LexisNexis

Renewable energy in Nigeria: law, regulation, trends and opportunities

Tuesday 8 June 2021

Wolemi Esan

Olaniwun Ajayi LP, Lagos

wesan@olaniwunajayi.net

Joba Akinola

Olaniwun Ajayi LP, Lagos

jakinola@olaniwunajayi.net

Dare Onakoya

Olaniwun Ajayi LP, Lagos

donakoya@olaniwunajayi.net

Georgette Monnou

Olaniwun Ajayi LP, Lagos 

gmonnou@olaniwunajayi.net

Introduction

Nigeria has 12,500 megawatts of installed generation capacity, being largely dependent on natural gas, at 87.5 per cent of the on-grid energy supply mix. This position is rather unsurprising given the nation’s vast gas resources and the relative cost-efficiency of gas-fired power generation. Due to perennial challenges with grid infrastructure and other well-documented constraints to reliable power supply, a large proportion of the economy is reliant on off-grid, captive energy generation, which is for the most part, powered by petrol and diesel.

As the harmful effects of pollution and greenhouse gas emissions become clearer and the need for sustainable development takes on a more central role in the global energy conversation, there seem to be a consensus among key players across the world that it is imperative to shift focus towards renewable energy (and other clean energy sources) to drive economic growth, not least in developing countries such as Nigeria, where the need for investment is greatest.

This global paradigm shift, along with various policy initiatives by governments to incentivise renewable energy development and financing has led to an unprecedented growth in renewable energy (especially solar and wind) projects in many countries. Even for a country like Nigeria, where renewable energy has always featured in the energy mix (hydropower accounts for about 12.5 per cent of its on-grid energy), the current trend provides an opportunity to promote and attract sustainable investment in its energy sector.

This article considers the legal and regulatory framework for renewable energy in Nigeria, key government policies to stimulate the development of renewable energy, and notable developments in the market, whilst highlighting some challenges and opportunities.

The regulatory framework for renewable projects in Nigeria

Nigeria’s electricity sector is primarily regulated by the provisions of the Electric Power Sector Reform Act 2005 (EPSRA), which among other responsibilities, establishes the Nigerian Electricity Regulatory Commission (NERC) as the apex sector regulator and authorises it to make rules, regulations, and policies relating to Nigeria’s electricity sector.

Among other things, the EPSRA also establishes the Rural Electrification Agency (REA) which is charged with: expanding the main grid; developing isolated mini-grid systems; and promoting renewable energy power generation. The REA is also mandated to set up and administer a Rural Electrification Fund (REF) which is to promote, support and provide rural electrification programmes to achieve more equitable regional access to electricity.

In recent years, the focus on renewables has become stronger and it is growing to become a focus of the Federal Government of Nigeria (FGN)’s electricity policy. This has resulted in the introduction of policy and regulatory instruments geared towards stimulating investment in renewables and both NERC and the REA have played key roles.

The NREEEP

In 2015, the Federal Executive Council approved the National Renewable Energy and Energy Efficiency Policy (NREEEP) which is broadly geared at removing barriers that put renewable energy and energy efficiency at economic, regulatory, or institutional disadvantages and providing a conductive political environment that will attract investments in the renewable energy and energy efficiency arena.[1]

Riding on this federal policy mandate, Nigerian Bulk Electricity Trading Limited (NBET), the government-owned utility which serves as a central counterparty between generators and retail distributors, executed power purchase agreements with 14 solar photovoltaic IPP developers, demonstrating a drive to adopt renewable energy sources as viable electricity generating sources. However, implementation of those projects appears to have stalled, with the Federal Government seemingly choosing to focus on promoting off-grid solar projects.

The REFIT Regulations

Also in 2015, NERC issued the Regulations on Feed-In-Tariff for Renewable Energy Sourced Electricity in Nigeria (REFIT). This applies to energy generated and supplied through the national grid and orders that NBET and electricity distribution companies shall, as a matter of priority, purchase 50 per cent of the renewable energy electricity capacity limit established by the regulations.[2]

In line with the policy’s priority of diversifying Nigeria’s on-grid energy mix, REFIT also provides a special tariff framework for renewables, in the form of feed-in-tariffs which were designed to be attractive to private investors. The feed-in-tariff must be approved by the NERC and shall be fixed (subject to periodic reviews). REFIT nevertheless has its limitations, as it only applies to renewable projects with a capacity of between one MW and 30 MW.

Notably, off-grid renewable projects do not fall within the remit of the regulations. This is understandable, given the nature of such projects, where the tariffs are designed and negotiated on a purely bilateral basis with limited regulatory involvement.

The Mini-Grid Regulations

In 2017, the NERC issued the Mini-Grid Regulations, which creates a framework for the establishment and operation of mini-grids in Nigeria. Mini-grids are defined as ‘any electricity supply system with its own power generation capacity, supplying electricity to more than one customer and which can operate in isolation from, or be connected to a Distribution Licensee’s network’,[3] generating up to one MW[4] of generation capacity.

A key objective of the Mini-Grid Regulations is to accelerate electrification of unserved areas and underserved areas. To this end, the NERC prescribes a simplified process for the establishment of certain kinds of mini-grids, under which projects do not need to be licensed but may simply register with NERC. To provide financial relief to developers, there is also a compensation mechanism for mini-grid projects to cover the possibility of the national grid eventually extending to cover the area(s) served by the mini-grid.

While the Mini-Grid Regulations are not limited to renewable projects in theory, due to a variety of technical and commercial factors the prevailing practice is for mini-grids to be developed as solar powered projects. This explains why the Mini-Grid Regulations are regarded as a critical piece of the regulatory landscape for Nigeria’s renewable energy.

The REA’s initiatives

For its part, the REA is driving initiatives such as, the:

    • Energising Economies Initiative, which aims to support the rapid deployment of off-grid electricity solutions to micro, small and medium enterprises in economic clusters through the provision of clean, reliable and affordable power by private sector developers;[5]
    • Energising Education Programme, which is geared at providing sustainable and clean power supply to selected federal universities and university teaching hospitals across Nigeria;[6]
    • Interconnected Mini-Grid Acceleration Scheme, an in-kind partial grant in the form of procured distribution and metering equipment and technical assistance, to support the deployment of privately led solar interconnected mini-grids, in partnership with the German GIZ;
    • Solar Hybrid Mini Grid Fund, a US$150m fund to support the development of mini-grids in unserved areas; and
    • Nigeria Electrification Programme, a comprehensive project aimed at accelerating electricity access in rural communities through solar hybrid mini-grids, with the support of the World Bank and the African Development Bank (AfDB).

Fiscal incentives

Moreover, in a bid to incentivise renewable energy investments in Nigeria further, in February 2020, the FGN issued the VAT (Modification Order) 2020 in the Official Gazette. This exempts specified renewable energy equipment from the application of VAT with respect to the importation or in-country sale of the equipment, but the exemption does not extend to services rendered with the use of this equipment.

However, the Federal Inland Revenue Service subsequently issued a public notice – Value Added Tax Act (Modification Order), 2020: Items not Exempted from VAT – stating that renewable energy equipment is not VAT exempt and will continue to attract VAT at the standard rate of 7.5 per cent. The validity of this public notice has been called into question as Federal Inland Revenue Service (FIRS) notices are merely for clarification and cannot override any tax law or validly issued instrument, and the power to vary, modify or amend the VAT exemption list as contained in the First Schedule to the VAT Act is vested only in the Minister of Finance.

More recently, in response to the Covid-19 pandemic, the FGN, launched the Solar Power Naija Project in December 2020. It focuses on providing five million households with solar home systems for off-grid communities, under the Nigeria Economic Sustainability Plan (NESP). The implementation of the project will be facilitated by the Central Bank of Nigeria, which will make available NGN140bn (approximately US$340m) in direct and indirect loans to qualifying projects.

The state of the market

As seen from the above, the Nigerian electricity sector has been stimulated by the encouraging frameworks put in place by the FGN as well as the support of multilateral agencies and institutional investors who have made impact investments to players in the sector. For example, the World Bank and the AfDB are currently partnering with the REA with respect to the Nigeria Electrification Programme with a US$350m commitment from the World Bank,[7] and about US$148m from the AfDB.[8]

The International Finance Corporation has launched a sustainable energy financing and advisory programme, the Climate Change Investment Programme for Africa, which will provide funds and advisory services to banks to help them increase financing for private sector energy efficiency, renewable energy, and cleaner production projects. Similarly, the EU has committed about US$47m in funding for renewable energy projects in emerging markets, including Nigeria.[9]

These efforts appear to be yielding fruit, as many significant renewable energy projects are coming on-stream. In addition to the large number of mini-grids and small scale solar IPPs springing up across the country, the FGN is also taking steps to boost the existing hydroelectric generation capacity, with the recent concession of Gurara Hydropower Project, the proposed concession of the Zungeru Hydropower Project and the planned development of the 3,050 MW Mambilla Hydropower Project.

Lingering challenges

Although there has been growth in the number of renewable projects and investor appetite, the on-grid power sub-sector is still beleaguered with its challenges including technical and collection losses and the lack of a fully cost reflective tariff which creates money making concerns for investors. Furthermore, the prevailing illiquidity in the Nigerian electricity sector creates a vicious cycle as much needed investments cannot be made in the grid infrastructure leading to a continuation of the earlier-described losses.

Usually, limited asset scale and exit prospects have affected the commercial viability of off-grid solar projects from an investor perspective, which has resulted in many of these projects requiring significant support in the form of donor grants and impact-oriented investments. However, recent advancements in technology have reduced project costs, thereby improving the viability of these projects, while access to relatively cheaper (or patient) capital remains available from various sources.

Another key challenge arises from the fact that these renewable projects are installed mainly in unserved, rural areas where consumers have lower incomes resulting in power affordability issues. To address the potential revenue risk, developers may need to consider affordable consumer financing structures, connect productive users on site and maintain a balance of productive users and household users who can withstand cycles in the productive users demand for power.

Conclusion

As nations around the world continue to seek way to reduce their carbon footprints and transition to renewable energy sources, it is imperative that Nigeria, as the largest economy in Africa, sets the pace by meeting the global Sustainable Development Goals. It is clear that environmental, social and governance related issues are becoming increasingly more critical for providers of capital, and renewable energy tends to be an important element of this, particularly in countries such as Nigeria, where energy asset development represents a large proportion of infrastructure investment.

There is little doubt that Nigeria has plenty of untapped renewable energy potential, seemingly limited over the years by various factors. However, as stated above, the public sector, industry players, investors, and other stakeholders are rapidly evolving frameworks and initiatives to encourage the sustained growth of renewables into the economy’s energy mix.

In view of the current commitment of the domestic and international political and business communities, the future look promising for Nigeria’s renewable energy market, remaining challenges notwithstanding. ​​​​​​​

 

Notes

[1] Ministry of Power, Federal Republic of Nigeria, ‘The National Renewable Energy and Energy Efficiency Policy’, 20 April 2015, see https://www.power.gov.ng/download/NREEE%20POLICY%202015-%20FEC%20APPROVED%20COPY.pdf, accessed 18 March 2021.

[2] Regulation 5(f) of the REFIT.

[3] Regulation 3 of the NERC Regulation for Mini-Grid Regulations, 2016.

[4] Regulation 4(1) of the NERC Regulation for Mini-Grid Regulations, 2016.

[5] REA, Energizing Economies Initiative, see https://rea.gov.ng/energizing-economies, accessed 18 March 2021.

[6] REA, About the Energizing Education Programme, see https://rea.gov.ng/energizing-education-programme-2, accessed 18 March 2021.

[7] The World Bank, Nigeria Electrification Project, see https://projects.worldbank.org/en/projects-operations/project-detail/P161885, accessed 19 March 2021.

[8] African Development Bank Group, Nigeria – Nigeria Electrification Project, see https://projectsportal.afdb.org/dataportal/VProject/show/P-NG-F00-020, accessed 19 March 2021.

[9] ‘Nigeria benefits from EU funding for renewable energy projects’, ESI Africa, 3 December 2020, see https://www.esi-africa.com/industry-sectors/finance-and-policy/nigeria-benefits-from-eu-funding-for-renewable-energy-projects, accessed 18 March 2021.