Large Scale Solar PV

Gbamu Gbamu Site

On-Grid

Introduction
Large scale PV systems, also known as solar parks, offer considerable economies of scale over smaller systems such as mini-grid systems. These grid-connected systems may be connected at different levels of the transmission and distribution networks.

Large-scale solar PV systems are utility-scale systems with an installed capacity of more than 1 MW. Systems connected at the transmission level (330 kv and 132 kv) are typically greater than 25 MWp, while systems connected at the distribution level are between 1 MWp – 5 MWp and are called ‘Embedded Generation’.

The implementation of the Electric Power Sector Reform Act 2005, which aimed to improve access to electricity in Nigeria, is in full swing. Bottlenecks in the energy sector are seen as the main obstacle to maintaining the country's economic growth as insufficient power-generation capacity and frequent power cuts affect the productivity and sustainability of the economic sector. 

Electricity in Nigeria is mainly generated in hydro and gas-fired thermal power plants, with hydroelectric power plants supplying 2,380 MW (about 16.7% of total generation capacity) and thermal power plants supplying 10,124 MW (about 83.3% of total generation capacity). The gas supply for electricity generation in gas-fired thermal power plants are a bottleneck factor because the infrastructure for gas supply is insufficient and the domestic gas market is poorly developed. This makes it necessary to supplement gas-fired power plants with renewable energies.

Renewable energy technologies such as solar energy in the utility sector offer the opportunity to generate energy in a sustainable way, without fossil fuels and without high operating and maintenance costs. Utility solar PV has been generating reliable, clean electricity at a stable fuel price for decades. Therefore, developing utility-scale solar energy is one of the fastest ways to reduce carbon emissions and put Nigeria on the path to a clean energy future.

factsheet_7_figure_1

Market Potential 

A huge population (more than 200 million people) and a low per capita energy level of 145 kWh (average per capita in sub-Saharan Africa is 486 kWh) show the existing power-supply gap in Nigeria. 

The Ministry of Power estimates that about 40,000 MW are needed to meet the electricity needs of the entire population of Nigeria. The World Bank estimates the economic cost of the power shortage in Nigeria at about $28 billion, which is equivalent to 2% of the country's GDP. Sustainable solutions to close this gap represent a great opportunity for investors. 

One of these opportunities is the development of large grid-connected solar plants to close the power-supply gap at the transmission and distribution level. The Transmission Company of Nigeria forecasts a peak demand of 25,790 MW, although it can only transmit an average of 3,566 MW (13.8%) of electricity. By comparison, in Ghana, this figure is about 77% with a peak demand of 2,371 MW and an average transmission capacity of about 1,820 MW. 

Nigeria has abundant solar energy resources – it is located in a belt of high solar radiation with an average sunshine duration of 6 hours per day and 5.5 kWh/m2 per day. The northern part of the country has the highest solar irradiation, around 7.0 kWh/m2 per day, and thus has the greatest potential for large solar PV projects in the country. Although on a smaller scale, the south has promising potential even with an irradiation of 4 kWh/m2 per day. 

factsheet_7_figure_2
© GIZ

Legal Framework

The Electricity Power Sector Reform Act (2005), the most important law regarding the Nigerian power sector, contains licensing provisions and regulates generation, transmission, distribution and the trade of electricity. In 2015, the National Renewable Energy and Energy Efficiency Policy was enacted to promote renewable energy production. It was developed as a policy document to consolidate the objectives of the above-mentioned 2005 Electricity Sector Reform Act. 

On behalf of the federal government, the Nigerian Bulk Electricity Trader (NBET) is currently the sole license holder for the purchase and resale of bulk electricity in Nigeria. NBET concludes agreements with power-generation companies and independent power producers (IPPs) for the purchase of electricity in large quantities, which is supplied via the Nigerian Transmission Company. 

For embedded power generation at the distribution level, a tariff is agreed with DISCO, which corresponds to the feed-in tariff for renewable energy developed by Nigerian Electricity Regulatory Commission.This tariff is intended to increase the participation of the private sector in electricity generation from renewable energy sources. The NERC is also responsible for issuing all licenses and permits related to the entire electricity value chain, such as licenses for network code transmission and distribution (generation, distribution, transmission, trading, system operation, metering, etc.).

NBET is obliged to purchase 50% of the electricity generated from renewable energy systems, the remaining 50% must be purchased by the DISCOs.

The regulations on feed-in tariffs (FiT) apply to electricity generation capacities from renewable energies between 1 MW and 30 MW. While power plants with a capacity of less than 30 MW are automatically integrated, RE projects with a capacity of more than 30 MW participate in a tendering process. The procedures are defined in the Feed in Tariff.

For the development of PV plants in Nigeria, the following regulations need to be considered:

  • MYTO (Multi Year Tariff Order)
  • Transmission, Distribution and Metering Codes
  • Embedded Generation Regulations NERC, 2012
  • Regulation for Independent Electricity Distribution Network (IEDN), 2012
  • Regulations on the Procurement of Generation Capacities, 2014
  • Regulations on National Content Development, 2014
  • Mini Grid Regulations, 2017
  • The Eligible Customer Regulation, 2017 

Investment Promotion

In an effort to create a favourable environment for investors, the federal government has taken measures to streamline coordination between the ministries, departments and agencies involved in the energy sector. In recent years, inter-ministerial committees have been set up to identify the sector's problems and present solutions to solve them. 

The Nigerian Customs Authority has recently reclassified solar cells (either in modules or assembled into panels) to apply a 0% rate of duty on imports. Although this does not apply to other components for solar technologies such as inverters, batteries, etc., the "The Zero Percent Import Duty for Renewable Energy Technologies Bill" is currently before the National Assembly, which aims to establish a special working group within the Nigerian Customs Service . 

The Nigerian Electricity Regulatory Commission Renewable Energy Feed In Tariff schemes aim to improve and promote electricity generation through renewable energy technologies by regulating priority access to the grid at a guaranteed price through binding purchase commitments for electricity from renewable energy sources in the DISCOs and Nigerian Bulk Electricity Trading. The REFIT schemes are limited to solar-energy  installations between 1 and 5 MW.

The West African Power Pool (WAPP) was established to integrate the national power systems into a single regional power market; Nigeria is participating in this initiative. To date, the World Bank has committed $750 million to support WAPP in its effort to build regional high-voltage transmission lines and create a robust electricity market. Phase 1 of the newly approved "Solar Development in Sub-Saharan Africa" project series will continue to support WAPP. It will help identify opportunities for solar project development and strengthen the capacity of its member utilities to integrate variable renewable energy into their grids. 

This regional approach to solar investment will enable WAPP to harness an abundant natural resource to ultimately lower electricity costs and reduce dependence on expensive and polluting fossil fuels, while capitalising on the cost reductions in solar technologies.

At present, the funds available for PV power plants in Nigeria are so limited that developers need to find equity investors to invest. Debt financing, especially from commercial banks and long-term loans, is difficult to find and expensive in Nigeria, making solar investment opportunities unprofitable. A sound financing option is provided by the Bank of Industry (BOI), which finances industrial and manufacturing projects at lower interest rates for Nigerian companies. For most companies, it is probably easiest to finance investments with foreign loans.

Business Models

Large-scale PV systems (>25 MWp) are designed to supply power to the electricity grid at the transmission level (330 kv and 132 kv) in line with the Transmission Code . They differ from other decentralised solar-electricity applications because they supply bulk flow power at the utility level with NBET as the main off-taker. All cash flows including financing are assumed to be in US dollars (USD) because the Power Purchase Agreement price as single source of revenue is paid in USD. Therefore, interest rates and inflation rates are also USD-based.

Embedded generation is a system ranging between 1 MW and 5 MW and directly connected to a DISCO distribution network (at 11 Kv) and licensed by NERC. It is directly connected to, or near the load centre of, the distribution network and is delivered to customers via the distribution network with DISCO as the main off-taker. All cash flows are accounted for in Nigerian Naira, so a typical average inflation rate of 10% is usually assumed for the project period and the yield is assumed to be lower to account for lower irradiation levels in parts of the country with the highest energy demand.

Key Performance Indicators

Indicator

Range of site characteristics

Population

200,963,599

Energy per capita

144.5

Installed Grid Generation Capacity

12,522MW

Installed off-grid Generation Capacity (diesel/petrol generators)

15,012MW

Energy consumption share (Residential sector/ Commercial & public sectors/ Industrial sector)

57.3% / 26.10% / 16.60%

Transmission voltage levels (>25MWp)

330kv & 132kv

Distribution voltage levels (<5MWp)

11kv

Project IRR (>25MWp)

11.75%

Project IRR (1MWp – 5MWp)

20%

Risks 

Notwithstanding important achievements, numerous obstacles and slowdowns may affect progress and prevent reforms within the energy sector, preventing it from fully achieving intended outcomes. There are numerous significant concerns remaining about the viability of the power sector, which threaten to further weaken the progress achieved with the reform so far. At the heart of these concerns is the accumulated sector deficit, which can be attributed to: 

  • The inability to quickly implement cost-recovery tariffs;
  • Weak regulatory oversight; 
  • Low power generation; and 
  • Continued changes in macro-economic parameters (exchange rates, inflation, etc.)

The risk factors for solar PV in Nigeria can be divided into socio-political, geographical and financial. 

Financial Risk Factors: A major financial risk that investors in PV systems face is initial funding. Capital costs for solar PV systems have fallen in recent years and yet they remain relatively high in Nigeria because of poor infrastructure and a lack of trained personnel. Given the high commercial bank rates, solar-project financing has largely been led by foreign investors because of the high interest rates and strict guarantee requirements. Commercial bank interest rates range between 23% and 29% whereas interest rates from the Central Bank of Nigeria were 12.5% per annum in 2020. 

The cost of solar PV systems in Nigeria is further impacted by the country's vulnerability to currency devaluations as companies have to utilise foreign currencies to procure solar components and technical talent. The cost is further impacted by environmental and security hazards because capital items become more expensive as more repairs and replacements are necessary.

Socio-political/geographical Risk Factors: Technical barriers in Nigeria also have an impact on the feasibility of solar PV businesses. These include the scarcity of skilled personnel and the lack of training facilities. Nigeria also lacks a stable institutional and regulatory framework that can drive solar-energy profitability. Given the lack of clarity and stability in the past, risks may also come in the form of sudden policy changes, which may affect the profitability of projects. 

Poor transmission infrastructure and an unreliable network system are also major risks to the success of solar PV in Nigeria. The existing power grid cannot accommodate the estimated 6,000 MW of power that is generated due to obsolete substation equipment, high technical and non-technical losses, and service providers’ inability to effectively evacuate power generated by the generation companies (GenCos). These factors are constraining utility-scale solar PV in Nigeria.

A pivotal risk in the solar PV business in Nigeria are natural disasters, such as heavy winds and heavy rainfall, which may lead to corrosive damage of panels and appliances. Insecurity and vandalism are also major risk factors in Nigeria. Theft of solar panels and batteries is a major concern for solar companies. Ongoing security concerns about terrorism in the north-east of the country are also impeding growth, particularly because the north-east has the highest solar radiation levels.