The 2023 Mini-Grid Regulations: What’s New, Project Development Procedures and Permit Requirements
Peter Okediya ACIArb
Bar Part II Candidate | Founder, Energy Brief | Energy and Finance enthusiast
The mini-grid sector in Nigeria has become notably competitive in recent years, surpassing comparable scenarios in other regions. This heightened activity is a testament to the potential within the Nigerian market to enhance electricity accessibility and replace prevalent diesel and fuel generator usage for off-grid power. Nevertheless, the sector faces a range of challenges, including uncertain permit durations, expansion of the national grid without commensurate compensation for isolated mini-grid operators, reliance on Multi-Year Tariff Orders instead of cost-reflective tariffs, and uncertainties surrounding revenue streams and project cashflow.
In the spirit of brevity (and to spare you any suspense), this piece is short. But, if you're just here for the list of amendments I so eloquently dissected, feel free to take the express route — head straight to the last page.
The Nigerian Electricity Regulatory Commission on the 29th of December 2023 released the 2023 Mini Grid Regulations (the Regulation) governing the development and administration of mini-grid electricity in Nigeria. The Regulation, replacing the 2016 Mini Grid Regulations, presents an opportunity for better private investments in the electricity supply industry and facilitates a framework for renewable energy projects. This article will consider the revised project development process for isolated and interconnected mini-grids according to the Regulation whilst reviewing the key amendments to the former 2016 Mini-grid Regulations.
Mini grids, as defined by the Regulation, is any electricity supply system with its own generation capacity supplying electricity to more than one customer and which can operate in isolation or be connected to a Distribution Licensee’s network. In the Regulation, the term mini-grid is used for any isolated or interconnected mini-grid generation between 0kW and 1MW of generation capacity per site. The key stakeholders and terminologies in the mini-grid value chain include the Nigerian Electricity Regulatory Commission (‘Commission’)[i], Distribution Licensee (‘DisCos’)[ii], Mini-grid developers[iii], underserved areas[iv] and unserved areas.[v]
Types of Mini-Grids
The Regulation categorizes mini-grids based on their generation capacity, relationship with Discos, and the served population. Two primary classifications emerge: Isolated mini-grids and Interconnected mini-grids.
Isolated mini-grids are those with distributed power up to 100 kW and mini-grids a generation capacity ranging between 100 kW and 1 MW. These mini-grids operate independently of a Disco's network and provide electricity to specific unserved communities. On the other hand, Interconnected Mini-grids fall within the 100 kW to 1 MW distributed power range. Unlike Isolated Mini-grids, they are connected to a Disco's network, facilitating the supply of electricity to underserved communities.[vi]
In addition, the Regulation introduces a new set of mini-grids described as portfolios. "Portfolio of Isolated mini-grids" refers to a set of isolated mini-grids as determined by the mini-grid developer, which is filed with the Commission for approval simultaneously. "Portfolio of Interconnected Mini-Grids" refers to a set of interconnected mini-grids as determined by the mini-grid developer, for which tripartite agreements with the same Distribution Licensee have been signed and filed simultaneously with the Commission for approval.
Project Development Process under the 2023 Mini-grid Regulations
This segment examines the project development process and relevant changes introduced to isolated mini-grids and interconnected mini-grids via the Regulation. It further highlights the permit requirements as prescribed.
A.????? Isolated Mini-grid
The journey of developing isolated mini-grids begins with the identification of a project site. This designated area must be unserved[vii], not included in the network expansion plan of a Distribution Company (Disco). Should the proposed site fall within the Disco's expansion plan, the mini-grid developer can seek written consent from the Disco.[viii]
Engaging the community[ix] is a pivotal step, involving consultations and interactions to ensure alignment with the objectives of the proposed mini-grid. An exclusivity agreement of one year with the community is established, allowing for an extension beyond 12 months upon request to the Nigerian Electricity Regulatory Commission (NERC).[x] Environmental Impact Assessment is then undertaken when the project has the potential to impact the environment significantly.[xi]
The developer proceeds to apply to the commission for a permit or registration, contingent on the mini-grid's capacity, along with tariff approval. Unlike the 2016 Regulations, the 2023 Regulations permit the issuance of mini-grid permits for both Isolated and Interconnected Mini-Grids.[xii] This unification ensures that the obligations and accountability stipulations previously exclusive to isolated mini-grid operators now encompass interconnected ones. Tripartite contracts must be registered before interconnected grid operators are granted mini-grid permits, marking a significant shift in regulatory purview of the Commission. The final stage involves the installation, operation and maintenance of the mini-grid.
Permit Requirements
The Nigerian Electricity Regulatory Commission (NERC) is empowered to issue isolated mini-grid permits, subject to the following conditions:
For isolated mini-grids up to 100 kW capacity, obtaining a permit is optional; developers can choose to register with the commission.[xiv] However, for generation capacities exceeding 100 kW up to 1 MW, a permit becomes mandatory.
B.????? Interconnected Mini-Grids
An interconnected mini-grid project also begins with the identification of a project site in an area underserved by the main grid[xv]. An exclusivity agreement is then negotiated and granted by the Distribution Company (Disco) and the community to the mini-grid developer, providing an exclusive right to project development.
The subsequent step entails the establishment of a tripartite agreement, which is a comprehensive document involving the mini-grid developer, the Disco, and the community. This agreement incorporates condition precedents to be fulfilled by all parties, delineating their respective rights and obligations. Once finalized, the tripartite agreement is submitted to the Commission for approval, and the Commission, upon receiving the application for a mini-grid permit, may register the contract and grant the permit. The final phase of this process involves the actual installation of the mini-grid and the commencement of operations.
Permit Requirements
Crucial to the interconnected mini-grid development is the requisite for the developer to establish a retail tariff. This tariff is calculated using the Multi-Year Tariff Order (MYTO) methodology and necessitates agreement from all involved parties—the mini-grid developer, the distribution license, and the connected community.[xvi] The agreed-upon tariff must then receive approval from the Commission.
Furthermore, the developer, the Disco, and community must execute a tripartite contract. In the case of interconnected mini-grids, the issuance of permits is contingent on the approval of their tripartite agreements, a regulatory alignment that ensures compliance and clarity in project execution.[xvii]
The regulatory timeline for the issuance of permits or the approval of tripartite contracts by the Nigerian Electricity Regulatory Commission (NERC) is defined. NERC is mandated to issue a permit or approve a tripartite contract within a maximum period of 30 days from the date of receiving the application, provided all requirements are met.[xviii]
Notably, a departure from the 2016 regulations is observed, as the new regulations omit a provision that enabled a mini-grid developer of up to 100 kW distributor power to commence operations as a registered mini-grid operator pending the issuance of the permit. The emphasis now is on the necessity of obtaining a permit before the commencement of operations.
Furthermore, a registered mini-grid operator aspiring to operate as a mini-grid permit holder is obligated to utilize the MYTO methodology in determining their tariff. Their right to compensation is only recognized when a permit has been officially granted by the Commission.
Other Key Provisions and Changes
I.?Tariff and Charges for Mini-grid Operators
Under the new regulation, tariffs for permit holders are calculated using the Multi-Year Tariff Order (MYTO) methodology. Notably, the allowable caps for technical losses and non-technical losses are set at 4% and 3%, respectively.[xix] This is a departure from the 2016 regulation, where the caps for both types of losses were uniformly pegged at 10%. This reduction in allowable losses reflects a strategic move towards enhancing efficiency and managing losses in the mini-grid sector.
Another pivotal shift lies in the flexibility granted to registered mini-grid operators in determining tariffs. The MYTO methodology can be adopted, or tariffs can be set through agreements with the community, represented by customers consuming a minimum of 60% of the electrical output.[xx] This contrasts with the previous regulation's wording, which required a minimum of electricity customers representing 60% of the electricity output of the community.
While the Commission retains the right to intervene and review tariffs agreed upon with the community for equity and fairness, the criteria for intervention have been refined. Previously, the Commission intervened when the rate of return exceeded six percent over the usual non-recourse commercial debt interest rate. The new regulation offers a broader scope for intervention, focusing on equity and fairness rather than a strict financial threshold.
Interconnected mini-grid retail tariffs now require calculation using the MYTO methodology agreed upon by the developer, Distribution Company (Disco), and the connected community, subject to the Commission’s approval. This collaborative approach seeks to align the interests of all stakeholders and streamline tariff determination processes.
The introduction of portfolio mini-grids enables permit holders to file a single tariff application for all sites within a portfolio or individual applications for each site[xxi]. This flexibility caters to the diverse operational models within the mini-grid sector, promoting adaptability and efficiency.
The new regulations also redefine the process for tariff adjustment and calculation of the depreciated value in case of discrepancies between initially provided figures and actual costs or revenues. Unlike the 2016 regulation, which focused on deviations during tariff definition, the 2023 regulation measures actual costs against approved benchmark costs and actual revenues against figures stated during the application. Moreover, the consequence of discrepancies is now more emphatic, with the regulation stating that tariffs and the calculation of the depreciated value "shall be adjusted," signifying a stricter directive compared to the previous "may be adjusted."[xxii]
II. Disco Interconnection and Compensation Procedure
The Regulation also addresses instances where a disco extends its network to an isolated mini-grid operated under a permit. In such cases, the mini-grid developer is empowered to transfer all distribution assets to the Disco.[xxiii] Compensation, as prescribed by the regulation, becomes the reciprocal agreement. This mechanism ensures a fair exchange between the parties involved and fosters smoother integration.
Crucially, the regulation protects the interests of mini-grid permit holders. Even as their assets are transferred to the Disco, they are allowed to continue operating the mini-grid until full compensation is received.[xxiv] This provision prevents any disruption to the mini-grid permit holder’s activities and ensures a seamless transition.
In cases where a Disco extends its distribution network to an area covered by a registered mini-grid, the new regulation introduces a clear decommission plan. This plan, jointly filed by both the mini-grid operator and the disco, ensures safety during the transition and orderly removal of assets and equipment within two months of the Disco commencing operations in the area.[xxv]
Concomitantly, the Regulation grants compensation rights to interconnected mini-grid permit holders. If a Disco seeks to reintegrate the interconnected mini-grid into its network after the expiration of a tripartite contract, the mini-grid operator is entitled to compensation. This marks a departure from the previous regulation, where compensation rights for interconnected mini-grids were not explicitly outlined.[xxvi]
Importantly, the Regulation enhances transparency by requiring the disco to notify an isolated mini-grid operator in writing at least 12 months before extending its network to the mini-grid. This notification provision rectifies a gap in the previous regulation, ensuring that isolated mini-grid operators have adequate time to prepare for network extensions.
To streamline the asset transfer process, the new regulation specifies that mini-grid permit holders should transfer only distribution assets to Discos in return for compensation.[xxvii] This targeted approach clarifies the scope of asset transfer, contributing to smoother negotiations and minimizing potential disputes.
III. Exclusivity Agreements
One crucial aspect of the regulation involves the granting of exclusivity to mini-grid developers. Communities have the authority to grant an exclusivity period of up to 12 months to an isolated mini-grid developer. This exclusivity can be extended upon justification to the Nigerian Electricity Regulatory Commission (NERC). However, certain conditions must be met before such agreements are formalized.
The community or the Disco has the right to request proof of the developer's commitment, such as a Letter of Intent from an investor or an endorsement letter from the state government.[xxviii] This ensures that the developer has the necessary support and resources to fulfill its commitments. Importantly, NERC is restricted from granting a mini-grid permit to a developer for a site covered by an existing exclusivity agreement or tripartite contract registered with the Commission.
Despite exclusivity agreements, Discos retain the right to integrate a community into their distribution network. This underscores the need for a balanced approach that considers both the interests of mini-grid developers and established distribution companies.
IV. Presentation of Reports
Another significant aspect of the Regulation pertains to the inspection of accounts by mini-grid permit holders. Developers are required to provide reports to NERC in a prescribed format, either for each mini-grid or as a combined report for a portfolio of mini-grids.[xxix] This reporting frequency, set by the Commission, ensures transparency and accountability in the financial aspects of mini-grid operations.
It's noteworthy that the 2016 regulation had less stringent reporting requirements, mandating reporting once every two years with no provision for combined reports. The revised framework under the 2023 Regulations reflects an increased focus on regular reporting, aligning with industry best practices and enhancing the Commission's oversight of mini-grid activities.
Conclusion
According to the SE4all 2020 Mini-grid Market Report, Nigeria’s estimated installed mini-grid capacity was about 2.8MW, with 59 projects serving rural consumers.[xxx] Last year, the Rural Electrification Agency announced the commissioning of 103 mini-grids as part of the Nigeria Electrification Project initiative.[xxxi] Despite this progress in mini-grid project development and amendments to compensation structure when a Disco intends to interconnect with isolated mini-grid areas, the 2023 mini-grid regulations is yet to sufficiently address the underlying challenges to mini grid financing such as cashflow and customer’s inability to pay highlighted earlier. Nonetheless, it signifies a step in the right direction to attract capital to the mini-grid sector in Nigeria.
Below is a simple list of the changes in the Regulations as discussed above:
a)?????? Provision enabling Mini-grid permits for interconnected mini-grid operators
b)????? Introduction of portfolio of isolated and interconnected mini-grids
c)?????? Provision for a submission of individual and combined reports for each mini grid and portfolio of min-grids respectively
d)????? Submission of reports on mini-grids at least once in a year
e)????? Stringent system for finding discrepancies in inspection of accounts for adjustment of tariffs.
f)??????? Provision of 12-month notification period to isolated mini-grid permit holder for Disco interconnection
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g)?????? Improvement in compensation and transfer of asset process to the Disco during interconnection in return for compensation
h)????? Filing of decommissioning plan by the Disco and the registered mini-grid operator
i)??????? Provision facilitating compensation to interconnected mini-grid operator where Disco reintegrates interconnected mini-grid into its network.
j)??????? Provision to file either a single tariff application for all sites under a portfolio of isolated/interconnected mini-grids or individual application for each site under the two portfolios.
k)?????? Reduction of allowable technical losses and non-technical losses cap for determining retail tariffs from 10% to 4% and 3% respectively.
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[i] The NERC is principal regulator of the Nigerian electricity supply industry, established and empowered by the Electricity Act 2023 (the ‘Act’) to license and regulate persons engaged in the generation, transmission, system operation, distribution, supply, and trading of electricity.
[ii] Also referred to as electricity distribution companies or DisCos. They are holders of distribution licenses issued by the Commission.
[iii] a legal entity established under Nigerian law that has applied for registration or a permit with the Commission for the operation of an isolated or interconnected mini-grid.
[iv] an area within a distribution licensee's network with an existing but dysfunctional distribution system resulting in poor quality of supply
[v] an area within a distribution licensee's network without an existing distribution system, otherwise called off-grid.
[vi] Section 3 2023 of the Regulations
[vii] Section 6(1)(a) of the Regulations
[viii] Section 7(1)(b) of the Regulation
[ix] Community refers to the mini-grid end use customers. is defined under the Regulation as a group of people within the same geographical location organized under a recognized local leadership structure or a legal recognized corporate entity capable of entering contracts and being capable of suing and being sued. ‘Connected Community’ is a community connected to the distribution network of a Disco
[x] Section 23 of the Regulation
[xi] Section 18 of the Regulation
[xii] Section 3 of the Regulation
[xiii] Section 7 of the Regulation
[xiv] Section 8 of the Regulation
[xv] Section 6(1)(b) of the Regulation
[xvi] Section 9(2) of the Regulation
[xvii] Section 9(1) of the Regulation
[xviii] Section 10(2) of the Regulation
[xix] Section 22 of the Regulation
[xx] Section 5 of the Regulation
[xxi] Section 22(4) of the Regulation
[xxii] Section 13(3) of the Regulation
[xxiii] Section 20(2) of the Regulation
[xxiv] Section 22(3) of the Regulation
[xxv] Section 20(8) of the Regulation
[xxvi] Section 20(9) of the Regulation
[xxvii] Section 20(3)(b) of the Regulation
[xxviii] Section 23(2) of the Regulation
[xxix] Section 13(2) of the Regulation
[xxx] Sustainable Energy For All, State of the Global Mini Grids Market Report 2020, https://minigrids.org/wp-content/uploads/2020/06/Mini-grids_Market_Report-20.pdf
[xxxi] Premium Times, 103 mini-grids built across Nigeira, https://www.premiumtimesng.com/news/more-news/617427-103-mini-grids-built-across-nigeria-says-rural-electrification-agency.html