A Comprehensive Guide For Foreign Investors Doing Business In Nigeria (Power And Renewable Energy)

1.0 INTRODUCTION

1.1 OVERVIEW ON NIGERIA'S LANDSCAPE IN THE POWER AND RENEWABLE ENERGY SECTOR

Nigeria's nascent power sector brings flashes of it's communication sector, where the strive of NITEL and the invite for private parties led to exponential growth in the sector. Today, the Nigerian economy boasts over 294 million mobile cellular subscriptions. This penetration rate represents about 85% to 90% of the total population and made communication companies like MTN and Airtel some of the major profitable global sites.

Nigeria, with its approximately 250 million population, has opened it's doors at a state level and federally to private partners and participation.

A quick overview of the historical landscape of power in Nigeria, which is further developed in later paragraphs, reflects a movement from pre-colonization with minimum government interference apart from licensing and general regulation to a greater amount of government participation under the military rule post-independence.

Recent laws, especially the 2023 Electricity Act, have however reopened this sector to the public, and just as was done with the communication sector where a few organizations keyed into this. We have started to see private companies come and benefit from this enabling environment which is rich in resources, has a high population who prioritize electricity, and a growing manufacturing sector which will require growth in the power sector to truly expand and now become an avenue for both private and public sector investment.

States like Abia have already seen private sector organizations take advantage of this new environment to start generating and supplying electricity to an over 4 million population.

Technology also means that the amount of capital required to scale investments like this is becoming lower, and with evidence of a stable democracy since 1999, this is the time to benefit from what has been coined by international organizations.

With predictions from established companies like Goldman Sachs that Nigeria will be among the largest economies by 2075, the UK government went on to rate Nigeria as a large prospective future market for trade and investment due to the present economy.

The country's history in the energy sector has made it an undeniable powerhouse, as it is lauded as one of the top ten producers or suppliers of crude in the world.

In the midst of all this, it can't be easy to forget that the nation has an effective framework to build off in the renewable power sector. Among the United Nations, Nigeria was able to develop a Renewable Energy Master Plan, which provides opportunities for foreign investors whether privately or in cooperation with the government using PPP (Private Public Partnership) who are capable of providing renewable energy to 250 million-plus people. This subsequent adoption and development of the Renewable Energy Sector in Nigeria, also plays a significant role in the country's reputation as the African Giant .

In fact, an overview by the Rural Electrification Agency identifies an opportunity for renewable energy companies to access a maximum of 100 million great power users. Nigeria is well known for its year-round sunny skies, even during the rainy seasons, and solar companies are entering into the country to take advantage of that especially under Tinubu's administration, which is creating a favorable environment for energy investment.

With the Naira at its current state, and tax incentives available to those in the renewable sector, astute businessmen will benefit from the advantages and wide range of scalability.

This guide therefore reviews the major aspects of the renewable energy sector here in Nigeria, identifying some of the key areas where foreign investors can benefit while providing adequate guidance and compliance requirements.

1.2 WHY NIGERIA?

1.2.1 Key Opportunities

A few years before Covid, Nigeria was touted as the fastest growing economy in Africa. It has outpaced its African contemporaries including South Africa, Morrocco, and Egypt, it had had paid off all international debts and was attracting more foreign investment than ever. In 2019, Covid brought with it a global recession and the need for the country to realign it's economic goals.

Only two years ago, Tinubu was inaugurated and he immediately put into place policies that have garnered recognition for creating an environment for Foreign Direct Investment (FDI). He removed the fuel subsidies as well as currency subsidy allowing the Naira to respond to national economic cycles of demand and supply. Whilst there have been a lot of groans at the increased cost of living of the people, Nigeria has also seen some of the fastest inflation reduction and has been able to settle a lot of foreign debt increasing confidence in the nation's future. It is therefore clear that Nigeria provides a strategic opportunity for any investor, and here are a few reasons why:

1. Market Size: Nigeria has a population of over 250 million people, one of the largest populace anywhere in the world. The country's population is also highly youthful, with over 70% being young and dynamic, and having the needs of a youthful demographic , e.g., buying new technology, clothes, etc. The emphasis on this is crucial as there are concerns that Nigeria, being a poorer nation than its counterparts, potentially has a lower spending power. However, as with all youths globally, there is a great desire for consumer products. While the older society possesses more funds, they would most likely err on the side of caution.
2. High Profit: One of the greatest benefits of entering into Nigeria is the high yields. While most developed countries would generate lower profits for investors, African investments see higher returns in the double or triple digits depending on the sector.
3. Economic Potential: Nigeria has the largest economy by GDP in Africa and it's power sector is one that is consistently growing with continuous opportunities in the continent and beyond.
4. Enabling Government: As earlier stated, the current president as well as previous administrations have ensured that there are incentives in place to encourage foreign participation in Nigeria. There is access to Free Trade Zones supported by the government and enabled by law, as well as tax holidays which is also referred to as pioneer status. Nigeria also makes repatriation guarantees to foreign investors participating in the economy as well as opportunities for foreign/private partnerships.
5. Workforce: Owing to its young population, Nigeria has an educated, tech savvy demographic available to contribute to the labour market. In addition to this, Nigeria's labour laws are not overly stringent.
6. English Speaking Populace: The lingua franca in Nigeria is English, commonly spoken in International business transactions and this makes for easy communication and an effective business environment.
7. Common Law Practice: The country's legal system was developed in line with the United Kingdom common law system which also exists in countries like the US, Australia, etc. It was the official system until the introduction of the SOGA of 1900, and still holds much sway in our current laws.
8. Double Taxation Treaty: Nigeria also maintains double taxation treaties with several countries, eliminating fears of paying for the same taxes twice. These countries include the UK, Belgium, Canada, France, etc.

1.2.2 Key Risks and Challenges

1. Regulatory Uncertainty: Compliance in Nigeria can be uncertain as a result of constant policy changes. This usually means that there is a lack of access to information about key laws. In addition, license processing can be complicated due to insufficient and overlapping information.
2. Security: Certain areas in the country are plagued with insecurity especially in the North East owing to insurgencies, kidnappings, and herdsmen attacks. In the South East, there are also concerns as to piracy. However, note that these occurrences are not as prevalent in the South West or in commercial hubs like Lagos and Abuja.
3. Uncertainty in Foreign Exchange: This has been resolved by the floating of the Naira and policies put in place by Tinubu. There is less volatility as the rates set by the CBNand unofficial markets are similar.
4. Bureaucracy: A major concern in Nigeria is the bureaucracy in the government, the outdated mode of carrying out functions, analogue operations, slow turnaround time and lack of technical expertise.
5. Corruption: Corruption is an elephant in the room for foreign investors looking to do business in the country. However, the perception of corruption is actually greater than the action There is therefore a need for greater understanding as well as greater levels of compliance.
6. Infrastructural Deficit: The country also bears the burden of lack of proper infrastructure and facilities like bad roads, congested ports, etc.

Top Tip: One fascinating method of mitigating most if not all of these risks is by working with a strategic and established law firm familiar with the local terrain with an understanding of the cultural nuances and differences of foreign investors. This makes Greydendale Legal a strategic solution in identifying and resolving these issues.

Other ways include:

1. Entering into public private agreements
2. Registering with the chamber of commerce
3. Relating with your country's high commission within Nigeria

1.2.3 Who Is This Guide For?

Whilst this guide is primarily for foreign investors coming into Nigeria, it has been crafted to appeal to a wide range of professionals as well as entrepreneurs, organizations, and any company that is seeking to enter into Nigeria's dynamic market.

Persons who would find this guide useful include;

1. International investors and venture capitalists
2. Foreign entrepreneurs and SMEs
3. Corporate expansion teams and multinationals
4. Government agencies and parastatals
5. NGOs and charities
6. Legal and compliance advisers
7. Economic and financial advisers
8. High networth individuals
9. Nigerian entrepreneurs in the diaspora

We believe you will gain a lot from the insight backed by two decades of Gresyndale's experience in this area and from supporting international structures to enter and grow within Nigeria's economy and championed by the multifaceted talent of its team.

The guide will assist you in having a realistic view of Nigeria's power and renewable energy sector and providing a framework for potential future investment, while avoiding potential pitfalls.

1.3 UNDERSTANDING THE NIGERIAN MARKET

1.3.1 Overview: History of Nigeria's Energy Landscape

"Electricity Law" has historically always been part of "Energy Law," which also covered oil, gas, and mineral extraction. This grouping stemmed from early legal explorers approximating these subjects as "ENERGY". However, recent legislation, regulations, and privatization in the electricity sector highlight the increasing recognition of Electricity Law as it's own specialized subject, similar to Telecommunication or Oil and Gas Law, in the broader discourse of energy.

While not domestically defined, Electricity Law generally encompasses the laws and regulations governing the generation, transmission, and distribution components of the electric power sector for end consumers.

The history of electricity in Nigeria dates back to 1896, with the first generation plant built by the Public Works Department. The Nigeria Electricity Supply Company (NESCO) began operations in 1929 with a hydroelectric power station. In 1950, the Electric Corporation of Nigeria (ECN) was established to coordinate electricity generation and distribution, working with existing licensees. The Niger Dam Authority (NDA) was created in 1962, following an executive veto in 1961 to explore the Niger River, and it constructed the Kainji Dam, which started operations in 1968.

The first substantive legislation was the Electricity Act of 1929, consisting of four sections. Its long title aimed to regulate and control electrical installations, generation, supply, and use of electrical energy. Powers were vested in the Minister of Power, and subsidiary regulations included the Electrical Supply Regulation (ESR), Electrical Wiring Regulation, and Electricity (Private Licences) Regulation. Section 3 of the Act mandated licenses for electricity operations, which were granted by the Minister of Power and Steel under the ESR. Licensing served to protect human life, property, and the business interests of entities in the electricity sector. The ESR, divided into three parts, covered licensing conditions, safety measures, and penalties for breaches. The Electrical Wiring Regulation detailed requirements for wiring works and electrical equipment, while the Electricity (Private Licences) Regulations outlined licensing procedures. While the 1929 Act contributed to the Nigerian electricity sector's advancement, it's focus on establishing a company rather than a comprehensive regulatory institution led to the Electricity Corporation of Nigeria Ordinance of 1950.

The Electricity Corporation of Nigeria (ECN) Ordinance 1950 established ECN as a statutory public corporation, facilitating the transfer of government electricity undertakings to the Corporation. This Ordinance contained saving clauses to ensure the validity of existing contracts and proceedings, and also provided for compensation for losses incurred due to the transfer. The Minister of Power retained executive control over the Corporation in matters of general concern, subject to consultations. ECN was established as an independent corporation to manage the electricity industry, taking over supply and power generation projects. ECN expanded rapidly, increasing transmission lines and adding power plants.

The National Electric Power Authority (NEPA) Act 1972 merged ECN and NDA to form NEPA. Its primary aim was to develop and maintain an efficient, coordinated, and economical electricity supply system for Nigeria, including generation, acquisition, bulk supply, and direct supply to consumers. NEPA was responsible for managing and maintaining electricity undertakings. In 1979, the NEPA Decree became an Act of the National Assembly and was consolidated into the Laws of the Federation of Nigeria 1990. Under the NEPA Act, electricity production and distribution became a government monopoly.

The Electric Power Sector Reform Act, 2005, was then enacted to introduce private participation, increase market competition, and improve service efficiency. The National Council on Privatization was tasked with this program. It provided for an initial holding company, Power Holding Company of Nigeria (PHCN), whose shares were held by the Ministry of Finance and the Bureau of Public Enterprises. These shares were later relinquished to successor companies, classified as generation (GENCOS), transmission (TCN), and distribution (DISCOS) companies, as well as the system operator. Private investors gained substantial stakes and operational licenses in these successor companies in November 2013. Currently, there are eighteen operational successor companies today.

Nigeria's shift towards renewable energy gained momentum in the early 2000s, driven by growing environmental concerns, volatile oil prices, and the need for diverse energy alternatives. In 2015, the National Renewable Energy and Energy Efficiency Policy (NREEEP) was introduced to create a systematic approach to promoting the use of renewable energy sources and fostering energy efficiency initiatives.

Finally, the Electricity Act 2023 was introduced to address existing power generation, distribution, and transmission needs, and to further improve renewable energy adoption, signifying a positive shift towards a decentralized regulatory framework, empowering states to generate, transmit, and distribute electricity in a bid to enhance the nation's electrical grid.

Flowing from its history, it is apparent that Nigeria's power and renewable energy sector has substantial opportunities for investment, with an aim towards robust economic growth. The ongoing reforms are designed to address current challenges, unlock significant market potential, and enhance industrial growth. Investment in generation capacity, transmission infrastructure, and distribution efficiency can therefore lead to substantial returns.

Furthermore, the focus on large-scale, sustainable power solutions through strategic investment will drive long-term economic transformation owing to the growth of generator importation and solar energy in response to demand for off-grid solutions. Therefore, the commitment to reform and the focus on diverse energy solutions, including renewables, position Nigeria for a future of enhanced energy security and broad-based development

1.3.2 Legal Framework For The Power And Energy Sector

The laws governing the applicability of the power and renewable sector in Nigeria include:

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