LexisNexis

Prospects of embedded generation in the Nigeria’s power sector

Tuesday 8 June 2021

Olayemi Anyanechi

Sefton Fross, Lagos

o.anyanechi@seftonfross.com

Kehinde Adegoke

Sefton Fross, Lagos

k.adegoke@seftonfross.com

Michael Chukwu

Sefton Fross, Lagos

m.chukwu@seftonfross.com

Introduction

Nigeria’s modern grid system began in 1951, with the integration of all government and native-owned generating plants and systems by the Electricity Corporation of Nigeria (ECN).[1] While at the time, this improved the electric power supply within the country through grid connection of electricity generation, transmission, and distribution, the system has degenerated over the years as demand outgrew supply.[2]

The challenges facing Nigeria’s power sector

The poor performance of Nigeria’s previously state-controlled power sector, have resulted in unstable electricity supply and frequent power outages. The situation has improved little since privatisation of much of the power sector in recent years, even with continued government subsidies for some users. Now, faced with dwindling income due mainly to the collapse of global oil prices, the government has the challenge of convincing frustrated electricity consumers that they must accept substantial increase in prices if Nigeria is to achieve a constant, stable, and nationwide electricity supply.[3]

Other challenges include infrastructure constraints; insufficient end-user tariffs/pricing; inability to reduce aggregate technical, commercial, and collection (ATC&C) losses; sectoral cash shortfalls; debts, electricity theft, and the non-payment culture of the public.[4]

The concept of embedded generation in Nigeria

Despite huge investments by public and private sectors in recent years, it is an open secret that the nation remains unable to claim a reasonable power supply to its citizens. The Nigerian population is greater than 183 million people, out of which 55 per cent have no access to grid-connected electricity. Access to electricity in rural areas is about 35 per cent compared to about 55 per cent in urban areas.

Faced with the myriad problems, stakeholders in the nation’s electricity industry have now adopted the embedded generation concept as an urgent immediate strategy to procure electricity for customers, while waiting for national grid power to improve significantly.

Embedded generation is electricity generation directly connected to and evacuated through a distribution system,[5] instead of the high voltage national grid. It aims at creating a fair, competitive, and transparent market for all generators,[6] as well as meeting the energy demand through minimal environmental impact.

Substantially, embedded generation would require more active distribution networks which allow electricity to flow to the electricity user for consumption in the homes or businesses and to the network when the user is exporting excess generation capacity. In pursuing this requirement, Regulation 6 of the Nigerian Electricity Regulatory Commission (Embedded Generation) Regulation 2012 (NERCER) provides that a distribution licence holder is expected to make access to the distribution system available to the embedded generation licence holder where there is capacity after reaching an agreement on acceptable conditions with the embedded generation license holder.

Prospects of embedded generation in Nigeria

Advantages

The integration of distributed sources into existing networks is becoming a viable option in modern power system networks, considering its numerous advantages such as: cost saving due to onsite production which avoids transmission and distribution costs and consequently, a 30 per cent saving in the cost of delivered electricity. Onsite energy production also reduces loss of generated power through transmission and distribution.

Embedded generation improves the level of power quality and reliability apart from serving niche applications such as remote sites. Distributed or embedded generation can also provide standby generation (emergency power), peak shaving capability and cogeneration. It also improves the efficiency of the power grid by having multiple micro-sources added to the system. The NERCER allows an independent power producer to integrate power with the network of the local distribution company without going to the trouble of connecting to the transmission network. This allows distribution companies to procure small power and dedicate it to ring-fenced customers, assuring them of round-the-clock electricity supply.[7]

Additionally, embedded generators are not restricted in their methods of generating power, which offers investors the opportunity to choose the most acceptable option based on its business model. This is cost effective for the investor and it also supports Nigeria’s outlook with regard to adopting renewable energy sources.

Although embedded generators are restricted from the business of transmitting, distributing, trading and systems operations,[8] where the Nigerian Electricity Regulatory Commission (NERC) is satisfied that there would be no abuse of market power to the detriment of the consumer, or that appropriate safeguards exist to prevent such abuse, it may licence a holding or subsidiary company of the Embedded Generation Licensee to engage in these activities or a distribution company who is interested in embedded generation. This may incorporate a separate entity to engage in the business and subsequently apply for a licence.[9]

Finally, embedded generation provides a major opportunity for private sector participation to improve the power sector given the scarcity of public finances to fund the increased power generation.

The NERCER confirms the commitment of the Federal Government of Nigeria (FGN) to tackle the inefficiencies in Nigerian power sector, and were issued as part of the FGN’s efforts to improve generation and to provide electricity for the 55 per cent of the population without electricity due to lack of access to the national grid. Furthermore, many of the areas connected to the grid experience very frequent power outages. Embedded generation also allows independent power producers (IPPs) to sell excess power to distribution companies, as well as guarantees cost reflective tariffs. There is immense potential market for power supply to housing estates, industrial estates/clusters, state governments and telecom installations. There is also the option to supply power to eligible customers. No additional distribution lines are required when power generation is connected to a distribution company, no transmission costs are incurred and no fresh distribution licence required.[10]

Disadvantages

Notwithstanding its attractive prospects, embedded generation is not without its own limitations, some of which include prohibition from engaging in the distribution, transmission, trading, and systems operation as these are differently regulated as mentioned above which may limit the ability to make profits from generated power as it would depend on other eligible companies purchasing energy from where such an arrangement was made.

Another problem with embedded generation is the management of investments into the industry in the face of pre-existing power sector licensees. With considerable investment in the sector, some of the distribution companies are opposed to the idea of smaller companies competing with them by generating even more energy where they struggle to deliver as much as possible.

An illustration of this issue is the debacle surrounding power generation and supply in Ariaria Market in Abia State where in 2004, Geometric Power Ltd secured a 20-year concession[11] from the Federal Government to supply power exclusively to the Aba Industrial City and its surrounding communities. The Aba Integrated Power Project was constructed, but a dispute arose when the Enugu Distribution Company was sold to Interstate Electrics Ltd which claimed territory of the entire Abia State.[12] Evidently, the argument between distribution companies is that the licence they have received from the Federal Government is territorial, but this position is not supported by existing legislation.

Section 71(6) of the Electric Power Sector Reform Act (EPSRA) 2005 provides that unless explicitly indicated in the licence, the grant of a licence shall not hinder or restrict the grant of a licence to another person for a like purpose and, in the absence of such a specific indication, the licence holder shall not claim any exclusivity; provided that the Commission may allow a licenced activity to be exclusive for all or part of the period of the licence, for a specific purpose, for a geographical area or for some combination of the above.

Essentially, exclusivity is not a right enjoyed by Nigerian distribution companies, except and until the Commission includes such a term in its grant and stipulates the reasons or limits for the exception being made.

Additionally, Section 71(7) EPSRA provides that a licence may contain terms and conditions for the licence to cease to have effect or to be modified or amended by the Commission in such circumstances as may be specified in the licence or as may be determined by the Commission and by Section 63, licence holders are bound to comply with the provisions of the licence, regulations, codes, and other requirements issued by the NERC.

Conclusion​​​​​​​

The Nigerian power sector has undergone– and continues to witness – much privatisation of government owned power assets. This is to take advantage of the perceived gains of private sector participation and the efficiency it brings to an industry traditionally fraught with shortages and challenges, characterised by unstable electricity supply and frequent power outages. Sadly however, the situation has not improved significantly despite privatisation. Embedded generation is the subsequent strategy identified by stakeholders for the immediate procurement of electricity to customers. It is hoped this strategy will significantly improve reliability of energy supply; offer efficiency gains for onsite applications by avoiding line losses; promote renewable energy sources, less-polluting forms of fossil energy, and high efficiency technologies; limit capital exposure and risk; prevent unnecessary capital expenditure; avoid major investments in transmission and distribution system upgrades; respond to increasing energy demands and pollutant emission concerns.

 

Notes

[1] Claudius A Awosope, ‘Nigeria electricity industry: issues, challenges and solutions’, Public Lecture Series, 38(3), Covenant University, March 2010, p6, see http://m.covenantuniversity.edu.ng/content/download/35621/245141/file/38th+Public+Lecture.pdf, accessed 24 March 2021.

[2] A S Sambo, ‘Matching Electricity Supply with Demand in Nigeria’, International Association of Energy Economics Newsletter, 4th Quarter, 2008 p1, see https://www.iaee.org/documents/newsletterarticles/408sambo.pdf, accessed 24 March 2021.

[3] ‘Challenges facing the Nigerian power sector’, The Economist Intelligence Unit, 26 February 2016, see http://country.eiu.com/article.aspx?articleid=1003980684&Country=Nigeria&topic=Economy_1, accessed 30 March 2021.

[4] Challenges and Interventions Needs in the Nigerian Electricity Supply Industry (NESI), CSEA, see http://cseaafrica.org/challenges-and-interventions-needs-in-the-nigerian-electricity-supply-industry-nesi/#:~:text=Infrastructure%20Constraints%20across%20the%20entire,and%20poorly%20maintained%20transmission%20and, accessed 30 March 2021.

[5] Regulation 36, Nigerian Electricity Regulatory Commission (Embedded Generation) Regulation (NERCER) 2012.

[6] Ofgem factsheet 5 | 27.09.01, page 2, file:///C:/Users/Michael/Documents/IBA%20Power%20Committee/Article%20on%20Electricity%20Embedding/Explanation%20of%20the%20concept%20of%20embedded%20power%20generation%20.pdf

[7] Kayode Oladipo et al 2018 IOP Conf Ser Mater Sci Eng 413 012037.

[8] Regulation 30(1), Nigerian Electricity Regulatory Commission (Embedded Generation) Regulation (NERCER) 2012.

[9] Regulation 30(2) and (4), Nigerian Electricity Regulatory Commission (Embedded Generation) Regulation (NERCER) 2012.

[10] Oladipo, see n 7.

[11] Nigeria Rural electrification Agency, ‘NERC grants 9.5MW electricity generation, distribution licences to Ariaria Market’ 23 June 2018, see https://rea.gov.ng/nerc-grants-9-5mw-electricity-generation-distribution-licences-to-ariaria-market, accessed 25 May 2021.

[12] Nextier Power, ‘EEDC, AMESL Battle for Ariaria Market’, Nigeria Electricity Hub, 8 June 2018, see https://www.nigeriaelectricityhub.com/2018/06/08/power-distribution-eedc-amesl-battle-for-ariaria-market, accessed 25 May 2021.