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BusinessDay
Nigeria's leading finance and market intelligence news report.

Lagos to create N5.2trn electricity market from gutting dirty generators

If residents of Lagos State are provided reliable grid power, they would save over N5.2 trillion currently spent generating 15,000mw of power through dirty generators, an incentive spurring the state government’s independent power market dream.

Olalere Odusote, Lagos commissioner for energy and mineral resources, in a public consultation forum held virtually on Wednesday, said fresh thinking on how best to deliver reliable electricity to Lagosians was needed otherwise the state’s development aspirations would amount to very little.

“This plan sets up an institutional framework for meeting demand for electricity in Lagos rather than the steady fragmentation to small ‘captive generators’ that cherry-pick high-end customers but do not grow the size of the customer base or meet the overwhelming need to deliver more electricity per capita,” said Eyo Ekpo, managing director, Excredite Consulting Limited, consultant to the state government.

Under the plan, the government will establish an autonomous regulatory agency that will license participants, undertake market monitoring ensuring that prices charged by market participants are cost-reflective and fair to end-users.

“Lagos State is matured now to establish its own regulatory agency that will regulate transactions in the electricity market,” Odusote told BusinessDay in an interview.

Read Also: Lagos power market seeks to make dirty generators unnecessary

BusinessDay first reported on the consultation paper drawn up by the state government to manage power generation, transmission and distribution in April 2020. Relying on Section 14 of the 1999 Constitution, which empowers a state assembly to make laws regarding the power distribution within the state, the government plans to build a first-of-its-kind power market.

Now, the government has furthered this plan by breaking down the deliverables in the short, medium and long term.

It would enact a comprehensive electricity law by December 31, 2021, license all relevant electricity market entities in Lagos State by December 31, 2022 and delineate the local electricity market (LEM) from the national electricity market no later than December 31, 2022.

Between 2023 and 2028, the state government will establish and start shadow trading of the commercial and technical framework of the LEM by June 30, 2023.

Read Also: The Lagos State Energy Policy: Prospects and Challenges

It will also commence full commercial LEM operations (credible, commercially-sound, technically-compliant, well-funded, financially-viable) by December 31, 2023, and establish with a clear focus on ensuring minimal adverse environmental impact and minimal recourse to Lagos State government subsidies or guarantees.

Within this period, it aspires to attain 30 percent year-on-year capacity growth and average 18 hours of supply daily over 5 years with growth in peak energy traded in Lagos State from 12,000 -15,000MWh daily in December 2022 to 81,000MWh (including a 15% reserve margin) by June 2028.

After 2028, it aspires to have reliable electricity in the Lagos Electricity Sector deploying the most efficient renewable and natural gas generation technologies to provide clean, adequate and constant access to all citizens without general recourse to alternative generator capacity.

Analysts and experts on the call lauded the creation of a Lagos Electricity Market (LEM) expected to be owned and operated substantially by the private sector and which will commercialise power distribution by charging cost-reflective tariffs.

“We pay almost twice the current tariffs for our reliance on generators The question of commerciality is more around what the state government can do to make sure they have a framework of regulation and contracts that focus on commerciality, and this will mitigate the risks of today where cost reflective tariff is not the norm,” Ekpo said.

Participants on the call expressed concern over how the Federal Government and its agencies would react to the radical idea, but the commissioner assured that the state was well within its constitutional powers to assert its own market.

According to Ekpo, the LEM provides for collaboration with the Federal Government and nothing stops the Transmission Company of Nigeria or other bodies from playing in the Lagos market.

However, this Federal Government and its agencies do not often allow constitutional restraints get in the way of their plans.

A significant feature of the LEM is the commercial nature of the arrangement. Contracts would be on a willing-buyer and willing-seller basis allowing for cost recovery after capital expenditure.

This is sorely lacking in the Nigerian Electricity Supply Industry where tariffs do not guarantee commercial returns. The government intervenes with subsidies through central bank intervention funding, but this has had limited impact even as liquidity challenges persist.

In the LEM, customers would be fully metered. It will identify clusters of credit-worthy wholesale and retail end-customers that will buy power from the Lagos grid and make sustainable arrangements for funding projects and personnel.

Lagos is also planning its own Independent System Operator (ISO) that will manage its grid’s connection with the national grid and take responsibility for all system planning generation and transmission resources. It will also be involved in procurement of energy, capacity, ancillary, and other needed services that will facilitate competitive and least cost trading of electricity in the state for on-grid and off-grid generation sources.

The market will consist of generation companies utilising various sources of thermal and renewable energy, a transmission entity, an ISO, and distribution entities carrying on various aspects of the downstream, customer-focused service segment.

According to Odusote, the majority of potential customers in Lagos are residential but live in poorly served communities. As of 2020, 31 percent of households in Lagos were connected to the grid.

“This implies that currently, 69 percent of households in Lagos are effectively off-grid and Off-Grid Solar solutions are ideal because they can be deployed within a matter of hours, days, months compared to grid connection,” he said.

The use of Off-Grid Solar solutions within Lagos State will assist in mitigating socio-economic issues such as poverty reduction, social equity and inclusion and job creation, and will also impact on resilience and independence of public infrastructure, the commissioner said.

Now, Lagos is on a quest to support improvement in infrastructure to drive wider access to reliable supply, reduce dependency on expensive backup generation and free up capital for investments, reduce cost of living and doing business, and secure stakeholder buy-in to support electricity market development aspirations.

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