Power distribution companies (DisCos) in Nigeria have been given the green light by the regulator to buy electricity directly from producers of the commodity after over 10 years of relying on an intermediary called the bulk trader.
In its new order on the Transition of Bilateral Trading in the Nigerian Electricity Supply Industry, the Nigerian Electricity Regulatory Commission (NERC) stated that Discos can now purchase electricity directly from generation companies (Gencos) without NBET acting as an intermediary.
“NBET shall forthwith cease to enter into new contracts for the purchase and resale of electricity and ancillary services in the Nigerian Electricity Supply Industry,” the commission ordered.
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This directive is in accordance with Section 7(2) of the Electricity Act 2023.
It was also stated that any contract executed by NBET in violation of this order shall not be approved by the commission and will be treated as an infraction subject to regulatory sanctions.
According to the regulator, the order aims to steer the electricity market towards bilateral contracting for energy and capacity between generation and/or trading licensees and distribution licensees, thus limiting the Federal Government’s fiscal exposure to market risks.
The new order is also intended to foster a more competitive market structure, as envisioned by the Electricity Act, by repositioning NBET from its current role as the sole bulk electricity trader in the Nigerian Electricity Supply Industry.
NERC stated that the order will “provide an equal opportunity for all hydro and thermal GenCos with existing ‘take-and-pay’ contracts with NBET to reduce their contracted capacities by trading directly with Discos on a bilateral basis.”
It will also transition the contractual framework for bulk energy trading in the NESI to “take-or-pay” contracts, thereby fostering increased certainty and market discipline among market participants.
The commission revealed that since 2022, it has issued trading licenses to ten private companies interested in trading electricity bilaterally with Discos and eligible customers.
This interest in electricity trading indicates significant potential in wholesale electricity trade outside the NBET single-buyer pool.
“The commission has further received requests for regulatory approval from some aspirational Discos for the purchase of electricity from parties other than NBET, i.e., directly from the Gencos or through other trading licensees.
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“On the supply side, the commission has received notifications from several Gencos signalling their intention to exercise their partial or full exit rights contained in their Power Purchase Agreements with NBET to contract for the supply of electricity directly to Discos, other bulk traders, and eligible customers, in accordance with the provisions of the Act.
“The key incentive for Gencos contracting bilaterally for energy and capacity with Discos is to secure satisfactory off-take commitments backed by some form of payment guarantees, thus enabling more predictability in generation and gas availability,” the order read in part.
“With the just released 2024 Multi-Year Tariff Order for each Disco, it would appear that Discos are now generally allowed to procure bilateral power from generation companies, directly,” Ayodele Oni, an energy law expert and partner at Bloomfield Law Practice, said. “This is in preparation for the transition of the bulk trader, NBET.”
He said DisCos indebted to the market would be required to enter into payment arrangements with NBET “and invariably the new contracting party, as NBET is anticipated to be dissolved in 2024”.
“Whilst acknowledging the challenges in the market, there is a positive attitude towards the initiative, which would eliminate middlemen, build accountability and allow the GenCos and DisCos and GasCos (gas companies) to trade with each other bilaterally based on their actual capacities on agreed terms including agreeing innovative forms of securitisation,” he said.
Already, nine GenCos, 16 offtakers including two DisCos have ongoing bilateral contracts, according to Oni, who said the TCN would appear to have recorded better performance under this arrangement.
“For this initiative to record success, accountability of all parties and sanctity of contracts is key in order that service level agreements will need to be firmed up with appropriate liquidated damages provisions,” he said.
He said under bilateral contracting, some residential customers’ electricity costs may go up in the interim. “But maximum demand customers will relish this as it would most invariably lead to improved supply for them,” he added.
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An industry watcher described the development as a game changer, saying it could “finally bring about the competition and efficiency that the sector has desperately needed for years”.
Liquidity challenges have persisted in the Nigeria electricity supply industry since the privatisation, with GenCos complaining of not receiving full payment for the electricity supplied by them.
