A new model for embedded generation with revenue assurance for developers can increase electricity supply at the distribution level

By Sakhi Shah, Olatunde Okeowo, and Osa Imoukhuede

Nigeria — the country with the largest GDP in Africa — needs more electricity. The private sector is helping increase the supply of electricity by building distributed energy resources (DERs), which has created an opportunity for investment. One such business model for DERs is embedded generation, which can improve supply for customers in urban and peri-urban areas in Nigeria by injecting up to 20 MW of generation per project directly at the distribution level. This method of implementing distributed energy resources is an effective way to improve electricity reliability for a large group of customers within an electricity distribution company’s (DisCo’s) territory. It has the potential to contribute 5 GW of supply, which would displace a sizeable portion of the 14–42 GW estimated distributed diesel generators and reduce energy costs for customers.

The Nigerian national grid falls short of providing reliable electricity supply to consumers due to inadequate generation capacity, limited transmission capacity, and outdated distribution infrastructure. High aggregate technical, commercial, and collections (ATC&C) losses and non-cost-reflective tariffs mean that the Nigerian electricity sector does not collect enough revenue to cover its costs, and as a result, struggles to attract investment to fix these issues. Consequently, many electricity users have to supplement their electricity supply with self-generation, mainly through inefficient, noisy, and polluting diesel or petrol generators.

Embedded generation can result in immediate supply improvements for customers, as it does not rely on uncertain future central generation and transmission build out. It also enables DisCos to improve supply for customers without ceding parts of their franchise areas to other parties. Despite its potential to solve a clear need, the uptake of embedded generation in Nigeria has been slow. Since the Nigerian Electricity Regulatory Commission’s 2012 Embedded Generation Regulation, only a handful of embedded generation projects have been built. The primary concern for DisCos, developers, and investors is that the revenue shortfall in the Nigerian electricity sector will limit the DisCos’ ability to pay for electricity supplied.

RMI created the Renewable Embedded Generation (REG) business model, described in a new report, to address the limited scaling of embedded generation, which will increase the reliability of supply for customers. This model was developed in collaboration with Abuja Electric Distribution Company, Eko Electric Distribution Company, Ibadan Electric Distribution Company, Ikeja Electric Distribution Company, Lagos State Government, and Viathan Engineering Limited.

Assuring Revenue for DisCos and Developers

In the REG business model, an embedded generation plant that combines solar PV, battery storage, and thermal generation interconnects to a DisCo’s distribution network and increases supply to a selected customer cluster. The battery storage and thermal generation enables the embedded generation installation to provide 24/7 reliability for a specific subset of customers referred to as premium customers, who will pay a premium tariff. The solar PV generation increases daytime hours of supply for all customers, including non-premium customers, who will continue to pay the service-based tariff for the number of hours of supply they receive. Project financed distribution network upgrades and metering will minimize network outages, reduce technical losses, and improve collection efficiency.

To address concerns about Nigerian DisCos’ liquidity issues, customer payments from REG-served feeders will be directed into an Independent Collections Account — a payment mechanism that separates REG electricity payments from the DisCo’s existing collections accounts, providing revenue assurance for developers without requiring DisCos to enter escrow arrangements that tie up scarce capital.

Reducing Customer Costs

REG reduces customer electricity costs compared with their current mix of grid supply and self-generated electricity. Premium customers are expected to be large commercial, industrial, and high-income residential customers, as these customers’ current electricity consumption patterns demonstrates their willingness and ability to pay higher cost-reflective tariffs for 24/7 reliability. Non-premium customers who will receive service improvement include small commercial and residential customers.

Premium customer costs are significantly reduced because the REG replaces costly self-generation during outages. Non-premium customers also benefit from reduced self-generation due to the new REG supply and increased grid supply due to grid upgrades and ATC&C loss improvements. This can avoid high diesel costs during some outages. Though the REG is not designed to guarantee supply reliability to non-premium customers, when there is a grid outage during daylight hours and if there is sufficient spare firm capacity (from thermal generator or batteries) for balancing solar supply, the solar from the REG can be used to supply non-premium customers.

Making DisCos More Profitable

By providing additional generation to DisCos, REG results in increased electricity sales. REG also provides DisCos with access to finance to improve their distribution network and meter their customers, thereby reducing losses and improving profitability. Additionally, by charging premium customers a premium tariff and improving supply for non-premium customers, REG further boosts a DisCo’s profitability. REG also helps DisCos prevent premium customers from defecting from their network.

Accessing More Customers

The collaboration between DisCos and developers on REG provides access to a larger customer pool for DER developers and more investment opportunities for financiers than is currently available. Currently, most DER developers develop smaller projects for single customers or in off-grid areas where the DisCo is presently not operating. However, REG allows developers to supply energy for DisCos to serve larger clusters of customers in areas where DisCos currently operate but do not want to cede their franchise.

Increasing Affordability for Marginalized Groups

It is important to consider gender, equity, and social inclusion (GESI) when assessing the customers who will benefit from REG because currently, women and marginalized groups are disproportionately affected by lack of access to energy. REG addresses the need for affordability by including non-premium customers who remain on service-based tariffs but benefit from grid upgrades, metering, and improved supply, which all result from the REG. Data collection for REG customer clusters should be sex-disaggregated and focus on the energy needs of diverse customer segments during project development. The full report details how GESI considerations can be included in different phases of implementation of the REG project, including in employment within the energy sector, which remains male-dominated.

The REG business model has the potential to scale embedded generation and incorporate distributed energy resources for improved reliability. It will result in more funding due to the revenue assurance model, improved DisCo profitability, and reduced electricity costs for customers by replacing self-generation.

The article has been sourced from RMI and can be accessed here