Embedded generation gives Nigerian electricity distribution companies (DisCos) the opportunity to  improve their supply of electricity to customers independent of the problematic national grid while  maintaining control of their franchise areas. The renewable embedded generation (REG) business model  described in this report enables DisCos and developers to collaborate to deliver improved electricity  services to customers through embedded generation.

Despite its potential, the growth of embedded generation in Nigeria has been limited, mostly due to  concerns about DisCos’ ability to pay for electricity purchased. As a result, existing embedded generation  business models in Nigeria either involve energy project developers supplying DisCos with excess electricity  from generation assets built for another purpose (e.g., on-grid generation plants with excess capacity,  captive generation plants, or minigrids) or a developer supplying a distribution network not operated by a  DisCo (e.g., through an independent electricity distribution network or a sub-franchising agreement).

Although these business models allow developers to reduce the risk of DisCo nonpayment, they have  limited scalability. Through their franchises, DisCos have the exclusive right to supply electricity to most  areas of the country and therefore alternative electricity suppliers can only supply areas where the DisCo  does not currently operate or where the DisCo grants them permission to supply customers. 

The REG business model improves supply for customers by combining solar photovoltaic (PV), battery  storage, and thermal generation. Through the inclusion of solar PV, the REG plant increases supply for  all customers in the REG customer cluster while the inclusion of battery storage and thermal generation  enables the provision of 24/7 reliable power to a subset of customers called premium customers. The model  addresses the concerns of DisCo nonpayment by directing REG customer payments into an independent  collections account (ICA). The ICA uses customer meter numbers to identify customers on REG feeders and  directs their payments into a separate account that is not directly managed by the DisCo. 

Providing additional generation to DisCos increases their electricity sales and therefore their revenue. In  addition, the REG business model provides DisCos with capital to improve their distribution network and  meter their customers, reducing their losses and improving their profitability. Furthermore, by charging  customers cost-reflective tariffs, the REG business model boosts DisCos’ profitability. Finally, the REG  model also helps DisCos prevent premium customers from defecting from the grid while bringing back  those who may have already defected. 

The REG business model also reduces electricity costs for customers compared with their current mix of  grid supply and self-generated electricity. Premium customer costs can be reduced by up to 50%, while  nonpremium customer costs are reduced by 20%–30%. For developers, the REG business model provides  access to a larger customer pool, a de-risked structure for collaborating with DisCos, and access to  funding from climate-focused financiers.