The Nigerian and Ethiopian Governments’ Bilateral Exchange on Mini-Grids
A bilateral exchange visit between the Governments of Ethiopia and Nigeria took place in Abuja on 29 May – 01 June 2019. The aim of the bilateral exchange visit was for the Government of Nigeria to share its experience on planning and deploying mini-grids. As Nigeria is an early-mover country in the mini-grids sector, there was a great deal of learning that was harnessed. One of the key discussion points was the role of the private sector in catalysing the development and deployment of mini-grid systems.
During the exchange visit, the officials discussed the Results-Based Financing (RBF) mechanism used in Nigeria, which is an efficient form of capital expenditure (capex) subsidy for energy access delivery through mini-grids. The Rural Electrification Fund (REA), a statutory instrument with a mandate to deliver 8,000-10,000 mini-grids by 2023, currently provides a capex subsidy of $350 upon connection. This has proven to be an efficient de-risking and subsidy mechanism and has consequently attracted significant private sector interest. Over and above the capex subsidy, there is an operational expenditure (opex) subsidy that is provided by REA at certain key points during the lifespan of the energy system. Cognisant of the need for a subsidy mechanism, the officials from the Government of Ethiopia presented the version of the RBF structure that they are exploring; one that is solely focused on capex subsidy. This is mainly to encourage innovation and efficiency from the private sector so as to decrease their opex costs, and thus increase their profit.
One of the stark differences in the mini-grid systems implemented in the two countries largely relates to the size of the systems. In Nigeria, the mini-grid systems are generally under 100 kW of generation power and the country’s regulatory framework only requires systems greater than this wattage to obtain a licence. In Ethiopia, the mini-grids systems being piloted range from 200 kW to 750 kW with most operating at an average installed capacity of 500 kW per site. The officials from Ethiopia reported that the rationale for having a higher generation capacity per site stems from the fact that off-grid smaller-scale systems have a high cost variance as compared to the larger systems and are thus more viable. The relaxed regulatory requirements in Nigeria have made it attractive for the private sector to develop small-scale systems. This was one of the key learnings from the exchange which will inform the development of the regulatory framework in Ethiopia.
Having interrogated the policy and regulatory framework, the tariffing structure, the subsidy model, the importance of productive use, community engagement strategy, and incentive schemes – from the public and private sector’s experience – the key message from the bilateral exchange was that the private sector can play an instrumental role in achieving electrification targets and, most importantly, in unlocking the socio-economic potential of millions through a stimulated local economy.
During the site visits to communities where mini-grid systems were in the process of being commissioned, it became apparent that without anchor tenants through productive use of energy (PUE), developers run the risk of only 10% of the generation power being used during the day time – as was the case at one of the sites. This highlights the need to engage with the local community to stimulate demand through PUE. Relying on the bulk of the load being used at night significantly increases capex cost of the system due to the need to deploy increased numbers of storage batteries. A more efficient example was displayed at one of the other sites where there is an anchor tenant (a cereal grinding mill) that will be consuming over 50% of the daytime load. In addition to providing a clean source of energy, the weekly costs of the milling business is forecast to decrease from $116 – which is exclusive of transporting the diesel to the site – to $96. PUE through the milling business improves the financial viability of the energy system.
The Nigerian officials shared information on innovative ways of changing the energy consumption behaviour of communities, which included encouraging them to use more energy during the daytime and decrease the load during the night. This could be done through decreasing the tariff rate for daytime users and increasing the tariff rate for night-time users.
In summary, the site visit learnings confirmed that informed planning, community engagement, and the use of modular systems increases the likelihood of financially viable business models.
The bilateral exchange was successful in that the Ethiopian delegation gained good practical insights into the role that the private sector can play by evaluating working models applied in Nigeria. The emerging information will contribute to identify unforeseen risks and outline appropriate mitigation plans and tools to grow the mini-grids sector in Ethiopia.
This exchange visit was financed by the BMU under the IKI Mobilising Investment for NDC Implementation Programme and supported by the Africa LEDS Partnership’s African Mini-Grids Community of Practice.