A consumer-based electricity reform requirement is trifold – a competitive electricity retail market, an entrenched consumer right of energy choice and an informed market population. These remain unachieved and to a huge extent, seemingly unimportant in the Nigeria Electricity Market sphere.
The privatization of the Nigerian electricity market is partial and superficially deregulated. The sale and purchase of electricity, remains heavily regulated. Successor distribution companies doubling as local utility companies are mandatory default options for electricity purchases. Household and small business electricity consumers are constrained to make purchases from government franchised sellers.
A properly deregulated market empowers consumers to compare charges, quality of services, different alternatives and choose options that best suit their needs. Operating a fully deregulated and competitive electricity market is evidenced by the consumers’ right to energy choice.
The right to energy choice denotes the consumers’ liberty to contract with any electricity provider of their choice. This freedom creates a competitive market for electricity which averagely is the ultimate aim of deregulation. Competition propels excellence in operations, provides choice for customers and drives costs to the lowest possible levels.
Context
Historically, electricity consumers globally had no choice as to their electricity suppliers. The local utility that supplied electricity in the consumer’s residence territory served all consumers within that territory mandatorily. This practice is still customary in Nigeria and a few parts of the world. Electricity consumers are constrained to electricity purchases from utility companies who have monopolies over their areas of operation.
However, currently, energy choice programs in most advanced climes allow eligible consumers to choose an electricity provider that best suits their needs, without being confined to geographical considerations.
This right of energy choice has been introduced and existed for decades in many climes. In 1977, 17 states legislatures in the United States, commenced the process of changing regulations to allow energy (electricity and natural gas) suppliers to offer their products directly to consumers.
The laws meant that consumers could pursue pricing preferences and alternatives that may be cheaper and suitable than their current offers. It created flexibility and gave the consumers the power to determine the best electricity services with their power of demand.
It promoted competition in the retail energy market. Competition introduced price reduction as energy companies competed for market share. This act ultimately gave consumers the right to choose their suppliers and usually at cheaper rates.
Why Electricity Choice Matters
A consumer’s right to energy choice drives competition. Competition compels electricity companies to focus on great service delivery and lower energy tariffs.
The right of choice offers on the consumer, the power to choose between flexible pricing alternatives, energy and cost-saving options, and comparable customer service care. It gives consumers the freedom to choose a plan that suits their requirements and budget.
Improving access to affordable electricity is effectively achieved through maximizing consumer choice and competition. Choice and competition drive innovation, as electricity producers aim to deliver better quality at lower prices. Consumers receive a wider variety of customized, flexible offerings, which may be unavailable to consumers served by monopolized utilities.
Regardless of all consumer benefits, electricity choice gives suppliers a solid incentive to innovate. Creating new solutions for businesses sets a company apart from other suppliers, attracts new customers and retains existing ones. Ever since major deregulation actions took place in North America in the 20th century, the continent has quickly adopted energy management strategies and efficiency conservation products. These were ideas and technologies which state and local utilities were slow to develop and accept.
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Competitive retail market, Deregulation, and the Electricity Consumer
Deregulation creates flexible electricity supply options for a consumer, in terms of contract terms, price structures, market risk exposure and efficiency solutions.
Countries have undertaken numerous market regulation methods- free and open market deregulation; deregulation of specific commodities like natural gas or electricity; partial deregulation restricting the number of participating customers or amount purchased and certain restricted fully regulated markets. The deregulated free market system is often regarded as most consumer-centric in operation.
To found a successfully deregulated electricity market, there should exist an established and strengthened electricity retail market. Independent suppliers must win the right to retail electricity in the open market and other utility or successor companies. Allowing retail prices set by market forces minimizes regulatory interference on tariff and cost settings
Challenges of Deregulation and global instances
Market manipulation risks in a deregulated market remain material, and retail choice programs must be strategic to avert manipulation.
Although deregulation can encourage variety and create cost savings for residential and business consumers, careful design of retail choice programs proves to be vital.
A glaring example of the huge risks of market manipulation is the California Energy Crisis. The California deregulation attempt which took off positively with about 200 electricity providers in competition to serve consumers terminated in an electricity crisis that led to the collapse of the state’s largest energy companies, extensive blackouts, and massive commercial losses.
The collapse of California’s energy market is attributable to the regulatory cap on retail price or tariffs, which electricity companies could charge their customers while allowing wholesale prices by the market. Regulators presumed that retail prices would stay higher than wholesale costs, permitting electricity companies to recover abandoned costs of high-priced nuclear facilities that were no longer in operation.
This hypothesis held for a short duration, but wholesale prices began rising by the spring of 2000 due to high gas prices. . Large energy wholesalers exploited the power shortage by further restraining supply. The wholesalers became arbitrary in their operations- took power plants offline for maintenance during peak demand, created a faux-congestion situation and withheld supply, then sold power albeit higher to out-of-state customers.
Also, California’s deregulated energy market collapse is attributable to the regulatory requirement that required the sale of most state power plants without signing long-term contracts with producers to meet the required power demand, similar to the operations of Nigerian privatized successor companies. This attitude led to California state buying power on short term market, exposing it to price fluctuations. .
These manipulations forced costs to record high levels, about 20 times higher than their regular value. Utilities were unable to recover those exorbitant costs because of the cap on retail prices. Majority of the companies became bankrupt and unable to purchase or supply electricity. This situation resulted in blackouts in most of their coverage areas and failure of the deregulation.
Total electricity deregulation was also less than successful in Ontario, Canada. The Ontario electricity market became deregulated in 2002, but a subsequent harsh increase in electricity price stalled the process until 2005 when Ontario introduced a Regulated Price Plan for residential customers and small businesses. The Ontario Energy Board sets 12-month price periods for this plan based on consumer usage patterns and the hourly market price of electricity.
Conclusion
Total deregulation of the electricity market is crucial to building a consumer-based electricity reform in Nigeria. The pre-requisites for a deregulated market in Nigeria is still far from being met. Further legal and regulatory modifications are needed to create a competitive electricity retail market and give consumers the right to choose. A free-market competition in retail electricity markets is crucial for consumers to have a right of choice as to their electricity suppliers.
The introduction of the retail electricity market and competition should come consistent consumer enlightenment on electricity plans and tariff payment systems. Consumer information is key to fostering efficient, competitive practices.
Consumers can independently assess estimated tariff payments and determine their costs, with greater chances of expecting and demanding better services. An informed consumer’s power will manifest in the exercise of their energy choice. This awareness will force competing service providers to offer improved services and aid efficiency in their services.
Building a consumer-centric electricity reform, requires increased focus on competition, a retail electricity market system, and consumer right of choice and information. These will force innovation and aid efficiency in the Nigerian Electricity Market.
