high returns in sustainable energy investments, supported by a clear regulatory framework.

Enhancement of Transmission and Distribution Infrastructure

To support the increase in generation capacity and decentralization, the legal framework prioritizes the modernization of transmission and distribution networks.

This modernization is critical for reducing technical losses and improving the reliability of power delivery. Nigeria has frequently been challenged by issues involving the transmission of electricity. As arguably the most populated nation in the continent of Africa, Nigeria faces difficulties caused by both its rapidly expanding industrial sector and its ever-growing population, which put a constant strain on the nation’s electrical infrastructure. Only 40% of Nigerians are linked to the national grid, and even those who are linked frequently experience power outages, this highlights the country’s severe electricity issue.

 

4.1 Investment Opportunities:

1. Transmission Infrastructure: Investors can participate in public-private partnerships (PPPs) or independent projects to build new transmission lines, substations, and grid interconnections. The new dispensation emphasizes strategies such as installing new transmission lines, reconductoring, converting to double circuits, voltage upgrades, reactive power compensation, and phase shifting. This is properly funded by the government in collaboration with the African development bank. The Nigeria Transmission Expansion Project Phase 1 (NTEP 1), as part of TREP, aims to enhance grid wheeling capacity, and a loan of USD 210 million from the African Development Bank supports this project
2. Smart Grid and Metering Solutions: The adoption of smart grid technologies and advanced metering infrastructure (AMI) presents opportunities to improve grid management and customer service.

Case Study: National Grid (United Kingdom)

Overview: National Grid, responsible for the UK’s electricity and gas transmission networks, has heavily invested in modernizing the country’s grid infrastructure. The company’s efforts include the deployment of smart grid technologies and the integration of renewable energy sources.

Benefit: National Grid’s investments have led to a more resilient and efficient energy network, reducing losses and supporting the UK’s transition to a low-carbon economy. The company’s proactive approach to grid modernization has ensured its continued relevance and profitability in a changing energy landscape.

 

 

Promotion of Public-Private Partnerships (PPPs)

 

Public Private Partnership is a long-term agreement between government agency and the private sector for the provision of infrastructure which is great deficit in Nigeria. The framework encourages public-private partnerships, particularly for large-scale projects that require significant capital and expertise. These collaborations help mitigate risks and ensure the successful execution of critical infrastructure projects.

5.1 Investment Opportunities:

1. Collaborative Infrastructure Projects: Investors can engage in PPPs to develop and operate power plants, transmission networks, and renewable energy installations.
2. Energy Efficiency Projects: PPPs focused on improving energy efficiency across various sectors offer opportunities for retrofitting buildings, upgrading industrial processes, and implementing demand-side management programs.

Case Study: Masdar (United Arab Emirates)

Overview: Masdar, a subsidiary of Mubadala Development Company, has successfully engaged in PPPs to develop large-scale renewable energy projects in the UAE and abroad. The company’s portfolio includes solar and wind projects, often developed in collaboration with government entities and other private sector players.

Benefit: Masdar’s strategic use of PPPs has enabled it to expand its operations globally, attracting investment and establishing itself as a leader in the renewable energy sector. The company’s ability to leverage partnerships has been key to its growth and success in a competitive market.

Introduction of New Tariff Structures

The NERC multiyear tariff order seeks to regulate the tariff structure in the Nigerian electricity market. It is important to state that the new legal framework introduces a cost-reflective and transparent tariff system designed to attract investment by ensuring that electricity prices reflect the true cost of production and distribution. This reform makes the sector more attractive to investors by providing a clearer path to profitability.

 

6.1 Investment Opportunities:

1. Stabilized Revenue Streams: A predictable and stable tariff regime reduces financial risks, making investments in new generation capacity or the rehabilitation of existing plants more viable.
2. Innovative Billing and Energy Management Solutions: With the new tariff structure, there’s a growing market for innovative billing solutions and energy management systems that optimize electricity usage and reduce costs.

Case Study: Eskom (South Africa)

Overview: Eskom, South Africa’s primary electricity supplier, underwent tariff reforms to reflect the true cost of electricity production and distribution. These reforms were part of broader efforts to stabilize the company’s finances and improve service delivery.

Benefit: While the reforms were challenging, they provided Eskom with the necessary revenue to invest in infrastructure upgrades and maintenance, ultimately improving the reliability of electricity supply. The introduction of cost-reflective tariffs helped stabilize the utility’s financial position, making it more attractive to potential investors.

Expansion of Off-Grid and Mini-Grid Solutions

Recognizing the challenges of extending the national grid to remote or rural areas, the new legal framework supports off-grid and mini-grid solutions as viable alternatives. These solutions are crucial for providing electricity to communities and businesses currently underserved or completely unserved by the national grid.

7.1 Investment Opportunities:

1. Mini-Grid Development: Investors can develop mini-grid systems powered by renewable energy sources to serve specific communities or industrial clusters.
2. Off-Grid Energy Solutions: For regions where grid extension is not feasible, off-grid energy solutions, such as solar home systems, offer a lucrative investment opportunity.

 

Case Study: M-KOPA (Kenya)

Overview: M-KOPA, a leading off-grid solar provider in East Africa, offers pay-as-you-go solar home systems to households and businesses in Kenya and other countries. The company’s innovative financing model allows customers to pay for solar energy systems in affordable instalments.

Benefit: M-KOPA has successfully scaled its operations, providing clean energy to over 1 million households in East Africa. The company’s off-grid solutions have significantly improved energy access in remote areas, contributing to economic development and improving quality of life for millions of people.

Conclusion

Nigeria’s new legal framework for the power sector represents a significant shift towards a more competitive, decentralized, and sustainable electricity market. By examining successful case studies from around the world, investors can gain valuable insights into how to capitalize on these emerging opportunities. Whether through renewable energy projects, infrastructure investments, public-private partnerships, or innovative energy solutions, the potential for growth and profitability in Nigeria’s power sector is vast.

As the country strives to meet its growing energy demands and achieve its economic development goals, investors have the opportunity to play a crucial role in transforming Nigeria’s power sector. With careful planning, strategic engagement, and a focus on sustainability, investors can not only generate substantial returns but also contribute to the broader goal of ensuring reliable, affordable, and sustainable electricity for all Nigerians.

 

[1] https://www.enel.com/company/stories/articles/2018/04/smart-grid-electric-energy-revolution