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What investors should know about the Electricity Act 2023

What investors should know about the Electricity Act 2023

By : Ayodele Oni

On Friday, June 9, 2023, Nigeria’s President Bola Ahmed Tinubu, signed a new electricity law, the Electricity Act 2023 (the “EA”) which replaced the erstwhile Electric Power Sector Reform Act Of 2005 (the “EPSRA”), a law signed into law by President Obasanjo who effectively commenced the reforms in the electric power sector of Nigeria. What the writer seeks to do with this piece, is to highlight a number of issues investors (current and especially prospective) should take note of.

Bankability

Section 1 of the new Electricity Act clearly specifies that its primary objective is to provide a comprehensive legal and institutional framework to guide the operation of a privatised, contract and rule-based competitive electricity market in Nigeria. One problem that the electric power sector has had and made many projects not bankable, is the structure of the market. According to Thomas Reuters’ Practical Law, ‘Bankability’ is the degree to which a project, or another commercial transaction requiring finance, is structured so as to represent an acceptable overall risk to lenders. Prior to the enactment of the Electricity Act, the Nigerian electricity market had not been contract-based, and market participants were allowed to act primarily based on ‘reasonable endeavours’. Hence, lenders (especially foreign ones generally interested in grid-connected projects) were unwilling to lend, thereby making investing, quite unattractive.

This challenge around lack of bankability was exacerbated by the issuance of the Interim Rules in 2014 or so, pursuant to which the bindingness of contracts, in the sector, was suspended. Where any electricity market is not rule and contract-based, then the same will not be bankable as no lender will provide financing, since contracts either do not exist at all or are not strictly enforceable. This makes it difficult for such lenders to have a line of sight as to how they would recover the funds from the project. The case in Nigeria is such that there have, only recently, been strong steps by the regulator- the Nigerian Electricity Regulatory Commission to partially activate key industry contracts, namely- power purchase agreements and gas supply arrangements.

Consequently, a situation where the new principal law makes its primary objective, the operation of a contract and rule-based competitive electricity market, could be perceived as good news for current and especially prospective investors, together with their financiers. For energy infrastructure projects and or transactions, bankability is usually the single most important issue.

The devil, though, is in the implementation framework. Whilst legalizing this objective is worthy of optimism, same will, remain very cautious optimism until we see how things pan out.

Investment Opportunities

To start with, the explanatory memorandum of the new law speaks to the integration of renewable energy into Nigeria’s energy mix and the attraction of investments. It would appear that more than ever before, the government will be keen to attract investments into the sector and promote the inclusion of renewable energy sources into the country’s energy mix. I think this with the perceived promotion of energy federalism suggests that Nigeria is more open for business especially when one considers the separation of distribution from retailing. The law makes reference to achieving national electricity access targets and attaining the highest per capita power consumption.

This will mean that more businesspeople and innovators will have more to do especially across the value chain, and general value-addition issues such as blockchain and data analytics will come into play. There is also a reference to a National Integrated Electricity Policy and Implementation Plan. In this respect, there will be business opportunities to support this endeavour, from legal consulting to the provision of information technology and all sorts of support to ensure that this integration goes on seamlessly with few challenges. It is not expected that civil servants will do this alone. There will be a need for the support of the private sector.

Specifically, the new law requires that the ministry of power shall within one year from the commencement of the new law, initiate the process for the preparation and publication in the federal government gazette, of an Integrated National Electricity Policy and Strategic Implementation Plan, in consultation with relevant government authorities and other stakeholders to guide the overall development of electric power sector in Nigeria. Added to the positive is that there is the desire to ‘eliminate through policy and regulatory measures, barriers to investments across the value chain’, as gleaned from the law.

Read also: A systems approach to solving Nigeria’s electricity sector crisis: Navigating the path to transformation

There may also continue to be opportunities for investments in rural, unserved, underserved and peri-urban areas, through the utilization of conventional and renewable energy off-grid and mini-grid solutions. This is the case as the new seeks to promote the same and to promote more public education on renewable energy production. There may then be more opportunities for public relations people and companies that provide engagement and enlightenment services to the public.

Further, the EA in its provisions provides that the Commission shall at a stage it considers appropriate issue such number of trading licenses it considers appropriate. This would be following its directive to the Nigerian Bulk Electricity Trader Plc, to cease to enter into contracts for the purchase and resale of electricity and novate its existing contractual obligations to other licensees.

This creates an opportunity for willing investors to delve into trading activities and puts an end to the long reign of monopoly as it concerns electricity trading.

Closer Investor Ties with States and Local Governments

With States now able to make laws across the entire value chain without any real restrictions and to, indeed, create their own electricity markets, investors across the value chain, and in particular, distribution companies, now need to have closer ties with governments at the local government and state levels. Such investors now need to re-think the sort of collaboration and opportunities in improving their business.
They also need to build political capital in States where they seek to invest or do (or do more) business. Some States are now likely to create their own regulators and expectedly, Lagos, Oyo, Edo, Rivers and Ondo are likely to take the lead.

It is also understood that Osun State is also considering enacting its own electricity law. Those looking to invest in any of these States need to begin to take active roles to be part of the process of law and policy-making in those states so that those laws and policies are practical, enforceable and ultimately, investor friendly. Better to be involved from the outset, as an investor so that the rules are suitable.

However, it is important to note that following the de-monopolization of the sector by the EA, investors looking to invest in the electricity sector might have to incorporate different vehicles should they decide to undertake foreign direct investment, as the regime of the sector would now be dependent on the state regulatory body which shall exercise oversight over such company. As such it is important that prospective investors are aware that despite the fact that the decentralisation of the sector, the duty of compliance on the investors looking to invest and operate in different states has also increased.

Unbundling of the Transmission Company of Nigeria

The Transmission Company of Nigeria PLC has been unbundled by the EA 2023. The EA provides that an Independent System Operator (‘ISO’) is to be incorporated by the TCN to carry out market and systems operations in the Nigerian Electricity Supply Industry (‘NESI’) in replacement of the TCN. However, it is important for every prospective investor to note that the TCN shall still retain its transmission service provider licence to the extent that it would be exercised for the development and maintenance of the power transmission infrastructure.

Sequel to the above, it is important for investors to note and understand the difference between both bodies and the extent of their interface in their activities.

This, with the perceived promotion of energy federalism suggests that Nigeria is more open for business

Better Tariff Structure

Whilst the decentralization of the sector would allow for market competitiveness between the market players, thereby impacting electricity tariff, it should be noted that the EA regime does not in actual terms guarantee the independence of the market, as it still allows the Commission to where it considers necessary regulate, the prices to prevent an abuse of market power.

It is provided that the prices will be regulated based on the methodologies adopted by the commission for regulating electricity prices and in accordance with the provisions of the Act.

Read also: Decentralising the electricity sector – issues arising from the fifth amendment to the Constitution

Collaborative prospects

The new regime of the EA allows for collaborations at all levels considering the de-monopolization of the sector by the Act. The Act allows participation in Nigeria’s electricity generation, transmission, and distribution sectors at the National level and empowers states, companies and individuals to generate, transmit and distribute electricity.

By so doing, it creates an avenue for cross-participation, a prospective investor may either choose to participate with the federal government, a state, or even a private entity. The opportunities presented are limitless and there is no gainsaying that this would have a positive impact on the enthusiasm of investors to participate in the Nigerian Electricity Supply Industry (NESI).

Compulsory installation of Meter(s)

The Act provides that a sector investor and/or licensee shall not supply electricity after the expiration of the date appointed by the Commission except through the installation of a proper meter system in accordance with the Act and relevant Commission regulations.

This is a paradigm shift from the position under the old regime, which did not mandate the installation of meters but rather lists it as part of the distribution facilities the Commission may authorize the licensee to maintain.

As such, it is important that a prospective power distribution licensee is aware that as opposed to prior, installation of meters is a mandatory precursor to the supply of electricity in today’s electricity sector in Nigeria, this is important so that the cost of same is factored into the affairs envisaged by the investor.

State Licensing of Mini-grids

Under the EA regulatory power over mini-grid operations, Independent Electricity Distribution Network Operations, and Independent Electricity Transmission Network Operations was given to the States. It grants States the power to establish legal and institutional frameworks to regulate these activities and attract investment in electricity activities within their jurisdictions.

Separation of the Distribution and Supply License

Distribution and supply activities which were activities to be conducted under a Distribution licence have now been separated under the EA, hence a separate licence is required for either of the activities Impliedly, a person seeking to carry on distribution activities will obtain a distribution licence which is different from a Supply licence that will enable such person carry out supply activities.

However, this is yet to take effect, as it is subject to the specification by NERC for the disaggregation of successor distribution companies and other distribution licensees. It is important that investors seeking to delve into the sector do not function under a misconception that both activities are still subsumed under a single licence. This also creates opportunities for participants who are not looking to enter into either the generation or distribution electricity value chain, it creates a new division for their participation.

Ayodele Oni is a solicitor who specializes in international energy (oil, gas & power) investment law and policy.