Isolated Mini-Grids

Third Mainland Bridge

Off-Grid Solutions

Introduction
Nigeria's efforts to achieve a stable power supply, its 200 million-plus inhabitants, its mature market and its predictable legal system makes the country a very attractive hub for investment in mini-grids.

Isolated Mini-Grids – A Market In Nigeria That Is More Than Ready

The total electrification rate in Nigeria is only 56.5% (2018), which means about 87 million people are not connected to the electricity grid. Many of these people use energy from generators that run on fossil fuels at a high cost of ₦150/kWh ($0.40/kWh) and also have a negative impact on the environment and the climate. 

Isolated mini-grids are independent power-generation systems with an installed capacity of less than 1 MW. They supply a large number of end-users connected to a local distribution network independent of the national grid. An isolated mini-grid provides reliable and affordable electricity to unserved communities where grid expansion is not economically justifiable. It has proven to be a cost-effective solution for the electrification of Nigerian communities through a decentralized energy strategy.

The Nigerian government is striving to improve access to energy within the country. The Rural Electrification Agency (REA), the implementing agency of the Nigerian federal government, is responsible for the electrification of unserved and underserved communities. As part of the programme to revitalise the power sector, the agency has developed an off-grid electrification strategy.

For commercial investors, Nigeria's large population and strong economy make the country an attractive location for developing the sector with a total potential of $8 billion in annual revenue.

Market Potential

Mini-grids offer an interesting opportunity for the government to rapidly increase the electrification rate within the country, as they are a cost-effective option compared to grid expansion. Therefore, one of the core goals of the off-grid electrification strategy is to provide 10,000 mini-grids, scaling the Nigerian mini-grid market to 3,000 MW by 2023. This will enable the urgently needed electrification of 14% of the population, creating an investment potential of $20 billion and opportunities for an annual revenue of more than $3 billion.

About 17.1 million households with 82.2 million people are at least 15 kilometres away from the nearest grid connection. Many of them are therefore dependent on electricity provided by their own generation and spend at least ₦150/kWh ($0.40) on it. As a result, the demand for electricity exists, and the development of isolated mini-grids within communities is a cost-effective solution for these consumers. 

By the end of 2019, Nigeria's installed mini-grid capacity was estimated at around 2.8 MW: 59 projects serve rural consumers, mainly for private and Productive energy uses.

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Legal Framework

Recently, there has been an increase in policies, plans, and regulations aimed at creating a clear policy environment to promote the renewable energy supply: The economy is receiving political and regulatory support for the development of the mini-grids in Nigeria. The mini-grid regulation of the National Electricity Regulatory Commission (NERC) was essential for the commercial development of mini-grids in the country, as it provides an explicit framework for mini-grid development. 

In particular, this regulation has facilitated the implementation of projects with a capacity of less than 100 kW and has encouraged developers to plan project pipelines in rural areas. The regulation distinguishes between isolated mini-grids with a capacity of less than 100 kW and mini-grids with a capacity of more than 100 kW but less than 1 MW. 

A licence is not required for the operator of a mini-grid with a capacity of less than 100 kW, but registration with the Nigerian Electricity Regulatory Commission is necessary. Still, a licence could be useful for the operator, as it entitles him or her to compensation if a distribution licensee extends its grid operation to an isolated mini-grid operated under a licence. 

For an operator of a mini-grid with a capacity of more than 100 kW but less than 1 MW, both registration and licensing are mandatory.  

Also important: The regulation authorises operators to set a cost-oriented tariff via the Multi-Year Tariff Ordinance, which allows for the financial viability of mini-grid projects.

Investment Promotion

The main support provided by the REA to the private off-grid sector is its efforts to reduce development costs by conducting pre-development activities, including identifying sites and facilitating cooperation with local and state governments. 

For example, REA maintains a GIS portal with 8,000 potential mini-grid communities, taking into account socio-economic factors such as the location of schools (Nigeria Rural Electrification Agency, 2018). This portal allows market estimates based on selected criteria such as economic activity and distance from the national grid. REA has so far visited more than 100 of these sites to review population data and estimate community demand, with the intention of increasing the number of potential sites significantly in the coming years.

To reach the goal of creating 10,000 mini-grids by 2023, a huge effort is needed, considering that only about 60 have been realized thus far. Accordingly, funding has been provided by various programs.

  • The financial arm of the Rural Electrification Agency (REA), the Rural Electrification Fund (REF), has provided capital grants for all mini-grids of qualified public and private rural electrification programmes built so far. The upper limit for the grant contribution is $300,000 or 75% of capital expenditure, whichever is lower. In addition, a performance-based connection grant is available, which is expected to be 30%. The REF can also provide project development assistance, mainly through the Rural Electrification Agency. 
  • The Bank of Industry’s Solar Energy Fund enables solar solutions to be developed for different categories of end-users by providing concessional debt financing. Developers can also benefit from this.
  • The World Bank and the African Development Bank (AfDB) have made important commitments to the Nigerian mini-grid sector with a $550 million fund for the Nigerian electrification project. Of this, $220 million will be allocated to a results-oriented programme through a performance-based grant and a minimum-subsidy tender.
  • With its NESP programme, the German Agency for International Cooperation (GIZ) is providing grants for the total cost of the distribution facilities (€1 million in Phase 1). 
  • The AfDB is also contributing $200 million and a performance-related connection grant of probably 30%.

Business Models

Most existing mini-grids in the country use an owner-operator business model funded through a mix of debt and equity. The most common debt-to-equity ratio is around 70 – 30 with an additional variable for grant funding via the Minimum Subsidy Tender or Performance-Based Grant programmes managed by the REA or other sources. Mini-grid developers report returns between 15% to 20% on successful projects. Other models such as the build-own-transfer and community-based models also exist.

Tariff model for Mini-Grids

The unique role played by mini-grids often poses particular problems for finding a tariff structure that maximises electrification while encouraging investment. 

Grid-level tariffs are almost invariably cheaper than cost-oriented mini-grid tariffs. While these cheaper tariffs would remove any cost barriers for potential customers, they can also discourage investment in the mini-grid sector. 

A compromise between these two extremes is necessary to promote mini-grids for faster and more reliable electrification. Examples include cross-subsidies based on customer classes or the setting of different tariff levels based on the size and capacity of mini-grids. It is also crucial to consider mini-grids as a hybrid component of the network, which is not necessarily a supplement to the network or a superfluous bridging of it. 

Subsidies, cross-subsidies, or other support for mini-grids must keep this long-term vision in mind. Tariff rates vary from site to site, and a single tariff is usually developed and implemented for all customers, usually in consultation with the host community. Different tariffs may be developed for residential and business customers.

Key Performance Indicators

Indicator 

Range Of Site Characteristics 

Population 

1,200–5,000

Commercial Energy Use

Welding, Barbing, Retail/Provision Stores, Grinding

Household Energy Use

Electric Bulbs, Electric Fans, Television Sets, Radio Sets, Cell Phones, Refrigerators 

Local Cost Of Petrol

₦150 - ₦300 (US$0.41–US$0.86) per litre

Local Cost Of Diesel

₦180 - ₦300 (US$0.46–US$0.86) per litre

Tariff

₦120 - ₦320 (US$0.34– US$0.86) per litre

System Size

16 kW—100 kW

Capital Expenditure 

₦30m—₦120m (US$90,000—US$300,000)

Annual Operating Expense

₦350,000—₦2.5m (US$900—US$6,900)

Capacity Utilisation

2%—100%

Collections

98%—100%

ROI

15%—20%

Energy Export

16 kWh/day—300 kWh/day

Consumer Savings

₦11—₦90 ($0.03 per kWh—$0.24) Per kWh (Compared To Self-Generation)

Risks

Despite an increase in beneficial conditions for mini-grids in Nigeria, there are some concerns that investors may have. 

  • Technical Barriers: Technical issues related to the construction and maintenance of mini-grids, such as expertise for initial installation, maintenance, and standards of components. The renewable energy associations have a good overview of local professionals and service providers. 
  • Economic Viability: The economic viability of mini-grid projects can be facilitated by grants or subsidies, which allow a developer to expand its customer base. There is great potential for scaling.
  • Data Availability: The REA strives to minimize development costs by providing important market information. Investors can also find information for their investment decisions through other sources. 
  • Arrival of the National Grid: The government’s promise to extend the national grid to currently unserved areas could deter investors in renewable energy. This risk can be mitigated by the provisions of the mini-grid regulation. It promotes cooperation between the mini-grid developer and a distribution licensee by requiring a mini-grid developer to obtain the consent of a distribution licensee if its proposed operational plans are within the distribution licensee’s five-year expansion plan. In the event that a distribution licensee extends its operations to an isolated mini-grid operated with a permit, the regulation provides two options for the operator:

 

  1. the mini-grid operator may transform the isolated mini-grid into an interconnected mini-grid; or
  2. the mini-grid operator may transfer the isolated mini-grid to the distribution licensee, in return for compensation for all assets that the isolated mini-grid operator does not wish to remove from the mini-grid.

These options act as buffers or incentives for the operators and help to minimise any form of loss to the operators, as they are entitled to compensation or an opportunity to top-up to an interconnected mini-grid if a distribution licensee enters the mini-grid operator’s site.

Success stories