Are Independent Distribution Networks a Viable Solution for Achieving SDG 7 in Nigeria?
Nigeria’s power development journey since 2005 reflects an emphasis by the Federal Government on the development of on-grid solutions over other solutions to provide electricity throughout the nation. This is in spite of the fact that on-grid solutions have consistently proven an inadequate and insufficient solution to the problem of blackouts and unreliable electricity. The alternative to on-grid solutions is the introduction of off-grid solutions across the entire electricity supply chain. In the distribution sector, this means developing a well-structured independent electricity distribution network (IEDN). Considering Nigeria’s Sustainable Development Goals (SDG) 7 commitment, are IEDNs the way to go?
Nigeria’s Current Electricity Distribution Structure
The electricity framework which presently subsists was developed by the FG in 2005 to unbundle the electricity sector and it favors the entrenched distributed networks that supply electricity to massive franchise areas under licenses issued by the Nigerian Electricity Regulatory Commission (NERC). Revenue burdens on the whole electricity value chain are placed on these power distribution companies who are responsible for funding their operations and liabilities as well as remit payments for services provided throughout the value chain. Tariff is centrally determined by the NERC based on several macroeconomic indices which are subject to regular fluctuation. These indices include gas price, local inflation, USD exchange rate, US inflation rate and available generation capacity. Under the multi-year tariff order structure, tariff should be reviewed and updated annually in line with those indicators.
Nigeria’s Electricity Distribution Structure and its Problems
Nigeria’s current electricity distribution structure has characteristics which happen to also be the bane of the structure:
- Franchise areas covered under Distribution Licences are too vast to cover all at once and immediately, without steady growth and profitability. Many of the successor-Discos were artificially granted coverage areas without previous experience and with insufficient workplans with no viable paths to profitability. This has proven an unwise approach to electricity distribution.
- The tariff structure previously emphasized a subsidized electricity tariff model where high-end customers subsidize the cost of power to lower income customers and the overall cost of electricity is partly subsidized by the government when tariffs are not cost-reflective. This has beleaguered the electricity value chain and the Federal Government’s purse. Since the summer of 2021, Nigeria has steadily moved toward a cost reflective tariff model, which in turn has meant tariff increases across the different tariff bands. This measure has been unpopular due to the general economic conditions in the country. With an upcoming election, power will be a significant point for election campaigns this season, especially in light of general popular and political unwillingness to move the market toward cost-reflective tariffs. This concern is particularly due to the centralized nature of electricity supply and distribution and tariff setting in the country.
- The Multi-Year Tariff Order (MYTO) annual review has not been strictly adhered to and the macroeconomic indices priced into the tariff have fluctuated faster than NERC has updated the tariff. As NERC has sought to update tariffs more regularly, this has led to regular and significant increases in tariff over the past several months and in light of the macroeconomic conditions, has placed a heavy burden on average Nigerians especially those in lower income communities.
- Despite the increasing tariff, power supply has remained erratic and unreliable. In April 2022, the grid collapsed twice, subjecting major portions of the Nigerian economy to power blackouts. These blackouts were further exasperated by severe fuel scarcity which was caused by a variety of factors including the importation of a bad batch of petrol, the Russia-Ukraine crisis and its effect on global oil markets, rising FX cost and US inflation. In addition to grid collapse, distribution licensees have also employed load shedding due to abysmally low power generation.
The effect of these on general productivity across the country cannot be over-emphasized. Between 2010 and 2019, Nigeria was subject to about 206 grid collapses and electricity blackouts. According to research on electricity blackouts and productivity in Nigeria, a 1% increase in electricity blackout will lead to a 104% decrease in productivity. There is therefore a nexus between resolving the electricity issue and increasing productivity and GDP in Nigeria. Achieving SDG 7 is clearly a central imperative for Nigeria.
SDG 7 and Nigeria’s Electricity Distribution Model
What is SDG 7? SDG 7 calls for affordable, reliable, sustainable, and modern energy for all. Making significant strides in achieving SDG 7 in Nigeria bodes well for the general African context of sustainability due to the country’s significance with respect to population and GDP across the continent.
A key part of SDG 7 is access to reliable electricity. In the Nigerian context, affordable and reliable have proven difficult to achieve. The apparent outworking of the current regulatory framework has worked against the achievement of these objectives. The unbundling and privatization of the power sector assets undertaken under the EPSRA of 2005 brought with it technical and commercial issues that have proven difficult to surmount. Across the electricity value chain, debt, inefficient assets and operational constraints have bogged down electricity security. This has effectively stunted the achievement of SDG 7 through grid power and opened the option of considering the viability of off-grid solutions for the purpose.
One viable off-grid solution that has been as a successful supplement to achieve SDG 7 under the current framework are independent distribution networks. In rural areas, the current structure is presently being supplemented by developmental investment in mini grids in order to achieve reliable, modern and affordable electricity. Mini grids are independent distribution networks which under Nigerian law are required to supply power below 100Kw. This capacity is sufficient for rural electricity needs where power requirements mostly cover lighting and the charging of small electrical devices. However, mini grids are insufficient for urban and suburban requirements, and in light of migration patterns and population density, solving the SDG 7 question for rural areas alone is counterproductive and unsustainable in the long run. Therefore, considerations must be made toward achieving electricity security in urban contexts.
Under Nigerian law, off-grid electricity generation and Independent Electricity Distribution Networks (IEDNs) provide a solution for urban and suburban settlements.
Achieving SDG 7 in Urban Areas Using Off-Grid Generation and IEDN
IEDNs are the licence structures created by NERC to support power distribution in the franchise areas of Power Distribution Licensees. They may either be isolated from the grid or embedded on to the grid. Either way, the purpose of an IEDN is to distribute electricity, either generated by itself or purchased from a Distribution Licensee, to a small, localized area. The IEDN model is more attractive for urban and suburban regions because of its capacity. IEDNs must have a minimum distribution capacity of 5MW.
The IEDN Model provides a sturdier bridge to achieving SDG 7 for a number of reasons:
- IEDNs can test run smaller service areas in order to achieve commercial viability and profitability. This makes them a more attractive and manageable investment and the existing grid system.
- An IEDN with its own generation capacity controls and administers the entire electricity value chain and is unbothered by the different and sometimes contrasting interests that plague the existing on-grid value chain.
- IEDNs are not plagued by the legacy debts of grid operators and can price tariff in a manner that adequately combines cost-reflective and service-reflective parameters. In urban and suburban centers, reliable power supplied at cost reflective rates, especially using cheaper fuels such as gas, is affordable and a boost to productivity and economic capacity in the long run.
- IEDNs with their generation capacity are better able to implement sustainable practices and incorporate renewable and/ or climate mitigation technologies to their operations, given their size, scale and control. The incorporation of these technologies further achieves the ‘modern’ energy component of SDG 7.
- Achieving the electricity and energy goals of SDG 7 in urban areas must primarily be a commercial enterprise, with a profit driven mindset, in order to achieve scalability and in turn manage the future requirements of subsidized energy prices in urban low-income communities. The IEDN model achieves this.
Roadblocks: IEDNs Versus Successor DisCos in Nigeria
The apparent monopoly of successor DisCos over franchise areas has created problems for the distribution network and served as a stumbling block for new entrants. This is more so as the law permits NERC to grant licence to a prospective IEDN in only two instances: where there is no existing distribution system in the area to be served by the IEDN or where the NERC is satisfied that the infrastructure of a DisCo is unable to meet the electricity demands of the customers in the area. In many cases, these conditions are hard to fulfil in the urban areas that are adequately covered by existing distribution networks. In suburban and rural areas which are not connected to the grid, many areas have some form of distribution infrastructure or the other. The DisCos argue that they are expanding their infrastructure and therefore the case for an IEDN would not hold.
Achieving SDG 7 is an important policy objective for Nigeria. For urban and suburban communities, this means resolving the lack of adequate power delivery from the grid, for commercial, industrial and residential areas. The present electricity distribution model that grants an apparent monopoly to successor Discos has not delivered on its objective of powering Nigeria. It is therefore important for policy thinkers, business operatives and investors to consider alternate models to achieve this goal. IEDNs are an attractive and workable option for this purpose, however, they may be hindered by DisCos seeking to enforce their apparent franchise monopolies. Regulatory frameworks must be updated to accommodate this option without the burden of litigious pushback from the successor DisCos. This option is beneficial to the Nigerian economy and will speed up the process of achieving SDG 7 in the country.
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About the authors
Nnanke Williams is a Senior Consultant at Brooks & Knights Legal Consultants (BKLC) and has expertise in energy, environment and policy issues. Nnanke holds a LLM in Energy Law and Environmental Policy from University of California Berkeley.
Adetayo Adetuyi is a Senior Consultant with Brooks & Knights Legal Consultants (BKLC) and has expertise in energy related infrastructure and project financings. Adetayo has worked as in-house counsel to an IPP developer and holds a LLM in Energy Law.