Renewable Energy and Power Purchase Agreements in Nigeria

Renewable Energy and Power Purchase Agreements in Nigeria

Introduction

According to the United Nations, renewable energy (“RE”) is energy derived from natural sources that are replenished at a higher rate than they are consumed. Renewable energy sources include solar, biomass, geothermal, hydropower, and ocean energy.[1] With the global need for decarbonization, one way to purchase renewable energy and facilitate the financing and development of renewable energy projects is through power purchase agreements[2].

Meaning of Power Purchase Agreement

A power purchase agreement (“PPA”) is an agreement under which a power producer agrees to supply energy to a person usually referred to as the off-taker. A PPA can also form the basis for a public private partnership (“PPP”) wherein a private sector developer generates power and sells the bulk of such power to the government or a government-owned entity. PPAs detail the commercial and technical terms that bind the power generator and the off-taker (the “Parties”).

Why PPAs?

PPAs enable the Parties to set a fixed price for the sale of power over a long-term engagement by mitigating market risk such as inflation. Similarly, PPAs also help to lock-in long-term demand and supply for RE and makes it easy for developers of renewably generated electricity to get loans and other forms of finance relying on the continuity of demand. RE-based PPAs facilitate the reduction of greenhouse gas emission and the avoided emission can also be traded as carbon off-sets. RE-based PPAs serve as legal documents evidencing renewables portfolio in jurisdictions where renewables portfolio standards are legally prescribed and/or mandated.

Essentials of a PPA

A standard PPA must have key provisions including volume and term, pricing structure, growth rate for renewables, development risk, project price volatility, consumption profile and shape of generation. A PPA should also speak to interconnection, metering, invoicing and payment, scheduled outages, force majeure exceptions (actual and potential transmission constraints and interruptions), dispute resolution, early termination and possibly, put and call options (especially for PPP-related PPAs). In negotiating a RE-based PPA, the source of RE and the ownership of the RE credits resulting from the said PPA must be considered.

RE-based PPAs in Nigeria

The principal legislation in the Nigerian power sector is the Electricity Power Sector Reform Act 2005 (“EPSRA”). The EPSRA established Nigerian Electricity Regulatory Commission (“NERC”) and grants it regulatory powers pursuant to which it issued the Regulations on Feed-In Tariff for Renewable Energy Sourced Electricity 2015 (“REFIT” or “Regulations”).

REFIT, amongst other things, provides for purchase obligations of off-taker and power producers[3] which should be considered in drafting a RE-based PPA in Nigeria. REFIT further imposes an obligation on an off-taker to buy all the electricity supplied from an RE projects subject to capacity limits specified in Schedule 1 of the Regulations[4].

REFIT Standard Form for Renewable Energy PPAs

Regulation 13 of REFIT provides for the standard form for RE-based PPA in Nigeria. Some notable provisions include:

• The PPA must be a must-take contract[5];
• The PPA shall be for a term of 20 years commencing from commercial operation date;
• The pricing in the PPA shall be based on the feed-in tariffs as detailed in Schedule 5. It further states that though the tariffs may change from time to time after review by NERC or other reason, the prevailing tariff at the time a PPA is signed shall be fixed for the entire duration of such PPA.

It is important to note that the Nigeria Bulk Electricity Trading (NBET) has signed more than 10 power purchase agreements with solar power project developers of cumulative capacity of over 975 MW.[6]

Recent Development

It is worthy of note that the recently assented alteration to the Constitution of the Federal Republic Nigeria amends – among other constitutional provisions – paragraph 14, Part 2 of Schedule 2 to the Constitution to the effect that legislative power is now bestowed on State Governments in respect of generation, transmission and distribution of electricity in areas covered by the national grid within the borders of their respective States.

In light of this amendment and considering the need to inject renewably generated power into Nigeria’s energy mix as contemplated in the Nigeria Energy Transition Plan, States may now take advantage of this to include provision on statutory minimums for renewably generated power in their legislations thereby compelling State-licensed operators across the electricity value chain to contemplate and include same in their portfolio of power projects – this will have significant on the concerted global efforts on energy transition and the ability of states to attract local and international green investments.

[1]What is Renewable Energy? Available at https://www.un.org/en/climatechange/what-is-renewable-energy#:~:text=Renewable%20energy%20is%20energy%20derived,plentiful%20and%20all%20around%20us. Accessed 29^th March 2023

[2]‘Infrastructure Solutions: The power of purchase agreements’ (European Investment Bank) https://www.eib.org/en/essays/renewable-energy-power-purchase-agreements accessed 31st March 2023

[3] Regulation 5 REFIT

[4] Regulation 5(b) REFIT

[5] That is to say, the offtaker must purchase all electricity supplied by the developer.

[6] Nigerian Electricity and Power Systems Available at https://www.trade.gov/country-commercial-guides/nigeria-electricity-and-power-systems Accessed 29^th March 2023.