Last week, Enlight Series introduced the Nigeria electricity market and its stages. The main objective of Nigeria’s electricity reform was to eliminate the state monopoly that has caused the sector’s inefficiency over time and transition towards a competitive electricity market. This transition process is designed to occur in four stages, namely: Pre-Transitional, Transitional, Medium Term and Long Term. Last week’s article highlighted the characteristics and conditions for each of these stages to be in effect. Whereas, this week’s session is a deeper dive into the current stage of the industry: The Transitional Electricity Market (TEM).
The Transitional Electricity Market
The Transitional Electricity Market (TEM) marks the second stage of the Nigeria Power sector reform. It is the stage between a pure monopoly and a completely bi-lateral, competitive market, where forces of demand and supply determined outcomes and promoted investor appetite. TEM is characterised by contract-based trading between GenCos and DisCos. Ideally, the TEM phase was, to begin with, the handover of Power Holding Company of Nigeria (PHCN) assets to the private investors at privatisation; however, there was no declaration because some of the pre-transitional market conditions remained unfulfilled. Some of these unmet conditions included the lack of a cost-reflective electricity tariff, reset of the distribution companies’ (DisCos) baseline losses to be implemented among others. Rather than delay the completion of the privatisation process, the Regulator, Nigeria Electricity Regulatory Commission (NERC), declared a placeholder known as the Interim Order.
Delay and the Interim Market Order
The interim period served as a cushion to prepare the market for the TEM. NERC introduced the interim rules in December 2013 to manage the sector’s revenue shortfall due to non-cost reflective tariffs and aggregate technical, commercial, and collection (ATC&C) losses. Transactions were operated without enforcing the existing Power Purchase Agreements (PPAs) and vesting contracts. Instead, the Regulator established a ‘best endeavours’ framework where GenCos provided invoices with the Nigeria Bulk Electricity Trading (NBET), and DisCos remitted payments to the Market Operator (MO) and the Nigeria Bulk Electricity Trading (NBET). The Federal Government also provided Interventions funds to operators to compensate for the market revenue shortfalls. There were also limits to the allowable revenues for each market participant.
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Despite its allowances, the interim market was misaligned with investor expectations and financial models as a basis for which they invested. Therefore, the market looked forward to the declaration of the Transitional Electricity Market. NERC declared the commencement of the TEM on 29 January 2015.
Market Realities and TEM Fulfilment
NERC released the TEM supplementary order upon declaration of the TEM according to the TEM order, market rules, and grid code. Section 8 of the Order made trading provision arrangements for parties that did not meet the requirements for participating in the TEM. Some of these include trading arrangements for the generation plants owned by the Niger Delta Power holdings for which privatisation transactions were yet to be completed, GenCos without effective PPAs, among others.
NERC justified its declaration of the TEM by stating that the TEM precedent conditions had been met up to a satisfactory level to allow for evolution from the Interim Stage. However, many market participants would argue that the current market realities do not reflect the expectations highlighted when at the declaration of the TEM. The state of contract enforcements, cost-recovery, and market coordination presents some of the counter-arguments to the current claims of a TEM.
Actionable Agreements
According to the Market Rules, all electricity trading arrangements made during the TEM are to be done via contracts. However, following the Interim Market stage, some market participants were without contracts and have had to rely on the TEM Supplementary Order for operational guidance during the TEM.
Gas Sale Agreements (GSAs) between the thermal GenCos and the gas suppliers serve to ensure the stability of the gas-to-power market. NBET has been unable to fully honour the Power Purchase Agreements (PPAs) with the GenCos. Some estimates put the cumulative amount being owed to the GenCos at just over N1tn since privatisation in 2013. The crisis is due to the inability of DisCos to honour their vesting contracts with NBET, based on suboptimal remittances over the years.
Between January 2017 and December 2018, the total DisCos’ remittance was just 28% of the NGN1.08trillion invoice issued by NBET. The absence of cost-reflective tariffs and the inability of the DisCos to effectively collect payments from customers are significant causes of the low remittance. The resulting liquidity crisis has had a cascading effect on the applicability of contracts in the market as the GenCos are incapable of honouring their gas supply agreements (GSAs) with the gas suppliers, leading to accumulation of high debt profiles by the GenCos. This situation is one such that gas suppliers are discouraged from supplying GenCos, and set terms in the GSAs that are more beneficial to them. One of which is the contractual provisions that allow for suppliers to determine when to uphold the GSAs.
Dispute Resolution
The state of regulatory enforcement in the electricity sector has always been a complex one. While the EPSRA set some of the frameworks for NERC’s establishment, they did not envisage many of the potential conflicts that have arisen amongst industry stakeholders.
EPSRA empowers NERC to resolve disputes between market participants, unless in cases concerning the law, in which the High Court arbitrates. Under the TEM, disputes among industry participants that relate to the market rules and grid code are resolved via the Dispute Resolution Panel (DRP) appointed by NERC. The establishment of this panel was one of the conditions precedent for the pronouncement of the TEM. However, this panel did not exist as of the time of declaration of the TEM. While the panel exists currently, there are doubts as to whether the arbitration process would effectively resolve disputes in the market. This avenue for dispute resolution is yet to be tried and tested under the TEM as the few industry disputes have been concerned with the law, which the High Court has jurisdiction over.
Market Coordination
The Supervisory Control and Data Acquisition (SCADA) infrastructure is widely known among industry stakeholders, as a system that would enable coordination of energy and financial data across the electricity value chain. Being expensive and cumbersome to deploy successfully, the TEM Order deemed the SCADA infrastructure ‘Condition Subsequent’. This term means the infrastructure deployment became unnecessary for the declaration of the TEM. The Order instead allowed for the System Operator to complete the SCADA infrastructure installation and the Market Operator (MO) to develop its market settlement IT platform and Automatic Meter Reader technology within 18 months and nine months of the declaration of TEM respectively.
These standards have not still been met five years after the commencement of the TEM. After failing thrice, TCN adopted the implementation of a functioning system-wide SCADA infrastructure as part of its four-year Transmission Rehabilitation and Expansion Programme (TREP) last year. The Presidential Power Initiative via the Siemens Power Deal in its first phase aims to upgrade the existing control centre to the latest state-of-the-art software and hardware technologies to enable real-time visibility and control.
The lack of a system-wide SCADA has led to disputes between the GenCos and the SO on generation capacity. The lack of this infrastructure has also contributed to the delay in contracts applicability in the sector.
Conclusion
Although the Regulator declared the TEM without fulfilling some of the preceding conditions, there were expectations that they would be fulfilled afterwards. Five years into the declaration, the TEM has not been successful thus far. The options for the industry remain whether to reverse, extend, or Improve the market to yield better results. The next article will address the various these options and provide recommendations for the fulfilment of the TEM.
