Productive Use of Energy, Mini-Grids And The Law
There are several definitions of the Productive Use of Energy (PUE), the Productive Use of Renewable Energy in Africa report defines the term as “agricultural, commercial and industrial activities, powered by renewable energy sources which generates income.” This joint report issued by the Alliance for Rural Electrification and the African Union Commission highlights that PUE can be employed at various levels such as for powering machines for pumps, drip irrigation, milk machines, mechanical workshops, refrigeration of food, mobile charging, IT supply for businesses, processing and storage industries etc. It is aimed at enhancing income generation opportunities and productivity. PUE is typically targeted at agricultural activities especially in rural areas in Nigeria.
A Mini Grid is a set of small-scale electricity generators and possibly energy storage systems interconnected to a distribution network that supplies electricity to a small, localized group of customers and operates independently from the national transmission grid. It ranges in size from a few kilowatts up to 10 megawatts. Smaller mini-grids are sometimes referred as “micro-grids” or “nano-grids”. Mini-grids can serve a wide range of customers. These include private households, commercial businesses such as shops, ice makers and mobile phone chargers, agricultural loads such as irrigation pumping and cold storage, productive loads such as grind mills and wood or metal working shops, and semi-industrials such as telecom towers, processing plants or flower farms. They can be developed or operated by state utilities, private companies, communities, non-governmental organizations, or a mix of different players such as public-private partnerships. The generation and distribution assets may be developed and managed by different players, both public and private. They can run on diesel, renewables (solar PV, hydro, wind, biomass etc) or as renewable-diesel hybrids. Green mini-grids are those that generate a significant portion of their power from renewables.
This article analyses how PUE have become an increasing consideration for siting Mini grids in Nigeria.
CONTEXT OF PRODUCTIVE USE OF ENERGY: A MAJOR CONSIDERATION IN SITING ENERGY PROJECTS IN RURAL COMMUNITIES
With the world’s largest unelectrified population, Nigeria has an obvious need for increased electric generation capacity. In the rural areas that have the greatest electrification needs, mini-grids are often the lowest-cost solution. However, continued expansion of mini-grids depends on overcoming a key rural development trap. Without significant demand for electricity, mini-grids are unprofitable and financially unsustainable. Without a reliable supply of electricity, it is hard to justify investing in the kind of industry that consumes large amounts of power. Thus, agricultural communities with the greatest need for electrification are caught in a vicious cycle, where power cannot be developed for lack of adequate demand, and demand cannot be developed for lack of power.
According to research conducted by USAID that studied 12 agricultural value chains across Kaduna and Cross River states through more than 250 field interviews with farmers, processors, and traders in over 40 rural communities as well as an extensive literature review and interviews with sector experts. Crops were selected based on their prevalence in rural Nigerian communities appropriate for mini-grids. The following factors were also considered:
- Crop production characteristics, including local yields, seasonal production, etc.
- Market potential – i.e. in what form the end products are consumed locally, existence of local demand/markets, etc.
- Value chain activities required to bring to market – i.e. key value-add steps between harvest and consumption, etc.
- Productive use integration potential – identifying process steps best suited for electrification
Also, there are four criteria that help rate productive use activities on a sliding scale from “deployment ready” to “significant support required”
- Local Capacity. Technical knowledge and skill of local communities
- Offtake Market. Strong local markets support immediate productive use activities.
- Electric Equipment. Deployment will be easier where mini-grid-compatible appliances are available on the market.
- Scalability. Widespread and high-volume value chains can be scaled more efficiently than specialty products.
ELECTRIC POWER SECTOR REFORM ACT AND MINI-GRID REGULATIONS IN NIGERIA
Nigeria adopted the Mini-Grid Policy in order to regulate mini-grids and create an enabling environment for further investments to speed up Nigeria’s electrification process. Mini-grids can either be isolated (standalone) or interconnected (connected to the network).
Isolated mini-grids up to 100 kW can either apply for a mini-grid permit or register with NERC in order to be able to operate. Receiving permit is not obligatory, however between 100 kW and 1 MW size projects must apply and obtain permit from the NERC. The Interconnected systems must apply and obtain permit from NERC while executing a tripartite contract with the community and the Distribution Licensee (DisCo).
- UNSERVED AREAS – ISOLATED MINI-GRIDS
The entire application process for unserved areas is summarized below:
Step 1: Identification of the Eligibility of Unserved Area
In order to be eligible, the area selected must meet the following conditions:
- The area is being unserved and must not have been assigned to an IEDNO (Independent Electricity Distribution Network Operator) or any other Mini-Grid Developer and that the area is not part of an already existing expansion plan (5-year plan) of a DisCo (A Distribution Licensee). Where it is identified that the area is part of an expansion plan of a Disco, the Mini-Grid Developer needs the consent of the Disco before the area identified becomes eligible.
- If the area identified fulfils the requirements listed above, the process can continue and the contact with the Community can be established. As a repository of the expansion plans of the Discos and applications from IEDNOs and other Mini-Grid developers, NERC may also assist Mini-Grid developers in identifying a suitable area that fulfils the above-mentioned criteria. Federal and State authorities responsible for electrification should also be consulted.
Step 2: Contact with the Community and Settlement of an Exclusivity Period
- Now, that the area located can potentially receive an Isolated Mini-Grid, the Community concerned should be contacted to confirm if the local population is interested in benefitting from the services provided by the Mini-Grid Operator. Either, the Community or the Mini-Grid Developer can approach the other party to start negotiations. At that stage, the Community and the Mini-Grid Developer can decide to set an exclusivity period and an exclusivity agreement is executed.
- The exclusivity period is used to investigate the feasibility of implementing a Mini-Grid at the location and ensures that no other operator is conducting any other feasibility during the investigation period. The exclusivity period is an agreement only between the Community and the Mini-Grid Operator and is only valid up to 12 months. This period could then be extended once and only for a further 12 months subject to the approval of the Commission.
- If at the inception, the Mini-Grid Operator needs an exclusivity period of more than 12 months, it can also enter into an exclusivity agreement. However, this would need to be justified, submitted to the Commission and the agreement approved by the Commission.
Step 3: Size of the System and Registration
- If the power distributed by the isolated Mini-Grid is larger than 100 kW, the Mini-Grid Developer will need to apply for a mandatory Permit. Also, If the generation capacity of the power station installed is larger than 1 MW the plant is not a Mini-Grid and other NERC regulations on generation will apply.
- If the power distributed by the isolated Mini-Grid is below 100 kW, the Mini-Grid Developer may voluntarily apply for a Permit following the same procedure as the mandatory permit. Where a Permit is granted by the Commission and a DISCO’s network eventually extends to such area, the Mini-Grid Operator will be entitled to receive a compensation for investment made including 12 months revenue before the Mini-Grid can be taken over by the DISCO and connected to the main distribution grid.
- The Mini-Grid Operator that has been granted a Permit will need to execute an agreement with the beneficiary community. Ensure to get a legal adviser to assist with this.
- UNDERSERVED AREAS – INTERCONNECTED MINI-GRIDS
The entire application process for underserved areas is summarized below:
Step 1: Identification of the Eligibility of an Underserved Area
In order to be eligible, the Community concerned should be first contacted to confirm if the local population is interested in benefitting from the services provided by the Mini-Grid Operator. The Community selected should meet the following criteria:
- The Community is being underserved. The Main grid is present in that area, but does not provide a sufficient level of service to meet the Community’s electricity demand. And that the Community is ready to pay higher tariffs than the Main grid tariff in order to improve the reliability of electricity supply.
Step 2: Contract with the Distribution Licensee and Settlement of an Exclusivity Period
- Once it has been established that the area located can potentially receive an Interconnected Mini-Grid, the Distribution Licensee should be contacted to know if it would be willing to enter in a Tripartite Contract.
- At that stage, the Community, the Mini-Grid Developer and the Distribution Licensee can decide to set an exclusivity period. This exclusivity period is used to investigate the feasibility of implementing a Mini-Grid at the location and ensures that no other operator is conducting any other feasibility study during the investigation period. The exclusivity period is an agreement between the Community, the Mini-Grid Developer and the Distribution Licensee valid for up to 12 months. However, this period can be extended once and only for a further 12 months subject to the approval of the Commission. If at the inception, the Mini-Grid Developer needs an exclusivity period of more than 12 months, it can also enter into an exclusivity agreement. However, this would need to be justified and the agreement approved by the Commission.
Step 3: Tripartite Contract and Registration
- An agreement between the Connected Community, the Mini-Grid Operator and the Distribution Licensee must be reached. Thus, a Tripartite Contract must be signed by all three parties. The contract is then submitted to NERC for approval.
Considering Nigeria’s constant struggle for stable electricity supply, its teeming population of over 170 million people on one hand and a more than ready market on the other, Nigeria is an attractive hub for investment in mini-grid operations. The mini-grid sector in Nigeria is developing fast and a number of companies are showing interest as it promises comparatively attractive returns on investment.
The consideration for productive use of energy in siting mini-grids makes strong economic sense. Electricity that is deployed via mini-grid would tap into the existing productive use of its rural environment. While uncertainties still exist particularly concerning community relations and agreements and the multiple bureaucratic hurdles that surround Environmental Impact Assessment (EIA) and Social Impact Assessment (SIA). Nonetheless mini-grids remain the most pragmatic means of achieving rural electrification goals while ensuring economic growth.
An interesting pathway is the existence of a sustainable market for the generation and distribution of renewable energy through mini-grids giving the global stance against greenhouse gas emissions and agitation about climate change as well as the over 55% of Nigerians in need of access to clean energy. Mini grids create an avenue for investment in clean energy especially renewable sources. This is of vital importance in combating climate change and its resultant environmental implication. However, it is always advisable for any investor to arm themselves with adequate competent advice from various professionals. Seeking expert legal advice is imperative under a dispensation where regulatory framework underpins mini-grid operations.
LAMINA GBENGA P
LLM (Energy Law), MBL (International and European Energy Law)