The Off-Grid Sector, the Opportunities and Challenges for Investors

For a population of about 200 million, Nigeria needs 180,000MW of power, but generates 4,500MW. The transmission company (TCN), which evacuates generated power to distribution companies, has a transmission capacity of 8,100MW, but can evacuate only about half of the current installed capacity.

The TCN is the weakest link in the electricity network. As a result, Nigeria’s urban electricity penetration is 55%, while rural penetration is 36%.  The lack of adequate electricity access and aging TCN infrastructure necessitated the push for investments in the off-grid (off TCN) sector.

According to the Rural Electrification Strategy and Implementation Plan (RESIP) 2015 and the World Bank; for remote settlements, mini-grid solutions are more cost-effective than expanding the grid.

Flowing from that, the Nigerian Electricity Regulatory Commission (NERC) rolled out Regulations to guide investment in the off-grid sector.

NERC Captive Power Generation Regulation 2012 – This regulates the generation of electricity exceeding 1MW, consumed by the generator entity, and not for sale to third parties. This may be used by industries with heavy power usage.

NERC Regulation for Mini-Grids 2016 – This regulates the construction of standalone power systems with an installed capacity less than 1MW, to supply electricity to unserved and underserved settlements. A mini-grid may be isolated with no link to the national grid; or interconnected, with link to the national grid through connection to a distribution network.

Independent Electricity Distribution Networks (IEDN) Regulations 2012 – This regulates off-grid distribution networks constructed in settlements not served or underserved by an existing distribution company. There are Isolated Off-grid Rural IEDNs, Isolated Urban Off-grid IEDNs (both, unconnected to an existing distribution network), and embedded IEDNs (connected to an existing distribution network).

The Rural Electrification Agency (REA) also introduced initiatives aimed at providing electricity to rural areas using off-grid power solutions.

Energising Economies Initiative (EEI) – This is aimed at supporting the provision of off-grid solutions to small businesses in the private sector, particularly in markets and shopping complexes, with pilot projects in Sura Complex (Lagos state), Sabon Gari Market (Kano state) and Ariaria Market (Abia state).

  • The Project at Ariaria Market – is a 5MW gas-fired power plant. The Developer of the project is Ariaria Market Energy Solutions Limited (AMESL), an SPV consisting of three companies, providing power generation, distribution and metering services. The market has about 37,000 shops, with less than 5% unoccupied or under construction.
  • Sabon Gari Market – involves stand-alone solar systems for each shop between 1-2KW capacity, providing stable power to the market. This project is developed by Sabon Gari Energy Solutions Limited (SGESL). The market has about 1,198 shops, with plans to expand to over 13,598 shops.
  • Sura Shopping Complex – involves a connection to power supply from Independent Power Producers (IPPs) located within Lagos Island. The electricity solution is taking surplus power from the IPPs to power the shopping complex through a distribution network, with an alternative power system as backup. The developer for Sura Shopping complex is Sura Independent Power Limited (SIPL). The project will power 1,047 shops.



Gas Supply- The majority of generating companies (including off-grid independent power plants) are gas-fired. 82% of total generation of 4,500MW is from natural gas. A big challenge to electricity generation is the unavailability of gas.

Only 1.4 Billion Standard Cubic Feet (bscfd) is required for generating companies to function at their maximum capacity, but only 0.9 bscfd is supplied to the power plants, the remaining rationed to other sectors within Nigeria. Lack of access to gas alone, reduces the utilization of the installed capacity of gas-fired off-grid power plants, which depletes investors projected cash flow.

Variation in gas price is also a pang of worry for investors in off-grid IPPs. Gas suppliers rarely agree to a fixed-price Gas Sales and Purchase Agreement. To buffer against variation in gas price and underutilization of installed capacity, a Pass-Through clause may have to be inserted in the PPAs between off-grid IPPs and off takers. By this instance, the loss as a result of underutilization of capacity and variation in gas price is monetized and billed into the eventual tariff that will be paid by the off-takers.

Lack of Federal Support- Large off-grid projects require huge capital outlays for effective execution. The absence of consistent financing options for such investments constitutes a barrier to the development of such off-grid projects. Investors without government support back-off from such projects. After the Azura-Edo IIP, the federal government has been unwilling to guarantee investments in power projects. This is reflected in the drag in the financial close of the Solar IPPs. Such unwillingness disincentivises investors whose only push may have been a sovereign guarantee to mitigate offtake risk. 

Purchasing Power of Consumers- Financial viability of off-grid investments is tied to the ability of consumers to pay tariffs. Before 2018, solar panels were exempted from import duty. However, with the reclassification of solar panels, imported solar panels are now faced with import up to 10% in duties and Value Added Taxes (VAT). Moreover, with the VAT increase from 5% to 7.2%, the import charges have moved upward to 12.2%. The other components that accompany a complete solar-PV system– batteries, inverters and charge controllers– already attract individual import charges.

Nigerians spend about 60% of income on food and estimated 30% of income on housing. Given static salaries and delay in implementing the new minimum wage, the border closure, which has driven up inflation in food prices, may see the percentage spend on food move upward to 65%. With 95% already off from income, the remainder 5% will be frugally spent. It would mean that the investors in the off-grid sector, for profitability, are competing with food and rent.

The VAT increase will also necessitate an increase in tariffs for solar-sourced power.

According to Segun Adagu, President of the Renewable Energy Association of Nigeria (REAN), the price of solar-PV systems could potentially come down by up to 25% if zero duty is considered for solar-PV systems, including the components that accompany them.

Twenty-five (25%) off the current tariffs for solar-sourced power would make power consumers more responsive to payments, which, in turn, would guarantee returns to investors. 


The off-grid sector presents a massive opportunity to expand electricity access. However, variation in gas supply and eroding the purchasing power of potential power consumers limit such opportunity.

To pull investors to the off-grid sector, there should be macro-economic and policy changes. The FG should increase investment in housing and road infrastructures, and drive flexible and extensive agricultural subsidies to aid mechanized farming. These will bring down food and rent prices, freeing up more disposable income for electricity tariffs.

Income duties should be zeroed for the importation of renewable power systems.

The FG should also be actively involved in the financing of off-grid power projects; to guarantee NBET’s PPAs for bulk power purchase from huge off-grid generating entities. The PPAs should be expertly negotiated, to factor in gas supply risk, pending stability in the gas sector.

Where the above are implemented, it is expected that investments in the off-grid sector will be guaranteed long-term returns, and Nigeria’s electricity access, considerably improved.

The opinions in the articles are for general information purposes only and do not form a legal relationship or be taken as legal advice. To explore legal advice, please consult your solicitor or feel free to get in touch with us directly.