• Saturday, June 15, 2024
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NESI constitutional amendment: Making the difference in Nigeria’s electricity crisis

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

Introduction

For decades, Nigeria has grappled with the challenge of energy access. The country currently has a potential electricity generation capacity of 12,522 Megawatts (MW) from existing power plants. Most times, however, it is only able to dispatch around 4,000 MW – which is grossly insufficient for a country of over 200 million people.

The Association of Nigeria Energy Distributors (ANED) suggested that Nigeria needs to generate at least 30,000MW to guarantee stable electricity across the country.

Nigeria’s current limited power generation capacity partly explains why industries rely on diesel generators to power their operations, and millions of young Nigerians rely on lanterns and candles to study at night. Disturbingly, the price of diesel has nearly tripled to 800 naira per litre in recent times and The Energy Commission of Nigeria says the country spends $22 billion (over 10 trillion naira) annually to fuel generators – a situation that worsens the challenge of high living expenses.

Nigeria’s perennial electricity crisis has evidently held back its socioeconomic potential for a long time. More significantly, energy poverty deepens systemic inequities. Hence, the perennial challenge of energy poverty in Nigeria makes tackling climate change a mirage in the country.

The recently signed Nigerian Electricity Supply Industry (NESI) Constitutional Amendment Act has ignited hopes for the country’s electricity future. Tackling the challenges of constant grid collapse and incentivizing the required investments needed to transform electricity generation, transmission, and distribution across Nigeria require a bold multi-stakeholder approach at the federal and state levels. Many legal, systemic, and policy issues must be addressed for Nigeria to optimally leverage the 2023 NESI Act and de-risk investments in the Nigerian Power Sector.

Understanding the legal frameworks

Previous legal studies had spotlighted how certain provisions in Nigeria’s 1999 Constitution made electricity generation the exclusive responsibility of the federal government and limited the participation of states and local governments in the power sector. These past constitutional provisions fenced out state governments and made it difficult for them to galvanize the required investments and structures needed to generate, transmit, and distribute electricity to their residents.

In March 2023, former President Buhari signed a bill to amend the 1999 Nigerian Constitution vis-a-vis the powers of the State House of Assembly on electricity matters. According to Part II, section 4, paragraph 14(b) of the 1999 Constitution, the House of Assembly could make laws regarding generating, transmitting, and distributing electricity to areas “not covered by a national grid system within that State.” However, the latest constitutional amendment altered the coverage areas – allowing states to make laws for generating, transmitting, and distributing electricity to areas covered by the national grid.

Historically, the 1979 Nigerian Constitution granted States unrestricted powers to make laws regulating the generation, transmission, and distribution of electricity within their territories. Paragraph 14(b), Part II of the Second Schedule to the 1979 Constitution expressly provides that “a House of Assembly may make laws for the State concerning the generation, transmission, and distribution of electricity within that State.”

Nevertheless, despite this unrestricted power granted to the States under the 1979 Constitution – the federal government single-handedly called the shots during that period. Before the incursion of NESI, all electricity- related activities were mainstreamed in a single power utility body (the defunct National Electric Power Authority – “NEPA”). In 2005, another Power Sector Reform Act transferred the public monopoly of NEPA to the Power Holding Company of Nigeria (PHCN) which was unbundled into 18 Business Units (i.e. 11 Distribution companies, 6 Generation companies and 1 Transmission company).

In June 2023, President Tinubu signed the Electric Power Sector Reform Act – which empowers States to generate their electricity and regulate the sector at the state level – through State appointed regulators. The primary objective of this Act is “to provide a comprehensive legal and institutional framework to guide the operation of a privatized, contract and rule-based competitive electricity market in Nigeria and attract through transformative policy and regulatory measures = private sector investments in the entire power value chain of the Nigerian Electricity Supply Industry”.

Systemic problems of funding, gas shortages, and payments

The Nigerian electricity supply industry runs a quasi-privatized structure – the Nigerian Federal Government (FG) is still heavily involved in most of the industry’s operations. The FG has spent over 1.5 trillion naira on bailouts despite the privatization of many assets. The industry has also struggled to attract sufficient funding – the World Bank disclosed in 2022 that the country needs $100 billion to tackle erratic power supply over a period of ten years.

Due to the inadequate funding of the sector – the industry’s aging, or in some cases – non-existent infrastructures have amplified the challenges of gas shortages and constant grid collapse. Punch Newspapers reported that the Nigerian national grid has collapsed at least 98 times in the last eight years alone.

Premium Times also reported that within the first seven days of March 2021, Nigeria’s power sector lost about 6.8billion naira to challenges related to insufficient gas supply to power plants — amongst other constraints.

There is a challenge with inefficient payment systems between the consumers and the Power Distributions Companies (DISCOs) – and between the DISCOs and the Power Generation Companies (GENCOs). Many consumers believe they do not enjoy uninterrupted electricity and hence default on electric bill payments. Most consumers are also not used to paying premium bills for used services.

This consumer behaviour negatively impacts the revenue of DISCOs – who in turn struggle to meet their financial obligations to GENCOs – and GENCOs also sometimes struggle to meet their financial obligations to gas suppliers – consequently creating an ecosystem of trapped funds in a sector that needs every available fund to function efficiently.

Modern energy services and Nigeria’s socio-economic development

Addressing Nigeria’s energy needs is key to unleashing its immense economic potential. A reliable power supply can help to tackle the challenges of economic poverty, unemployment, and insecurity. Despite being the largest economy in Africa, Nigeria’s current GDP is still a scratch on the surface of what the country could become. A reliable power supply will boost big businesses and help MSMEs scale at lower costs – creating meaningful jobs and improving Nigeria’s Human Development Index.

The following are imperative to making the difference in Nigeria’s electricity crisis:

(i) Reacquisition and refinancing of DISCOs and GENCOs

The privatization of the power sector by the Bureau of Public Enterprise (BPE) in 2013 has not yielded the expected transformational results. Some analysts suggest that Nigeria gifted its Power Distribution Network to many companies with poor technical and financial capacities.

To remedy this, the government needs to conduct a performance review of the privatization policy and open its current equity stakes in the DISCOs and GENCOs to financially buoyant and technically capable companies.

It should also encourage struggling DISCOs and GENCOs to sell their assets to more competent investors. Stringent technical and financial thresholds should be set for the fresh acquisition process – and these thresholds should be made publicly available for transparency and accountability.

(ii) Amend the electric power sector reform act to allow inter-state electricity distribution

The Federal Government could further amend the Electricity Act to allow inter-state electricity distribution. Such an amendment would allow Lagos to potentially sell electricity to Oyo and Ogun states. Edo could sell to Anambra, and Kano. That way, States with excess capacity or more resources can export electricity to neighboring states – consequently boosting national energy access and state revenues.

(iii) Create a one-stop department for Investors

State governments should avoid the pitfalls of discouraging investors with red tape. Nigeria has immense energy potential, but administrative bottlenecks most times create demoralizing roadblocks for prospective investors. State governments should create a one-stop department for investors, donor agencies, and technical partners in their respective Ministries of Power.

Investors are typically required to meet several requirements on licenses, permits, approvals, and clearances – many of these requirements are managed by agencies or ministries outside the power sector. These bureaucracies can stonewall the entire process and disincentivize well-meaning investors.

State governments could create a department comprising experts and administrative staff from relevant ministries to interface uniformly with investors and technical partners.

(iv) De-risk investment through strength-drive state investment platform and zones

States should play to their strengths in ways that assure yields on investments. Assured returns on investments will further attract capital inflow to the power sector. In playing to their strengths – states like Lagos or Akwa Ibom, for instance, can create Offshore Energy Zones and encourage investors to develop offshore wind turbines in the zones to add to the grid.

States like Kaduna and Kano can create Solar Power Complexes in ways that leverage their landmass and sunshine. States should be willing to establish interactive investment platforms and energy generation zones or opportunities that can help de-risk investments. These strategies could help promote sustainable socio-economic development while reducing greenhouse gas emissions.

(v) Local government renewables-driven power generation

There are diverse energy potentials across Nigeria’s 774 local government councils. As part of implementing the reviewed NESI Act, local governments should also be allowed to leverage their strengths through off-grid sources like solar, biogas, onshore wind turbines, etc. If every local government could generate at least five megawatts of electricity over the next five years, the country’s total capacity would have increased by 19,350 megawatts.

(vi) Scale-up smart metering

While some Nigerians already use smart meters, mainstreaming them among most consumers would require improved investments in their production, as well as making the meters readily available to consumers – and building formidable trust between DISCOs and consumers. A digitalized metering system allows consumers to see their energy usage in real-time.

This could improve consumer confidence through the elimination of estimated billing and cut losses on the DISCOs’ end. Governments at all levels should enable modern electricity meter plants that comply with technical requirements and allow consumers to choose their preferred brand of smart meters just like it is obtainable in the telecommunication sector.

This could help to solve the challenge of cost-reflective tariffs. The installation of smart meters can also be monitored on a dashboard by the Nigerian Electricity Regulatory Commission (NERC) and state regulators to assess DISCOs progress in installing them nationwide. The dashboard data can also help inform better policy decisions and service delivery.

(vii) Create a quota-driven natural gas marketplace for GENCOs

Nigeria holds over 209 trillion cubic feet of proven gas reserves as of March 2022. The country also currently exports over 30% of its natural gas production. Yet, Nigeria’s power plants face gas shortages due to low gas production and the inability of GENCOs to timely pay gas suppliers (reportedly due to their trapped funds with DISCOs).

The current huge global demand for natural gas means Nigeria needs more investments to massively scale up its natural gas production and protect the country’s local natural gas needs through a special marketplace for GENCOs. The marketplace could ensure prioritization of the quota needed to fuel key power plants across the country as a necessity for national development.

While earning foreign exchange through natural gas export is essential to economic growth, prioritizing the needs of GENCOs and powering the local economy is equally pivotal.

(viii) Embrace an adaptive knowledge-driven approach to regulation

Governments should adopt a research-based and knowledge-driven regulatory approach that is adaptive to changing circumstances – ensuring that lessons learned on a previous project are integrated into future improvements in line with industry best global practices.

This approach could also include public participation mechanisms through which governments seek the input of relevant stakeholders – including private investors – to further boost investor confidence and incentivize private sector participation.

(ix) Further unbundle the technical operations of the TCN

The Transmission Company of Nigeria (TCN) is responsible for evacuating electric power generated by the GENCOs and wheeling it to the DSICOs. There are two major arms of the TCN — the Transmission Service Provider (TSP) and the Independent System Operator (ISO).

According to the EPSR Act, the TSP and the ISO should be different entities – the TCN was also issued two operating licenses in 2006 for both entities but they are currently fused together. The TCN’s hitherto fused structure is a stumbling block to the development of Nigeria’s electricity market – because the TCN practically serves as a regulator and a player at the same time.

To remedy this, private TSPs with technical and financial capacity could be licensed to build and operate transmission infrastructure in various parts of the country to expand wheeling capacity, improve stability, and reduce transmission losses.

One of the ways to reduce transmission losses is the adoption of a Super Grid concept – which according to the TCN itself would cost about $5billion. This scale of investment suggests governments at all levels would require private investments to develop their transmission infrastructures.

For proper regulation, governments could use their regulatory channels to ensure private TSPs always adhere to technical, operational, and financial thresholds. In addition to these, unbundling the TCN would also help Nigeria meet one of the conditions required by the World Bank to access intervention funds for the power sector.

(x) Cross-licence DISCOs and GENCOs

Cross-licensing technically capable DISCOs and GENCOs to operate power generation, transmission, and distribution networks could help to efficiently decentralize the Nigerian grid system and maximize its energy potential. This could create a platform for capable companies with excellent track records in the Nigerian power sector to operate in different segments of the sector in a competitive and effectively regulated flourishing business environment.

Conclusion

The NESI Constitutional Amendment and the new Electricity Act could be a defining moment for Nigeria’s power sector. It provides an opportunity to build an electricity system that maximizes our local resources and creates shared prosperity for all Nigerians.

The attainment of these transformative possibilities will however be hinged on the forward- thinking approaches of governments at all levels and the commitment of all (or at least: most) Nigerians to do their own bit in the hard work of reshaping our power sector and redefining how we live our daily lives as Nigerians.

Professor Fagbohun, SAN, is an energy policy and environmental law expert. He formerly served as Vice Chancellor, Lagos State University. He was awarded Nigeria’s National Productivity Order of Merit award in 2019.

Olugbenga is an energy and sustainability consultant. He currently works with the Energy and Climate Practice team of an international development consulting firm based in the Washington DC area.