• Monday, July 15, 2024
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Governors target risk reduction, tariff revamp to launch state-owned power firms

Nigeria’s Transitional Electricity Market, Part 1

Nigerian governors are pushing for a reformed electricity sector, with plans for a reformed electricity market with reduced risks and new tariff structures as a way to launch state-owned electricity companies.

BusinessDay’s findings showed that the central idea involves creating a power market environment that is more attractive to investors and lenders. This could involve measures to guarantee payments for electricity generated by states, as well as safeguards against market volatility.

For instance, Lagos State, Nigeria’s commercial capital argue that a derisked market will attract more investment into the sector, ultimately improving generation and distribution of electricity.

“There are gaps in the policies, market designs and laws we started initially; so, we withdrew them and worked on the gaps to make sure they align with our derisking documentation. That’s why derisking the market was a priority for us,” Biodun Ogunleye, commissioner for energy, Lagos state said at BusinessDay’s energy event.

He added, “A key outcome of derisking work is ensuring metering is not just a tool but the centre to making sure market revenues are recovered. If you want us to subsidise anything you have to provide the money”.

Nigeria’s commercial capital currently generates an estimated 15,000 megawatts (MW) of electricity through diesel generators but a mix of gas-sourced power with off-grid solutions means that the Lagos Electricity Market plan could potentially double the size of the state’s economy.

The plan under Babajide Sanwo-Olu’s government seeks to provide a cheaper, cleaner alternative to inadequate grid power and could speed up industrialisation of the state.

Read also: Nigeria, others need $100bn annual investment to fix electricity woes

“We are open to arrangements as long as they fall into low cost, management practices that ensure electricity is for all and strong regulations that those do not have space for storytelling,” Ogunleye said.

Ogunleye noted that there is a strong need to deliberately pursue a low-cost state electricity market by making sure at least 25 per cent of what goes to the state grid is low-cost renewables.

He added that investors are glad to explore the Lagos market because they will get the assurance that contracts will be respected.

“We are providing spaces for investors to come and do plug-and-play generation in new hubs. The hubs are around locations where transmission infrastructure is coming up; We are also ensuring generation is a need-driven thing not really about licensing,” Ogunleye said.

The Lagos power plan seeks to use available energy sources in the state – gas and renewable energy sources – to attain at least 18 hours of supply daily over five years with growth in peak energy traded in the state expected at 81,000MWh by June 2028.

This will lead to a significant reduction in backup generator emissions and the fostering of a natural gas market in Lagos through a programme to transit Lagos’ backup gen-set fleet from distillate fuels to cleaner gas fuels.

It will also incentivise licensees to adopt cleaner, commercially viable modern technologies power generation sources to deliver energy to residents of the state.

Read also: Court stops DisCos, NERC from hiking electricity tariff

Lagos accounts for almost 70 kobo out of every N1 spent in Nigeria as well as over 53 percent of manufacturing employment in Nigeria, but it is only allocated 25 percent of power supply from the creaking national grid, leading to 50 percent capacity underutilisation for industries.

“We understand the humongous challenge which is why we need to get the state electricity market right in Lagos if we don’t other states may not get it right,” Ogunleye said.

Apart from Lagos, BusinessDay’s finding showed state governments are getting set to eliminate electricity subsidies in their territories as more states gear up to join others in running their different power markets under their laws.

According to a new Nigeria Governors’ Forum report to the federal government on the state of power in the country, subsidies have contributed to the inefficiency of power distribution companies (DisCos), resulting in inadequate service provision.

“Moreover, the so-called electricity subsidies benefit only customers who are connected to the national grid and enjoy some form of supply reliability. Millions of households, particularly in underserved and unserved communities, pay more than twice the average true cost of on-grid supply.

“To this end, States recommend that wholesale and retail electricity subsidies to customers and across the NESI value chain are reduced and eventually eliminated over time, except for pre-defined customer categories or in line with national economic growth initiatives,” the report titled ‘Development of the National Integrated Electricity Policy & Strategic Implementation Plan: Policy Recommendations by State Governments to the Federal Ministry of Power’ said.

The governors said a new model of electricity tariff that is cost-reflective be implemented to encourage growth in the sector.

The governors said the tariff should determined by the State according to the market and electricity policies of each State.

They added that the new tariff system will encourage market sustainability across board.

“It should be recognized that States will implement different end-user tariff methodologies within their markets according to the state electricity policies and strategic implementation plans, viability and market sustainability requirement and peculiar socio-economic characteristics in States.

However, States recommend that electricity tariffs should be both efficient and cost-reflective across the Federation,” they said.

The State governors also suggest licensing new DisCos and creating a new business model that is suitable for each State.

“To cultivate robust competition and facilitate innovation, it is essential for States to expand the constellation of electricity providers and business models accessible within a state electricity market beyond Successor DisCos operating within the state territory.

“Consequently, States will license new players and develop new business models that would introduce more competition in both the wholesale and retail markets within their territories,” the governors said.