How do mini-grids provide electricity in cities?

Nigeria's electricity supply industry needs all the help it can get. 

45% of Nigerians still don’t have grid access eight years after privatisation. While most of these unserved households dwell in rural areas (only 25% of rural households have grid access), urban electrification is equally unimpressive. Just last week, the grid collapsed again for possibly the 7th or 8th time this year (we’ve lost count). And even those with access are underserved; 78% of Nigerians receive less than 12 hours of electricity daily.

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Thankfully, the Nigerian Electricity Regulatory Commission (NERC) and the government have recognised that the fate of Nigeria’s electrification cannot be left to the distribution companies, Transmission Company of Nigeria (TCN) or generation companies alone. There’s room for other players, whether they work with the discos or independently.

At the end of the day, most Nigerians don’t particularly care where their electricity comes from; they only want an affordable and reliable electricity supply.

Until recently, urban residential alternative electricity supply was mostly constrained to petrol or diesel generators and solar home systems or inverters for individual homes. But Nigerians need other alternatives with diesel prices at almost ₦800/litre and Nigeria’s regular bouts of petrol scarcity.

However, they only need these alternatives because they’re either unserved or underserved by Nigeria’s electricity grid. So, what if the distribution companies could work with other private companies to supplement the grid’s unreliable power to specific communities? This would eliminate the need for alternative self-generation and all the hassle that comes with it. Thankfully, some discos are open to partnering with private companies and today, we’ll focus on one type of partnership—interconnected mini-grids.

Interconnected mini-grids

A mini-grid is an electricity supply system with a power generation source that supplies electricity to more than one customer with a generation capacity not exceeding 1 MW, enough to satisfy about a thousand average Nigerian households.

Mini-grids in Nigeria are typically associated with rural electrification in areas with little to no grid infrastructure. Mini-grid developers will go to rural communities and propose solar or solar-and-diesel hybrid mini-grids to solve their electricity issues. But mini-grids can also work in urban areas with access to grid supply, even in sardine-packed cities like Lagos.

Mini-grids can either be interconnected or isolated. An isolated mini-grid isn’t connected to any distribution company’s infrastructure. This means the developer will have to construct their own distribution infrastructure to connect their generation plant to the community. These are typically used in rural areas where distribution companies have little to no infrastructure. As such, the developer’s contract is bilateral with just the community. However, these arrangements are typically much more expensive for both parties (the developer and the community) because of higher capital costs.

On the flip side, our focus for today is interconnected mini-grids connected to the distribution company’s infrastructure. This means the developer has to partner with a distribution company, such as Ikeja or Abuja discos, to connect the generation plant to the disco’s distribution lines already connected to the community. So, it’s a tripartite agreement between the developer, the distribution company, and the community to be served.

Interconnected mini-grids are much more efficient for urban areas because discos already have relatively good infrastructure. Discos usually concentrate on serving customers in urban areas since it is cheaper and easier because urban customers typically earn better and, as such, are easier to collect electricity payments from, one of the discos’ most significant issues. It also helps that discos already have infrastructure in urban areas built under the defunct PHCN and NEPA. But, this also means discos are more likely to jealously guard their urban customers by making it difficult for them to exit the discos’ networks. In the past, discos have frustrated customers’ efforts to find other electricity suppliers.

But, interconnected mini-grids can be a great option for customers, developers, and distribution companies, as each stakeholder stands to benefit from the interconnected mini-grids.

Enaro energy is a mini-grid developer that recently signed an agreement with Ikeja Disco to supply electricity to over 1,000 households in Ayobo Community in Alimosho local government, Lagos state, through an interconnected mini-grid. Let’s see what each stakeholder stands to benefit from the agreement.

The customer comes first

All electricity customers in Nigeria want is a reliable and affordable electricity supply. 

Reliability and affordability are equally important in getting customers on board for novel solutions like interconnected mini-grids. If the electricity isn’t reliable or affordable, they might as well stick to the grid, which is equally insufficient but affordable.

Mini-grids in rural areas are much more expensive than the grid, with tariffs that can exceed ₦100/kWh compared to the maximum Band A ₦60/kWh from the grid. Rural mini-grid costs are high because solar generators and equipment have higher up-front costs in addition to the construction costs of the distribution infrastructure. But this model works for rural communities because alternatives aren’t readily available. For urban households, it’s more of an uphill battle.

First, urban communities have alternatives—diesel generators, petrol generators, the grid, solar home systems and inverters. Another factor is that urban dwellers have fully experienced the inefficiencies of the defunct NEPA, PHCN, and the current privatised system, so there’s not a lot of trust for disco partnerships there. So, developers have to work extra hard to convince urban communities to sign on.

The most critical questions a developer must address when engaging urban communities concern energy costs (affordability) and reliability.

Ikeja Disco serves Ayobo community in Lagos state under service band C, meaning Ikeja Disco is obligated to supply just about 12 hours of electricity daily. Ayobo is clearly underserved, which presents an opportunity for a developer to pitch alternatives to them. Enter Enaro, a mini-grid developer, with an idea to supplement Ayobo’s 12-hour electricity supply with a gas-powered mini-grid to keep costs low. According to the CEO of Enaro, Seun Smith, convincing the community was the toughest part of the deal because of their mistrust of electricity companies. 

The community’s acceptance is crucial to the success of interconnected mini-grids because NERC regulations mandate a developer to get at least 60% of community member signatures for a project to be approved.

Enaro’s engagement with the Ayobo community started in 2018 and wasn’t concluded until February 2022 (COVID lockdowns affected 2020 and part of 2021). Even now that the deal has been signed, engagement will continue to ensure the customers are carried along every step of the way. In the end, the benefits to Ayobo were undeniable.

Enaro will install meters to help manage their electricity costs and supply them with electricity when Ikeja Disco can’t (meaning round-the-clock service), saving them from generator hassle. The tariff will also be affordable, giving them a reliable power supply at a tariff slightly above Ayobo’s Band C tariff of ₦45.8/kWh but much less than the  ₦100/kWh solar mini-grid tariff.

So, Enaro’s interconnected mini-grid agreement satisfies the Ayobo community’s need for affordable and reliable electricity. Now, what’s in it for Ikeja Disco and Enaro energy?

Partnerships make the journey smoother

Ikeja Disco is the best-performing distribution company in Nigeria. But, this isn’t saying much, given that 9 out of 11 discos lose at least 40% of their monthly revenues to energy theft and non-payment.

Still, Ikeja Disco leads the discos in terms of performance with less than 25% loss, and now, it’s embracing partnerships and collaboration. It helps that Ikeja Disco gains a lot from the agreement with Enaro.

First, Enaro will pay Ikeja Disco a Distribution Use of System (DUOS) charge for every kilowatt-hour sent to Ayobo through Ikeja Disco’s lines, which varies per disco. This is Enaro’s compensation to Ikeja Disco for using its infrastructure.

Second, and even more importantly, Enaro will ensure Ikeja Disco’s customers in Ayobo are satisfied by providing an additional 12 hours of electricity to supplement Ikeja’s 12-hour supply. In addition, Enaro will install meters for every household currently unmetered in the Ayobo community, which Ikeja Disco hasn’t been able to do. According to the NBS, as of Q1 2022, only 54% of Nigerian electricity households were still unmetered, and about 22% of Ikeja’s customers were unmetered.

Discos in Nigeria suffer severe funding challenges due to their poor revenues, making them unattractive to private lenders. This means they must prioritise whatever expenditure they can afford for high-revenue potential areas with wealthy residents like Ikoyi or Ikeja. Consequently, communities like Ayobo may slip through the cracks and struggle with poor infrastructure and electricity service.

Enaro will ensure that Ayobo households are metered to guarantee its revenue, inadvertently helping to guarantee Ikeja disco’s revenue. In the end, Ikeja disco’s revenue from the 12-hour supply it gives Ayobo is secured through the pre-paid meter. It also gets the DUOS charge from Enaro for allowing its distribution infrastructure to be used.

Last but not least, what does the mini-grid developer, Enaro, get?

Risks and rewards abound

Even though it’s an interconnected mini-grid, Enaro will still incur many capital costs. Smart pre-paid meters aren’t cheap nor compressed natural gas (CNG) generators that will require agreements with gas suppliers to transport gas via trucks. One pre-paid meter can cost over ₦100,000 if it’s three-phase, and a 1 MW CNG generator can cost over $200,000 excluding logistics, insurance or installation.

But, despite the heavy capital and operational costs, Enaro will recover these costs through the tariff over time.

You see, the electricity business is a cost-intensive business where recovery can only happen in the long run. So, companies, whether discos or developers, must invest in infrastructure to recoup their costs in the future. By partnering with Ayobo and Ikeja, Enaro is playing the long game.

Also, if Ayobo is successful, Enaro could expand to larger geographical areas in Ikeja or other Disco’s franchise areas and grow from 1,000 customers in one community to 10,000 customers in 10 communities.

But success will depend on Enaro keeping its word to Ayobo. This means installing meters and supplying electricity per the agreement. Smith, Enaro’s CEO, said that Enaro had not promised uninterrupted supply to Ayobo purely because it takes a few minutes to start the generators when Ikeja disco’s supply shuts off. So, while it is roughly 24/7, it is not precisely 24/7, and the Ayobo community needs to understand this to avoid unmeetable expectations. Success will also require surveillance and monitoring to prevent the vandalism of equipment. Finally, success will require Ikeja Disco to ensure its distribution infrastructure is tip-top to prevent unplanned prolonged interruptions.

When asked about the biggest challenges to serving Ayobo Community, Smith mentioned three issues, which serve as a reminder of how difficult providing electricity is in Nigeria. First, funding for gas-based urban-serving electricity projects is hard to come by. Conversely, grants and other cheap financing are available for renewable rural-serving electricity projects. Second, it’s almost easier to pass through the eye of a needle than to secure the trust of an aggrieved community with a long history of poor electricity supply. Finally, securing adequate land in a city like Lagos to set up gas generators for a mini-grid is no easy feat. While Smith could push through these challenges, the project is still in the construction phase, and he envisions that there might be more challenges ahead.

In the end, while there are risks to the developer, there are rewards that make interconnected mini-grids worthwhile for customers, distribution companies and mini-grid developers. All Nigerians want is a reliable and affordable electricity supply, by whatever means necessary.