Power firms uncertain as new supply contracts start July 1

Electricity sector operators appear uncertain as July 1, 2022, the agreed date to activate new sets of contracts they have signed that commit them to deliver 5,000 megawatts of power to Nigerians, draws near.

BusinessDay spoke with operators along the value chains on their state of preparedness to live up to their contract obligations, which place heavy sanctions including revocation of licences for reneging on them, and the responses were tepid.

“We will wait and see,” said Joy Ogaji, executive secretary of the Association of Power Generation Companies, a group that represents the interest of power generation companies (GenCos).

The distribution companies (DisCos) who spoke to BusinessDay also said they were waiting to see how things unfold. “For now, we are following what the commission has directed,” said Abdullazeez Abdullahi, spokesperson of Kaduna Electric. “We are not sure how things unfold; so we will see.”

Sanusi Garba, chairman of Nigerian Electricity Regulatory Commission (NERC), in a press briefing in Lagos recently, said the absence of commercial contracts underpinning transactions within the sector had been a major challenge, adding that the commission had resolved the issue by compelling operators to sign contracts for services.

“We are currently moving to ensure that we achieve stability now, and that is why the government is making investments to improve the grid so that 5,000MW will be our benchmark from July,” Garba said.

Total power generation in the country stood at 3,049.1MW as of 6am on Wednesday, according to the Nigerian Electricity System Operator. It put the grid generation installed capacity at 13,014.14MW; generation capacity at 7,652.6MW; and transmission wheeling capacity at 8,100MW.

The new contracts, according to the NERC chairman, obligate the DisCos to take the power sent to them or pay for it. This eliminates the issue of stranded power because, according to the terms, electricity wheeled to DisCos from July 1 would be contracted volumes.

By the terms of the contract, the Transmission Company of Nigeria (TCN), the Federal Government-owned participant, will be compelled to ensure that the grid remains stable enough to wheel the contracted volumes from generation plants to either hydro or gas-fired plants. If the grid is unable to wheel power generated, the TCN will pay for the power supplied.

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The GenCos were compelled to sign contracts with gas suppliers for the required gas volumes to maintain the projected power delivery. Eighty percent of Nigeria’s power generation is from gas-fired power plants, and a lack of firm contracts has forced suppliers to prioritise other users.

Under the new terms, even the hydropower plants – Kainji and Jebba – have entered into the agreement committing to maintain water levels that will ensure a minimum supply of 2,000MW.

The commission, he said, was moving to ensure that all contracted gas volumes are fully paid for. The NERC chairman said the commission was going to enforce this contract by ensuring that erring market operators pay stiff penalties for failing to meet their obligation.

“We have had discussions with all the participants and secured their commitments. All stakeholders have made a commitment and there will be consequences for failing to meet them,” he said.

“But beyond paying penalties, we are keen to resolve the issues in the power sector and that is why we are engaging all the players to ensure that the rules are followed.”

In the first phase, NERC seeks to secure available generation capacity of at least 5,000MW starting from July 2022 while 6,000MW will be secured from January 2023.

The contract activation seeks to improve the capacity of the DisCos to migrate customers to higher service bands and attract commercial and industrial customers to provide a stable base-load.

It is aimed at creating certainty in the gas-power market segment through contracting as a way to improve firm gas availability to power stations and to move the electricity market to a full contracts market.

Existing contracts

The existing contracts in the Nigerian energy supply industry sees the Nigerian Bulk Electricity Trading Plc (NBET), the manager and administrator of the electricity pool in the industry, buy energy and capacity from 26 generation plants owned by the respective GenCos that have contracts with NBET.

Some GenCos have power purchase agreements; others have interim agreements executed pending formalisation on PPAs. The electricity purchased by NBET through PPAs are resold to DisCos through vesting contracts and transported on a physical network that forms the electricity value chain.

Other contractual arrangements include gas supply agreement, gas transportation agreement, and grid connection agreement.