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Nigeria’s Transitional Electricity Market Part 2: Should the TEM be Reversed or Improved?

Is it Time to Establish a Parallel Electricity Market? (Part 1) Liquidity Crisis

Enlight Series treats the subject of Nigeria’s Transitional Electricity Market (TEM) in two parts. The first introduced the TEM as the second stage in the journey towards competition for the Nigeria Electricity Market (NEM). The article analysed delays surrounding the declaration of the TEM, the interim order and current implications of its subsequent declaration.

One may argue that NERC declared the TEM prematurely and without consideration for the provisions of the Electricity Power Sector Reform Act (EPSRA) 2005. The analyses in the previous article indicate that some of the conditions for its declaration are still unmet, after over five years of declaration. Based on such a premise, a faction of the government has recently argued to reverse the TEM and ultimately privatisation. While such arguments may seem logical due to market dissatisfaction, it is crucial to consider the implications of a reversal. A position should only be taken after considering its impact and alternatives.

Graphic: Implementing the Transitional Electricity Market

Should the TEM be Reversed or Improved?

Reversing the TEM would mean going back to the pre-transitional market which was in effect before privatisation. Although privatisation has not yielded expected results, the effects of a reversal would be far worse than the current market situation. Reversing the TEM would nullify the market rules since they provide for the transition stage and medium-term market. If the TEM is reversed, all provisions made in the market rules for applicable energy contracts, market operator functions, transmission service provider, market administration, and other ancillary services will become of no effect.

Read Also: The Unending theatrics of Nigeria’s Electricity Tariff Structure

Another option for the electricity market is to issue another interim rule. Considering that NERC issued an interim rule in 2013 between privatisation and the declaration of TEM in 2015, NERC may either issue another or re-activate what was previously given. The downside of this option, however, is that market participants would likely relent on the little efforts currently being made, in silos notwithstanding, towards fulfilling the terms of the TEM. In essence, the Industry would retrogress, and government cost recovery bailouts would continue for as long as the interim rules are active.

In essence, the best way forward for the Industry is to strive towards meeting all the conditions of the TEM. The challenges hindering market progress are less with the provisions of the TEM than with how they have been implemented thus far. Liquidity, infrastructure, and capacity are the root issues that must be tackled to enable progress towards fulfilling the TEM conditions. At the very least, relevant industry participants must take the following actions to fulfil the requirements of the TEM:

Activate existing contracts

The Nigeria Bulk Electricity Trader (NBET) needs to do more work to activate existing contracts between operators and traders. Gas Sale Agreements (GSAs) between the thermal GenCos and the gas suppliers serve to ensure the stability of the gas-to-power market. However, NBET has been unable to fully honour the Power Purchase Agreements (PPAs) with the GenCos, which in turn, impacts the ability of thermal GenCos to observe their GSAs. Currently, gas suppliers are discouraged from supplying GenCos and set terms in the GSAs that are more beneficial to them due to the high debt profiles of the GenCos. One such term is the contractual provisions that allow for suppliers to determine when to uphold the GSAs.

The gas supply agreements (GSAs) between gas suppliers and generation companies should transcend from the current ‘reasonable endeavour’ basis to one where the best interests of all parties are met. To fully activate contracts, however, tariffs, cost recovery, and infrastructure shortcomings would have to be addressed. Now that the service-reflective tariff initiative is being implemented, it is expected that DisCos remittances would improve, which would mean better cost recovery for the GenCos and gas suppliers. The close-to-cost-reflective tariffs that would be arrived at using this new system would be a basis to improve cost recovery. It becomes easier to activate and renegotiate existing contacts when GenCos can recover their costs and DisCos can be held fully responsible for meeting their minimum remittances without government intervention.

Operationalise the Independent System Operator

The Independent Systems Operator (ISO) controls, coordinates and monitors the energy and financial operations of the electricity value chain. The ISO currently operates as an arm of the Transmission Company of Nigeria, and this position limits the independence of the ISO’s decisions.

The ISO needs to become operational to ensure a non-discriminatory discharge of electricity across the value chain. In the meantime, the Bulk Trading (NBET) Company needs to establish new contracts, in addition to activating existing contracts, while it is still functional. NBET can later transfer all contracts to the ISO and exit the market according to the provisions in the EPSRA (2005).

Implement Market Communication and Coordination Structure
Automated monitoring systems such as Supervisory Control and Data Acquisition (SCADA) and automatic meter reading technologies are essential to provide real-time operational oversight on energy generated and transmitted. Being expensive and cumbersome to deploy, The TEM Order allowed for the ISO to complete the SCADA infrastructure and market settlement IT platform and Automatic Meter Reader technology within 18 months of the declaration of TEM. These standards have not still been met five years after the commencement of the TEM.

The ISOs needs to install and test the market communication and coordination systems. These systems need to be in place to enable communications between the TSP, ISO, and DisCos. Meanwhile, the fact that the Siemens deal is approaching implementation is a positive note for the sector’s infrastructure development, considering its plans to install a functional SCADA system.

Optimise the Dispute Resolution Panel
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 DRP exists but can be optimised for effectiveness to resolve market disputes that may arise among parties. As NERC has reconstituted the DRP, there should be a clear scope of the panel’s involvement, influence levels, and limitations. Establishing these factors would help to focus the individual and collective capacity building needs of the board.

Coordination of Regulations and Orders with Market Rules and Power Sector Act
The TEM, according to the market rules, is characterised by some level of monopoly among licensees. Many have argued that the enactment of the Eligible Customer Regulations contradicts these market rules. Disputes arising from the Eligible Customer Regulations about the rightful suppliers of high voltage 132 kilovolts (kV) customers have indicated the necessity of market design coordination to prevent disparities that affect regulation effectiveness. Suppose there is a disparity like the one between the EPSRA 2005 and TEM order on the customer status of the 132kV customers. In that case, there should be a shared understanding of either the superior reference or an expected line of action to correct such discrepancies. Such measures would also help to improve the efficiency of the DRP, which may need to consult these references to resolve disputes.

Conclusion

The market to fulfil outstanding requisites is the most feasible path forward for market progress. Therefore, participants of the NESI must realise that the TEM is a contributory stage towards the development of a competitive market; hence, the Industry cannot reach a stalemate at this point. Therefore, all hands must be on deck to ensure its fulfilment before the declaration of the Medium-Term Market.