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Recent policies enabling energy investments in Nigeria | Dentons


The importance of energy access

“Improving access and reliability of power is key to reducing poverty and unlocking economic growth in the aftermath of the global COVID-19 pandemic,” Shubham Chaudhuri, World Bank Country Director.

Electricity drives the engine of opportunity in the modern world. It is the foundation of modern society and essential to drive industrial processes such as manufacturing, production and other services within an economy. The African continent, particularly Sub-Saharan Africa (SSA), presents a good example of where a significant increase in access to electricity is required for economic development. A 2015 World Bank study, which concluded that better accessibility to electricity proved to lead to greater income, jobs and educational benefits at the individual household level, highlights the importance of energy access. Likewise, a 2014 report by the International Renewable Energy Agency finds that attaining the United Nations sustainable development goal of ensuring access to affordable, reliable, sustainable and modern energy for all by 2030 would generate up to 4 million direct jobs in the off-grid energy sector alone.

Electricity access is also essential for the progression of rural communities and villages, which make up most of the African population (even though urbanization is on the rise). Less electricity access in rural communities leaves a lot of households in the dark and adversely impacts the effectiveness of small businesses. It is also important to recognize that countries not only need access to electricity but cheaper forms of it, for economic development. Hence, costly access to electricity could potentially hamper development. For instance, in West Africa, the average price of electricity is more than twice the global average at USD 0.25 per kilowatt-hour and access to electricity is at 52% with shortages of up to 80 hours per month.1 This underscores the importance of affordable and reliable access to electricity in SSA.

An overview of the investment conditions in Africa

Despite the significant barriers to the speedy development of energy access across SSA, such as limited institutional capacity, lack of finance, technology limitation, weak physical infrastructure, lack of awareness and unfavorable policies, most African countries have managed to surmount some of these barriers to attain laudable progress in the energy sector. For instance, Kenya’s electricity access rates increased from 20% in 2013 to over 85% in 2019, with key progress in both on and off-grid connections. Additionally, Kenya, Tanzania, and Ethiopia accounted for half of the 5 million population that gained access to electricity through new solar household systems in 2018.2

According to the International Energy Agency (IEA), since 2013, SSA has seen a steady decline in the number of people without access to electricity, owing to enhanced energy access policies in countries such as Kenya, Senegal, Rwanda and Ghana. However, the years of steady progress in SSA were nearly obliterated by the Covid-19 pandemic. The IEA found that in 2021, the number of people without access to energy in SSA increased by 2% since the pandemic. It further noted that the number of Africans without access in 2021 was expected to continue to increase, to about 4% above pre-pandemic levels, and reach nearly 600 million3.

The COVID-19 pandemic has both decreased the flow of new investments and increased the cost of capital in developing economies. A 2022 World Bank report shows that the impact of the pandemic, including lockdowns, disruptions to global supply chains, and diversion of fiscal resources to keep food and fuel prices affordable, have affected the pace of progress toward the realization of the Sustainable Development Goal 7 of ensuring access to affordable, reliable, sustainable and modern energy for all by 2030.4 Furthermore, the invasion of Ukraine by Russia has also exacerbated the effects of Covid-19 on the energy crises in recent months, which has created uncertainty in global oil and gas markets and pushed energy prices to all-time highs.

Recent policies enabling energy investments in Nigeria

The Nigerian government has implemented several policies following the pandemic to bolster the legal and regulatory framework in the energy industry. In the oil and gas sector, the Federal Government of Nigeria (FGN) enacted the long-awaited Petroleum Industry Act (PIA) in August 2021 and implemented certain power sector reforms to maintain affordability for consumers and provide financial support to energy providers. Efforts were also made to improve the country’s business environment through an updated taxation and company law regime. This publication discusses a few of these policies below.

The PIA

The PIA comes at a critical moment to provide much-needed clarity regarding the governance, regulatory, and budgetary framework for Nigeria’s energy transition. It appears to focus on gas as the transition fuel for Nigeria. Although Nigeria’s gas sector has been bedeviled with several challenges such as poor infrastructure, regulatory uncertainty and price inefficiencies amongst others, the PIA aims to address these issues, particularly in the gas supply industry by diversifying the energy mix and promoting investment through improved regulations and incentives for gas infrastructure such as tax holidays of up to 10 years for investment in gas pipelines, reduced royalty rates and exemption on price reflective royalties.

The PIA also made strides in the area of reducing carbon emissions through several provisions such as gas flaring penalties, obligations on licensees to produce an environmental management plan, payment of a prescribed financial contribution to a newly established environmental remediation fund for the rehabilitation or management of negative environmental impacts of the petroleum operation and directing the Nigerian National Petroleum Corporation Limited (NNPC Limited) to engage in renewable energy development.

While it appears that the PIA introduced certain laudable provisions for the Nigerian energy industry, some critics have argued that the government missed an opportunity to diversify the nation’s energy mix by failing to provide a framework to fund the increase of renewable energy share in the system. It was suggested that considering the low investment in the renewable energy sector in the country, the government should have established a renewable energy fund through the PIA, similar to the Frontier Exploration Fund established under the PIA, which is funded by 10% of rents on petroleum prospecting licenses, 10% of rents on petroleum mining leases, and 30% of NNPC Limited’s profit oil and profit gas in production sharing, profit sharing, and risk service contracts. Many believe that the allocation of oil revenues to a dedicated renewable energy fund would promote the development of renewables by improving investment and liquidity in the sector, resulting in better access to electricity for the citizens and the achievement of the nation’s climate goals.

Power sector reforms

In September 2020, the Nigerian Electricity Regulatory Commission (NERC) introduced the service-based tariff system as a step toward full cost-reflectivity – which has been identified as one of the major setbacks for investment in the sector. Under the new tariff system, electricity Distribution Companies (DisCos) are only permitted to review the electricity tariffs of metered customers after due consultation with them, having guaranteed a certain level of electricity availability, based on an hourly supply. However, the modifications of the new regime will not apply to unmetered customers or those on lifeline tariffs.

Additionally, based on the Electricity Power Sector Reform Act of 2005, which mandates a six-month electricity tariff increase as prescribed by the Multi-Year Tariff Order, NERC increased electricity tariffs from 56% to 80% in November 2020 and recently adjusted electricity tariffs across some DisCos with increases ranging from 5% to 12% in May 2022. Consequently, NERC emphasized that the increases were necessary to achieve long-term improvement in reliability of supply in accordance with the DisCos’ capital expenditure proposals and performance improvement plan.

However, as NERC reviewed the energy tariffs, it also made efforts to address the issue of estimated electricity billing which is, without doubt, an untenable and untransparent way to measure and sell energy to Nigerian customers. As such, the FGN approved the National Mass Metering Program (NMMP) in October 2020 to close the metering gap in the country and reduce the impact of the service-based tariff on end-users. The Central Bank of Nigeria (CBN) issued the NMMP financing framework, which outlines the operational procedures for providing financial assistance to DisCos and indigenous meter manufacturers. According to the FGN, about 750,000 meters were distributed to Nigerians in the first phase of the NMMP, which lasted 8 months. NERC also issued a directive in March 20215, requiring DisCos to replace all damaged and obsolete meters under the NMMP in strict compliance with the Metering Code and other extant regulations.

The Solar Connection Facility

The Solar Connection Facility project (Project) is a ₦140 billion long-term and low-interest credit facility for private sector developers in the business of deploying Solar Home Systems (SHS) and mini-grids. The Project was introduced by the CBN in September 2020 as part of the FGN Economic Sustainability Plan to mitigate the effects of the COVID-19 pandemic, provide support to MSMEs, expand energy access through the roll-out of 5 million new-solar-based connections to connect off-grid communities and generate revenue for the government through tax revenues and import substitutions. The Project is supervised by the Rural Electrification Agency (REA) which is responsible for obtaining necessary approvals for the Project, providing appropriate institutional arrangements for its implementation, and joint monitoring the funded projects.

Consequently, the CBN issued the “Framework for the Implementation of the Solar Connection Facility” in September 2020 (the CBN Guidelines) to define the categories of facilities under the Project, financing terms and eligibility criteria for participation in the Project. Accordingly, the CBN Guidelines define 2 types of off-grid solar market participants that are eligible to benefit from the intervention funding subject to attaining certain eligibility criteria as prescribed under the CBN Guidelines. The participants include the Upstream Participants and the Downstream Participants.

The Upstream Participants include companies engaged in the manufacturing of solar generation components and balance of system, the establishment, expansion, upgrade of solar manufacturing facilities, assembly of solar components and balance of system, repair and maintenance of solar home systems and mini-grid equipment, solar component research and development and any other off-grid solar value chain activity as may be prescribed by CBN. The Downstream Participants, on the other hand, are described as entities engaged in the distribution and after-sales support of solar home systems, mini-grid project development activities including site identification and assessment, design, planning and customer acquisition; engineering, procurement, and/or construction of mini-grid facilities, and any other retail-based, off-grid solar value chain activity that may be prescribed by the CBN.

Currently, a total of ₦7 billion has been disbursed so far with potential institutional investors indicating a keen interest in the Project6. The Project has been described, by many, as a laudable initiative of the FGN and if well implemented, it is believed to have the capacity to significantly expand energy access across the country.

The National Gas Expansion Programme Facility

The National Gas Expansion Programme (NGEP) introduced a CBN ₦250 billion intervention facility to help stimulate investment in the gas value chain. The NGEP seeks to improve the level of investment in the production and utilization of Compressed Natural Gas (CNG) and Liquefied Petroleum Gas (LPG) as clean alternative sources of domestic energy in Nigeria. The main objectives of the intervention facility include enhancing access to private finance, stimulating investments in infrastructure, developing gas-based industries such as petrochemical (fertilizer, methanol, etc.) to support large industries, and encouraging the use of CNG and LPG as the choice of fuel for transportation and cooking. The NGEP has been examined extensively in our earlier publication.

The Companies and Allied Matters Act 2020

The Companies and Allied Matters Act 2020 (CAMA 2020) was passed on 7 August 2020 to repeal and replace the Companies and Allied Matters Act, 1990. The law establishes a solid framework for addressing the identified burdensome legal, regulatory and administrative bottlenecks which, for decades, have made doing business in Nigeria difficult (particularly for Micro, Small and Medium Enterprises (MSMEs)), and hindered investments into the country.

CAMA 2020 has over 15 new provisions to promote the ease of doing business and reduce regulatory barriers. It introduces the Limited Liability Partnership (LLP) and Limited Partnership (LP) business structures, allowing investors to benefit from a limited liability structure with the tax status and flexibility of a partnership. It is also supported by the Companies Regulations 2021, which outlines the procedures for registering a private limited company.

Furthermore, CAMA 2020 also made efforts to reduce the regulatory burden on small businesses by eliminating the administrative bottlenecks that existed under the previous regime. The new law now allows a sole member of a company, which gives more flexibility, control and the corporate personality for small business founders to access finance. Additionally, one of the most significant benefits of the new regime is the increase in the threshold for qualification as a small company. Under the previous regime, a small company was defined as one with a yearly turnover not exceeding ₦2 million and a net asset value not exceeding ₦1 million; otherwise, it is classified as a large company. However, under the new regime, the annual turnover of a small company has been significantly increased to an amount not exceeding ₦120 million, and a net asset value of not exceeding ₦60 million. As a result, MSMEs can now take advantage of the regulatory and financial privileges enjoyed by small companies which include the exemption from the mandatory appointment of a company secretary and auditor7 including other tax incentives under the Finance Act, 2020, which exempts companies with annual gross turnover of ₦25 million or less from Companies Income Tax.

Value Added Tax (Modification) Order 2021

The Value Added Tax (VAT) (Modification) Order, 2021 (the “2021 Order”)8 commenced on 30 July 2021. The 2021 Order replaced the previous VAT (Modification) Order 2020 and modifies the First Schedule to the VAT Act by expanding the list of exempt goods and services and updating the definition of some terms to ensure consistency with the amendments introduced to the VAT Act by the Finance Act, 2020.

Notably, the 2021 Order exempts 8 renewable energy equipment from VAT, including wind-powered generators, solar-powered generators, solar cells whether or not in modules or made up into panels, other photosensitive semiconductor devices, solar DC generators of an output exceeding 750 Watts (W), solar DC generators of an output exceeding 750 W but not exceeding 75 Kilowatts(kW), solar DC generators of an output exceeding 75 kW but not exceeding 375 kW and solar DC generators of an output exceeding 375 kW. Also, the 2021 Order exempts 5 items listed as petroleum products from VAT, including aviation spirit, petroleum oils and oils obtained from bituminous crude, motor spirit super and ordinary, kerosine type jet fuel and household kerosine.

Conclusion

Investment in the power sector is a mandatory part of any economic growth strategy. The significant barriers to the speedy development of electricity access across SSA (as identified above) have a strong impact on their access to financing. However, international support is critical to accelerating investment to meet the rising energy demand in the region and overcome the financing barriers. The IEA envisages a significant increase in demand for power in SSA at a compound average annual growth rate of 4.6%, and by 2030, the existing electricity generation is expected to double.

The concern of the rising energy demand has also been intensified by the huge funding gap that exists in facilitating energy access in SSA. According to the IEA, closing this gap will require an estimated annual investment of USD28 billion yearly from 2018 to 2030. Concessional and blended finance structures could be a useful method to close the funding gap in SSA, as well as effective regulatory frameworks improved by local governments to foster easier access to finance. In Nigeria, the policies discussed above signal the government’s commitment to creating a strong, sustainable and attractive business climate for foreign investors.

  1. World Bank – Doing Business Report 2020
  2. IEA Report on Scaling up Energy Access in Africa (2020)
  3. IEA Electricity Market Report – 2021 Outlook
  4. The 2022 edition of Tracking SDG 7: The Energy Progress Report
  5. NERC Order No. NERC/246/2021
  6. This Day Newspaper, published 22 February 2020. Accessed 15.6.22
  7. In addition to companies that have not carried out business since incorporation (other than an insurance company or a bank or any other company as may be prescribed by the CAC). Section 402 of CAMA 2020
  8. Official Gazette No. 167, Vol.108 of 21 September 2021.



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