• Friday, June 21, 2024
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Decentralised electricity markets in Nigeria: A critique

FG targets 1,268MW boost from eight new power plants

Background

Nigeria’s electricity supply chain had been fused under a vertically-integrated state-owned utility called National Electric Power Authority (NEPA). Guided by the Electric Power Sector Reform Act 2005 (EPSRA), the power sector reform programme saw to the liberalisation of the Nigeria Electricity Supply Industry (NESI) and charted a framework for the separation of potentially competitive market functions and established an industrial structure for the operation of those functions.

Ultimately, competitive wholesale and retail electricity markets were established with the Nigeria Electricity Regulatory Commission (NERC).

As the regulatory, Section 62 of EPSRA empowers NERC to license any operator seeking to venture into the business of generation, transmission, system operation, distribution and trading of electricity in Nigeria. NERC is also the regulator of electricity pricing and has, in that light, established the Multi-Year Tariff Order (MYTO) – a methodology for regulating electricity prices that outlines a long-term path for the industry with short-term minor reviews.

Similarly, NERC is responsible for the establishment, promotion and monitoring of a competitive, private sector-driven electricity market, and eliminating undue market power.by a single or multiple group of players.

New Sheriff in Town?

Recently, President Muhammadu Buhari assented to the Constitutional Alteration Bill No. 33, to allow States generate, transmit and distribute electricity in areas covered by the national grid; and for related matters. The Bill, now an Act, ushers in a new epoch of State Electricity Markets, a remarkable development in the NESI post-privatisation, allowing States to license, generate, transmit and distribute electricity in areas covered by the national grid.

Hitherto, arguments were rife that the federalisation of grid-connected electricity markets in Nigeria has hindered States that want to accelerate growth within their boundaries to do so. On the other hand, some have cited the inability of the States to leverage their right to generate, transmit and distribute electricity in off-grid areas in making a case for continued federalisation. In any case, we set out to analyse the Constitutional amendment ushering in State electricity markets, and its potential impacts on the NESI.

Positives of the new market structure

Restructuting and Decentralisation: If looked from the vantage point of efficiency and performance, decentralisation could recalibrate the market for greater efficiency, more reliability and less vulnerability than the centralised market structure.

This could not have come at a better time, especially in view of the abysmal performance of the power sector privatisation program and the slow pace of reforms. If States assert their rights under the structure, they could effect a liberalisation of the grid and the creation of sub-grids. If carefully implemented, this could allow for competitiveness in the electricity supply and end the top-down model of the NESI presently in place.

If the governance structure is decentralised, generation sources multiplied, options made available, control and management responsibilities devolved, the power sector could then push towards stability and balance.

Competition: Greater competition could now be seen between State-owned utilities and Distribution Company (Disco) Licensees in their territory of domain. With the emergence of new licensees comes the inevitability of competition, thus underscoring the need for an overhaul of traditional market structures and sound regulatory frameworks to guide effective and sustainable competition. As new licensees emerge, they will invest in power systems, meter customers and collect tariffs.

In addition to Reducing Aggregate Technical Commercial and Collection (ATC&C) Losses, this will introduce consumer choice of power supplier as an essential ingredient of a reformed electricity market. This will stimulate quality supply and swift response to consumer issues. In distribution especially, consumer choice will give end-users a bargaining tool through the ability to switch electricity suppliers, indirectly impacting price structures, product diversity and service conditions in the NESI.

Breathing space for Discos: With the growing inability of the grid to wheel mechanically-available electricity generation capacity due to weak and dilapidated transmission and distribution infrastructure, the new market structure will enable States and their new licensees to trial end-to-end supply of electricity within their domains.

Opportunity for Captive Power Generation, Eligible Customers and Distribution Franchises will broaden to target industrial clusters, universities, and the likes. As these customers seek to connect to more reliable electricity suppliers, Disco network franchise areas can then focus on serving residential and average commercial customers within regular consumption bands. Under this structure, there could be an opportunity for collaboration for Discos to earn Distribution Use of System (DUoS) Charges, thereby recovering the cost of installing and maintaining the local distribution networks.

Read also: Collaboration, finance seen as keys to improving power transmission grid

Decarbonisation of the energy mix

The new decentralised market structure potentially offers support for decarbonisation and improves resilience. States in the North-East for example, can tap into the abundance of solar radiation while opportunities for hydropower generation can be explored in the North.

Distributed solar PV can provide affordable power supply to households and businesses, reducing their dependence on the national grid. With this, the market structure will enable States to produce and supply electricity in accord with their own preferences and can also support decarbonisation by enabling fuel switching to renewables.

An End in Sight for Power Theft: Notably, electricity theft hampers the economic viability of the NESI. This new market structure thus provides an opportunity for States to tackle power theft the best way they see how. With legislation, electricity theft will now attract varying sanctions, depending on what a State’s law provides.

Rilwan Idris is the Lead Partner, Transadvisory Legal.

Atiku Jafar is the Head, Energy Practice, Transadvisory Legal.