The Lagos State Government (LASG) released its consultation paper on the “Lagos State Energy Policy”. The policy is geared towards achieving economic growth and sustainability by developing a local electricity market focused on ensuring energy access and the drive for sustainable energy solutions.
A Potential Market
Lagos state is known as the economic powerhouse of the country and indeed the West African region. A hub for commercial activities, Lagos State’s population has exploded over the last decade. Being home to over 27 million residents, Lagos is the most populous state in the Southern region and the second most populous in Nigeria.
The State sits at the top of the charts in terms of revenue generation in the country.
According to data from the Nigeria Bureau of Statistics (NBS), Lagos state generated a total of N534,921,208,353.81, a 78.33% contribution to the total revenue generated in the country in the year 2020. 55.7% of the total revenue generated in the State was from taxes alone, proving it a commercial hub. With two electricity Distribution Companies (DisCos) servicing the State and well over one million customers with an average daily supply of 1,000 megawatts (MW), Lagos state is currently home to the largest customer population in the Nigeria Electricity Supply Industry (NESI). It receives an average daily supply of 1,000 megawatts (MW) daily and has an average daily supply of 12 hours.
The Lagos state Energy Policy aims to create an electricity market that is separate and not connected to the existing national grid infrastructure. To do this, LASG must consider the regulatory, infrastructure and commercial implications of such a market.
1. Legal Framework: The LASG must enact legally binding legislation approving the establishment of an independent electricity market separate from the national grid network. The Constitution of the Federal Republic of Nigeria (CFRN) 1999, 2nd Schedule, S.14 provides the legal framework for the Energy Policy.
2. Regulatory Framework: The LASG must establish a clear and concise regulatory framework for the electricity market. A functional electricity market must have a regulator. The LASG proposes creating an autonomous electricity regulator for the state electricity market with some responsibilities to include ensuring prices are charged by market participants, ensuring the safety, reliability, and quality of service in the movement of electricity within the Lagos electricity market.
3. Commercial Framework: To successfully execute the Energy Policy, the LASG must ensure that the electricity market is commercially viable. Given the problems of the national on-grid electricity market, the Lagos state proposed electricity market must be commercially attractive for investments. Hence, the market must be competitive, and electricity tariffs must be cost-reflective.
4. Infrastructural Framework: In establishing an independent electricity market, the LASG must have an independent grid. Control of the current national grid structure resides in the Transmission Company of Nigeria (TCN) with several regional transmission areas. Lagos State is home to the Lagos Transmission Region (LTR), which serves the State exclusively. The LASG proposes that the existing LTR become a subsidiary of the TCN, fully owned and operated by the LASG as an Independent System Operator (ISO). The other option is the establishment of an independent grid network by private sector players.
The proposed Lagos Electricity Market (LEM) is an ambitious but necessary plan to improve the State’s access and quality of electricity supply. The policy outlines the pathway to the establishment of the LEM; however, some notable challenges must be addressed for the LEM to be successfully executed.
1. Despite the provisions within the CFRN 1999, the interpretation is ambiguous. S. 14 (b) provides that the State Assembly can make laws for the generation, transmission, and distribution of electricity only to areas not covered by the national grid system. However, to the LASG “areas not covered by a national grid system” based on its interpretation are areas with some grid connection present. The LASG posits that areas with 12 hours and below of supply, an average of 1000MW of supply, a large population figure, and a demand deficit such as in Lagos state constitute a state without grid coverage. While the interpretation of this provision can be sought in the Court of Law, the CFRN 1999 is quite clear on what a state government can do about the areas without grid supply.
2. The commercial framework is not clear on the modalities of addressing the current challenges in the sector. It maintains that the LEM will be a competitive electricity market. For the market to be competitive, the retail tariff must be a Cost Reflective Tariff (CRT). For a tariff to be cost-reflective, it must consider all the contributory factors in electricity supply to the consumer. Given the current economic challenges in the country, a CRT will most likely be unaffordable for many Lagosians. A private investor expects to return on investments that cannot be feasible without implementing a CRT. It is essentially a catch 22 situation.
3. For a market to be competitive, it must fulfil certain obligations such as executing critical market agreements such as the Gas Sale Agreement (GSA). While the LASG Energy Policy encourages the use of renewable energy sources for the electricity market, it will have, at the initial stages, a reliance on the use of gas (or at least a budding energy mix) for electricity generation.
4. The establishment of a LEM will invariably encroach on the licenses of existing Distribution Companies (DisCos). Eko and Ikeja DisCos, through their existing Distribution licenses, can operate in clearly delineated boundaries. The Nigerian Electricity Regulatory Commission (NERC) was recently sued by the Benin Electricity Distribution Company (BEDC) over the planned issuance of a Distribution License to Asaba Distribution Company Limited.
5. The regulatory framework for LEM is still unclear. The LEM proposes creating an autonomous Regulator for its market, essentially coveting the Lagos market and regulating it. The NERC is the sole electricity regulator in the country and derives its powers from the CFRN 1999.
6. Infrastructure is a critical step in the establishment of the LEM. The TCN is owned and operated by the FG. LASG proposes that the Federal Government makes TCN Lagos Zone a subsidiary entity owned and operated by the LASG. On the other hand, the LASG is proposing the construction of a grid by private sector investors. The cost implication of a new grid system is massive. Unless all commercial and regulatory challenges are resolved, getting private sector investors to invest in the LEM will be a huge hurdle to tackle.
Towards a Successful Implementation
The LASG Energy Policy document is a well thought out policy albeit fraught with challenges that must be resolved for a successful implementation. Investors only need to look at the current national electricity market and NESI’s challenges to make an investment decision regarding the LEM. The onus lies with the LASG to ensure a truly viable and competitive market without the hassles of inadequacies. Some key areas that the LASG must address before the implementation of its Energy Policy include:
• The LASG must seek the legal interpretation of S. 14 of the 2nd Schedule on the legal framework. This provision is the foundation on which the entire proposed LEM rests. The position of the LASG on the interpretation “areas not covered by a national grid system” is too unrealistic. Not covered by the grid is very self-explanatory.
• The LASG needs to get to work on the methodology for determining the tariff. It is important to show investors a commitment to creating a competitive and viable environment for investments in the LEM. The methodology for tariff computation must consider all costs incurred to arrive at a Cost Reflective Tariff.
• Just as with the CFRN 1999, the LASG must seek the interpretation of the provisions of the EPSRA 2005 on the legality of an autonomous state electricity regulator.
• The Licenses issued to the DisCos by the NERC are currently valid and operational. The LASG must address the implications of carving out an electricity market from the legal delineation of an existing DisCo Licensee.
• Given the current gas to power challenges, the LASG must begin negotiations on gas supply for the market. For the LEM to be different from the current national electricity market, the LASG must sign, execute, and securitise all GSAs and Gas Transportation Agreements (GTAS).
• On the ISO, the LASG may approach the FG and work out the modalities for a TCN Subsidiary. If the option of a privately constructed electricity grid is chosen, then the LASG must begin the process for the construction of a grid.
In conclusion, the LASG Energy Policy is a brilliant idea best suited to optimise the economic capabilities of Lagos state. It is imperative that as a pioneer seeking to create a market within an existing market, the LASG must get it right the first time around. Implementing this policy is an opportunity for LASG to open the State up for investments, which impacts development and ensures open electricity access for all Lagosians.