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Reviewing the legal framework for renewable energy projects in Nigeria

FMC Owerri gets solar power system for steady supply

Renewable Energy (“RE”) has come to symbolize the opposite of the bleak prospects of fossil fuels’ exhaustiveness and hope for mankind’s un-quenching thirst for energy.

The global search for ‘green’, sustainable energy sources has been driven largely by the:

increasing need for energy for industrial, manufacturing and domestic purposes;

exhaustive nature of fossil fuel sources;

collateral damage to the environment by the fossil fuel extraction and consumption value-chain; and

fluctuation in prices of oil and gas/consequential effect on national and global economy.

Nigeria, is a major exporter of crude oil and importer of petroleum products, with over 90% of the nation’s foreign revenue derived from petroleum/gas exports and nearly 70% of its domestic energy needs dependent on fossils. Current global and economic factors have necessitated a policy shift from near-total reliance on fossil fuel extraction and consumption to frantic search for alternative energy.

Power generation and distribution in Nigeria has been perpetually described as ‘epileptic’, hardly a befitting tag for an economy projected to be among the top 20 world economies by 2020. According the African Development Bank (2009), unstable electricity supply is by far the most binding constraint to doing business in Nigeria. Perennially in search of dependable solutions to its energy problems, Nigeria had initiated legislation and policy to drive its renewable power subsector.

Overview

Legislative Framework

The Nigerian RE policy is fundamentally:

target based, seeking ambitious achievements relating to (a) increasing RE generation/distribution and (b) reducing dependence on traditional energy sources; not standard-centric, neither wholly tailored against any specific internationally accepted standards nor establishing a unique standard for Nigeria-based projects; and complementary – neither proposed as a stand-alone solution to Nigeria’s energy needs nor as a wholesale replacement of traditional energy sources.

Energy Commission Act (“ECA”)

This legislation made in 1979 and amended in 1988 and 1989 established the Energy Commission of Nigeria (“Commission”) whose Technical Committee is mandated to carry out the following functions:

Gather and disseminate information regarding Government’s policy on energy development;

Serve as a trouble-shooting centre for technical issues in energy development;

Advise State and Federal Governments on energy development issues, including funding for energy R&D; and

Prepare master plans and policies for energy development, exploitation, utilisation, project execution, project financing, incentives, and recommendations to Government.

The Commission is made up of the following specialised departments:

Information System

Planning and Analysis

Training and Manpower Development

Administration and Finance.

The Commission is run by its Director-General appointed by the President.

While the principal Act made scanty references to RE development, the 1988, 1989 and proposed 2009 amendment Bill sought to align the principal Act with Government’s policy of developing, harnessing and distributing RE and protecting the environment from effects of fossil fuels.

It is noteworthy that ECA, as amended, does not make any specific provision for standards to which RE development must conform. However, the Commission has developed the National Energy Master Plan and the Renewable Energy Master Plan which provide more detailed policies towards meeting proposed RE targets. These are discussed further below.

Electric Power Sector Reform Act (“EPSRA”) 2005

This act was made in response to the terminal inefficiency of the National Electric Power Authority (“NEPA”, later branded Power Holding Company of Nigeria) in generating and distributing power across Nigeria. The Act made provision for:

Repeal of the NEPA Act;

Unbundling of NEPA along functional and jurisdictional lines – the generation, distribution and transmission functions were decoupled and incorporated as independent entities;

Privatisation of the decoupled entities;

Establishment of the Electricity Regulatory Commission of Nigeria (“NERC”) to regulate activities of generation, distribution and transmission companies; and

Granting of licenses by NERC for electricity generation, distribution, system operation, trading and transmission.

Of particular note

EPSRA provided a platform for (i) private electricity producers to make commercial arrangements with the now privatised distributors or even the end user for the sale of power generated by the private producers and (ii) licensing of electricity generation projects, including renewable electricity, exceeding 1MW. Any renewable electricity generation, distribution or transmission project will therefore be carried out only under the appropriate licence granted by NERC.

In order to prevent anti-competition, an applicant shall disclose to NERC any interests above 10% that it already holds in another license.

Underprivileged consumers are entitled to power subsidies funded from the Power Consumer Assistance Fund (“Assistance Fund”). The Assistance Fund is established under Section 83 and funded by contributions from ‘privileged’ consumers, eligible customers and power subsidy funds set aside by the National Assembly for this purpose.

I consider that

While the Assistance Fund will enable rural and underprivileged consumers to access/afford power supply, the veiled subsidy charges will amount to double taxing other consumers and ‘eligible customers’ and will directly increase the cost of power to these users. The Assistance Fund is also likely to be abused as a result of corruption, an endemic Nigerian malaise.

It is recommended that the Government provide the subsidy solely or establish a pricing mechanism whereby an automatic price equalisation allows consumers pay for power on a sliding scale in accordance with their consumption, without having a fund in-between. There is currently no evidence that any contributions or disbursements have been made into and from the Assistance Fund, and no preferential tariffs are being charged any consumers at this time.

Interestingly, Sections 88 – 92 provide for the establishment of a Rural Electrification Agency and a Rural Electrification Fund (“Rural Fund”) for the provision of accessible electricity to rural areas. The Rural Fund is to be sustained by eligible customers and licensees. Needless to say, the Assistance Fund and the Rural Fund are duplicative and better consolidated. In reality, contributions are yet to be levied on or paid by any customers or licensees.

In summary

EPSRA is a robust, well-intentioned legislation whose provisions are largely unimplemented and requires a strong political will, simplification of its bogus administrative structure and pragmatic review to achieve its commendable objectives.

Roadmap for Power Sector Reform

The Roadmap released in 2010 by the Presidential Task Force on Power outlines Nigeria’s plan to accelerate the pace of reforms already mandated under EPSRA. While not having the legislative force of ECA and EPSRA, it provides a guideline for government decisions and programs in implementing the foregoing legislations. Key provision of the Roadmap relating to RE include:

Granting concessions for operation of Kainji, Jebba and Shiroro hydro plants formerly owned and operated by NEPA;

Privatizing thermal generating plants through sale of at least 51% equity to investors with technical/financial ability to operate/expand the plants;

Focusing Government’s direct involvement in RE generation on hydroelectricity due to high capital costs and long lead times required to develop solar, wind, nuclear and biomass energy sources; and

Short, medium and long-term targets and identified key challenges for power generation between 2010 and 2016.

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National Energy Policy (“NEP”)

The Commission released the NEP in April 2003 to espouse Government’s policy on development and exploitation of all Nigeria’s energy resources, addressing environmental issues, energy utilization/efficiency, financing and policy implementation. Like the Roadmap, NEP has no legislative force and imposes no statutory obligations on either the Government or an investor. In relation to RE, NEP sets out the following principles:

Identification of nuclear, biomass, wind, solar, hydro and hydrogen as viable energy sources to be harnessed by the nation in an environmentally sustainable manner;

Local research, development and exploitation of the foregoing energy potentials to be commercially undertaken through public, private and indigenous participation;

Non-RE sources are to be used conservatively;

Nigeria to make steady and reliable electric power available at all times to at least 75% of the population by the year 2020 at economic rates for economic, industrial, and social activities;  and

An integrated energy planning system to be developed involving energy related programmes and activities of other sectors.

Of particular note

An important aspect of NEP is the policy on energy financing. It provides that Nigeria shall explore and adopt all viable financing options from local and international sources for cost effective exploitation of its energy resources.

Juxtaposed with the provision of the Roadmap that Government shall only provide short-term financial assistance to the unbundled, privatised entities of NEPA by incentivising their participation in energy generation and not by direct funding, it stands to reason that private participants in RE projects will be driving any funding arrangements for the relevant projects. In addition, only a sustainable, economics-driven energy pricing regime will support an unsubsidized RE market.

It is also noteworthy that while a key driver of energy efficiency is awareness by end users of conservative energy utilisation principles and use of energy efficient appliances, these are not adequately and specifically addressed, even with the optimistic titling of “Energy Utilisation” and “Energy Efficiency and Conservation” in chapters 3 and 4 of NEP.

Currently, ECN is reviewing an updated 2013 draft NEP which will among other things, make more robust provisions for each of the identified RE sources, update the generation targets provided in NEP and lay more specific emphasis on international standards and best practices in energy efficiency and conservation.

Renewable Energy Master Plan (“REMP”)

The overall objective of the REMP is to articulate Nigeria’s vision and targets for addressing key development challenges through the accelerated development and exploitation of RE. The REMP, issued in 2005, was a collaborative effort by the ECN and the United Nations Development Programme. The REMP is based on certain economic and social assumptions:

Nigeria GDP continuing to grow at 13%PA;

Minimum of 95% of households ultimately having access to modern energy;

Minimum electricity demand being 315,113MW by 2030; and 20% of the entire energy mix being renewables.

As with the Roadmap and NEP, the REMP has no legislative force. However, an investor seeking partnership with Government or investment incentives will be well advised to align its project with the objectives and targets of the REMP, revolving around developmental programmes for –

Biomass

Solar

Hydropower

Wind

New energy promotion, R&D.

The regulatory framework for achieving the objectives and targets include:

Creating a Level Playing Field – giving incentives to market operators for the introduction of RE systems and encouraging consumers to have access to RE products.

Renewable Portfolio Standard – a targeted proportion of national energy supply to come from RE sources.

Fiscal Incentives – creation of innovative incentives to encourage RE technology supply companies at start up stage – customs duty exemptions, tax credits, capital incentives and long term preferential loans, plus establishment of an RE Fund.

Market Incentives – fixed price/payment system and fixed capacity or quantity target pursued by competitive mechanisms.

Integration of RE into non-Energy Sector Policies – agriculture, transport, industry and infrastructural development. For example, encouraging home designers/owners to incorporate solar energy systems in their designs.

Establishment/Reinforcement of Regulatory Institutions – proposes creation of the Nigerian Renewable Energy Agency, a National Steering Committee and State Coordinating Units.

Standardization of RE Products – recommends the standardization of RE equipment and products to be deployed in Nigeria to boost investor and customer confidence, with emphasis on their suitability to local conditions.

Renewable Electricity Policy Guidelines (“REPG”)

The REPG was released by the Federal Ministry of Power & Steel in 2006 to direct Government’s vision, policies and objectives for promoting renewable energy.

Frankly, it is quite easy to confuse the REPG with the REMP, being that they both deal with the same subject matter and issued one year apart. The distinction though may be found in the fact that while the REMP deals with the entire RE value chain, the REPG focuses on treating RE-generated electricity only. Save for its focus on and reiteration of provisions in the NEP and REMP on the treatment of electricity generated through RE sources, the REPG regrettably adds very little illumination to the RE policy landscape.

The REPG proposes the establishment of a Renewable Electricity Trust Fund (“ETF”) under the Rural Fund. A substantial portion of the REPG is dedicated to proposals for funding the ETF. As stated above, the catalyst to fire up RE development in Nigeria is hardly the creation of multiple, overlapping bureaucracies.

Captive Energy Generation Regulations (“CEGR”)

The CEGR was issued by the NERC in 2008 as a complement of EPSRA. While EPSRA makes no comprehensive provisions for regulation of small scale energy generation for private or commercial use, it empowers NERC to make regulations regarding such captive generation.

The CEGR defines Captive Power Generation slightly different from EPSRA as “generation of electricity exceeding 1 MW for the purpose of consumption by the generator, and which is consumed by the generator itself, and not sold to a third-party.” Like EPSRA, CEGR is not RE-specific, but applies to any RE generation project that is captive in nature. Principally, CEGR provides for:

Procedure for application, renewal and cancellation of the captive generation permit;

Supply of power by a captive permit holder to an off taker in excess of 1MW; and

Provision of data to the NERC by captive generators.

H.  National Biofuels Policy (“NBP”)

The NBP was released by the NNPC in 2007 to drive an Automotive Biomass Programme for Nigeria. The goal was to gradually reduce Nigeria’s dependence on imported gasoline and environmental pollution and create a commercially viable biofuel industry. The input of the NBP to the RE regulatory woodwork include the following proposals:

Establishment of a biofuels commission;

Issuance of a biofuels regulation by the Minister of Petroleum Resources;

Establishment of a biofuels research agency;

Funding of R&D in biofuels development; and

Incentives scheme for participants in the biofuels development subsector.

Regulatory Agencies

Federal Ministry of Power (FMP), variously named Federal Ministry of Power & Steel and Federal Ministry of Energy: an administrative arm of the federal government responsible for policy formulation and provision of general direction to other power sector agencies.

Nigerian Electricity Regulatory Commission (NERC): a public agency established in 2005 by EPSRA, mandated to regulate and monitor the power sector. NERC is the technical arm of FMP and the most important power sector regulator. NERC’s mandate include the implementation of EPSRA and licensing of operators of the generation, distribution, transmission and trading value chain.

Energy Commission of Nigeria (ECN): was established under ECA with a statutory mandate for strategic planning and coordination of national policies in the energy sector.

Rural Electrification Agency (REA): was established by EPSRA to promote, supporte and provide electricity access to rural and semi-urban areas of the country.

Various Proposed Additional Regulators: each of NEP, REMP, REPG, CEGR and NBP propose the creation of various regulatory agencies.

Implementation and Projects

Opportunities & Challenges

The legislations and policies discussed here are well-intentioned. Nigeria needs to urgently diversify its energy sources to meet current needs and have an energy future. However, the current design of the regulatory framework is littered with flaws in the following compartments:

Policy

The various draft bills and policies are too many, repetitive, wordy and overlapping. A repetitious and un-harmonized policy framework creates uncertainty for both regulator and regulated. The provisions of the NEP, Roadmap, REMP, REPG and NBP would make more sense if consolidated in a concise NEP and provisions relating to specific RE sources dealt with as separate sections. It is obvious by the conflicting targets and repetitive provisions that some of the policies are in the blind spot of provisions of other policies on the same subject matter.

Further, inconsistency in policies, with each administration issuing its own policy, makes Nigeria an investment landmine. Risk of discontinuity in government incentives encourages investment jitters. Nigeria will need to get its policy acts together in order to create confidence in potential RE investors.

Regulatory Bodies

There are too many regulatory institutions with overlapping mandates and responsibilities, resulting in disagreements between agencies over jurisdictional boundaries. The various existing and proposed regulators may be more purposefully brought under the supervisory jurisdiction of the FMP, with the development of each of the RE sources conferred on specialized departments.

Nigeria has the potential to be the RE hub of Africa if the policy and regulatory framework is mapped right.

Jama Onwubuariri