Globally, the power sector is one of the largest sources of carbon emissions. Specifically, about 14.8% of Nigeria’s carbon emissions emanate from the sector. We look at the possible effects of renewable energy integration on the Nigerian power sector and some policy options to consider.
Over the past decade, climatic disruptions have become commonplace. Across many continents, severe floods and bouts of desertification have significantly hampered the prospects of attaining sustainable development. This situation has triggered an urgent global drive to overhaul the current fossil fuel dependency. In many national economies, this global drive has been directed towards the power sector— and for a good reason.
The power sector is one of the largest sources of global carbon emissions, and it also has the ability to absorb large-scale renewable energy sources. For instance, about 14.8% of Nigeria’s carbon emissions emanate from the power sector. Essentially, the power sector is the most strategic route for reducing carbon emissions and integrating renewable energy. Already, in countries like Denmark, the share of renewable energy in the annual electricity generation has been increased to about 58 per cent.
Like Denmark, Nigeria has joined the bandwagon of electricity-focused renewable energy integration. In recent years, the government has released several objectives to increase the share of renewable energy in the power sector. For example, through the Renewable Energy Master Plan (REMP), Nigeria has set a target to increase the share of renewable energy in electricity generation to 36 per cent by 2030. However, whilst the quest to reduce fossil fuel usage is undoubtedly beneficial, it raises significant questions on the possible effects of such a fundamental transition on a developing country like Nigeria.
Possible Effects of Renewable Energy Integration On the Nigerian Power Sector
Given that the crux of renewable energy integration is a fundamental change in the energy mix, it is expected that the fuel mix that currently underpins the Nigerian power sector is set to change. Thus, carbon-intensive energy sources like oil and coal, which constitute about 50 per cent of Nigeria's power generation, will continually be phased out. In contrast, renewable energy generation will take the central stage.
Aside from this, an increase in renewable energy integration would result in significant infrastructural expansions within the Nigerian power sector. Unlike conventional energy sources, renewable generation assets can only be located where the resources are available. This often creates a considerable distance between the source of generation and the demand pool. To cater to this scenario, significant investments would have to be directed towards strengthening the transmission network and conducting system upgrades to accommodate additional power injection on the grid.
Already, Nigeria's solar energy capacity has been pegged at 28 megawatts, with projections that it will tower at 8 gigawatts by 2030.
Structural disruption is another crucial impact that renewable energy integration could have on the Nigerian power sector. As the share of renewables increases, the Nigerian power sector will become more decentralised. Off-grid solutions will increasingly be deployed, and energy storage could become more prevalent. Most importantly, demand-side participation would increase as more households will continually generate their power through solar photovoltaic (PV) installations.
Already, Nigeria's solar energy capacity has been pegged at 28 megawatts, with projections that it will tower at 8 gigawatts by 2030. This structural change will create novel market conditions that could occasion a fundamental change in Nigeria’s electricity market design. For instance, an increase in demand-side participation would reduce the revenue of Nigerian distribution companies (Discos). This is because the concept of demand-side participation is hinged on households and commercial entities—who are ordinarily customers of discos— generating power on their own. This would inevitably lead to significant revenue losses for distribution companies since tariffs are mostly usage-based.
Lastly, the integration of renewable energy could pose significant operational challenges to the grid. Given that renewable energy sources like solar and wind power are often weather-dependent, on-grid renewable energy integration would increase the need to seek alternative energy sources to make up for weather-induced generation shortfalls. In this scenario, Nigeria's system operator would have to adopt new grid operation procedures to mitigate supply inadequacies of renewable energy. Spain is a case in point. Since it attained a renewable generation of about 24 per cent, it has had to deal with persistent grid instability, which has necessitated the use of natural gas as a backup generation resource.
While these impacts are undoubtedly significant, Nigeria’s power sector is expected to face a greater challenge in its quest for renewable energy integration. This challenge is tied to the sector’s illiquidity.
The Power Sector’s Illiquidity Problem
The current illiquidity of the power sector could pose a challenge to renewable energy companies. For example, in 2020, it was reported that the Nigeria Bulk Electricity Trading Plc (NBET) owed power generation companies to the tune of one trillion naira. This severe illiquidity becomes even more prominent within the context of Renewable Purchase Obligations (RPOs) mandated by the Feed-in Tariff Regulations. Under the regulation, distribution companies must purchase 50 per cent of the stipulated renewable energy capacity, while the NBET is mandated to purchase the other 50 per cent. The sector's illiquidity significantly increases off-taker risk, as the NBET is hardly capable of paying renewable generators for power produced.
This consequence is currently playing out in India. Without tackling the illiquidity within its power sector, India mandated its distribution companies to purchase power from renewable generators. The policy backfired. By April 2021, Indian distribution companies had owed renewable generators to the tune of ₹113.34 billion (approximately 565 billion naira). This bolsters the fact that solving the power sector's liquidity crisis is a prerequisite for the successful integration of renewable energy.
Policy Options for The Way Forward
Passage of The Electricity Bill
The recently proposed Electricity Bill needs to be passed to successfully integrate renewable energy into Nigeria's power sector. The Bill provides a substantially strong structure for conventional and renewable energy sources to thrive within the power sector. It also expands the electricity market to accommodate renewable energy participants and prescribes comprehensive fiscal incentives for renewable energy players. This legal certainty will significantly de-risk the investment climate in the renewable energy sub-sector, thereby, increasing renewable energy adoption.
High-Quality Distribution Services
For distribution companies to maintain profitability in the face of the impending evolution of Nigeria’s electricity market, quality assurance has to be prioritised. While distributed generation will undoubtedly continue to increase, the intermittency of renewable energy connotes that households and commercial entities will still require conventional on-grid power. Essentially, a significant opportunity exists for distribution companies to maintain revenue generation by adopting a business model centred on providing quality and reliable power to customers. This can be achieved by increasing capital infusion to expand the distribution network and strengthening operational capacity to reduce load rejections.
Unbundling The Transmission Company of Nigeria (TCN)
Nigeria's transmission company's unbundling is particularly significant for two reasons. First, as earlier stated, on-grid renewable energy generation would require substantial expansion of Nigeria’s transmission infrastructure. Second, on the commercial side, Nigeria needs a system and market operator that would be able to forecast power generation, balance demand-supply dynamics, and efficiently control the market even in the face of evolving market conditions. Evidently, strong institutions are needed to carry out these functions on both fronts. However, due to the government ownership of the TCN, the transmission and market operations have been largely inefficient. Unbundling the TCN would create separate and efficient institutions to strengthen the power transmission network and scale renewable energy integration in the electricity market.
Resolving The Liquidity Crunch Through Cost-Reflective Tariffs and Mass Metering
To resolve Nigeria’s liquidity crunch and encourage renewable energy uptake within the power sector, the collection losses of distribution companies have to be considerably reduced. This can be achieved by increasing metering rates to expand the scope of tariff collection and adopting cost-reflective tariffs to ensure profitability. Reviewing the Multi-Year Tariff Order (MYTO) to accommodate cogent costs like frequency deviations and changes in exchange rates would be beneficial. Similarly, the current metering rate can be increased by easing the metering application process under the Meter Asset Provider scheme. This way, more customers can be incentivised to obtain electricity meters at their own cost.
The global energy transition has catalysed a paradigm shift in numerous power systems across the globe. As the evolution continues, national stakeholders need to prioritise the adaptation of their power systems to changing market conditions. More specifically, it depicts the need for Nigeria to adopt strategic policies directed at optimising the opportunities and addressing the challenges that may arise with integrating renewable energy into the power sector.
Oyin Komolafe | Research Analyst, Energy | email@example.com
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