Renewable Energy: Making an Investment Case in A Developing Economy
By Osaze Ogbomo
Research has shown that Renewable Energy (RE) has contributed about 19 per cent to the world’s global energy consumption and 22 per cent of total electricity generation. The paradigm shift from conventional sources to energy derived from natural sources that are replenished at a higher rate than they are consumed (renewable energy) has been seen as a cost-effective solution for developed and emerging economies including Edo State. Particularly, resulting from the changing energy landscape, the decreasing price of renewable energy, and the often-remote location of the majority of people without access to electricity, Edo State may find renewable energy as an effective and more reliable energy source.
Recognizing the beneficial effects of putting Nigeria on a path of sustainable energy, the Nigerian Electricity Regulatory Commission (NERC) previously set a target of 2000Megawatts (MW) from Renewable Energy (RE) sources by 2020 and as such recently approved a Regulation which introduces a Feed-In-Tariff (FiT) mechanism to stimulate investment in RE electricity generation. Generally, a FiT is a price-setting policy usually implemented by Governments to reduce cost and pricing-related barriers by establishing favourable pricing regimes for RE Generation companies.
The NERC FiT regime guarantees a purchase price over a fixed duration for different priority technologies, ensuring an appropriate return on investment for the developers. However, only projects between 1MW and 30MW connected to the transmission and/or distribution system can take advantage of the FiT; off-grid power projects are not included in the arrangement. The renewable energy technologies covered in the scheme are: solar, wind, small hydro, and biomass sources and the capacity cap for each is 387MW, 412MW, 675MW, and 526MW respectively.
The Investment Case
According to the provisions of the Regulation, the off-takers, the Nigeria Bulk Electricity Trading Company (NBET) and Distribution companies shall guarantee priority purchase and distribution of all electricity supplied by the RE generators. NBET will be obligated to procure 50 per cent of the generated capacity requirement while the Distribution companies will be obligated to procure the remainder 50 per cent. As such, the RE investors are guaranteed a return on investment (RoI) over the term of the Power Purchase Agreement signed with the Off-takers; the term is 20 years. Although, under the FiT regulations, the RE generators will be responsible for connecting their plants physically to the nearest point of the electricity distribution network, it is however unlikely that this will affect their bottom line as the tariffs already have been incorporated into them, a standardized allowance for interconnection costs.
The Regulation provides that a full tariff review will take place every year for the first five-year period of implementation and every three years thereafter but the resulting tariffs will only be applicable to new projects developed after the revised guidelines are published. Thus, the tariff applicable at the time a PPA is signed is the fixed value which will apply over the 20-year life of the PPA subject to adjustments being made from time to time to reflect the dollar-naira exchange rates. Also, the Operations & Maintenance component of the tariff will be subject to semi-annual indexation using the Nigerian Consumer Price Index. At the end of the 20-year period, the RE generators will be required to negotiate tariffs under market conditions at the applicable time.
However, with the fifth alteration, No. 17 of the constitutional amendment assented to by President Muhammadu Buhari which has empowered states to generate, transmit and distribute electricity. The energy market in Nigeria is looking more attractive for investors because of the deregulation that has brought about the need to explore options such as renewable energy and green hydrogen gas for improved power supply. Edo State has taken advantage of the opportunity by repealing the Rural Electricity Board Law of 1972 to re-enact a law that makes provision for the generation, transmission and distribution of electricity for residents of Edo State, paving the way for the establishment of an electricity market in the state. It corroborates the efforts of the federal government that has adopted gas as a transition fuel to balance the large interest in solar power on our grid. Edo State has large deposits of gas in communities down south and going green is also a cheaper and cleaner option, especially with respect to solar battery crunch. Hence, investors will benefit from a friendly investment climate with business environment reforms designed to enable their businesses to grow and expand sustainably.
Furthermore, poor power supply still remains one of the major challenges of micro, small, and medium enterprises in the state and to remedy this issue, the Edo State Government under the leadership of Governor Godwin Obaseki entered a Power Purchase Agreement (PPA) of 55MW with Ossiomo Power and CCETC Clean Energy (CCETC-Ossiomo Power), to boost electricity market in the state. The partnership is also aimed at improving the plight of businesses as it supplies power to the Edo production centre, an industrialisation program located along the Sapele road axis of Benin City, where Small and Medium Enterprises (SMEs) ply their trades. Rural communities across the state are not left out as the state government continues to collaborate with stakeholders for improved energy supply. For instance, the Edo State Government in partnership with the Nigerian National Petroleum Corporation Limited and Sahara Energy Group recently established the Enageed Resource Ajoki Gas-to-Power project that generates a combined capacity of one-megawatt round-the-clock electricity from gas to tens of thousands of residents in Ajoki community. Another noteworthy impact, Governor, Godwin Obaseki has made, is that he cleared the N10m debt owed Benin Electricity Distribution Company (BEDC) by Ibiwe, Obhakhavbaye, and other commercial communities to facilitate the reconnection of the communities to the national grid after being cut off for over two years. Despite these efforts, more investments are needed to scale up reliable and affordable energy for businesses in Edo State. As it stands, investment in alternative sources of energy might be key to meeting the demands of our business environment which outweighs supply.
The FiT are a very welcome development for two reasons: one, they help to encourage the diversification of energy sources bringing about a more reliable supply of electricity. Two, which is more important, in light of the Paris Agreement on climate change, they serve to kick start the growth of a renewable energy sector in Nigeria. The case for the increased use of RE as a source of power cannot be overemphasized. The rapid development of renewable energy and technology diversification of energy sources would result in significant energy security and economic benefits. Anyone who has been monitoring the energy industry globally will know that the sector’s future lies in the successful deployment of renewable energy technologies. It is good that Edo State has identified this opportunity and is presently taking advantage of it.
This article is written by Mr. Osaze Ogbomo from the Ease of Doing Business Secretariat-ESIPO.