MINIGRID INVESTMENT REPORT - Sun-Connect-News · • Review the ESIA process BUSINESS COMMUNITY • Create a minigrid business community consortium • Design standardised, modular

MINIGRID INVESTMENT

REPORTSCALING THE NIGERIAN MARKET

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SUPPORTED BY

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Authors 3

About This Report 4

Executive Summary 4

Chapter 1: Electricity Access and the Nigerian Electricity Sector 9

Chapter 2: Minigrids in Nigeria Today 10

2.1DefiningMinigrids 10

2.2ExistingMinigridsinNigeria 13

2.3MinigridSuccessFactorsandBestPractices 16

Chapter 3: Minigrid Policy Environment 19

3.1Off-GridEnergyPolicyinNigeria 19

3.2RegulatoryandEconomicIncentivesforOff-gridInvestment 19

3.3PolicyEffectivenessandImpact 22

Chapter 4: Opportunities for Growing the Nigerian Minigrid Market 24

4.1OpportunitiesforGrowthDuringProjectDevelopment 24

4.2OpportunitiesforGrowthDuringConstruction 27

4.3OpportunitiesforGrowthDuringOperation 27

Chapter 5: Recommended Next Steps 29

5.1Policymakers 29

5.2BusinessCommunity 29

5.3InvestorsandDevelopmentPartners 30

5.4MinigridDevelopers 31

Chapter 6: Conclusion 32

Appendices 33

Appendix1.MinigridValueChain 33

Appendix2.ListofAuditedCommercialMinigrids 34

Appendix3.MinigridProjectAttributes 35

Appendix4.LevelofImplementationofOff-gridRenewableEnergyInvestments 35

Acknowledgments 38

Who We Are 39

Contents

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Published byTheNigerianEconomicSummitGroup(NESG)

NigerianRenewableEnergyRoundtable(NiRER)3rdFloor,RightWing,UnityBankTowerPlot785,HerbertMacaulayWay,Abuja.August 2018

AuthorsAbdulmuminiYakubu NigerianEconomicSummitGroupEbunAyandele RockyMountainInstituteJamesSherwood RockyMountainInstituteOluAruikeOlu RockyMountainInstituteSachikoGraber RockyMountainInstituteAuthors listed alphabetically

ContributorsEmekaOkpukpara NextierPowerNigeriaFatimaAdemoh Waste-2-WattLimitedHannahKabir CreedsEnergyMariaYetano WuppertalInstituteforClimate,EnvironmentandEnergy

ContactsSachikoGraber [email protected] [email protected] [email protected] [email protected]

Design NoahOlatoye NigerianEconomicSummitGroup

Authors

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ExecutiveSummaryAbout this reportThis report is intended to illuminate the current state of the Nigerian minigrid market and the opportunity for investment. It offers an in-depth look at current minigrid projects throughout the country and provides perspectives on the current opportunities and challenges to scaling the market. The report represents the outcome of a collaborative process through which information on the minigrid sector was collected and synthesised. Data and perspectives pertaining to the current state of the market and the potential for scaling were collected from a vast array of sources—including minigrid developers, customers, investors, and policymakers. This report is intended for a wide range of readers who may have an interest in minigrids and energy access issues in Nigeria.

Nigeria continues to focus on electrifying rural areas of thecountry, where as much as 55% of the population remainswithoutelectricityaccess.Recently,theemergenceofminigridsas a cost-effective option for electricity provision has createdan exciting opportunity to rapidly increase electrification. Forpolicymakers,minigridsfillanimportantgapbetweenexpensivegridextensionprojectsandlow-powersolutionslikesolarhomesystems,andcanhelpprovidepowertomillionsofpeople.Forcommercial investors, Nigeria’s large population and strongeconomymakeitanattractiveplacetobuildthesector;thevastbutunderdevelopedminigridmarketoffersrevenuepotentialof₦2.8trillion(US$8billion)annuallyinNigeriaalone.

TheNigerianminigridmarket today has reached an inflectionpoint - costs are competitive with alternatives like diesel andpetrol generators, and projects are moving away from grantfundingtocommercial investment.At thesametime,minigridcosts can be reduced bymore than 50% over the next threeyears, unlocking market scale to tens of thousands of siteswithinNigeriaalone.

The market for minigrids in Nigeria is strong, and clear best practices are emerging NESGandRMIauditedarepresentativesetoftencommercialminigridsinNigeria—thosedevelopedwithasignificantamountof private equity or debt finance—to build a snapshot of thecurrentmarket(Figure ES-1).Thisaudit,whichincludedsitevisits,interviewswithminigrid customers, and developer interviews,providesa clear pictureof existing isolated, rural, commercialminigrids, which are the focus of this report. Interconnectedminigrids—developed in collaboration with distributioncompanies—areanotherpromisingmarketsegment,butremainarelativelyunexploredoptioninNigeria.AsTable ES-1shows,minigridcostsarehigherthanthemaingridbutlowerthansmallgenerators,whichtypicallycostupwardof₦250(US$0.70)perkilowatt-hour.Customer satisfaction is very high acrossmostsitesandcollectionratesarenear100%.Mostdevelopershaveusedanowner-operatorbusinessmodelfundedthrougha70:30mixofdebtandequitysupplementedwithgrantfunding.

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Figure ES-1.AuditedcommercialminigridprojectsitesacrossNigeria

Metric RangeTariff 120–300/kWh

Systemsize 16–100kW

Capitalexpenditure N30–N100million

Capacityutilisation 2% –100%

Collections 98%–100%

From these ten projects, a clear set of best practices has emerged (Figure ES-2). These best practices demonstrate the success and growth of the industry to date, and are particularly important for stakeholders involved in development and operation of specific projects (developers, investors, programme coordinators, etc.). Incorporating them into future projects can help ensure success, both from a business perspective in terms of profitability and from a community perspective in terms of affordability and reliability. Chapter 2 discusses existing projects and best practices in more detail.

• Select optimal sitestomaximizefinancialviabilitybyfindingdenselypopulatedareaswithsignificantlocaleconomicactivityandabilitytopayforelectricityandclusteringsitestobenefitfromeconomiesofscaleinconstructionandoperations.

• Engage the communitythroughsensitisationandearlydevelopment,frequentsitevisits,involvementof local representatives, and other continuous engagement activities in order to build customerinterest,collectfeedback,andmaintainsatisfaction.

• Stimulate demand byprovidingappliancefinancingprogrammesandenergyefficientappliancesandmachinery,especiallyforproductiveuses,tobalanceminigridloadprofilesandincreasecapacityutilisation.

• Maximise developer ownershipbyusing innovativefinancing techniquesandownershipmodels,such as the split asset model, to implement an owner-operator model and overcome financeconstraints.Figure ES-2.Bestpracticesinminigridprojectdevelopmentandoperations

Table ES-1.CostandcollectionsforauditedminigridprojectsVerylowcapacityutilisationratesreflectnewsitesthatarenotyetfullyoperational

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Table ES-2.Opportunitiesacrosstheminigridvaluechain

Nigeria’s existing policy provides a backbone for minigrid developmentThe Federal Government of Nigeria has createdpolicy over the past several years to enableminigrid andoff-grid development in the country.Beginningwith theNationalElectricPowerPolicyof 2001, and including more recent policies likethe Nigerian Electricity Regulatory Commission’sMiniGridRegulationof2017,thegovernmenthasincreasingly committed to off-grid developmentand electrification. This commitment has rangedfrom enabling regulation and policy to directinvestmentthroughbudgetedfundsandfacilitatingdevelopmentpartnerloansandgrants.

While these policies have supported thedevelopmentofearlymarketgrowth,goingforwardtheycanbeimprovedtoenablethenextphaseofminigriddevelopment.Specifically,thereisaneedto provide more clarity on policy by addressingoverlappingmandatesandcompetingframeworks,as well as to more consistently enforce existingregulation.The government can also continue toimprove the ease of doing business, consideringcustoms issues and supporting financedevelopment in particular. These policies andimplementationneedsarediscussedinChapter 3.

There are opportunities for improvement to accelerate market growth. Despite theminigridmarket’s rapid growth, thereare opportunities to further accelerate the pace

of innovation and implementation. Stakeholdersacross the industry in Nigeria have identified aset of eight opportunities along each element oftheminigrid value chain (Table ES-2). These aredescribedmorefullyinChapter 4.

Stakeholders across the value chain can play a critical role in supporting the marketGiventheopportunitiestoacceleratetheminigridmarket,thereareclearnextstepsforstakeholdersto take (Figure ES-3). With this report wehave identified actions across four key sets ofstakeholders that, taken together, can supportdeployment of commercial minigrids and unlockinvestmentopportunities acrossNigeria.Chapter 5discussesthesenextstepsingreaterdetail.

The market forecast for minigrids in Nigeria is promisingFindings from this report show that there is aclearpathtoscale forminigrids inNigeria,whichbuilds on the foundation of experiencewith proj-ectstodate; thetime is right for investment.Thesector israpidlymovingawayfromgrantfundingtowards private debt and equity capital, and Ni-geria has enormousmarket potential to supportsuchgrowth.StakeholdersacrossthevaluechaininNigeria can enable and accelerate this growththrough a few key actions. Together, minigridspresent an exciting investment opportunity thatis primed to significantly increase energy accessacrossNigeria.

Phase 1: Project Development

Increase data availability throughdevelopmentindustryassociationsanddatasharingplatformIncrease confidence in Distribution Company (DisCo) transparencybyimprovingenforcementof5-yearDisCoextensionplansandguaranteeingassetpurchaseuponDisCoexpansionIncrease affordable project financebycreatingaminigridfinanceconsortium,providingconcessionalandotherappropriatefinancinginstruments,conductinginvestmenttrainings,andincreasingthelimitforminigridsystemsizeReduce Environmental and Social Impact Assessment (ESIA) costsbystreamliningtheprocessforminigridswhereappropriate

Phase 2: Construction

Reduce hardware costsbyimplementingabusinessconsortiumtoincreasebuyingpower,employingsplitassetbusinessmodels,andutilizingexistingunelectrifiedgridextensionprojectsEliminate import barriersbyexemptingminigridcomponentsfromdutiesandaddressingcustomsdelays

Phase 3: Operation Bypass mobile limitationsinnetworkserviceandpaymentplatformsbyexpandingpaymentoptionsIncrease capacity utilisationthroughdemandstimulationprogammesandmodularsystemdesigns

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POLICYMAKERS• Allowtaxanddutyexemptionsandreduceimportdelays• Clarifycurrentregulationsandimplementadditional

enablingpolicies• Increasestateandlocalgovernmentinvolvement• ReviewtheESIAprocess

BUSINESS COMMUNITY• Createaminigridbusinesscommunityconsortium• Designstandardised,modularminigridsystems• Improvetelecomservicereliability

INVESTORS AND DEVELOPMENT PARTNERS• Supporteffortstoincreaseaffordabilityandavailabilityof

finance• Providepartialgrantsandoperationalsubsidies• Createaminigridfinanceconsortium• Createcross-sectoralimplementation

MINIGRID DEVELOPERS• Improvecustomerengagementstrategies• Implementcost-reductionstrategies• Developadata-sharingplatform

Figure ES-3. Recommendednextstepsforstakeholders

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Operational minigrid systems in Cross River State (top) and Niger State (bottom) of

Nigeria (Source: NESG/RMI site visits, 2018)

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Chapter1:

Electricity accesscontinues tobeachallenge inNigeria.Approximately55%ofNigeria’spopulationlacks access to electricity;1 a rate that has notimproved over the last five years.2 Meanwhile,Nigeria’s average daily generating capacity of 4GW is insufficient to meet the country’s energydemands, and delivers electricity at a highlyregulatedtariffrangingbetween₦4and₦50perkWhthatisneithercost-reflectivenorsustainable.Asaresultofaninadequatesupplyofelectricity,domestic and commercial consumers spend anestimated ₦4.9 trillion (US$14 billion) annuallytopower14GWofsmall-scaledieselandpetrolgeneratingsets.3

Rural electrification is especially complicated—only 36% of the population has access toelectricity—becauseruralcommunitieshavelowereconomicactivityandenergydemandcomparedto their urban counterparts.i Grid extension torural areas is problematic due to the generationshortfall, the non-commercial viability of manyrural grids, and high technical and non-technicallosses; so rural communities experience limitedeconomicgrowth.Despitethechallengeswithgridextension,off-gridalternativessuchasminigridsandsolarhomesystemshavenotfullypenetratedtheruralmarket.

The insufficiency of grid-supplied power hindersbusiness productivity, profitability, and growththroughout Nigeria—particularly for small- andmedium-scale enterprises. Over 80%ofNigerianbusinessownersciteelectrificationchallengesasthemostsignificantobstacletodoingbusiness,astheyexperienceanaveragemonthlypoweroutageof 239 hours.4 Nigeria’s Power Sector RecoveryProgramme (PSRP) estimates that the erraticsupply of power results in an annual economicloss in excess of US$25 billion.5 Additionally,unreliablepowersupplycreatessocialchallengessuch as lack of access to food, potable water,lighting, healthcare, education, information, andotherbasicamenities.

Minigrids offer an alternative to costly gridextension and an emerging solution to ruralelectrificationchallengesinNigeriathatcanrapidlybecomecost-effective,presentinganopportunity

i Current installed capacity is 12.5 GW, but less than half of this is typically available at any given time.

for investment and economic development.Nigeria’s large population of 186 million,6 largeeconomy, andgrowing energy needsmake it anidealmarket tospearheadminigriddevelopmentinsub-SaharanAfrica.

Rural consumers commonly spend a significantamount on energy alternatives, and are ableto pay for minigrid services. Despite this hugepotential, minigrid penetration remains relativelylow—Deutsche Gesellschaft für InternationaleZusammenarbeit (GIZ) estimates 30 solarminigridswithatotal installedcapacityof1MW,serving 6,000 customers.7 Scaling the Nigerianminigrid market to ten thousand 100 kW sitesby2023wouldpower14%ofthepopulationwithcapacityupto3,000MWandcreatea₦7trillion(US$20billion)investmentopportunitygeneratingover₦1.05trillion(US$3billion)inannualrevenue.8 In total, the minigrid market in Nigeria offerspotential annual revenue of ₦2.8 trillion (US$8billion).Inordertorealisethispotentialformarketgrowthandinvestment,government,developmentpartners, and the private sector must worktogethertoaccelerateminigriddevelopment.

This report is intended to provide a snapshotof the minigrid market in Nigeria as well as toidentify opportunities for increasing investment.To that end, Chapter 2 provides an overviewof the minigrid value chain, presents a detailedassessment of existing and operationalminigridsystems, and shares best practices in minigriddeployment. In Chapter 3, we evaluate thepolicy landscape enabling off-grid electrificationand discuss institutional mandates, policyeffectiveness,andbarrierstoscalingthemarket.Chapter 4 recounts opportunities to grow theminigridmarket,whichwereexpressedbyfinancialinstitutions, industry experts, policymakers, andproject developers through personal interviews,workshopsettings,andprojectaudits.Chapter 5 provides recommendations toachieveamarket-driven approach to scaling investment in thesector, includingnextstepsforpolicymakers,thebusinesscommunity, investorsanddevelopmentpartners,andprojectdevelopers.Finally,Chapter 6offersconcludingthoughts.

Electricity Access and the Nigerian Electricity Sector

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Inrecentyears,supportforminigriddevelopmenthasincreasedduetoimprovedcommercialviabilityandrecognitionoftheco-benefitsofelectrification,suchaslocaleconomicdevelopment.Thenascentminigridmarketisexpandingrapidlybothgloballyand in Nigeria, where the number of developersin the market has increased significantly. Theminigridvaluechainiscomplexandspansseveralsectors, encompassing a variety of companies,skills, andareasof expertise. In this chapter,weprovideadefinitionofminigrids,explorethevaluechain,reviewexistingprojectcharacteristics,anddiscussfactorscontributingtoprojectsuccess.

2.1 Defining MinigridsMinigrids are stand-alone power generationsystems of up to 1 MW capacity that provideelectricity to multiple consumers througha distribution network.9 They may remainisolated, convert to an interconnected minigridby connecting to the distribution company’snetwork, or be developed as an intentionallyinterconnected system. Minigrids differ fromembedded generation, which are independentpowerplantsconnectedtothecentralisedgridatthedistributionlevel.Minigridstendtobesmallerin capacity compared to embedded generation,and are also intended to operate independentlyfrom the local distribution licensee. Figure 1 providesanillustrationofseveralminigridprojectscurrentlyoperationalinNigeria.

Minigridsareoftendeployedinremoteruralareasasamorecost-effectivemeansofelectrificationthan traditional extensionof themaingrid.Theyoffer more reliable power than the main grid inmany settings, including much of rural Nigeria.OneGIZassessmentof theminigridopportunitysuggests that over 26 million Nigerians can bemost effectively provided with electricity vianearly 8,000 isolatedminigrid systemsproviding4.4GWhperyear.10

ii. The wide variation in project completion timeline within the construction phase is due to factors such as equipment importation and logistics, which can cause delays.

Although minigrids may be developed as eitherisolated or interconnected systems, this reportfocuseson isolated, rural,commercialminigrids.Isolated commercial systems address manychallenges of rural electrification and closethe access gap in remote regions of Nigeria,where national grid infrastructure is limited ornon-existent. There is also a large potential forthe development of interconnected ‘undergrid’systems, and the mapping of communitiesappropriate for undergrid development providesscopeforfutureresearch.

2.1.1 The Minigrid Value ChainDevelopingandoperatingminigrids isacomplexprocessthatinvolvesawiderangeofstakeholdersand requires a skilled workforce. Figure 2 illustratestheminigridvaluechain,whichincludesthree primary phases: project development,construction,andoperations.Eachactivitywithintheminigrid value chain contributes to the finalqualityandcostofserviceprovidedtoconsumers.Theprojectdevelopmentphase,whichistypicallycompleted in one to threemonths, involves siteidentification and assessment, system designand planning, and customer acquisition. Theconstruction phase, which can take two to 12months, includes equipment procurement,system installation, and commissioning.ii Finally,the operations phase can continue indefinitely(depending on reinvestment—although minigridproject lifetime is typically estimated at 20–25years) and comprises ongoing maintenance,metering, billing, and collections, anddecommissioningorgridintegration.

It is possible for a single, vertically integratedcompany tocompleteallcomponentswithin thevaluechain;butprojectsmore frequently requireseveral companies each specializing in differentareas of the value chain. Appendix 1 providesadditionaldetailoneachcomponentofthevaluechain.Ongoingcommunityengagement, trainingandcapacitybuilding,andotheropportunities toimproveoperationsthroughoutthevaluechainarediscussedinChapter 4.

Chapter2:Minigrids in Nigeria Today

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COMMERCIAL MINIGRID PROJECT-SITES IN NIGERIA

Tungan Jika, Magama LGA of Niger State (100 kW)

Umon Island, Biase LGA of Cross River State (50 kW)

Bisanti, Katcha LGA of Niger State (37 kW)

Egbeke, Etche LGA of Rivers State (10 kW)

Angwan Rina, Shendam LGA of Plateau State (50 kW)

Kurdula, Gudu LGA of Sokoto State (80 kW)

Gbamu Gbamu, Ijebu East LGA of Ogun State (85 kW)

Obayantor, Ikpoba-Okha LGA of Edo State (40 kW)

Figure 1.CommercialminigridsitesacrossNigeria(Source:NESG/RMIsitevisits,2018)

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SITE IDENTIFICATION & ASSESSMENT

• Feasibility Study• HSSE Plan

• Resource Assessment• System Design• Licensing & Permitting

• Project Financing• Environmental and

Social Impact Assessment

• Community Engagement

THE MINIGRID VALUE CHAIN

• Site Survey• Load Assessment• Demand Projection

• Land Acquisition• Community Engagement

• Equipment Inspection• Equipment Calibration• System Testing

• Troubleshooting• Community Engagement

METERING, BILLING, & COLLECTIONS• Usage Monitoring• Load Management• Customer Invoicing

• Payment Collection• Community Engagement

SYSTEM MAINTENANCE

DECOMMISSIONING/GRID-INTEGRATION

• Generation/Distribution/Metering

• Plant Monitoring• Equipment Inspection

• Grid Interconnection• Asset Transfer• Disassembly/Refurbish

/Recycle/Resale

• Impact Evaluation• Community Engagement

• Equipment Repairs• Community

Engagement

• Generation System• Distribution System

• Metering System• Community

Engagement

• Civil Work• Infrastructure Work• Parts Assembly

• EquipmentInstallation

• CommunityEngagement

PHASE 3Operation

DESIGN & PLANNING

PROCUREMENT

SYSTEM INSTALLATION

COMMISSIONING

CUSTOMER ACQUISITION • Demand Stimulation• Appliance Financing

• Customer RelationshipManagement

• Community Engagement

PHASE 1Project

Development(1–3 months)

PHASE 2Construction

(2–12 months)

(up to 25 years)

Figure 2.Theminigridvaluechain

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2.2 Existing Minigrids in NigeriaTheNigerianminigridmarket is rapidly evolving.Overthepastdecade,minigridshavetransitionedfromgovernment-contractedandhumanitariantoa commercial model, through which developersand operators rely relatively less on grants andgovernment funding. Since 2010, the number ofcommercialdevelopershasgrowntoatleastnineactive members of the Nigerian chapter of theAfricaMini-Grid Developers Association (AMDA);andcommercialminigridprojectsare increasinginnumberaswell.Thesuccessoftheseprojects,which have implemented cost-reflective tariffsand generated customer demand, demonstratesthe potential profitability of commercialminigridprojects.

iii. In March 2018, RMI and the Nigerian REA convened leading global experts from across the minigrid and investment community to identify a pathway to achieving minigrid tariffs of N70/kWh by 2020. These experts agreed that this is feasible through achievable cost reductions across six categories (hardware, load management, customer engagement, project development and O&M, finance, and policy). (RMI and REA, “20 By 20: A Design Charrette to Achieve 20c/kWh by 2020”)

Today’sminigridsdemonstrategreateravailability,reliability,andcustomervaluecomparedtocurrentalternativesinmostruralareas.Althoughtoday’sminigrid tariffs are high relative to distributioncompanies and the central grid, they fall withinthe ability and willingness of customers to payforelectricity (seeBox 1).Today’scost-reflectiveminigrid tariffs are typically near N200/kWh(US$0.57/kWh),which is lessexpensivethanthecosttorunasmalldieselorpetrolgeneratorset.Althoughthiscostreflectsthesmallscaleandriskofanascentmarket,minigridtariffsareexpectedtocontinuefallingandcanbereducedby60%by2020.iii

BOX 1GbengaAkanjiownsanelectronicsrepairshopinAraromi-OsosuncommunityinOgunState(Figure3).GbengaspendsN302/kWh(US$0.86/kWh)torunhis0.75kVAgeneratorforhisbusiness.Ourinterviewwithhimrevealedaneagernessandwilling-nesstotransitiontominigridservice,whichwouldbeacost-effectivealternativetoreplacethehighcostsincurredtorunhisgenerator.

Figure 3.TheownerofSharpSharpElectronicsbusinessathisshop(Source:RMIsitevisit,2018)

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Theremainderofthissectionprovidesasummaryof existing commercial minigrids in Nigeria,factors affecting their success, and lessonslearnedfromauditedprojects.Datawerecollectedthroughminigridaudits,whichinvolvedvisitstoarepresentative sample of ten minigrid projectsoperated by eight private developers, customerand staff interviews, and data collection onsystemoperations.Projectsvisitedwereselected

iv. One project was entirely grant funded, but was included in the audit because the current operator did not install the system.

asrepresentativecommercialprojects,indicatingthattheywerefinancedatleastinpartthroughdebtandequity.ivSitelocationsareshowninFigure 4. Inadditiontoprojectaudits,personalinterviewsoftheeightminigriddeveloperswereconducted tocollectinformationonminigridcompanypracticesandprojectfinancialandoperationalinformation.

Figure 4. AuditedcommercialminigridprojectsitesacrossNigeria

2.2.1 Summary of Existing Minigrid ProjectsMost minigrid projects today are situated indenselypopulatedagrariancommunities,typicallywith a population of around 2,500 distributedamong300–500households.Priortothearrivaloftheminigrid,communitymembersusedkerosenelamps, candles, torchlights, and generators asnon-cookingenergysources.Themaineconomicactivities in audited communities are farming

and fishing, and income is primarily obtainedthrough the sale of cash and food crops likemaize,millet,sorghum,yam,cocoa,andcocoyam.Other common commercial activities includeretail,welding,grainmilling,andbarbing.Table 1 summarises thecharacteristicsofa typicalhostcommunity, and Appendix 2 and Appendix 3 includeadditionalinformationonauditedprojects.

Indices Range of site characteristicsPopulation 1,200–5,000

Economicactivities Farming:maize,millet,sorghum,cocoa,oilpalm,rubber,yam,cassava,plantain,bananasFishfarming

Commercialactivities Welding,retail,grainmilling,oilpalmprocessing,cassavagrinding,barbingCommercialenergyuse Welding,barbing,retail/provisionstores,grindingHouseholdenergyuse Electricbulbs,electricfans,televisionsets,radiosets,

cellphones,refrigeratorsLocalcostofpetrol N145–N300(US$0.41–$0.86)perlitreLocalcostofdiesel N160–N300(US$0.46–$0.86)perlitre

Table 1.Typicalcommunitycharacteristicsforauditedminigridprojects

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The audited minigrid projects share commontechnologiesandoperatingpractices.Allsystemsauditedaresolarprojects;nineofthetenprojectsuse 100% solar generation with battery storage,while one project is a solar-diesel-batteryhybrid. The hardware for these projects wasgenerally imported from China or Europe. Mostprojects utilised local labour for constructionand installation, and employ local (community)representatives for site management, security,sales,andbusinessdevelopmentactivities.

The ten audited projects are still expanding;but together, they already serve about 2,000households (65% of local homes) and over 250commercial connections. The combined systemcapacityof364kWsupplieselectricitytoatleast10,000individuals.

2.2.2 The Minigrid Business ModelMostexistingcommercialminigridsuseanowner-operatorbusinessmodelfundedthroughamixofdebt,equity,andgrantfunding.Themostcommondebt to equity ratio is around 70:30, with anadditional variable grant component. Commercialdebt for audited projects was obtained primarilythroughconcessionalloansandimpactinvestment.Some developers used unique approaches toraisingaportionofbothdebtandequity,suchascrowdfunding. Minigrid developers report 15%–20%returnsonsuccessfulprojects.

Tariff ratesvary fromsite tosite,butaflat tariffstructure(asinglefixedpriceperunitofelectricity)forallcustomerswasimplementedinnineoftensites.Atthe lastsite, residentialandcommercialusers were charged using different tariffs. Formostprojects,tariffsweredevelopedinagreementwith the host community. In each community,the majority of residents report spending less

v. Tools such as the NESP Mini-grid Due Diligence Guidelines can be used for additional benchmarking of minigrid cost structures: https://energypedia.info/images/2/24/Due_Diligence_Guidelines_for_Mini-grid_Investors_in_Nigeria.pdf

on electricity from the minigrid now than theydid on energy alternatives before the minigrid’sinstallation. For instance, the levelised cost ofelectricity(LCOE)fromasmalldieselgeneratorisatleastN250/kWh(US$0.71/kWh).

The cost structure of audited minigrid projectsis summarised in Table 2.v Reported capacityutilisationratesspanawiderange,dueinparttovaryingsuccesswithcustomerenumerationanddemand assessment. Higher capacity utilisationfigures indicate systems that were either right-sizedorslightlyundersized,whilelowernumberswere often reported for projects that are lessthan one year old, where developers are stillacquiringcustomersandstimulatingdemand.Forexample,onesiteoperatingat100%capacitywasundersizedduetoanunderestimateofcustomers,whilethesitewiththelowestcapacityutilisationisyettobefullyoperational.

2.2.3 Future Project PipelineThe eight minigrid developers interviewed forthis report expressedplans tobeginworkonanadditional 200 minigrid projects by the end of2018.SomeoftheseprojectswouldparticipateinREA and development partner programmes, butmanyareexpectedtobeindependentlyfinanced.Based on current project statistics, these 200projectswould yield approximately an additional10MWinstalledcapacitythroughoutNigeriaand,atcurrentcostsforminigriddevelopment,wouldrequireaN10billion (US$28million) investment.Through these projects, many developersare broadening the geographic focus of theirwork—those retaining a regional focus plan toextend operations to nearby states, while somedevelopers will operate projects across severalregionsofNigeria.

Metric Range MedianTariff N120–N300/kWh

(US$0.34–0.86/kWh)N200/kWh(US$0.578/kWh)

Systemsize 16–100kW 45kWCapitalexpenditure N30–N100million

(US$90,000–$300,000) N50million(US$140,000)

Operatingexpenditure(perannum) N300,000–N2.4million(US$900–$6,900)

N690,000(US$2,000)

Load 16–300kWh/day 218kWh/day

Capacityutilisation 2%–100% 19%Collections 98%–100% 99%

Table 2.Costandcollectionsforauditedminigridprojects

Capacity utilisation as reported by minigrid developers is shown here—assumed to be calculated as peak demand/system capacity. A capacity utilisation rate was not included for one project that is currently in the commissioning stage and not fully operational. In all projects audited, collections were conducted through a pay-as-you-go model.

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The interest in rapid minigrid deploymentdemonstrates high confidence in effectivebusinessmodelsandtheabilityto identifyviableoff-gridsiteswithdemandforminigridsolutions.

2.3 Minigrid Success Factors and Best PracticesAnalysis of minigrid audits and developerinterviews indicates that the success of today’sminigrid projects depends on many factors,the majority of which are within the locus ofdeveloper influence. Factors for success includesite selection, community engagement, demandstimulation, ownership, and regulatory support.Based on these factors, developers are alreadyimplementing best practices to lower costs,improve customer satisfaction, and achieveeconomic viability in new projects. This sectionexplores the featuresof successfulprojectsandtheemergingbestpracticesassociatedwiththem.

Selection of economically viable sites is a keyfactor to project success. During site selection,developers use demand surveys and customerenumeration to assess local economic activityand ability and willingness to pay for electricity.Siteswithhigh levelsofcommercialactivityandcustomer willingness to pay maximise systemrevenue, while sites clustered near each otherminimise the cost of ongoing operations andmaintenance. Proper site selection results inminigrids sited in communities with high abilityandwillingnesstopay,ahighratioofcommercialtoresidentialcustomers,andminimalconcernsofsafetyorpoliticalvolatility.Othersitesunsuitableforaminigridaretypicallybetterservedbylower-cost grid extension, grid repairs, or stand-alonesolarhomesystems.

Emerging best practice: Developersplantolocatenew sites in more densely populated areas,whichprovidesufficientcommercialactivityforoptimisedcapacityutilisation.Manydevelopersalso plan to geographically cluster isolated minigrid sitestobenefitfromeconomiesofscaleandreduceoperationalexpensesbydecreasinglabour and time associated with systemmaintenance.Finally,developersarecontinuingtohone demand assessment accuracythroughmorecomprehensivesitesurveysandimprovedforecastingmethodologies.

Community involvement during site development ensures local buy-in and the sustainability of aminigrid system. A common strategy for thisengagement includes sensitisation of the localcommunitytotheideaofasolarminigridsystemthroughtownhallmeetingsandengagementwith

leaders, includinglocalelders,youthleaders,andgovernmentofficials.Additionally,developerswhocontractwiththecommunitytoofftakeelectricityat an agreed-upon tariff set clear expectationsfor the minigrid business model and revenuegeneration,andseegreatercustomersatisfactionandwillingnesstopay.

Emerging best practice:Developerswhospend time engaging with the local communityaheadof project commissioning experience bettersuccess with long-term system financialsustainability.Communitiesthatareinvestedintheprojectaremorelikelytorecognisethevalueoftheminigrid,increasingbothitsphysicalandfinancialsecurity.

Ongoing community engagement, orcontinuousinteractionoftheminigridoperatorwiththehostcommunity,isimportantforpreservingcustomerinterest, collecting feedback, maintainingsatisfaction, and quickly identifying operationalproblems.Strategiesforcommunityengagementinclude appliance financing programmesand ongoing engagement with youth andcommunity leaders across gender lines. Amongprojects audited, those exhibiting greaterdeveloper engagement with the communityalso demonstrated higher levels of customersatisfactionandwillingnesstopay.

Emerging best practice: An increasing numberof developers continuously engage host communities tomaintain a strong relationshipandaddresscustomerconcernsastheyemerge.Bestpracticesduringprojectoperation includefrequent site visits, siting local representativeswithin the community, and ongoing activitiessuch as energy efficiency or appliancefinancingprogrammes.Continuouscommunityengagementimprovesacquisitionandretentionofcustomers,maintainswillingness topay forpower,andensurestheeconomicviabilityoftheminigrid.

Demand stimulation and appliance financing provide opportunities to balance the load profileofminigridsystems,increasecapacityutilisation,and minimise the cost of electricity generation.Since the availability of commercial load isespecially vital to minigrid profitability, somedevelopers offer targeted financing of energyefficientequipment,suchasmillingmachines,tocommercial customers (seeBOX 2). Successfulprojects improve capacity utilisation throughapplianceandequipmentfinancingprogrammesandcommunityengagementonenergyefficiencyandproductiveuses.

17

Figure 5.Anoperator-financed,electric-poweredmillingmachine(Source:NayoTechnologiesLtd)

BOX 2Appliancefinancingprogrammeshavebeenaneffectivemechanismtobalanceloadbyincreasingdaytimeenergydemandandenergyefficiency.InNorthernNigeria,aminigridoperatorprocuredandfinancedanelectric-poweredmillingmachineshowninFigure 5.Themillingmachineisofferedtoagro-processingbusinessesinthecom-munityonalease-to-ownfinancingmodel.Thisfinancingschemehelpstheminigridoperatortooptimisedaytimeload,electricitydemand,andcapacityutilisation.

Emerging best practice: More developers arebeginningtoimplementself-financedappliance and equipment financing programmes,particularly for commercial users. Developershavealsofoundthatworkshopseducatingusersonthebenefitsofenergy efficient appliancesareeffectiveatbalancingcommunity loadprofiles,and these workshops are being held in morehostcommunities.

Developer ownership increases projectsustainability through increaseddeveloperbuy-inandaccountability.Theowner-operatormodel, in

which the same company is responsible for thedevelopment, operation, and maintenance of aminigrid system, has proven successful inmostauditedcommercialprojects.Further,developerswho implement finance structures with higherdebt and equity relative to grants are moreproactiveindevelopingstrategiesforcommercialsustainability. Comparatively, projects that arelargelyfundedthroughgrants(withminimaldebtor equity) are less likely to achieve commercialsuccessduetothedecreasedfinancialexposure.

18

Emerging best practice: Developers are usinginnovative financing techniques and alternative ownership models to implement the owner-operatormodeldespitefinanceconstraintsintheyoungminigridmarket.Forinstance,developersareembracingasplitassetmodelforfinancingnear-term projects, with developers owningthe generation asset while the government ora third party owns the distribution asset. Thislowersinstallationandhardwarecoststocreatecommerciallyviablesystemswhilemaintainingdeveloper ownership. Other developers areseekingoutnovelmethodsoffinancing,suchascrowdfunding, to generate sufficient debt andequity for commercial projectswithout relyingongrantfunding.

Regulatory certainty for minigrid projects,whileexternal todeveloper influence, isvital toprojectsuccess.Nigeria’ssupportiveMiniGridRegulationpromotes commercial development of minigridprojects.Thisregulationhasparticularlyincreased

theease ofimplementingprojectsbelow100kWcapacity,anddevelopersareconfidentlyplanningproject pipelines in rural areas in Nigeria. Theregulation also protects the right to set cost-reflective tariffs, supporting project financialviability.

Emerging best practice: Nigeria’s supportive and market-oriented minigrid regulation offersmore freedomandsupport todevelopers thansimilar policies in other countries. As a result,developers are finding that rural Nigeria is anaccessible and profitable minigrid market, asdemonstratedbytherecentinfluxofdevelopersfromIndia,EastAfrica,andelsewhere.Despitesome concerns that distribution companiesmay challenge existing policies, this level ofregulatory certainty is critical to long-termsustainabilityandinvestment,assuddenshiftsinpolicycanderailayoungmarketandincreaseperceivedinvestmentrisk.

19

MinigriddevelopmentinNigeria isenabledbyanactiveeconomycoupledwithpolicyandregulatorysupport.Thispolicyenvironment iscritical,giventhatthemarketforminigridsremainsyoungandinvestment has been restrained. Relevant policysupporting off-grid and rural electrification canbe tracedbackoveradecade,but recently therehasbeenanincreaseinsupportivepolicies,plans,and regulations. New policy development hassuccessfullyenabledthedevelopmentofsitestodateandlaidthegroundworkfornewinvestment.Forexample, regulationofminigrids inNigeria ismore supportive ofmarket development than inmost developing countries,where such policy iseitherlessadvancedornon-existent.AsdiscussedinSection3.2.1,theNigerianElectricityRegulatoryCommission (NERC)Mini Grid Regulation offersanexplicitframeworkforminigriddevelopmentinNigeriaandprovidesamechanismfordevelopersto more easily recover investments, enablesdevelopment of underserved communities, andgenerally allows developers to access morecommerciallyviablesites.Whileexistingpolicyhassuccessfully enabled initialmarket development,with more to come, several key opportunitiesremaintoensurethattheindustrycancontinuetoscaleinthecomingyears.

3.1 Off-grid Energy Policy in Nigeria The Federal Government of Nigeria (FGN)is committed to enacting and implementingsupportivepoliciesthatencourageprivatesectorinvestments and development of the electricitymarket.This sectionprovidesanassessmentofexistingpowersectorpoliciesandimplementationplans—encoded in legislation—that support thegrowthofoff-gridandruralelectrification.

Theminigridand rural electrificationpoliciesarenested within the broader national policies onpower and the renewable energy subsector.TheElectricPowerSectorReformAct(EPSRA,2005)empowerstheFederalMinistryofPower,WorksandHousing(FMPW&H)withtheoverallresponsibilityfor formulating electric power policies,while theRural Electrification Agency (REA) is responsiblefor thecoordinationand implementationof rural

electrification strategies and activities (underthe supervision of the FMPW&H). The NigerianElectricity Regulatory Commission (NERC)independently regulates the entire power sectorincludingoff-griddevelopment.Table 3describes,inachronologicalorder, eachpolicy’s impactonoff-gridruralelectrification.

Two early policies provide the underpinning formuchoftherecentpolicyandregulatorysupportof off-grid electrification. The National ElectricPower Policy (NEPP), 200111 and the ElectricPowerSectorReformAct(EPSRA),2005providefortheunbundling,privatisation,anddevelopmentof Nigeria’s electricity market. The NEPP isencoded in legislation through the EPSRA, andwiththeEPSRA,theNigerianpowersectorreformachieved institutionalisation and secured thereformsfromnormalpoliticalturbulencetoalargeextent.Sincethe‘unbundling’ofthepowersectorin2013,Nigeriahastransitionedfromaverticallyintegrated, publicly owned electricity network toan essentially privately owned and unbundledelectricity network, except for the TransmissionCompanyofNigeriathatisownedbytheFGN.

For the off-grid electricity market, Section 4.4.2of the NEPP states that “the clear separationof business activities between generation,transmission, distribution, and sales (marketing)would not apply to off-grid systems.They couldcontinue as vertically integrated systems andwithout any imposed separation of functionsor cross-ownership restrictions.” The EPSRAexcludes all integrated power systems below 1MWfromNERCregulation—but isgovernedbytheMiniGridRegulation.

3.2 Regulatory and Economic Incentives for Off-grid InvestmentsThe FGN has outlined its commitment andapproach to rural electrification in a numberof official policies and plans, including but notlimitedtotheNEPP(2001),theESPRA(2005),theNREEEP(2015),theRESIP(2016),NERCMiniGridRegulation(2017),andthePSRP(2017).

Chapter3:Minigrid Policy Environment

20

2001

2005

2015

2016

2017

2017

2017

Prov

ides

for t

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and

priv

atis

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EEP)

Coor

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impl

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ts N

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rura

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polic

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targ

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IP)

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igrid

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proj

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sele

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und

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EF

Out

lines

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delin

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EFO

G)

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ff-g

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rifica

tion

Tabl

e 3.Tim

elineofkeypoliciesan

dtheir

impa

ctonoff-g

ridelectrifi

catio

n

21

Thesepolicyframeworks,amongotherregulationsand plans, are expected to increase access toinclusive, modern, and clean energy services,improve energy security and climate objectives,andcontributetodiversifyingNigeria’senergymixawayfromfossilfuels.TheRESIPwasdevelopedbased on these documents and was approvedby the FGN in 2016 to pursue the government’sambitioustargets,whicharetoincreaseaccesstoelectricityto75%and90%(bothruralandurban)by2020and2030respectively,withatleast10%renewableenergy by 2025.12 The policy documentsmentionedabovecontain a numberof regulatory andeconomicincentives,whicharediscussedinthissection.

These incentives were designed to promoteprivate sector participation in the sector byattractinglocalandforeigninvestment,increasingaccess toconcessionaryfinance, reducingcostsfor project development, enforcing contracts,limiting exposure to foreign exchange volatilitythroughlocalsourcingofcomponents,eliminatingimport duty/tax, and fast-tracking customsclearance. Each incentive and its relevance tominigriddevelopmentisdiscussedindetailbelow,organizedbyimplementingbody.

3.2.1 Federal Ministry of Power, Works and Housing: National Renewable Energy and Energy Efficiency Policy, 2015Section2.6.2oftheNREEEPaspiresto“drivethecreationofmarketincentivesforthedeploymentofefficientprivate-sectordrivenrenewableelectricitysolutions,forremoteandoff-gridareas.”Sections2.7.3–2.7.5 provide for the participation of localand foreign banks, international donors andNGOs, and indigenous companies/communitiestodeployrenewablepowersupply toruralareas,while the FGN provides the framework for itsimplementation.13 Under the supervision of theFMPW&H;theREA iscurrently implementingtheRuralElectrificationStrategyandImplementationPlan, supporting development under the NERCMini Grid Regulations, and coordinating otherregionalandinternationalenergysectorinitiatives,such as the ECOWAS Renewable Energy andEnergyEfficiency(ECREEE)electrificationtargets,the United Nation Sustainable Energy for All(SE4All) initiative, to increaseenergyaccessandpromoteprivatesectorinvestmentsinNigeria.

3.2.2 Rural Electrification Agency: Rural Electrification Strategy and Implementation Plan, 2016Rural Electrification Fund Operational Guidelines, 2017The RESIP is focused on developing a centrally

coordinated,demand-driven,andmarket-orientedapproach to rural electrification, and it targets aleast-cost electrification pathway by providingfor a national, sector-wide roadmap. The RuralElectrification Fund (REF), administered by theRuralElectrificationAgency(REA),providescapitalgrants for up to 75% of project costs, includingtechnicalsupporttoruralelectrification.14

The REA provides one-off capital subsidiesand technical assistance to project developersin order to promote fast and cost-effectiveexpansionof electricity access in unserved ruralareas across the different geo-political zones ofNigeria. The objective is to increase access tofinanceinordertoachievemoreequitableaccessto electricity, stimulate innovative approaches torural electrification, and improve the living andsocio-economicconditionsof ruraldwellers.TheREF Operational Guidelines, 2017 is a workingdocumentthatdetailsthesourcesandallocationofREFresources,investors’eligibilitycriteriaandqualifiedprojectsunderREF,andthegrantawardprocess, including monitoring, verification andevaluationofprojects.15

3.2.3 Nigerian Electricity Regulatory Commission: Mini Grid Regulation, 2017TheNERCMiniGridRegulation,2017,governsthedevelopment and operation of electricity supplysystemsofunder1MW,eitherinisolationfromorinterconnectedtoDisConetworkinfrastructure.16 This regulation seeks to incentivise and simplifytheprocessforprivatesectorparticipationintheminigrid sector, which will in turn contribute toincreased access to electricity in unserved andunderservedparts ofNigeria.17 It provides for acompensationmechanismtoprotecttherightsofminigridpermitholdersfromearlyencroachmentof the central grid, defines a multi-year tarifforder (MYTO)methodology for calculating cost-reflective tariff (for permitted systems), andincludesstandardisedcontracttemplates,forms,andguidelines topromoteuniformityacross thesector.

3.2.4 Nigerian Investment Promotion Commission: Compendium of Investment Incentives in Nigeria, 2017Companies Income Tax Act, 1990Theincentivesforthepowersectorfallundertwocategories: tax-based incentivessuchascredits,exemptions, allowances, breaks/holidays, ordrawbacks and tariff-based incentives based onthe fiscal policy for electricity supply. The levelof implementationof these incentives isdefined

22

inAppendix 4. The Compendium of InvestmentIncentives in Nigeria (CIIN) is a compilation offiscal incentives inNigerian tax lawsandsector-wide fiscal concessions approved by the FGNandsupportedbylegalinstruments.18Inaddition,the Rural Investment Allowance was created bySection 34 of the Companies Income Tax Act(CITA),whichstatesthat“whereacompanyincursexpenditureontheprovisionof facilitiessuchaselectricityetal(withnoexistingelectricityfacilitiesatall),forthepurposeofatradeorbusiness,suchacompanyshallenjoyanadditionalallowanceof50%undertheSecondScheduleofCITA.”19

TheNigerianInvestmentPromotionCommission(NIPC) houses a “OneStop InvestmentCentre”20 —an investment facilitation mechanism where27 government agencies are brought together,coordinated, and streamlined to provide efficientandtransparentservicestoinvestors.TheCentreprovides statistical data and information on theNigerian economy, investment climate, legaland regulatory framework, and other sectorand industry specific information to aid existingand prospective investors in making informedbusinessdecisions.21

3.3 Policy Effectiveness and ImpactPursuanttoSection(s)1.6and5.4ofNREEEP,theFGNiscommittedtoaseamlessimplementationof the incentives discussed in this report.Policies that are clear, inclusive, and effectivelycommunicated to all stakeholders play afundamental role in scaling-up investments intominigriddevelopment.Measuringandevaluatingthe effectiveness of policies over the short-,medium-, and long-term will further improvethe enactment of supportive policies that boostconfidence in the sector. Appendix 4 assessesthecurrent level of implementationof thepolicyincentivesinthesector.

The NERC Mini Grid Regulation promotescost-reflective tariffs and a fast-track processfor obtaining permits and creates a uniqueopportunity for interconnected systems. Powersystems under 100 kW do not require a permit,whilethepermittingprocessforsystemsbetween100 kW and 1 MW is abbreviated from themandatorylicenseforlargepowerprojects.22Thisdifferentiationfacilitatesinvestmentandimprovesrural electricity access. The regulation de-risksoff-grid investments by clarifying the financialandoperationaltermsforisolatedminigridsintheevent of grid entry, in addition to providing for a12-month (extendable) exclusivity period duringwhichaminigriddevelopercandevelopaproject,therebyeasinginvestorconcernsofunanticipated

competition.

The RESIP (2016) pursues the FGN’s ruralelectrificationtargetbypromotinginvestmentsinelectrificationprojects.Public-privatepartnershipsare encouraged, whereby the private sector andcommunity-based organisations are increasinglyresponsible for the service delivery, with limitedfinancialsupportfromthegovernment.TheRuralElectrificationFund is used topromote, support,and provide equitable distribution of electricityaccess by providing capital subsidies (grants)and technical assistance to supplement privatefunding. The REA acknowledges that minigridsolutions (with either fossil fuel or renewableresource-powered generation technology) maybecomethequickestapproachtoprovidingruralelectricitytospursocio-economicdevelopment.23

3.3.1. Achievements in the Off-grid Sector In 2017, the Board and Executive ManagementoftheREAsecuredUS$86million(N30.2billion)under the 2016/2017 Capital Budget Provision.Since that provision, the REA has successfullycontracted a total of 386 rural electrificationprojects across the six geopolitical zones, with329projectsfullycompletedand57stillongoing.Furthermore, 28 projects have been contractedunder the Zonal Intervention Projects. The rateofcompletionandperformanceoftheseprojectsis highly commendable, with solar (minigrids,street-lighting and standalone solar systems)contributing 107 projects (achieving 100%completion rate), and others--grid extension andinjection substation projects--contributing 309projects (with 81% completion). A total numberof 4,830 skilled and unskilled jobs were createdduringthecontractimplementationphase.24

TheREAsecuredaUS$350million(N123billion)loanfromtheWorldBanktosupporttheNigerianElectrification Project (NEP). The NEP aims toprovide a pipeline of potential local investmentsand financial incentives to catalyse theNigerianoff-gridmarket through the provision of detailedmarket data, grant funding, and technicalassistance. It is expected that US$150 million(N53 billion) of the total amount earmarked forNEP will be dedicated to the development ofminigridsystemsacrossthecountry.Thisfundingis intended to support the electrification of300,000householdsand30,000localenterprisesandinstitutionsacrossNigeriawithinthenextfiveyears (2018–2023).25 Additionally, in 2018, theRural Electrification Fund (REF) is implementingaseparateUS$6million(N2billion)capitalgrantschemeforoff-gridprojects.

23

Development partners and investors such as AllOncontinuetoofferfinancialsupportintheformofworkingcapital, equity,quasi-equity,debt, andtactical grant investments to new and existingenergysolutionproviderstohelpgrowandachievescale. Nigeria’s Bank of Industry (BoI) providesconcessionaryfinanceforthedeploymentofsolarPVinstallationsacrossthecountry.Inpartnershipwith General Electric, U.S African DevelopmentFoundation (USADF), and others, Power Africahas awarded nine US$100,000 (a total of N275million)grantstoentrepreneursforinnovative,off-gridenergyprojectsinNigeria.Inaddition,USADFandAllOnhaveanagreementtoprovideblendedfinance to off-grid energy companies, includingminigriddevelopers,through2020.

TheNigerianEnergySupportProgramme(NESP),implemented by GIZ , completed its first phasefrom 2013–2017 with development of six off-grid solar minigrids in five partner states, incollaborationwith local private companiesusinga Public-Private Partnership (PPP) and split-asset model. Through this model, the privatesectorcovered50%oftheproject’scapitalcostswith its own equity and project finance. The sixminigrid projects are currently operational andare expected to provide 10,000 individuals withreliableaccesstoelectricity.26 During itssecondphase (2018–2020), NESP will further supportthe implementation and enforcement of aninvestor-friendlyminigrid framework.The goal isto deploy, through local partners, large off-gridsolar minigrids that provide electricity servicesto100,000peopleandatleast400businessesinruralNigeria.27

Programmes like NESP have been particularlyinstrumental in establishing capacity buildingandbusinessdevelopment services to thecleanenergysectorinNigeria,throughmorethantwentytraining institutions. NESP recently developedsevencleanenergycertificationsincludingtrainingcurriculum, provision of training materials, andfacultystrengthening.vi

3.3.2. Barriers to Policy Implementation Stakeholders have identified the overlappingmandates and a lack of interrelations betweenthevariousMDAsasabarrier,especiallybecausethe minigrid sector is regulated both withinthe renewable energy industry and broaderpower sector. This overlap has led to a lack of

vi Nigerian Energy Support Programme. “Rapid Assessment of the Magnitude of Clean Energy Training Potential in Nigeria.” 2017.

effective coordination and implementation ofNigeria’s policy and institutional framework. Themyriad policies on renewable energy need to beconsolidatedandclearlycommunicatedinordertoaddresstheconfusioninthesector.Theelectricityindustryneedstofurtherdevelopthecapabilitiestorealisevalueanddriveinnovationacrosseverypointofthevaluechain.

TheFederalMinistryofFinancehasnotaligneditselfwith public and private sector actors to facilitatetax breaks and expedite customs processes. Thiscollaborationwould increase the speed and lowerthecostofminigriddeploymentand is relevant tothefinancialsectorthroughtheroleofelectrificationin reviving local economies and increasing taxrevenues from the real economy. Expeditedprocesses can be realised by eliminatingVATandtariffsonsolarproducts.ExperiencesinKenyaandelsewhereshowthattheeliminationofVAT,importduties,andtariffssignificantlybooststhegrowthoftherenewableenergymarket.ImplementingthezeropercentCorporateIncomeTaxforoff‐gridoperationsofrenewableenergycompanieswillhaveasizeableimpact. In this regard, there needs to be furtherclarificationonthepractical implementationof the‘ZeroDuty’regulationcontainedintheNREEEPandthe NIPC—Compendium of Investment Incentiveswithregardstoallcomponentsofrenewableenergyinstallations.

The innovative finance instruments currentlyavailable in the market are still difficult fordevelopers to access. Available finance oftencomes with long-lead times, and standardisedfinancingtemplatesarenotavailable; inaddition,many minigrid developers have had challengescompilingbankabledocumentationfor investors.Stakeholders must work together to designinvestmenttemplatestoattracthigh-qualitysolarcompaniestoinvestinoff-gridprojects.Thiscanbe achieved by collaborating with the Bankers’Committee and Banks’ Sustainability Group toagree on specific guidelines for commercialbanks for assessing loan applications, includingdefinitionofrenewableenergy-specificcollateralsfor adoption by the entire banking communityfollowingtheEaseofDoingBusinessRegulations.The Nigerian Renewable Energy Roundtable(NiRER)comprisingof relevantstakeholderscanserveasaplatformtofacilitatethis joint task, inadditiontoaddressingotherindustry-wideissues.

24

Todate,theFGNhasenabledminigriddevelopmentthrough supportive policy and regulation. Thepolicy framework is rapidly maturing and, inconjunction with ongoing training and capacitybuildingbydevelopmentpartners,haspromptedthe private sector to increasingly invest inminigriddevelopment.Atthesametime,asinanynascentindustry,earlyprojectshaveencounteredchallenges. To address these challenges, thischapter offers potential solutions to unlock theminigridinvestmentopportunityinNigeria.

The perspectives expressed herewere collectedfrom a broad set of stakeholders, includingthose from financial institutions, industryexperts, policymakers, and developers. Datawere collected through personal interviews,workshop-styleevents,andminigridsiteaudits.AstakeholderroundtablehostedbyNiRERcollectedfeedbackfrom170participants,identifiedfortheirinvolvement in at least one component of theminigridvaluechain.Thisroundtablefocusedonrenewableandoff-gridenergy inNigeria,withanemphasisoneconomicandpolicysupportofthesector.

Figure 6summarisestheopportunitieshighlightedby stakeholders as key to accelerating minigridmarketgrowthandremovingbarrierstoexpansion.Thesectionsthatfollowreviewtheseopportunitiesindetailateachstepof theminigridvaluechainand provide a summary of the challenges andactionable opportunities to address it. Chapter 5 further expands on these opportunities byidentifying the specific stakeholders who canimplementrecommendations.

vii. REA’s energy database provides information such as population, load profiles, energy resources, schools, and available grid infrastructure allowing developers evaluate potential off-grid sites. http://rea.gov.ng/energydatabase/

4.1 Opportunities for Growth During Project Development

(i) Site Identification and AssessmentIncrease data availability to improve demandassessment accuracy through industryassociationsandaplatformfordatasharing.

Challenge: Limited data availability for demand assessment can prevent developersfrom efficiently and accurately evaluatinglocal economic activity, energy demand,consumption trends, and customer paymentbehaviour. Inaccurate customer enumeration,poor load growth prediction, and inadequatecustomer engagement can result in poorcapacity utilisation and higher costs (excesssystem capacity supported by insufficientload). In addition, lack of customer paymenthistory data can lead to reduced revenue ifcustomers are not actually able to affordtariffs.

Opportunity: Industry associations and a platform for data sharingamongstakeholderscan allow more accurate load assessmentand better site selection. Increased dataavailability will allow developers to betterunderstand customer loads and predict up-front customer acquisition. Although existingenergy databases, such as that created byREAandFMPWH,vii enablemoredetailed siteassessments,theydonotprovideamechanismfordevelopersandotherstakeholderstoshareinformation. An industry association or newdata-sharing platform could improve dataaccess to allow more comprehensive siteassessments.

Chapter4:Opportunities for Growing the Nigeria Minigrid Market

2525

PHASE 1Project

Development

PHASE 2Construction

PHASE 3Operation

OPPORTUNITIES FOR SCALING THEMINIGRID MARKET

INCREASE DATA AVAILABILITY through development of industry associations and a data sharing platform

REDUCE ESIA COSTSby streamlining the process for minigrids where appropriate and providing ringfenced support to fund ESIA processing

INCREASE CONFIDENCE IN DISTRIBUTION COMPANY (DISCO) TRANSPARENCYby improving enforcement of 5-year DisCo extension plans and guaranteeing asset purchase upon DisCo expansion

ELIMINATE IMPORT BARRIERS by exempting minigrid components from duties and addressing customs delays

INCREASE AFFORDABLE PROJ-ECT FINANCEby creating a minigrid finance consortium, providing concessional and other appropriate financing instruments, conducting investment trainings, and increasing the limit for minigrid system size

REDUCE HARDWARE COSTS through a business consortium to increase buying power, employing split asset business models, and utilizing existing unelectrified grid extension projects

BYPASS MOBILE LIMITATIONS in network service and payment platforms by expanding payment options

INCREASE CAPACITY UTILISATION through demand stimulation programmes, energy efficiency measures, and modular system designs

Figure 6.Opportunitiesacrosstheminigridvaluechain

26

Increase confidence in distribution company (DisCo) transparency by improving enforcementof5-yearDisCoextensionplansandguaranteeingassetpurchaseuponDisCoexpansion.

Challenge: Low confidence in distribution company transparency lowers investor anddeveloper confidence in isolated minigridslocatednearthegridedge.Uncertaintyaroundgrid expansion limits the ability to developoptimalsites;mostdevelopersselectlocationsfarawayfromthegridtoreducethechancesofgridinterconnection,butthesecommunitiesare often characterised by lower electricitydemand.

Opportunity: Improved regulatory enforcement canincreaseconfidenceinthefinancialsecurityof projects against grid expansion. Today,distributioncompaniesareexpectedtocreate5-year expansion plans to inform developersiteselection.Distributioncompaniesarealsopermitted to purchase minigrid assets uponexpansion, butmust compensate developersfor minigrid assets acquired. By enforcingthe creation of 5-year plans and increasingclarityontheprocessofpaymentforminigridassettakeoverupongridextension,NERCcanincreaseconfidenceinminigriddeployment.

(ii) Design and PlanningIncrease affordable project finance by creatinga minigrid finance consortium, providingconcessional and other appropriate financinginstruments,and increasingthe limitforminigridsystemsize.

Challenge:Limited project financing and high commercial interest ratesmake itdifficult forcompanies to enter theminigridmarket, andmost minigrid developers in Nigeria todayhave expressed difficulties procuring finance.Manydevelopersstruggletopresentbankableprojects that attract investors. Commercialprojects are often delayed by over a year toacquire sufficient debt and equity, which isavailablefrommostlocalfinancinginstitutionsat rates of 20% or higher. More affordablecapital, such as that available from investorslike the Nigerian Bank of Industry (BOI), AllOn, and ElectriFi, can be complicated forsome developers to access due to fundingrestrictions or documentation requirements.Difficulty accessing concessional financinglimitsmanysmallercompaniestohigher-costdebt, in some cases preventing them fromenteringthemarket.

Opportunity 1: Developers and developmentpartnersrecommendaglobal minigrid finance consortium to support funding throughoutthe project lifecycle. This group of financeexpertscanalsoprovideguidancetominigriddevelopers on creating accounting andmanagement best practices to better attractnewequityinvestment.

Opportunity 2: Investment and developmentpartners can provide appropriate financing instruments and payment guarantee schemes to support minigrid projects and investment trainings to developers. Development financeinstitutions (DFIs) should provide projectdeveloperswithfinancinginstruments(patientequity and debt, grants, and concessionalfinance)ataffordablerates.Financingprojectsin the local currency is especially importantfor early stage companies in the Nigerianmarket. These financing instruments couldinclude currency hedging services to de-risk investments in addition to traditionalloans. Additionally, development partnerscan increase funding availability by providingpartial grants and operational subsidies todevelopers to lower the cost of debt andpromote efficient long-term operation of theminigrid. Investment trainingshave impact inhelping developers access finance; the REAandDFIsshouldcontinuetoconducttheseforlocalinvestorsandbanksonhowtoassesstheviabilityofminigridsystemfinancing.

Opportunity 3: NERC should consider increasing the 1 MW limitforminigridsystemspermittedunder the regulations. Internationalfinanciers have pointed out the benefits oflarger systems, which aremore efficient anddemonstrate investment needs more in linewith existing financing options. Therefore,NERCcouldstudytheprevalenceandnecessityof systems larger than 1 MW capacity andadjusttheregulationaccordingly.

Reduce environmental and social impact assessment (ESIA) costs by streamliningthe assessment process for minigrids whereappropriate.

Challenge: The prohibitive cost of ESIAs hasdiscouraged developers from undertakingpermittedminigridprojects(i.e.,projectslargerthan 100 kW). ESIAs are required for thesesystems,butcantakeuptoayeartocomplete.Developers and policymakers noted that theexpense and time demands of ESIAs havehinderedtherapidscalingofminigridsystemsinNigeria.

27

Opportunity 1:NERCcanworkwithdevelopersto create a streamlined ESIA requirement for minigrid projects. While recognizing theclear importance of impact assessments,proponents of rural electrification requestedan affordable, efficient, and enforceableESIA process to speed up minigrid projectimplementation. Reducing the time andexpense of this process would increase theinstallation of systems greater than 100 kW.Lessonscanbelearnedfromthecleardefinitionof the environmental impact assessmentsprocess available on the Tanzanian Mini-grids Information Portal,28 which is reportedto lower costs and ease logistical barriers ofdeployment.

Opportunity 2: Development partners couldofferaring-fencedsupportelementtofund the ESIA processfordevelopers.Loweringthecostof ESIAs to developers could hasten projectdevelopmentwhilealessprohibitivetimeandcostmodelisdeveloped.

4.2 Opportunities for Growth During ConstructionReduce hardware costs through a businessconsortiumto increasebuyingpower,employingsplitassetbusinessmodels,andutilizingexistingunelectrifiedgridextensionprojects.

Challenge: High hardware costsincurredduringprocurement and system installation amplifydeveloper challenges in accessing capital.Developers pass these high up-front coststo the end-user when the minigrid becomesoperational.

Opportunity 1: A consortium of minigrid developers, hardware suppliers, and service providers can work to lower hardware coststhrough scaling and collaboration. A strongindustry association and supplier networkacrossthevaluechaincantapindustryexpertiseto achieve standardisation, modularity, andbulkpurchasingofminigridsystems.Standard,modular minigrid systems would reduceengineering time by a third and installationcostsby80%,whilebulkpurchasingcansavean additional 15% on capital expenditures.In total, standard, modular, containerisedsystemswillreducethetotalcostofservicebyupto20%.29

Opportunity 2: The split asset model implementedinseveralexistingprojectslowersminigridcapitalcostsbydividingtheownershipof generation and distribution assets. This

model has been successful in several EastAfrican countries, where the governmentowns thedistribution network. InNigeria, theimplementationofstateornationalownershipof distribution assets would lower developercapitalcostandspreadtheinvestmentrisk.

Opportunity 3: The rehabilitation of existing and dilapidated grid extension projects can allow minigrids to be implemented inunderserved areas with lower distributioncosts. Existing infrastructure projects can becededtominigridoperatorsbytheREAorlocalgovernment agencies, which often installeddistributionthatwasneverelectrified.

Eliminate import barriers by exemptingminigridcomponents from duties and streamliningcustomsprocessestoavoiddelays.

Challenge: Import duties and customs delays increase the cost and time required toconstructminigrid systems.Most developersexperienced unexpected port delays andimport duties. While the Nigerian CustomsServicehasclearguidelineson importdutiesfor different categories of products, theyhave been inconsistently implemented andare subject to sudden change, impacting theeffectivecostofhardwarecomponents.

Opportunity: Tax and duty exemptions onminigridcomponentscan lowerup-frontcostfor developers. Consistent enforcement ofsuchexemptionswouldenablemoreaccuratepricing of minigrid systems and increaseinvestor confidence. Port operations shouldalso allow speedy and reliable processing of energy system components, which wouldlower the cost of delays and unexpectedholdingfees.

4.3 Opportunities for Growth During Operation(i) Metering, Billing, and CollectionsBypass mobile limitations innetworkserviceandpayment platforms by using vouchers, scratchcards,andmobilemoneytop-up.

Challenge: Limited mobile network service and the absence of mobile payment platforms decreasescollectionsuccess.Withoutmobilepaymentoptions, operators relyoncollectionagentsandimperfectvoucherorscratchcardmethods of prepayment, and cannot employremotemonitoringtechnologies.

28

Less reliable methods of payment andcollections can reduce revenue; for instance,one developer relayed a concern that localsalesagentsoftenranoutofvouchersontheweekend, limiting the ease of prepayment,therebydecreasingsales.

Opportunity: Expanding payment options by allowing customers to choose betweenvouchers, scratch cards, ormobilemoney totop-uptheiraccountscanminimisecollectionschallenges. The Nigerian CommunicationsCommission and theCentral Bank ofNigeriahave made concerted efforts to harmoniseregulationandengagethevariousstakeholdersin themobilemoney sector to allow amoreinclusiveapproach,enablingadditionalcapableplayers to participate. The Gates FoundationisalsoworkingwiththeNigeriangovernmentto increase digital payment options for low-income households.30 Once successful, thiswill enable mobile money solutions to beused for minigrid collections where networkcoverage exists. The convenience of mobilepayment platforms can improve customerengagement, increasing minigrid sales andoverallsystemviability.

(ii) System MaintenanceIncrease capacity utilisation through demandstimulation programmes, energy efficiencymeasures,andmodularsystemdesigns.

Challenge:Poor capacity utilisation increasesoperating costs, and is common in ruralcommunities that lack daytime commercial

electricityconsumption.Loadprofilesintheseareasoftenpeakintheeveningfromhouseholdelectricity use; this increases the cost ofelectricity by requiring expensive battery orgenerator components to complement thelow-costdaytimesolarresource.

Opportunity 1: Improved coordination of demand stimulation effortscanhelpminigridsaccess appliance financing programmesthat are already being implemented. Forinstance, state government and developmentpartner programmes intended to help ruralcommunities finance agricultural processingequipmentcanworktogetherwithdevelopersto complement new electricity systemswith productive use appliances in the samecommunity.

Opportunity 2: The development anddeploymentofstandardised modular minigrid systems can improve capacity utilisation, inadditiontoreducinghardwarecostasdescribedabove. Standardised system additions couldincreaseminigrid capacity through amodulecontaining additional PV panels, batterystorage,andotherhardware.Modularsystemcomponentswouldallowdevelopers tomoreeffectivelysizesystemsandupgradecapacityasenergydemand increases.SizingsystemsbasedoncurrentdemandwillincreasecapacityutilisationandsubsequentlylowertheLCOEofelectricityconsumed.

29

Minigrid projects inNigeria have gained tractionrecently because they provide an effectivesolution to rural electrification in a challengingenvironment.However,keychallengescontinuetolimit themarket.Support frompolicymakers, thebusinesscommunity,investors,anddevelopmentpartners is needed—in addition to continueddeveloper efforts—to achieve a market-drivenapproach to scaling within the sector. Thischapter discusses the recommendednext stepsfor each stakeholder group to address barriersto investmentandunlock theN2.8 trillion (US$8billion)annualrevenueopportunityforminigridsinNigeria.31

5.1 PolicymakersPolicymakers are vital to the minigrid scalingprocess,as theyare responsible formakingandenforcingregulationsthatenablemarketgrowth.Policymakers can take the following steps toaccelerateminigriddeploymentinNigeria:

1. Allow tax and duty exemptions and reduce import delays. Eliminating duties and fees onrenewableenergytechnologyimportswillreduceup-front cost for developers, lower tariffs forend-users, and increase productivity across theeconomy. Consistency in implementing suchexemptions will encourage investor confidence.FGNshouldreducecustomsdelays,whichfurtherincreaseup-frontcostsfordevelopersbyincurringadditionalstoragefees,extendingprojecttimeline,anduncertaintyandrisk.

2. Clarify current regulations and implement additional enabling policies. Current policiesaround the publication of distribution companyexpansionplansshouldbeclarifiedandenforcedto eliminate the uncertainty minigrid operatorscurrently face. Additional clarity can also helpdevelopers avoid costly litigation with DisCos.TheNERCregulationscanbeexpandedtoprotectminigridoperatorsifdistributioncompaniesdefault

onpaymentsaftertheminigridassettransfer.Theregulations can address larger systems to helpminigrid developers attract multinationals andforeign investors who are able to finance onlylargersystemswithgreaterexpectedreturns.

3. Increase state and local government involvement in off-grid projects, as well asincreasing coordination and collaboration withfederalenergyagencies(suchastheREA).Stateand local governments have key roles to play insupporting and enabling minigrid development.First, governments can lower the cost ofengagement by sensitizing communities aboutthepotentialroleofminigridprojectstoprovideasustainablesourceofenergy.Second,statescanprovide vital local knowledge on site suitability,assist with land acquisition, and provide aconnection to the local DisCo. Third, through asplit-asset model states could take on some ofthe risk ofminigrid development by investing indistribution assets. Finally, appliance-financingprogrammes should be coordinated with localminigriddevelopmenttoimproveapplianceusageandstimulateenergydemand. 4. Review the ESIA process required forminigrid permitting and consider opportunitiesto streamline the process. Technical assistanceor abbreviated requirements through regulatoryactioncoulddecreasetheinvestmentrequiredinESIA for minigrids. Alternately, the governmentcould provide resources to reduce the financialand temporal burden of the ESIA process forminigrids.

5.2 Business CommunityThebusinesscommunitycanplayacrucialroleinachievingcostreductionsthroughouttheminigridvalue chain, particularly during procurement,installation,andsystemmaintenance.Theprivatesectorcan take thestepsbelow to realise thesecostsavings:

Chapter5:Recommended Next Steps

30

1. Create a minigrid business community consortium. A consortium of industry expertswith an interest in participating in the minigridvalue chain, including manufacturers, hardwaresuppliers, vendors, and developers, can workcollaboratively to accomplish bulk procurementand lower overall minigrid costs. A businessconsortiumcouldpursuesystemstandardisationandready-to-installsystems,enablingcostsavingsthrough bulk purchasing, decreased design andinstallationcost,andtimesavings.

2. Design standardised, modular minigrid systems.Hardwaremanufacturerscanworkwithdevelopers to design modular minigrid systemsthat are adaptable to demand growth. Modularsystemswilldecreasetheneedfordeveloperstoinitiallyoversizesystems,loweringup-frontcostsandincreasingcapacityutilisation.

3.Improve telecom service reliability. Telecomcompaniescanworkwithdevelopers to improveservice reliability inminigridcommunities.Betterservicewillenableoperatorstoremotelymonitorplant operations and improve system efficiency.Additionally, if telecom companies are able todevelop telco-led business models that allowcustomer payment through mobile platforms,minigrid developers can partner with themto implement mobile payments for electricityservices.

5.3 Investors and Development PartnersThe unavailability of affordable project financingis a significant barrier to accelerating minigriddeploymentinNigeriatoday,andistheresultofbothrealandperceivedinvestmentrisksintheminigridsector. Investors and development partners canpursuethefollowingstepsto increaseaccesstofinanceandencourageminigridinvestments:

1. Support efforts to increase access to affordable finance.Today,localNigerianfinancialinstitutions are reluctant to invest in minigrids.Whentheydoinvest,theyoftenofferloansathighinterestratestomatchtheperceivedmarketriskof minigrid projects. However, developers needaccess to affordable debt as well as equity tobe able to scale-up their operations. More localinstitutionscouldofferaffordableinterestratesifthey receive technicalassistanceandon-lendingfocused on better understanding the true risksassociated with the Nigerian minigrid market,potentially with the support of developmentpartners.FacilitiesarenowavailablethroughDFI

support from Sterling Bank, Access Bank, andUnitedBank forAfrica (UBA),aswellas throughtheAfricanDevelopmentBank’sFacilityforEnergyInclusion (FEI) that minigrid developers will beable to tap for affordablefinancing. Localbankscan also reduce investment risks by providingcurrency-hedging services to offset foreignexchange risks. To encourage investment inminigrids, portfolio aggregation can reduce risk,toolscanbedevelopedtohelpfinanceinstitutionsunderstandtheriskofminigridprojects,andcreditenhancementscanhelpbackstoprisk.

2. Provide partial grants and operational subsidies. Development partners can supportmarket scaling by providing funding tosupplement developer debt and equity. Partialgrants and subsidies—for example, to facilitatea split asset model or connection subsidies—allowdevelopers to invest debt andequitywhilecreating bankable projects with affordable tariffstructures. Operational subsidies motivateoperatorstosupplyreliableelectricityandimprovesystem efficiency thereby fostering long-termsustainability. Similarly, full grants should bediscouraged,asdeveloperco-investmentofdebtand equity incentivises efficient operations andlong-termprojectsuccess.

3. Create a minigrid finance consortium. Investorsanddevelopmentpartnerscanadvanceinvestments by creating a finance consortiumin which different investors are responsible forfunding specific project stages in the minigridvaluechain.Aconsortiumcouldprovide fundingaccess to developers in the form of grants,subsidies, technical assistance, or concessionalloansthroughouttheprojectlifecycle.Additionally,thisconsortiumcanproviderecommendationsonbestinvestmentstrategiestothegovernmentandcandeveloptoolstoassessandreducetheriskofminigridprojects.

4. Coordinate cross-sectoral implementation to stimulate demand. Developmentpartners,alongwithNGOsandgovernment,cancoordinateeffortswith related sectors. For example, partnershipsbetweendevelopersandappliancemanufacturersoragriculturalorganisationscanenableappliancefinancing for minigrid customers, improveproductive uses, and drive energy demand.Development partners and the governmentcan also work together with banks to conductinvestment trainings,whichwouldhelp investorsbetter understand the real risks associatedwithminigridprojectfinancing.

31

5.4 Minigrid DevelopersDevelopersshouldcontinuetohonetheirbusinessmodels and take advantage of cost-reductionopportunities to make minigrid systems viablein rural communities. Minigrid operators cancontinuetosupporteconomicviabilitythroughthefollowingsteps:

1. Improve customer engagement strategies. Developers can improve customer engagementthrough more frequent communication, bothduring project development and throughout theoperation of a minigrid project. In addition toincreasing customer buy-in through personalcommunication, developers can use appliance-financingprogrammestoofferadditionalservicestocustomers.

2. Implement cost-reduction strategies. Developerscanimplementsiteclustering,demandstimulation, and the education or financing ofenergy-efficient appliances to lower costs andimprove capacity utilisation. Clustering siteswillreduce O&M expense by lowering labour and

logistics costs. Additionally, stimulating demandthroughcontinuouscommunityengagementandappliance financing programmes will increaseenergy load and enhance capacity utilisation.Finally,theuseofmoreenergy-efficientappliancescanlowerpeakdemandandreducethetotalcostofgeneration.

3. Develop a data-sharing platform. Currently,theREAandFMPWHdatabasesupportsminigriddevelopment by providing access to availabledatatoinformsiteassessment.However,thedataavailable on this platform is not comprehensiveacross all of Nigeria. Data availability can beimproved by encouraging a shared platformamong developers and other government anddevelopment partners that collates informationsuch as site demographics, load profiles,payment behaviour, and other useful data frommany sources. Groups such as the Africa Mini-Grid Developers Association (AMDA) Nigeria orRenewableEnergyAssociationofNigeria(REAN)can support the robustness of data collectedthroughsuchplatforms.

32

This report has put into perspective the pathtraversed to develop the minigrid industry inNigeria,andthepotentialpathforwardtobringittoscale.Theopportunityisundeniable:minigridscan be used to provide cost effective andreliablepowertomillionsofun-andunderservedNigerianswhilecreatingamarketopportunitywithpotential annual revenue of N2.8 trillion (US$8billion).Acceleratingdevelopmentof thismarketwill require building on the foundation in placeand addressing key challenges that may slowprogress.

Implementation of the commercial minigridsdetailed in this report provides a proof pointfor how projects can be successfully installedand operated. These projects also provide clearbest practices that developers, investors, andother stakeholders can learn from as the nextgenerationofminigridsareinstalled.Atthesametime, their experience highlights opportunitiesto significantly reduce cost through a variety ofmeasures. Similarly, continued improvement ofthebusinessandpolicyenvironmentwillenhanceproject bankability and sustainability and unlock

investment needed to reach greater scale. Thisreport presents a set of key recommendationsfor how policymakers, the business community,investorsanddevelopmentpartners,andminigriddeveloperscanaddressthesechallengesandhelptorealisethisenormousopportunity.

As theminigrid sector inNigeriagrows, it offersbothmeaningful impactandexciting investmentopportunities. In a matter of 12–24 monthsthe number of commercial minigrid systems isexpected to increase by a factor of ten, whileproject costs are falling and best practices arebeing implemented across the sector. Thisprogress can be further accelerated as newinvestors enter the market and stakeholdersaddress opportunities for enabling growth. AstheNigerianmarketscales, itcanbeavanguardfor expandedminigrid development across sub-Saharan Africa, where investors and developerscantransfertheexperiencesandlessonslearnedin Nigeria to other countrieswith similar energylandscapes.Takenasawhole,thefutureisbrightfortheminigridindustryandtheelectrificationofruralNigeria.

Chapter6:

Conclusion

33

Appendix 1. Minigrid Value ChainPhase 1 Project DevelopmentTheprojectdevelopmentphaseofthevaluechainbegins with site identification and assessment, in which suitable sites forminigrid systems areselected. During site assessment, developersevaluate current energy demand and anticipatefuture load by engaging with communitymembers to understand their energy needs.Indicatorsused toevaluatedemand includegridproximity, level of economic activity, willingnesstopay,andgeographiclocation.Developersoftenavoidsites incloseproximitytothenationalgridduetouncertaintyofgridextension,butthiscanforce them to avoid sites with high economicactivityandlatentdemand.Thelevelofeconomicactivity—forinstance,thepresenceofcommercialkiosks, productive use equipment, or cell phoneuse—isoftenusedasaproxyforwillingnessandabilitytopay.Thepresenceofacellphoneserviceallows developers to explore mobile paymentplatforms. Site selection should also include anevaluation of logistical convenience, politicalstability, community safety, and local and statesupport.

Afterasitehasbeenidentified,design and planning begins.Thisinvolvestheassessmentofavailableenergyresources,feasibilitystudies,anddecision-making about the minigrid system structure.Developers explore various design variables toselect a suitable generation technology, systemconfiguration,distributionlineandpolestructure,and overall system layout. System capacity isdetermined during system design using datacollected through site identification to estimatecurrentandfutureelectricitydemand.Thesystemdesignprocessbalancescost,systemefficiency,andmaintenance requirements todetermine themost suitable systemconfiguration.Additionally,developers must demonstrate a successfulbusiness model in order to secure projectfinancing. Developers also consider relevantgovernment regulations that affect minigridoperability, including tariff regulations, licensing,andpermitting.DesignandplanningalsoincludesESIA,whichinvolvesevaluatingtheenvironmental

andsocialimpactoftheprojectandimplementingappropriate measures to minimise and mitigateassociatedrisk.

Customer acquisition is required to guaranteean off-taker of electricity and the generation ofrevenue.Duringcustomeracquisition,developersmanage customer relationships and developstrategies to increase customer retention, sales,and payment collection. A sale strategy mayinvolve increasing productive uses (e.g., grainmillingorwaterpumping)byleveragingconsumerappliance financing to stimulate demand.Developersengagethehostcommunitytoidentifychallengestocustomeracquisitionandretention.For instance, some customers prefer servicebundles that allow them to pay per time ratherthan per kWh consumed. Similarly, there maybe a preference for different payment platformssuchasmobilemoneyorvouchersovercashorcreditcardpayments.Customeracquisitionisanongoing process that continues throughout thevaluechainuntiltheproject’sendoflife.

Phase 2. ConstructionThe construction phase of the minigrid systembegins with procurement of equipment andelectrical components necessary for generation,distribution,andmetering.Procurementactivitiesmay involve requests for proposals, quotationrequests, tenders, manufacturer selection,negotiations, insurance, and legal services,in addition to product inspection, import, andtransportation to site. The quality of serviceprovidedtocustomersdependslargelyonsystemefficiency, which is specific to the procuredcomponents. System installationinvolveshardwareassemblyandconstruction.Installationbeginsafterallthenecessaryequipmenthasbeensourcedandprocured.Itincludessetting up generation, distribution, and meteringsystems. Depending on the generation technology,thiscomponentmayinvolvetheinstallationofsolarpanels, inverters, mounting systems, and batterystorage systems. Distribution lines, poles, andassociatedelectricalequipmentarealsoinstalledtodistributepowertotheconsumer.

Appendices

34

Additionally, system installation may includeinfrastructural work such as building accessibleroads, water supply, and other supplementaryinfrastructure.

As construction ends but before plant operationbegins,theinstalledequipmentistestedtoensurethe plant is working according to operationalspecifications through commissioning. Commissioning includes activities such asequipment inspection, system testing (requiredby the Nigerian government), calibration, andtroubleshooting. These processes ensure thatconstruction and installation are in accordancewithdrawingsandspecifications.Acommissioningand performance certificate is typically issuedoncetheplanthasbeenestablishedtomeettherequireddesignperformancelevelandclearedtobegin operations. This component of the valuechainmayalsoinvolveanofficialunveilingoftheproject,oftencommemorated inaribbon-cuttingceremony to declare the commencement ofoperations.

Phase 3. OperationsOngoingoperationsofaminigridsystem involvemetering, billing, and collections. Thiscomponentincludes monitoring usage, customer invoicing,payment collection, and customer relationshipmanagement.Meteringsystemsprovidedemandandusagedataandenableoperatorstodetermineappropriateusagefeesandtariffs.Regularmetersprovideonlybasicdataonenergydemand,powergeneration and consumption, voltage and totalsupplyhours.Smartmeterscanprovideoperatorswith more detailed information, including thequantity of electricity used, time of use, andappliances associated with each connection.The information collected allows operators toanalyse usage data for load management toimproveoperationalefficiency,suchasdeveloping

strategiestoshiftpeakdemandandsubsequentlyreduce O&M costs. The billing and collectionsprocesses are vital to revenue generation andoften occur through prepaid or pay-as-you-gosystems.

The system maintenance component involvesservicingandmaintaininggeneration,distribution,and metering systems to ensure seamlessoperation.Maintenanceincludesdailymonitoringof plant operation, equipment inspection, andrepair. A warranty is often available for mostgeneration system components for a certainperiod,afterwhichanindependentcompanymaybe contracted to provide maintenance services.In addition to the jobs created for technologymanufacturers and maintenance serviceproviders, there isalsoopportunity tobuild localcapacitybytraininghostcommunitymemberstobecomeservicetechniciansandcustomerservicerepresentatives. Local participation in ongoingmaintenance can enhance efficient systemoperationandsafety.

Grid interconnection or decommissioning isthe final component in the value chain. If thegrid arrives before the project’s end of life, anisolated minigrid operator may convert to aninterconnectedminigridor transferassets to thedistribution company. Conversely, if the projectreaches its end of life before grid extensionoccurs, the minigrid developer can disassemblethe equipment, and the components can beeither resold, repurposed, refurbished, recycled,or disposed. The entire minigrid system mayalsoberefurbishedtocontinueservingthesamecommunity. At the end of the project life, thedeveloper should also conduct an evaluation oftheminigrid to determine its environmental andsocialimpactonthecommunity.

Appendix 2. List of Audited Commercial Minigrids

Developer Location (Community) Local Government Area State

ACOBLightingTechnologyLtd. DokanKarji Kauru KadunaArnergySolarLtd. Obayantor Ikpoba-Okha EdoCREDC UmonIsland Biase CrossRiverGoSolar Kurdula Gudu SokotoGVEProjectsLtd. Bisanti Katcha NigerGVEProjectsLtd. Egbeke Etche RiversGVEProjectsLtd. (i)AngwanRina

(ii)DemshinShendam Plateau

HavenhillSynergyLimited Kigbe Kwali FCT(Abuja)NayoTropicalTechnologyLtd. TunganJika Magama NigerRubitecSolarLtd. GbamuGbamu Ijebu-East Ogun

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Appendix 3. Minigrid Project AttributesNote:Toprotectproprietaryinformation,projectsbelowareordereddifferentlyfromAppendix2.

kW capacity Number of connections Tariff Structure(N/kWh)

O&M (N/month) Capacity utilisation (%)*

34 280 220/160† 40,000 70

85 500 180 125,000 4720 130 120/150† 25,000 40

50 100 200 140,000 5100 300‡ 140 50,000 20

40 800 200 200,000 10026 326 200 30,000 316§ 100 - - 2

80 500 200/300† 80,000 80100 250 288 32,500 9

*Basedoncurrentnumberofconnections;severalprojectswereonlyrecentlycommissionedandwillsignificantlyincreasetheircapacityutilisationoverthenextyear.†Tariffstructuredifferentiatedbycommercialandhouseholdusers,respectively.‡Expandingto765connectionsasofJuly2018.§Notyetfullyoperational.

Appendix 4. Level of Implementation of Off-grid Renewable Energy Investments

ImplementationofNREEEP,2015S/N Strategies Level of Imple-

mentation(* NONE / ** LOW /*** HIGH)

1 PublicBenefitsFund(PBF)basedonpenaltiesofcompaniesnotmeetingstandardswithaportionofthetariffdesignedtosupportrenewables.

NONE

2 Taxincentivestomanufacturersofrenewableenergyandenergyefficientequipmentandtheiraccessoriestopromotewidespreaduseincluding:(i)fiveyeartaxholidayformanufacturersfromdateofcommencementofmanufacturing;(ii)fiveyeartaxholidayondividendincomesfrominvest-mentsondomesticrenewableenergysources.

HIGH

3 Providingfiscalincentives,subsidiestoalleviateup-frontcosts,taxandexcisedutyexemptionsforprospectiveinvestorsintherenewableenergy(RE)subsector.

LOW

4 Government(federal/state)shallassistinallocationorgrantoflandtomanufacturersofenergy-efficientproductsandrenewableenergyprojects.

HIGH

36

Implementation of CIITA, 2017S/N Categories Level of Imple-

mentation(NONE / LOW / HIGH)

1 Taxholidayofthreeyears,andrenewableforthenexttwoyears HIGH2 Exemptionfromdutytaxesonimportedequipment,machinery,spares,

andconsumables.NONE

3 Capital&investmentallowance,whichcanbecarriedforwardandusedaftertaxholidayperiod

NONE

4 Manufactureoftransformers,meters,controlpanels,switchgears,cables,andotherelectrical-relatedequipmentisconsideredapioneerindustry.Asaresult,thereisataxholidayoffivetosevenyears

LOW

5 Allowancefor100%foreignownershipofelectricityplants HIGH6 Repatriationofprofitwith5%withholdingtax HIGH7 20%taxcreditonqualifyingexpenditureforcompaniesandotherorgani-

sationsengagedinresearchanddevelopmentactivitiesforcommerciali-sation

LOW

* NONE:Notknowntohavebeenimplementedatall** LOW:Implemented,withnoclearprocedure*** HIGH:Implementedandhighlyaccessiblewithclearprocedures

37

Endnotes

1 “NIGERIA Power Africa Fact Sheet.” US Agency for International Development, 4 Apr. 2018, https://www.usaid.gov/power-africa/nigeria.

2 “Access to Electricity (% of Population).” The World Bank, https://data.worldbank.org/indicator/EG.ELC.ACCS.ZS?loca-tions=NG. Accessed 6 May 2018.

3 Nigeria Minigrid Investment Brief. Rural Electrification Agency, 2017. http://rea.gov.ng/Nigeria_MinigridInvestment-Brief_171202-V2.pdf. Accessed 7 May 2018.

4 “Program-for-Results Information Document (PID) Concept Stage.” The World Bank, 2017, http://documents.worldbank.org/curated/en/266341497992825758/pdf/Nigeria-Power-Sector-Recovery-P4R-Concept-Stage-PID-8-3-2017.pdf. Accessed 10 May 2018.

5 Power Sector Recovery Programme: 2017 - 2021. PSRP, 2018. http://mypower.ng/wp-content/uploads/2018/02/PS-RP-Master-Document-January-2018.pdf. Accessed 12 May 2018.

6 “NIGERIA Power Africa Fact Sheet.” USAID

7 Miro, Luis-Carlos. Personal communication. 21 June 2018.

8 Nigeria Minigrid Investment Brief. Rural Electrification Agency

9 “Nigerian Electricity Regulatory Commission Regulation For Mini-Grids 2016.” Nigerian Electricity Regulatory Commission, www.nercng.org/index.php/library/documents/Regulations/NERC-Mini-Grid-Regulation/. Accessed 19 May 2018.

10 Cader, C. and Moller, J. 2015. Preliminary modelling of off-grid PV capacities for the whole of Nigeria. GIZ.

11 “National Electric Power Policy.” Electric Power Sector Reform Committee and National Council on Privatisation, http://bit.ly/EPP2001. Accessed 18 June 2018.

12 “Rural Electrification Strategy and Implementation Plan.” Federal Ministry of Power, Works and Housing, http://rea.gov.ng/download/rural-electrification-strategy-implementation-plan-resip/. Accessed 10 June 2018.

13 “National Renewable Energy and Energy Efficiency Policy 2015.” Federal Ministry of Power, Works and Housing, http://www.power.gov.ng/download/NREEE%20POLICY%202015-%20FEC%20APPROVED%20COPY.pdf/. Accessed 10 June 2018.

14 “Rural Electrification Strategy and Implementation Plan.” Federal Ministry of Power, Works and Housing.

15 Rural Electrification Fund (REF) Operational Guidelines 2017. Rural Electrification Agency, 2017. rea.gov.ng/rural-electri-fication-fund-ref-operational-guidelines-2017-approved-october-2017/. [REF Operational guideline]

16 Miro, Luis-Carlos

17 “Release Of Mini-grid Regulations By The Nigerian Electricity Regulatory Commission.” Details Commercial Solicitors, http://www.detailsolicitors.com/release_of_mini-grid_regulations_by_the_nigerian_electricty_regulatory_commission. Ac-cessed 12 May 2018.

18 “Compendium of Investment Incentives in Nigeria 2017.” Nigerian Investment Promotion Commission and Federal In-land Revenue Service, http://pwcnigeria.typepad.com/files/nipcfirs_compendium-of-investment-incentives-in-nigeria_nov2017.pdf. Accessed 26 May 2018.

19 “Companies Income Tax Act 2007.” Federal Inland Revenue Service, www.firs.gov.ng/Tax-Management/Tax%20Legisla-tions/CITA.pdf. Accessed 16 May 2018.

20 https://www.nipc.gov.ng/agencies-at-osic/

21 “One Stop Investment Centre.” Nigerian Investment Promotion Commission, https://www.nipc.gov.ng/agencies-at-osic/. Accessed 6 May 2018.

22 “Nigerian Electricity Regulatory Commission Regulation For Mini-Grids 2016.” Nigerian Electricity Regulatory Commis-sion.

23 “Rural Electrification Strategy and Implementation Plan.” Federal Ministry of Power, Works and Housing

24 Rural Electrification Agency. “REA 2017 Capital Budget Performance.” 2018.

25 Ibid.

26 Nigerian Energy Support Programme. “Reducing Energy Poverty in Rural Nigeria.” 2018.

27 Ibid.

28 Minigrids Information Portal, http://www.minigrids.go.tz/

29 Rocky Mountain Institute and Rural Electrification Agency. “20 By 20: A Design Charrette to Achieve 20¢/kWh by 2020.” 2017.

30 “Digitizing Government Payments in Nigeria.” Bill and Melinda Gates Foundation, 2014. https://docs.gatesfoundation.org/documents/digitizing%20government%20payments%20in%20nigeria.pdf. Accessed 29 June 2018.

31 Nigeria Minigrid Investment Brief. Rural Electrification Agency.

38

Acknowledgments

NESGandRMIwouldliketothankthemembersoftheminigridcommunityforthetimeandexpertisetheysharedthroughoutthedevelopmentofthisreport.Inparticular,wewouldliketothankourfunders-AllOn,HeinrichBöllStiftung-Nigeria,andtheRuralElectrificationAgencyforsupportingthisproject.

RMIwouldalsoliketothankTheRockefellerFoundationandVirginUnitefortheirgeneroussup-portfortheSustainableEnergyforEconomicDevelopmentprogramme. TheviewsexpressedinthisreportaresolelythoseofRMIandNESG.Theauthorsthankthefollowingorganizationsforofferingtheirinsightsandperspectivesonthiswork.-RuralElectrificationAgency(REA)-NigerianEnergySupportProgramme(NESP)-PowerSectorRecoveryProgramme(PSRP)-UnitedStatesAgencyforInternationalDevelopment(USAID)-PowerforAll-SolarcentricTechnologiesLimited-AllOn Thefollowingrepresentativesofminigridcompanieswereinstrumentalinprovidinginterviews,accommodatingsitevisits,andsharinginformationabouttheirvariousprojects:- Engr.Abraham,SiteEngineer,CommunityResearchandDevelopmentCentre(CREDC)- IbrahimAbubakar,SiteEngineer,GoSolarAfricaLtd.- CalebAdeyeni,ManagerandChiefFinancialOfficer,GoSolarAfricaLtd.- FemiAdeyemo,ChiefExecutiveOfficer,ArnergySolarLimited- OluwatobiDada,BrandCommunicationManager,ArnergySolarLimited- JosiahDanbabaUmar,ProjectManager,ACOBLightingTechnologyLtd.- AuduDanganaBanku,ResidentEngineer,MinistryofLands,NigerState- Engr.Ifeanyi,Engineer,NayoTropicalTechnologyLtd.- ClementIlechukwu,LeadEngineer,GreenVillageEnergy(GVE)ProjectsLtd- EmekaNwoko,Engineer,NayoTropicalTechnologyLtd.- AlexanderObiechina,ChiefExecutiveOfficer,ACOBLightingTechnologyLtd.- SegunOdunaiya,ChiefExecutiveOfficer,HavenhillSynergyLimited- AnayoNasOkenwa,ChiefExecutiveOfficer,NayoTropicalTechnologyLtd.- DavidOmorogbe,SecretarytoEldersForum,ObayantorCommunity- IfeanyiOrajaka,ManagingDirector,GreenVillageEnergy(GVE)ProjectsLtd- FemiOye,ChiefArchitect,GoSolarAfricaLtd.- BoladeSoremekun,FounderandMD,RubitecSolarNigeriaLtd- EtiosaUyigue,ChiefExecutiveOfficer,CREDC

39

Who we are

The Nigerian Economic Summit Group Ltd/Gte (NESG) is a leading private sector think tank and Policy Advocacy Group founded in 1996 with a commitment to the development of a modern, globally competitive economy. The NESG is an independent, non-partisan, non-sectarian organisation, committed to fostering open and continuous dialogue on Nigeria’s economic development.

The Nigerian Renewable Energy Roundtable (NiRER), hosted by the NESG, is a multi-stakeholder engagement platform, established to provide an enduring framework to address the challenges for renewable energy advancement as well as provide a scaling up and expansion of investments in order to create jobs, improve business value chains, and increase access to reliable electricity supply.

Rocky Mountain Institute (RMI) is an independent, nonpartisan, non-profit organisation founded in 1982 with the mission to transform global energy use to create a clean, prosperous, and secure low-carbon future. RMI engages businesses, communities, institutions, and entrepreneurs to accelerate the adoption of market-based solutions that cost-effectively shift from fossil fuels to efficiency and renewables.

All On, an independent impact investing company, was seeded with funding from Shell, and works with partners to increase access to commercial energy products and services for under-served and un-served off-grid energy markets in Nigeria, with a special focus on the Niger Delta.

40

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