Lagos power market seeks to make dirty generators unnecessary

If Lagos was a country, it would be Africa’s seventh-richest economy, yet on its best days, it gets only 10 percent of the power it needs, while its inhabitants rely on self-generation often from dirty generators to plug the gap.

The state wants to put an end to this by creating its own market, which will bank on improving some of the inefficiencies in the Nigeria Energy Supply Industry, particularly in distribution, to thrive.

Therefore the state’s Ministry of Energy and Mineral Resources has drawn up a consultation paper for an ambitious Lagos Integrated Resource Plan (IRP) that will manage power generation, transmission and distribution.

Olalere Odusote, commissioner for energy and mineral resources, in an interview with BusinessDay, says the government is seeking to leverage the huge demand in the state, abundant generation capacity, and a huge market to ramp up distribution by taking control of the process.

Relying on Section 14 of the 1999 Constitution, which empowers a state assembly to make laws regarding the generation, transmission and distribution of electricity within the state, the government plans to build a first-of-its-kind, power market.

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“Distribution was omitted in the responsibility of the Federal Government, but at the time the ESPRA was passed in 2005, with the composition of the distribution companies as outlined by the Federal Government, it was not possible for the state governments to easily regulate them,” the commissioner states.

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 says.

Lagos accounts for almost 70k 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 get 25 percent supply allocated to us not because that is the proportion of our demand but that is by virtue of the national allocation formula. This means that the fortunes of Lagos will never improve until Nigeria’s fortunes improve in terms of power supply,” he states.

The state is apparently tired of waiting for a dysfunctional NESI to hold it back. It is creating a Lagos Electricity Market (LEM) expected to be owned and operated substantially by the private sector.

It will primarily be charged with identifying 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, and 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 independent system operator (ISO), and distribution entities carrying on various aspects of the downstream, customer-focused service segment.

“What has happened so far is that everybody has started to look after themselves and in doing this, they pay for an expensive and inefficient solution using generators, but we will not enjoy the economies of scale that comes with a stable supply.

“We want to make Lagos competitive and this means you don’t need to buy generators in your house, it means cost-effective power from the grid when you want and that is what we are hoping to kick start with this policy, to leave no one in doubt of the intentions of the Lagos State government,” he states.

According to the commissioner, the tariff would be cost-reflective and the government will be promoting metering for every customer as well as intense advocacy to build people’s trust in the project.

The fear that cost-reflective will mean higher bills is unnecessary as inefficiency priced into the current system fuels disaffection, he notes.

“Our expectation is that the Lagos market we are building will be efficient. Now, while the unit cost of electricity may be higher, in terms of the absolute cost, by the time we add efficiency improvement it won’t be the same, it may be less.”

However, the government has only two years in office raising concerns about whether it can deliver. The commissioner assures that what is important is that a policy is now available on which a future government can follow through on.

“With the policy in place, it helps the state house of assembly to be able to make the law and ensure that it fulfils the policy. When the law exists, there is no reason it cannot be implemented,” he says.