• Friday, March 29, 2024
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Independent System Operator: Exploring its Dynamics in the Current Ailing Power Sector (II)

DisCos report N188 bn revenue in Q2 2022, lowest in four quarters

The transmission network is vital to the sustenance of the power sector and the socio-economic development of Nigeria. Unlike generation and distribution, transmission remains a fully-owned Federal Government entity under the Transmission Company of Nigeria (TCN).
The previous article discussed the current situation that calls for the system’s unbundling into two: TSP and Independent System Operator (ISO). It explored various transmission systems worldwide and considered the ISO model the best for Nigeria’s electricity market. Today’s issue is to assess how suitable the ISO is for the NEM, suggests the best governance structure and how to actualise and sustain the unbundling.

Accessing the Place of the ISO in the Nigeria Electricity Market
It is imperative to reiterate that the EPSRA has anticipated separating the operations of the system and market operators from the TSP; however, according to the Act, it is subject to the declaration of a fully privatised market. Section 26 of the Act provides for the legal backing for the approval of the development of the Market Rules for the national grid operation by the SO and the establishment and governance of markets related to electricity and ancillary services. Rules 6 of the Market Rules set out the three stages for the development of the competitive electricity market: (a) The Pre Transitional Stage (b) Transitional Stage (C) Medium Term Stage. The Transitional Stage indicates the growth of the NESI climaxing in the shift from a government-controlled structure to contract-based arrangements for electricity trading and the institution of competition for entrance into the market.

The ensuing question is whether the NESI has attained a fully privatised market. The answer is yes. The market attained this status following the electricity regulator’s declaration of the commencement of TEM from February 1, 2015, upon the attainment of the completion of all the conditions precedent set out in the Market Rules, which are required to be satisfied before the declaration of TEM.

Considering the current market stage, sector issues and the poor performance of the SO thus far, there is every justification for exploring the ISO model. Being a subsector of TCN, the SO is already burdened in the execution of its operations. Furthermore, the issue of lack of funds is a hindrance to its development. It is expected that the ISO would be able to source the necessary funds for the implementation of the required tools to address some of the challenges currently faced by the SO.

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The ISO must be structured in a mode that is bereft of impediments, particularly constraints from the action or inaction of any other institution. In this case, the ISO is undertaking the roles of the System Operation and Market Operation.
A vital characteristic of the ISO is its independence by separating control from the individual market participants. The degree of independence of system operation in the power sector is intricately linked to the level of transmission system unbundling. Transmission assets can be owned and maintained separately from system operation.

The independence of the SO guarantees its ability to provide non-discriminatory, efficient system operation and market administration services and assures the relevant stakeholders of its complete independence on issues of emergency grid management, data disputes, and other critical functions. Again, the ISO can be held accountable to its obligations under the extant laws in the sector. Moreso, the challenge of the lack of deployment of ancillary services such as the spinning reserves, black start, reactive power reserves, etc., could be addressed. More importantly, the ISO model follows industry best practices, giving rise to the system’s best operation and a drive towards instituting a bilateral wholesale electricity market.

It could be safe to say that the unbundling of the SO functions into an independent system is necessary at this point in the sector. It is also encouraging to know that NERC has commenced steps aimed at unbundling the TCN into TSP and ISO functions, respectively, as revealed in the consultation paper on “Greater Independence of the Electricity System Operator,” publicised in July 2020, calling for inputs from stakeholders on the readiness of the industry. But we cannot delude ourselves that the process would be a walk in the park.

What Would be the Best ISO Ownership/Governance Structure?
The ownership and governance structure, a regulatory concern, is a crucial design issue of the ISO. As earlier mentioned, the PJM ISO model best fits the Nigeria scenario. PJM is a membership organisation providing services like the various ISOs worldwide on a non-profit basis. The members take part in its stakeholder process, which provides a forum for those who have a stake in the wholesale electric industry to discuss and work through current and future matters related to the market, operations, and public policies. Admission into the organisation’s membership entails the completion of applications and requirements delineated in its governing documents.

The organisation runs a two-tiered governance structure: the Independent Board and the membership committee. The Board’s role is to ensure the efficient control of the grid and operation of competitive and fair electric power markets. The Board also guarantees that no member or market participant has undue influence over its operations. The Board is comprised of its voting members and the president, who is a non-voting member. The voting board members are elected for three-year staggered terms by the Members Committee.

The members’ committee comprises the generation and transmission owners, other suppliers, electricity distributors, and the end-user. Its primary role is to review and make decisions on significant changes and initiatives recommended by committees and user groups. The organisation is financed by recovering its administrative costs, including electric transmission and wholesale electricity market operations. Cost recovery is made through fixed rates billed to members based on their activity levels. NESI can adopt this model.

Another Model that the NESI can explore is the Nigeria Inter-Bank Settlement System Plc. (NIBSS). NIBSS is owned by all licensed banks and discount houses, including the Central Bank of Nigeria (CBN). It has modern world-class infrastructure for handling inter-bank payments to eliminate potential bottlenecks linked with inter-bank funds transfer and settlement. The company also operates the Nigeria Automated Clearing System (NACS), which facilitates the electronic clearing of cheques and other paper-based instruments, electronic funds transfer, automated direct credits, and automated direct debits. The Board of NIBSS comprises the CBN as the Chairman, representatives of banks, discount houses as directors, and the Managing Director/CEO.

While this model is similar to the PJM ISO, it is incorporated as a public liability company owned by all licensed banks, including the Central Bank of Nigeria (CBN), with its owners having shareholdings in the company.

Actualisation and Sustainability of the Unbundling
For stakeholders and persons familiar with the sector, actualising and sustaining the unbundling would raise some worries, especially when the sector’s records are considered. Interestingly, in 2015, the attempts at unbundling TCN failed when the Federal Government revoked the splitting of the company into the TSP and ISO, and the Managing Directors of the two hitherto separate entities instructed to revert to their previous positions. Arguably, the ground for the reversal was that due process was not observed; however, it has also been generally believed that the reversal was due to political reasons.

Political/government interference has been a challenge in the sector, particularly regarding the regulator’s functions. It is generally believed that NERC is not independent, and therefore, there is no guarantee that same will not play out in the current process. The proposed ISO model is expected to assure complete independence of the system operation functions and is achievable in the present sector setup.
Again, implementation is a significant challenge in the sector. While NERC can reasonably be commended for instituting policies, regulations, and ideas, it cannot be commended for enforcement. Will the Commission perform differently this time? The Commission also needs to ensure proper monitoring and evaluation mechanisms are put in place. Can it be guaranteed that it will do so? Finally, does the Commission have the technical resources to ensure the success of the process? I believe all these factors have to be pondered on and addressed, or the ISO will be another recorded failure.