The two phrases (Embedded Power Generation “EG” and Captive Power Generation “PG”) are occasionally confused for one another and there have been instances where legal practitioners have referred to both terms as being the same and therefore used them interchangeably. In this article, we will make the reader understand what Embedded Power Generation is, as distinct from what Captive Power Generation is, in line with the regulation in place particularly as it applies to the Nigerian context and that would enable us find the dichotomy that exists between both terms.
Embedded Power Generation
Embedded Power Generation (EG) refers to electricity generation connected at distribution level rather than transmission level. Embedded Power Generation is defined to mean the generation of electricity that is directly connected to and evacuated through a distribution system. Thus, an Embedded Generation licensee, that is, one who has acquired a generation license from the Nigerian Electricity Regulation Commission (NERC), generates power and evacuates same through the existing distribution facilities of a distribution licensee (i.e. privatized Distribution Companies (DisCos) or through an Independent Distribution Licensee). Here, the Embedded Generator is just as any other power generation plant which engages in the generation of power which would essentially be sold to a distribution company that subsequently sells to the electricity consumers. But under Embedded Generation, the generator would only wheel or evacuate the generated power through the existing facilities of licensed distribution company; in most cases, a privatized DisCo or an independent distribution company.
Unlike other power generation arrangements where there is usually the need to enter into a connection agreement with the Transmission Company of Nigeria (TCN) in order to evacuate the generated power to its destination, the Embedded Power Generator would not need to do that because it is focused on wheeling out the generated power through a private DisCo or an independent facility. What is very clear from an Embedded Power Generation is that, there is absolute absence of any form of Grid Connection because the range within which the electricity generated would be used is usually within the locality where the power was produced. Also, the Discos would not need to worry about purchasing power from the Nigerian Bulk Electricity Bulk Trading (NBET) or try to qualify as an Eligible Customer under the new regulation in order to buy directly from a GenCo. All that the Embedded Generation Company is required to do is required to do is to generate power, connect to an existing distribution facility of a DisCo and the power generated is wheeled to the Distribution Company through its distribution system.
This kind of power generation is very much ideal where the intention is to not rely on grid supply or use the power generated as a standby alternative to grid supply. Also, it is very much suitable for rural communities without connection to the grid. In addition, Embedded Power Generation also ensures that the quality of power which is made available is of good quality since it would also minimize line losses and voltage sag since closeness to load results in more efficient power transmission.
The only problem one can easily envisage with Embedded Power Generation is the ability of the available distribution facility to wheel the generated power over a long distance. The concern arises from the fact that it is only when the distribution facility has a substation which would enable the generated power to be wheeled at a high voltage so that the strength and quality of the power does not diminish before it gets to its final destination and this is only possible with Grid connection. If this is not the case, then it would be difficult to wheel the generated power to a very long distance while maintaining quality electricity. The Embedded Generator usually engages and negotiates relevant Power Purchase Agreements (PPA) with an electricity distribution Conpamy (DisCo), or an independent distribution company.
The Regulatory Aspect of Embedded Power Generation
Section 62(1) of the Electricity Power Sector Reform Act (EPSRA) provides that no person, except in accordance with a license issued pursuant to the Act or deemed to have been issued under section 98 (2), shall construct, own or operate an undertaking other than an undertaking specified in subsection (2) of the section, or in any way engage in the business of electricity generation. The import of the provision is that, before anyone would engage in the generation of electricity in Nigeria, such person must apply for and obtain a power generation license from the Nigerian Electricity Regulatory Commission (the “Commission”). The Commission may issue a license to construct, own, operate and maintain, or to procure the construction, operation and maintenance of an Embedded Generation facility; provided that a licence shall not be issued unless the Commission is satisfied that rule 22.4.1&2 of the Market Rules as well as other conditions stipulated in these regulations are complied with.
The import of the provisions of the Market Rules cited above is to enable the Commission ensure that whichever local sale to be made by the Embedded Generator to a Distributor would not endanger the Grid. All applications for an embedded generation license should not exceed 6 months, and related proceedings shall be governed by Nigerian Electricity Regulatory Commission Application for License Regulations 2010.
Moreso, considering the significance of Embedded Power Generation, the Commission issued the Nigerian Electricity Regulatory Commission (Embedded Generation) Regulation 2012. The main aim of the Regulation is to provide a regulatory framework for fair competition between grid supply and distributed generation that will ultimately result to improved availability, reliability, quality, safety and affordability of supply to meet the demands of the consumers.
Captive Power Generation
In contrast to Embedded Power Generation, Captive Power Generation is also a kind of power generation where the power generated is solely used by the generator itself and not sold to any third party. Basically, power that has been generated by a Captive Generator is not expected to be sold except in certain circumstances; where there has been compliance with the provisions of the law. Generally, unlike other kind of engagements in the power sector (like Generation, Transmission, System Operations, Distribution & Trading) which primarily requires license from the NERC to operate, Captive Power Generation does not require a licence unless it would be generating more than 1MW, in which case, a permit of the Commission must be obtained. Regulation 8 of the NERC Regulation for the Grating of Permits for Captive Power Generation clearly provides that, where a permit has been granted, that is, to generate more than 1MW, such permit holder must apply for, and receive prior written consent of the Commission before supplying surplus power not exceeding 1MW to an off-taker.
Regulatory Aspect of Captive Power Generation
As stated earlier, a captive power generator does not require any license to operate unless it is generating more than 1MW, in which case, it will then require permit from the Commission to operate. Pursuant to the powers conferred on the Commission by section 96(1)(2)(c)(d) of the Electric Power Sector Reform Act to make regulations to give effect to the provisions of the Act, the NERC (Permits for Captive Power Generation) Regulations, 2008 was made. The said regulation defines Captive Power Generation to mean generation of electricity exceeding 1 MW for the purpose of consumption by the generator, and not sold to a third-party. It is important to note here that, the definition given here is in anticipation that a Captive Generator would be generating at least more than 1MW and in this sense require permit. However, where the generation is less than or 1MW, no permit would be required. Chances are that a captive generator who is generating more than 1MW for its consumption would have surplus and would want to supply the surplus to an off taker. The law under paragraph 8 of the Regulation for Captive Power Generation is that, a Permit holder must apply for, and receive prior written consent of the Commission before supplying surplus power not exceeding 1MW to an off-taker. The moment a permit holder intends to supply surplus power exceeding 1MW to an off taker, then, the permit holder must apply for a generation license in compliance with the provisions of Section 62(2) of the Electric Power Sector Reforms Act.
The differences that exist between both phrases are now glaring; both in their ordinary meanings and in terms of the regulations that govern them. Amongst the decipherable differences are: before a prospective Embedded Generator would be able to carry out generation activities, it must obtain license from the Commission whereas a prospective Captive Power Generator does not need any form of licence whatsoever before engaging in Captive Generation unless of course it intends to generate more than 1MW in which case it would require permit from the Commission. The sole purpose of Embedded Generation is to sell the generated power to DisCos; whereas, the singular purpose of Captive Power Generation is to use the power produced for its personal consumption and not to be sold to a third party unless certain conditions of the law is complied with. Also, the central law that governs all electricity activities/businesses in Nigeria is the Electric Power Sector Reforms Act(EPSRA); however, in order to give effect to the provisions of the law as it applies to Captive Power Generation and Embedded Power Generation, different regulations have been made by the Commission for both activities due to their peculiar nature. Captive Power Generation is regulated by the Nigerian Electricity Regulatory Commission (Permits for Captive Power Generation) Regulations, 2008, while the Nigerian Electricity Regulatory Commission (Embedded Generation) Regulations, 2012 regulates the activities of Embedded Power Generation in Nigeria.
Conclusion In conclusion, Captive Power Generation has proved vital to the operations of manufacturing companies in Nigeria like Dangote Cement, Nestle, Unilever and many others, in the absence of stable public electricity supply. It is no doubt that this venture has really aided these businesses to thrive in the Nigerian Economy. Embedded Power Generation on the other hand poses a very lucrative business opportunity for those who are into electricity generation wherein they would be leveraging on the fact the Grid connection has not gotten to some part of Nigeria or that the Grid supply is inadequate to step in to provide an alternative supply or as standby for the unstable Grid supply. The bold step taken by the Lagos State Government by making a new law with respect to embedded generation is like the icing on the cake of business opportunities that are ready for grabs particularly in Lagos and other parts of the country.
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