Transitional Electricity Market- A Commentary

The Transitional Electricity Market also referred to as the TEM, is an offshoot of the reforms in Nigeria’s electricity supply industry. TEM suggests that the market is in the process of developing and it is the author’s view, that the Nigerian Bulk Electricity Trading Plc. (“Bulk Trader”) is critical in the transitioning of the Nigerian electricity market. This is because many of the generators who are market participants have only become reasonably confident in the market, because of the inclusion of the Bulk Trader. The Market Operator and the system operator are also important in this market.

A market is a medium for sale and purchase, hence the TEM is a medium to sell and purchase electricity and ancillary services which key characteristic is that terms of contracts between counterparties in the power industry now become binding and each counterparty becomes obliged to do beyond acting ‘on a reasonable endeavours basis.’ The Market Operator (who also keeps track of market transactions via its register) performs Market administration whilst the System Operator attends to matters connected with load projection.

The Interim Period and Declaration of TEM

Without going into the controversy as to whether proper procedure was followed in declaring TEM, suffice to state that TEM commenced on February 1, 2015 with the effect of making hitherto ineffective contracts executed in the power sector (particularly pursuant to the privatization) now binding on the parties such that any party in breach would be liable pursuant to the said contracts. Prior to the declaration of the TEM and reliance on the Interim Rules, market participants could neither enforce the risk-allocation contracts nor enforce the performance of the contractual rights and corollary obligations. Consequently, there was an adverse effect on the inflow of the requisite funding in the power sector thereby making it unattractive to commit any further funds in the sector- apart from the federal government which has provided some loan in the form of an intervention fund.

The apathy to providing additional funds for the sector by both banks and investors alike was because of several reasons. The reasons included, amongst other reasons, the almost certain shortfall in revenues acknowledged by the Interim Rules as various distribution companies from which funds flow through the Market Operator to all beneficiaries were in almost all cases required to remit less than the monies due to the generation companies. Furthermore, the tariffs in themselves have been insufficient to cover all the costs of the distribution companies.

The Features of TEM

There are certain peculiar features of the TEM which include the participation of the Bulk Trader in the electricity market such that the generation companies hived-off the now defunct Power Holding Company of Nigeria (“PHCN”) and the other independent power producers can sell power either to Bulk Trader, the distribution companies directly or to certain eligible customers. Due largely to the perception that the Bulk Trader is more likely than other entities to pay for the electricity it off-takes, more generation companies are likely to want to sell to the Bulk Trader; unless the other entities can provide satisfactory security.

Apart from the foregoing, other features of the TEM include entry of new generation companies, the procurement of energy on ‘firm basis’, such that (as stipulated above), there are contractual liabilities for the breach of a party’s obligations under any relevant contract.  There would also be adherence to the Market Rules and specifically, a market procedure for the management and allocation of load. There would additionally be the submission of generation adequacy report by the market operator to the regulator in order for the regulator to adequately and appropriately perform its oversight function over the sector. Additionally, it is a genuine expectation that with the declaration of  TEM,  all relevant codes and rules such as those related to health environment and safety, the grid, metering etc. which have hitherto not been effective would become effective and  operational amongst participants in the market and service providers.

Apart from the foregoing, it is the expectation that the market surveillance panel shall inter alia begin to monitor the behavior of participants in the market and report acts of abuse or possible abuse of market power to the regulator.

Conditions for Participating in the Market

Reference to the market, is reference to the wholesale electricity market. By virtue of the Market Rules, a prospective participant requires registration with the Market Operator as a participant. Registration, however, requires holding a licence to generate, distribute, trade electricity or engage in system operations. Specifically, the General Condition of licence, particularly for on-grid licences make compliance with the Market Rules obligatory. The application to participate in the market would be accompanied by relevant documentation set out in the Market Rules. Copies of the relevant documentation would also be forwarded to the regulator.

Upon receiving the said application, the market operator would be required to, within 3 business days, notify the applicant of the receipt of same. There would be discussion around the adequacy of security to be provided by the prospective participant; amongst other matters and from the wording of the Market Rules, it would appear that the process of registration as a market participant should be completed within 3 months. Once registered, that entity becomes a market participant but may have its participation suspended where it does not submit to the Market Operator within a 12 month period, a security cover which complies with the Market Rules and Procedures. Further, a market participant may be suspended where it does not, at the request of the Market Operator, submit a plan to upgrade its commercial metering system. To remain as a market participant, an entity is required to inform the Market Operator where there is a material change to its assets or circumstances disclosed in its application to participate in the market or where there is any modification to the technical and operational characteristics of any of its equipment or facilities.

Practical Realities and Way Forward

The declaration of TEM would appear to be a step in the right direction. However, where the broader issues around gas availability and the enhancement of the grid are not catered to, the declaration of TEM may not achieve much of its desired result as there needs to be gas to generate and then the grid needs to be able to wheel sufficient electricity to the relevant distribution network. It is pertinent to have a clear strategy to address these together with matters around cost reflective tariffs structure. It is, however, not sufficient to have a strategy, without careful implementation such that there are no weak aspects of the electricity supply value chain which would adversely impact power delivery to the electricity distribution companies who supply electricity to consumers who ultimately provide the funds required throughout the value chain.

For more details about the power sector, do pick up a copy of the text on the power sector written by Ayodele Oni.

Ayodele Oni {[email protected]}, a solicitor, specializes in international energy (oil, gas and electricity) investment law and policy. He holds a mini-MBA in power & electricity. Follow me @ayodelegoni.