Introduction

Following a series of public consultations held across Nigeria, the Nigerian Electricity Regulatory Commission (the "NERC") released the 2023 Mini-Grid Regulations (the "2023 Regulations") on December 29th, 2023. Effectively replacing the 2016 Mini-Grid Regulations (the "2016 Regulations"), the 2023 Regulations introduced a number of notable changes aimed at progressively building the confidence of energy investors, financiers and mini-grid developers in Nigeria, unlocking more influx of capital, and facilitating a more expansive framework for renewable energy project development in Nigeria.

Key changes introduced by the 2023 Regulations include:

  1. Clarification that Mini-grid Permits ("Permit") shall be issued for both Isolated and Interconnected Mini-grids.

Section 9 and Section 10 of the 2016 Regulations outline the process for the approval of a Tripartite Contract and the application procedure for a Permit respectively, but neither clarify whether a Permit shall be issued for interconnected Mini-grids and isolated mini-grids. Notably, section 9(2) of the 2023 Regulations introduces amendments that provides that the approval of an Interconnected mini-grid application requires both a tripartite agreement approved by the Commission and a mini-grid permit issued to the interconnected mini-grid developer. Additionally, the definition of a Mini-grid Permit was expanded to include a reference to interconnected mini-grid operators, an omission from the previous regulation.1

  1. Introduction of Portfolio of Isolated and Interconnected Mini-Grids.

The 2023 Regulations introduce a portfolio approach to mini-grid applications, allowing mini-grid developers the opportunity to simultaneously apply for mini-grid permits for multiple isolated or interconnected mini-grids. A "Portfolio of Isolated Mini-Grids" is defined as a set of isolated mini-grids as determined by the mini-grid developer which are filed with the Commission for approval simultaneously. A "Portfolio of interconnected Mini-Grids", on the other hand, is defined as a set of interconnected mini-grids as determined by the mini-grid developer, for which tripartite agreements with the same Distribution Licensee have been signed and filed simultaneously with the Commission for approval.2 Additionally, unlike the 2016 Regulations, the 2023 Regulation allows for submission of a combined report for a portfolio of mini-grids. This new application approach will significantly promote a more investor-friendly environment, reducing the administrative burden for investors managing multiple mini-grid projects.

  1. Establishment of a clear timeline for DisCos to respond to mini-grid developers' requests for confirmation or consent.

The 2016 Regulations stipulate that the confirmation of a DisCo must be obtained before the grant of a permit by the Commission for development of mini-grids of over 100kw to 1MW in an unserved area, such that the mini-grid investment does not interfere with a DisCo's expansion plans, and in the event expansion plans covers the project area, a written consent from the DisCo for the proposed mini-grid project must be obtained. The 2023 Regulations introduce a new sub-section (2), establishing that DisCos must provide the requested confirmation or consent within 15 business days of receipt of the request, otherwise the DisCo would be deemed to have consented to the request.3 This bold move to expedite approvals not only enhances efficiency in the regulatory process but also fosters a more predictable environment for mini-grid investments. This fosters the ease of doing business as captured in the Business Facilitation Act 2023 which contains similar provisions applicable to regulatory bodies.

  1. Submission of Monitoring and Evaluation Report Once Every Year

Mini-grid Operators are now required to submit reports of their monitoring and evaluation activities to the Commission, in accordance with the prescribed reporting template to be filed in hard copy or through digital platforms approved by the NERC.4

  1. Single Tariff Application Filing for Portfolios of Mini-grids

The 2023 Regulations offer both single and individual tariff filing options for portfolios of isolated or interconnected mini-grids. A mini-grid permit holder may file a single tariff application for all sites under a portfolio of mini-grids or an individual tariff application for each site under a portfolio of mini-grids.5 The availability of the suite of options foster adaptability, efficiency and flexibility by accommodating the many operating models seen in the mini-grid industry. Additionally, the inclusion of the Distribution Use of System ("DUOS") charge in the 2023 Regulations is also an interesting way to broaden the scope of the Regulation's tariff structure as it pertains to interconnected mini-grid permit holders.

  1. Reduction of Allowable Technical Losses and Non-Technical Losses from 10% to 4% and 3% respectively.

Retail tariffs and other charges for mini-grid permit holders are calculated using the Multi-Year Tariff Order (MYTO) methodology, subject to prescribed limit on allowable technical and non-technical losses. Under the 2016 Regulations, the allowable caps for both types of losses were uniformly pegged at 10%6. However, the allowable caps under the 2023 Regulations are set at 4% for technical losses and 3% for non-technical losses, respectively.7 The reduction in allowable losses is a significant strategic move towards enhancing the overall efficiency and minimizing the aggregate technical losses in the electricity distribution system.

  1. Expansion of DisCo Area Network

Prior to the 2023 Mini-grid Regulations, a DisCo could extend its network to any geographical area without notice to an isolated mini-grid currently operated under a permit. However, DisCos intending to extend their network coverage to isolated mini-grids are now required to notify the mini-grid operator in writing at least 12 (twelve) months before the grid extension reaches the relevant isolated mini-grid.8

  1. Improved Compensation for Isolated Mini-grid Developers Transferring Distribution Assets to DisCos

Under the 2016 Regulations, where a DisCo extends its network area to an isolated mini-grid, mini-grid operators, who transferred their distribution assets, within their first five years of operation due to the DisCo's expansion received a compensation equal to the remaining depreciated value of assets including construction and development costs plus the revenue generated from the mini-grid commencing 12 months before the interconnection. However, for asset transfers beyond the initial five-year period, mini-grid operators received as compensation the remaining depreciated value of assets plus the revenue generated from the mini-grid commencing 12 months before the interconnection.9

The 2023 Regulations have removed the "5 years initial period" clause and also specified that the compensation for the affected distribution assets be equal to the book value of depreciated network assets. The value is based on historical acquisition cost, including construction and development cost along with an equivalent of the pre-tax profit earned 24 months from the mini-grid operations before the handover date by the mini-grid operator. The mini-grid shall also be allowed to continue operating in accordance with its mini-grid permit, until it is fully compensated by the DisCo and the DisCo shall not disrupt or obstruct the mini-grid permit holder's activities. Additionally, the mini-grid, upon transferring its distribution assets to the expanding DisCo, may (with such DisCo's mutual agreement) deploy its generation asset as an embedded generator to the DisCo or become an emergency supplier to niche customers during DisCo supply outages. We envision that, with time, such mini-grids may also participate in balancing markets as contemplated under the Market Rules.

  1. Disposition of Mini-Grid Permits and Business

Mini-grid developers are now mandated to seek the prior written consent of the NERC before transferring, assigning, selling or disposing of ownership of their business with, provided they submit specific documentation and evidence of the technical capability or capacity of the transferee company to operate the mini-grid.10 The 2016 Regulations was silent about this, thereby affording permit holders the leeway to transfer, assign, or sell their permits without proper consent from the NERC.

  1. Submission of Technical and Investment Proposals to DisCos

Under the 2016 Regulations, a mini-grid developer could choose to submit a proposal to a DisCo when considering the development of an interconnected mini-grid provided that the proposed coverage area has been identified by either the mini-grid developer or connected community and a notification duly made to the Commission. The 2023 Regulations, however, now mandates that mini-grid developers must submit a technical and investment proposal to the DisCo prior to the commencement of any mini-grid project.11

  1. Provisions of the Metering Code

Prior to now, all registered mini-grid operators were required to adopt the metering code in measuring the flow of energy. However, under the 2023 Regulations, the Commission may give specific derogation at the request of the mini-grid operator to adopt other standards outside the metering code.12

Conclusion

The 2023 Mini-Grid Regulations indeed marks a significant shift towards a more efficient and predictable regulatory environment for mini-grid development in Nigeria. For investors, the portfolio approach and simplified tariff filing methodology offer greater flexibility and reduced administrative burdens. The 15-day DisCo response deadline and deemed consent regime foster predictability and accelerates project timelines. For mini-grid developers, the clarification on permits for both isolated and interconnected grids expand their options and opens up new possibilities. Overall, the amendments introduced in the 2023 Regulations have undeniably marked a significant transition from the 2016 Mini Grid Regulations, addressing key concerns and fostering a more conducive environment for sustainable energy solutions. However, it is imperative to emphasize that the true impact of these changes lies not only in the redefined legal landscape but, more crucially, in their effective implementation. The success of these Regulations hinges on the commitment to translating written reforms into tangible actions, ensuring that the envisioned advancements in the Nigerian mini-grid sector become a reality and contribute meaningfully to the attainment of our energy transition goals.

Footnotes

1 Section 3 of the 2023 Regulations.

2 Section 3 of the 2023 Regulations.

3 Section 7(2) of the 2023 Regulations.

4 Section 21 of the 2023 Regulations.

5 Section 22(4) of the 2023 Regulations.

6 Section 20(3) of the 2016 Regulations.

7 Section 22(3) of the 2023 Regulations.

8 Section 20 of the 2023 Regulations.

9 Section 19 of the 2016 Regulations.

10 Section 14 of the 2023 Regulations.

11 Section 9(3) of the 2023 Regulations.

12 Section 19(2) of the 2023 Regulations.

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