Nigerian communities benefit from lower electricity prices when the government subsidizes mini-grids in rural areas.
Productive use initiatives are crucial for encouraging people to use electricity once mini-grids are in place.
This conclusion to our two-part report examines how mini-grids affect communities and what Nigeria's innovative mini-grid support might mean for the developing world.
This is the second part of a report by Remy Dhingra (YC ‘20) which examines the Nigeria Electrification Project and its implications for developers and communities. Part I detailed the structure of the initiative and its two-pronged approach to supporting mini-grid developers. Part II considers how the project impacts the communities receiving electricity access, from cost savings to job creation.
The Nigeria Electrification Project (NEP) is a groundbreaking initiative to accelerate energy access in Nigeria, where less than one third of rural residents can utilize electricity. Implemented by the Rural Electrification Agency (REA) and funded by the World Bank and the African Development Bank, the project aims to kickstart the mini-grid industry through two financing mechanisms: performance-based grants and a minimum subsidy tender.
In 2015, esteemed Nigerian author Chimamanda Ngozi Adichie penned an op-ed for the New York Times about her life as it relates to electricity. Adichie describes her deep-seated frustration with the insufficient and capricious supply of power, which she terms a “Nigerian phenomenon that can buoy spirits and smother dreams.” She also wonders how much hardship other, less-privileged Nigerians have faced as a result of energy shortages. Adichie’s ruminations serve as a grave reminder that energy access deficits must be addressed with end-users in mind—from the bottom-up, not just the top-down.
The Nigeria Electrification Project mini-grid initiatives can be labeled a supply-side initiative, because they directly assist the suppliers of electricity and assume that benefits will trickle down to the electricity consumers. This assumption is not always grounded in empirical evidence. According to Andrew Allee, a Research Fellow at the Rocky Mountain Institute, several supply-side initiatives in the past have failed to increase consumers’ electricity usage, which has encouraged a focus on the demand component of energy access. This demand-centric mindset allows observers to draw conclusions by looking at experiences in communities with newly-constructed mini-grids.
Benefiting Communities: Affordability and Access
Though the mini-grid component of the NEP is explicitly private-sector led, implicit benefits accrue to communities in the form of increased affordability. Nigeria’s energy regulator requires mini-grid developers to submit memorandums of understanding that states an agreed-upon electricity tariff that the developer and community support. When some developer costs are subsidized, the minimum tariff—what a developer needs in order to make the mini-grid cost-effective—falls. As a result, the price of electricity for end-users under the NEP is less than the price accompanying a mini-grid built without similar subsidies. James Sherwood, a Principal in the Rocky Mountain Institute’s Electricity Practice, explains that the NEP is “making up a difference between what [financing] developers can procure… and what it takes to make tariffs affordable.”
Another way the NEP can benefit communities is by electrifying sites that mini-grid developers would normally reject. Nigeria has many such sites that challenge developers, financially or otherwise. For example, a developer might be reluctant to build in a locale with low incomes, a lack of incoming roads, or poor connectivity. For some of these sites, especially those with low population densities, solar home systems might be more appropriate. Fortunately, the NEP also includes a component dedicated to increasing the distribution of solar home systems. Other challenging sites might be bundled into lots and auctioned off through the minimum subsidy tender. While bundles on the whole are financially viable, Anita Otubu (the NEP’s Component Head at the REA) says that certain sites within a bundle might not be individually attractive to a developer.
In Nigerian communities with mini-grids built prior to the NEP’s roll-out, residents seem satisfied with their new electricity source. Ifeoma Malo co-founded the Clean Technology Hub, which was tasked with examining how Nigerian rural consumers felt about mini-grids serving their communities. Malo, who also serves as the Nigeria Campaign Manager for Power for All, conversed with people in four communities and found that residents were content with the electricity. Though the new power was not cheap, the community members decided that paying now was far better than waiting several decades until the grid reached them. In fact, according to Malo, communities adjacent to those with mini-grids requested that systems be built in their own villages after seeing their neighbors enjoy the associated advantages.
Benefiting Communities: Productive Use
Andrew Allee also surveyed residents of a community with a mini-grid built before the NEP. He traveled to Gbamu Gbamu, a village in Ogun State, where a mini-grid went online in February 2018. The system was built by Nigerian developer Rubitec and partly funded by the European Union and the government of Germany. Allee relays that the people of Gbamu Gbamu were satisfied with mini-grid’s reliability. However, he says, “person after person reported that the thing that would make their situation better was the ability to buy appliances,” which would let them take further advantage of the clean, steady electricity.
A growing focus on productive use appliances—those that use energy in ways that can generate additional income—is part of the shift towards demand-side thinking in the energy access field. According to Richenda van Leeuwen, a Managing Director at the Rocky Mountain Institute, ensuring that people have the capacity to increase their electricity usage is crucial to linking energy access with health improvements, livelihood outcomes, and economic development. She asks, “Can they access capital and purchase or lease appliances, so that they can take advantage of the electricity supply when made available to them?”
The African Development Bank-funded side of the program recognizes the importance of helping rural communities increase their electricity consumption. The second component of the Bank’s collaboration with the REA allocates $20 million to performance-based grants that will encourage energy access companies to distribute appliances. According to Rhoda Limbani Mshana, the African Development Bank’s Chief Power Sector Regulations Specialist, the grants will “support the incremental operational expenditures of retailing appliances alongside energy services.” In other words, the component encourages companies to not only provide access to electricity but also provide the means to increase their use of the resource.
Mshana lists a few examples of the approved appliances, which include maize shellers, egg incubators, sewing machines, and salon haircutting kits. (A final list, she says, will be announced after market studies are completed.) These appliances increase the amount of electricity being used, which amounts to higher returns for developers as well as process improvements for local businesses.
As of March, this productive use appliance component was still in its early stages. Chris Ebiware—Nigeria Country Manager for mini-grid developer Renewvia—attended the component’s launch in Abuja several months ago alongside several other mini-grid developers. At the launch, the developers provided constructive feedback to the team on methods of disbursement.
Bringing productive use into the NEP is vital to ensuring that electricity access yields an increase in living standards. The inclusion of appliances in the program aligns with a growing trend of developers incorporating appliance retail in their operations, which the Rocky Mountain institute calls an “emerging best practice.” Daniel Anastos agrees, explaining that offering appliances to customers is an increasingly common non-core function of a mini-grid company. Anastos leads business development for another mini-grid developer that has successfully built a mini-grid with NEP support, Powergen. PowerGen offers basic appliance packages—think switches, outlets, and lights—to match customers’ needs. “Once everyone has light,” he says, “that’s when we focus on the businesses.” The company’s distribution of agro-processing and other business-specific equipment, the kind Mshana mentioned, is less common.
A smaller but relevant benefit to communities is job creation. When Renewvia builds a mini-grid, the company hires at least three local staff, including a site agent and a security guard. Likewise, PowerGen hires security guards from the community and often contracts local electricians to fix minor problems that may arise at the mini-grid site.
Given the unprecedented scope of the NEP, an enormous amount of data is needed to monitor its progress. Enter Odyssey Energy Solutions, a big data platform for distributed energy assets founded in 2017, the same year the company began working with the World Bank and the Rural Electrification Agency. The functionalities built by Odyssey play a crucial role in ensuring that benefits to electricity end-users materialize as intended.
Odyssey created a simple and low-cost way for the REA to ensure the reliability of customers’ connections. Using detailed data collected from on-site smart meters, the REA can remotely verify that communities are receiving electricity as promised. Odyssey’s system also flags when connection claims submitted by developers have errors, such as missing data or duplicate serial numbers. To complement the widespread remote monitoring, REA is conducting a handful of field surveys as part of verification.
Additionally, dashboards created by Odyssey allow REA to keep a finger on the pulse of the project. The agency and the World Bank have access to live summaries of impact indicators, including how many customers have been connected and the number of connected households headed by women.
With tens of millions of rural Nigerians still lacking access to electricity, it is imperative that the NEP’s financing schemes advance expeditiously. Odyssey’s data-driven capabilities have increased the speed and efficiency with which funding can be doled out, ramping up the pace of electrification. For example, Odyssey automated the feasibility studies that the REA is using to determine the viability of lots under the minimum subsidy tender. The company also streamlined the bidding process under the tender and the technical application submission process under the performance-based grant program. Emily McAteer, CEO and Co-Founder of Odyssey Energy Solutions, theorizes that the straightforwardness of the funding process played a major role in the rapid deployment of mini-grids under the performance-based grants.
Two types of communities remain out of the scope of the NEP and, more broadly, Nigeria’s current subsidy regime. First, some communities with low electricity usage and low population density will likely remain unattractive to developers. According to Jon Exel, who leads the World Bank’s NEP task force, a market assessment revealed that Nigeria has roughly 10,000 potential mini-grid sites. Some of these sites are prime business opportunities for developers. However, says Exel, “at some point, all of these sites will have been taken.” Though this moment is not in the near future, it constitutes a point in time that Nigeria could be forced to re-evaluate its mini-grid market support strategy. Perhaps more subsidies will be needed, or perhaps mini-grid costs will have been reduced enough for these more remote sites to become financially viable.
A second type of community meriting focus on this analysis is the “underserved.” Some communities ostensibly have grid access, but the power supplied by distribution companies remains unreliable at best. These communities might be best supported by smaller mini-grids, according to a recent Rocky Mountain Institute report. However, under the NEP, companies are only allowed to obtain performance-based grants for mini-grids in unserved—not underserved—communities, though this requirement may be relaxed in the future.
The Nigeria Electrification Project is supported by an unprecedented amount of financing and incorporates a broad scope of initiatives, making an expansion of rural electrification highly likely. In particular, the mini-grid-related components of the World Bank- and African Development Bank-funded programs are cleverly designed to ease the financial burden on developers and encourage growth of both the industry and the rural energy access rate.
As the NEP continues to take shape, the course of the minimum subsidy tender program and the productive use component will be worth monitoring. Since the minimum subsidy tender invites larger companies with broader mini-grid portfolios into the industry and shifts the responsibility for pre-construction diligence away from the developer, it represents a shock to the sector and its current business model. Additionally, the productive use component is crucial to ensuring energy access actually leads to higher incomes.
COVID-19 has presented the project with some unexpected challenges. Ifeoma Malo of the Clean Technology Hub predicts that obtaining financing will be harder in an adverse economic environment, acting as a potential headwind to developers. She also notes that the pandemic caused supply chain slowdowns by way of restrictions on the movement of people and goods within Nigeria. For example, PowerGen’s Moyeen Abiodun reports that her company’s project schedule was delayed due to supply chain limitations. Given that the NEP focuses on rural areas, says Rhoda Limbani Mshana, its implementation is deeply impacted by constraints on intra-country travel.
The NEP has made a few changes to deadlines and requirements to account for the impacts of COVID-19 on developers. For example, under certain circumstances, the REA is now willing to disburse 40% of a performance-based grant to pre-qualified developers before the connections have been verified, as stated in an updated project implementation manual.
If successful, the benefits of the Nigeria Electrification Project could reverberate beyond Nigeria itself. The innovative nature of the program—and the strong enabling environment surrounding it—could be replicated in other countries with low rural energy access rates. As the NEP continues to progress over the next few years, the outcomes from its mini-grid initiatives are enthusiastically anticipated.