The Columnist

Independent System Operator: Exploring its Dynamics in the Current Ailing Power Sector

December 19, 2020

The importance of the power evacuation infrastructure in the electricity value chain globally cannot be over-emphasized. The transmission network is not only vital to the sustenance of the power sector, but also the socio-economic development of any nation. This is because the economic growth of a country is contingent on reliable and clean electricity supply and the transmission network guarantees that energy reaches the consumers. As already stated, the power sector is a value chain, consisting of the Generation, Transmission, and Distribution subsectors.

Following the unbundling of the sector in November 2013, the generation and distribution subsectors ware privatised, while the transmission subsector remained a fully-owned Federal Government entity, under the ambit of the Transmission Company of Nigeria (TCN), which is comprised of three functional departments namely:

  • Transmission Service Provider (TSP)
  • The Market Operator (MO)
  • The System Operator (SO)

While the TSP is responsible for the development and maintenance of the transmission infrastructure and expands it to new areas, the Market Operator is in charge of the administration of the Nigeria Electricity Market (NEM). The System Operator can best be described as the ‘soul of the grid’, performing a number of functions. The SO by definition undertakes control of the physical operation of the electricity system for which they are responsible.  The role of the SO in the NESI, is critical to its survival, as the SO is saddled with the responsibility of managing the transmission grid lines, ensuring its reliability, and also maintaining the technical stability of the grid through its operations of planning, dispatch, and control of the grid.

According to the Nigeria Electricity Regulatory Commission (NERC), the general roles of the System Operator includes, “the Generation scheduling, commitment & dispatch; Transmission scheduling and generation outage coordination; Transmission congestion management; International transmission coordination; Procurement and scheduling of ancillary services and system planning for long term capacity; Administration of the wholesale electricity market including the activity of administration of settlement payments, in accordance with the market rules; and Such other activities as may be required for reliable and effective system operations.” These roles as stipulated by the regulator, are in line with the roles as defined by the extant laws governing the Sector. But in more precise terms, the role of the SO borders on enforcing compliance with the Grid Code and Market Rules as well as the management and monitoring of the operations of the grid.

Notwithstanding the high level of performance expected of the transmission subsector, the existing transmission network has proven to be poor, erratic, and fragile. The deficiency of the power evacuation entity which has remained underdeveloped with network devices and equipment that are predominantly controlled manually, explains the instability in the transmission network and has guaranteed that industrialisation is unattainable as industrialisation entails substantial power supply, especially through the grid and not off-grid systems. This infrastructural paucity calls for a desperate need for revamping requiring huge investments, which TCN has maintained it lacks the funds to do.

Even more worrisome, is the inadequacy of the System Operator to deliver on its mandate in the Sector. It is absurd that even in this present day, the SO still relies on radio and telephone communication to control the grid due to its inability to deploy SCADA; and also the failure to implement Generation Dispatch Tools. This poor communication mode accounts for the incessant system outages experienced in the country. Furthermore, there are also challenges relating to the lack of ancillary services. Free Governor Mode of Operation and the SO’s constant instructions to the GENCOS to ramp up and ramp down when in full operation jeopardises the Generating Units and proliferates the maintenance cost since the periods in between maintenance are shortened.

A glaring fact is that the solution to the problem is nowhere near rocket science but largely lies in the deployment of real-time grid management and control mechanisms. However, the System Operator in its present structure i.e. being subsumed under the Transmission Company Nigeria (TCN), will continue to be incapacitated in effectively accomplishing its functions. This can be said to be the catalyst to driving the unbundling of the functions of the SO into an Independent System Operator (ISO) to subvert any intrusion by TCN.

Interestingly, the intention of EPSRA, is that in the long term, the SO will devolve into an independent body distinct from the company upon the electricity market attaining a fully developed stage. Section 26(7) of the Act states that at any time following the declaration of a substantially privatised market under section 24, the successor company identified in section 25 (b) may transfer the function of system operation to an independent system operator on such terms and conditions as the Commission may direct and on such transfer, the independent system operator shall be subject to the same powers and duties as have been imposed on the transferring successor company under this Act in relation to system operation. What this means is that upon the transfer, the ISO shall assume the powers and roles of the System Operator.

Functions of the Independent System Operator

Going by the provisions of Section 26(7) of the Act, it can be deduced that the transfer of the functions of the SO to the ISO is subject to the terms and conditions imposed by the Commission and upon the transfer, the ISO assumes the powers and roles of the System Operator. This means that the functions of the ISO as regards the NEM, are in pari materia with that of the SO. In fact, Section 100 of the Act, categorically defines the Independent System Operator as a System Operator, which is not affiliated with any entity holding a transmission licence.

In other jurisdictions, the functions of the ISO have evolved over time. In the United States, for instance, the ISO exercises some functions such as Tariff Administration and Design, Congestion Management, Ancillary Services, OASIS, and total Transmission Capacity (TTC) and Available Transmission Capacity (ATC), Market Monitoring, Planning Expansion and Interregional Coordination. In New England, the ISO has three critical roles namely: Grid Operation, Market Administration, and Power System Planning.  One major factor to be noted though is that regardless of the jurisdiction, the functions are basically interwoven. However, some key functions cut across every electricity market, chief of which is Grid Control.

Irrespective of how broad or limited the functions of the ISO in the various jurisdictions including Nigeria are, the core functions of the ISO though not limited to the following, can generally be surmised to include:

  • Real-time grid control
  • Operational and expansion planning
  • Tariff administration
  • Congestion management
  • Ancillary services management
  • Transmission capability assessment
  • Market monitoring
  • Interregional coordination
  • Settlement of energy, capacity, service, and imbalance charges
  • Invoicing of service charges and imbalance charges

 Models of Independent System Operators Worldwide

The ISO is a model practiced in electricity markets globally. The model guarantees confidence in the electricity market amongst investors and other stakeholders including consumers. From research, five key models of transmission system operation have been identified across the world.

  1. The independent transmission system operator – An example is the National Grid in the UK. [ITSO]. Under this model, the functions of the SO are combined with the ownership and maintenance of the transmission system. The advantage is that the investment is fully integrated along with the long-run planning and short-run dispatch of the system. The ITSO usually has an incentive to grow transmission capacity to aid trading and competition.
  2. The legally unbundled TSO, e.g. RTE falls under the French electricity transmission company with remains owned by EdF the former monopoly utility. Having been unbundled from the rest of the system, it owns and operates the transmission assets. This can include actual separation of transmission operation from the other aspects of the sector leaving the transmission assets under the same ownership as generation/production or retail. This model is becoming increasingly common.
  3. The independent system operator – This model includes PJM in the US, and also Scottish electricity in the UK. This is said to be an ‘asset-lite’ SO model where the system operator does not own the transmission assets but rather its ownership is unbundled from the transmission system. Such an ISO arrangement can operate at a multijurisdictional level.
  4. There is also the hybrid model where the ISO and the TO are unbundled from the rest of the transmission system. The ISO is asset-lite, while the TO has no system operation function. This can be seen in Chile and Argentina, where it was observed in the context of rapidly expanding systems.
  5. The vertically integrated utility, e.g. traditional utilities in Europe. This is the model that energy market reforms have tried to move away from. However, it is still in de facto or de jure operation in many electricity markets and even gas markets worldwide.

Coming back home to Nigeria, looking at the aforementioned models vis-à-vis the Nigeria Electricity Market, it is safe to say that the best applicable model is the US PJM ISO model. It is noteworthy to state that ISOs have a reasonably long history in the US which has taken them to their present phase of development. The US has largely followed one model for realising this – the creation of a stand-alone independent system operator (or ISO).

PJM which stands for Pennsylvania, Jersey, Maryland Power Pool was founded in 1927. It is a regional transmission organisation (RTO) in the United States which forms part of the Eastern Interconnection grid operating an electric transmission system serving all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, and the District of Columbia. It is headquartered in Valley Forge, Pennsylvania. Until the development of the European Integrated Energy Market in the 2000s, the organisation held the position as the world’s largest competitive wholesale electricity market. It has over a thousand companies as its member, serves 65 million customers, and has 180 gigawatts of generating capacity. With 1,376 generation sources, 84,236 miles (135,560 km) of transmission lines, and 6,038 transmission substations, PJM delivered 807 terawatt-hours of electricity in 2018.

Some basic attributes of the ISO model are as follows:

  • A non-profit entity without ownership of the transmission assets
  • Independent boards and stakeholder committees
  • Responsible for operating the network reliably and economically
  • Manages FERC Open Access Transmission Tariff, OASIS, generator interconnection rules
  • Manages voluntary wholesale spot markets for energy and ancillary services
  • Manages applications for transmission service, allocation of scarce transmission capacity and network expansions
  • Transparent Regional Transmission Expansion Planning process
  • Market monitoring and mitigation programs
  • Coordination with neighboring control areas, including imports/exports (cross-border trade)
  • Regulated Incumbent Transmission

Accessing the Place of the ISO in the Nigeria Electricity Market

It is imperative to reiterate that the ring-fencing of the operations of the System Operation and Market Operation roles from the TSP is one that has been anticipated by the EPSRA.  However, in accordance with the wordings of the Act, it is subject to the declaration of a fully privatised market. In determining what amounts to a fully privatised market, the provisions of Section 24 of EPSRA must be critically analysed. Section 24(3) specifically states that “…when the Minister, in consultation with the President and the National Council on Privatisation is satisfied that the electricity market in Nigeria has developed to the point where a more competitive market ought to be established pursuant to section 26 of this Act, having regard to the criteria described in paragraphs (a), (b) and (c) of this subsection, the Minister shall issue a declaration that a more competitive market is initiated.”

While Section 26 provides for the legal backing for the approval of the development of the Market Rules by the System Operator, for the operation of the national grid by the SO, and the establishment and governance of markets related to electricity and ancillary services, Rules 6 of the Market Rules set out the three stages for the development of the competitive electricity market which are: (a) The Pre Transitional Stage (b) Transitional Stage (C) Medium Term Stage. The Transitional Stage indicates the growth of the NESI climaxing in the shift from a government-controlled structure to contract-based arrangements for electricity trading and the institution of competition for entrance into the Market.

The ensuing question is whether the NESI has attained a fully privatised market. The answer can be said to be in the affirmative. Following the declaration by the Commission, by Order No. NERC/15/0011, of 2015, of the commencement of TEM from February 1, 2015, upon the attainment of the completion of all the conditions precedent set out in the Market Rules, which are required to be satisfied before the declaration of TEM.

Considering the stage at which the market is currently, the conundrum in the sector, and how poorly the System Operator has performed, there is every justification to explore the ISO model. So why is NERC delaying its implementation? I believe the Commission is in the best position to give answers.

The SO being a subsector of TCN, is already encumbered in the execution of its operations. Furthermore, the issue of paucity of funds faced by the company is a hindrance to the development of the SO. With the advent of the ISO, it is expected that it would be in the position to source the necessary funds for implementation of the required tools to address some of the challenges currently faced by the SO, such as the deployment of SCADA.

The ISO must be structured in a mode that is bereft of impediments, particularly constraints from the action or inaction of any institution. In this case, the ISO is undertaking the roles of the System Operation and Market Operation. A key characteristic of the ISO is its independence and this is in terms of the separation of control from the individual market participants. The degree of independence of system operation in the power sector is said to be closely linked to the level of transmission system unbundling. Transmission assets can be owned and maintained separately from system operation. However, if the transmission assets are unbundled from the competitive parts of the system, the separation of the transmission ownership and system operation may be pointless.

The independence of the SO guarantees its ability to provide non-discriminatory, efficient system operation and market administration services and also assures the relevant stakeholders of its complete independence on issues of emergency grid management, data disputes, and other critical functions. Again, the ISO can be held accountable to its obligations under the extant laws in the Sector. Also, the challenge of the lack of deployment of ancillary services such as the Spinning Reserves, Black Start, Reactive Power Reserves, etc. could be addressed. More importantly, the ISO model, is in accordance with industry best practice, giving rise to the best operation of the system and drive a move towards instituting a bilateral wholesale electricity market.

It could be safe to say that, it is a settled fact that the unbundling of the SO functions into an independent system is necessary at this point in the sector. It is also encouraging to know that NERC has commenced steps aimed at unbundling the TCN into TSP and ISO functions respectively, as revealed in the consultation Paper on “Greater Independence of the Electricity System Operator”, publicised in July, 2020, calling for inputs from stakeholders on the readiness of the industry. But we cannot delude ourselves that the process would be a walk in the park.

However, certain factors have to be pondered on if the goal of unbundling must be achieved?

  1. What would be the best Ownership/Governance Structure?
  2. Actualisation and sustainability of the unbundling

What would be the best Ownership/Governance Structure?

A key design issue of the ISO is the Ownership and Governance Structure which is also a regulatory concern. As referenced earlier, the PJM model best fits the Nigeria scenario, PJM is a membership organisation providing services like the various ISOs worldwide, on a nonprofit basis. The members take part in its stakeholder process, which provides a forum for those who have a stake in the wholesale electric industry to discuss and work through issues related to its markets, operations, public policies and current and future industry matters. Admission into the membership of the organisation, entails completion of applications and requirements delineated in its governing documents.

The organisation runs a two-tiered governance structure namely: the Independent Board and the membership committee. The role of the Board is to ensure the efficient control of the grid, and also the operation of competitive and fair electric power markets. The board also guarantees that no member or market participant has undue influence over its operations. The Board is comprised of its voting members and the president, who is a non-voting member. The voting board members are elected for three-year staggered terms by the Members Committee.

The members’ committee comprises of the Generation Owners, Transmission owners, other suppliers, Electricity Distributors, and finally the End-Use Customers. Its key role is to review and make decisions on major changes and initiatives recommended by committees and user groups.

The PJM organisation is financed through the recovery of its administrative costs which include the costs of operating the electric transmission system and the wholesale electricity markets. This is done through fixed rates billed to members based on their activity levels. This model can be adopted by the NESI. The members would consist of the generation, transmission, distribution, trading companies as well as the consumers.

Yet another Model that can be explored by the NESI, is the Nigeria Inter-Bank Settlement System Plc. (NIBSS), owned by all licensed banks including the Central Bank of Nigeria (CBN). Discount houses operating in Nigeria also own substantial shares in the company. It has in place modern world-class infrastructures used for handling inter-bank payments to eliminate potential bottlenecks linked with inter-bank funds transfer and settlement. The company also operates the Nigeria Automated Clearing System (NACS) which facilitates the electronic clearing of cheques and other paper-based instruments, electronic funds transfer, Automated Direct Credits, and Automated Direct Debits. The Board of NIBSS comprises the Central Bank of Nigeria as the Chairman, representatives of Banks, discount houses as Directors, and the Managing Director/CEO.

While this model is similar to the PJM, it is, however, incorporated as a public liability company owned by all licensed banks including the Central Bank of Nigeria (CBN), with its owners having shareholdings in the company.

Actualisation and Sustainability of the Unbundling

For stakeholders and persons familiar with the sector, this definitely would raise some worries. This is especially going by the antecedents in the Sector and of the regulator.  Interestingly, in 2015 the attempts at unbundling TCN failed, when the splitting of the Company into the TSP and ISO was revoked by the Federal Government, and the Managing Directors of the two hitherto separate entities instructed to revert to their previous positions. Quite arguable, the ground for the reversal was that due process was not observed, however, it has also been generally believed that the reversal was due to political reasons.

Political/government interference has been a challenge in the sector, particularly with regards to the functions of the regulator. It is generally believed that NERC is not independent and therefore, there is no guarantee that same will not play out in the present process. The proposed ISO model is expected to assure complete independence of the system operation functions, can that be achievable in the present setup of the sector.

Again, implementation is a major challenge in the sector. While NERC can reasonably be commended for instituting policies, regulations, and ideas, it cannot be commended for enforcement, Will the commission performs differently this time? There is also the need for the Commission to ensure proper monitoring and evaluation mechanisms are put in place, can it be guaranteed that the Commission will do so? Finally, does the Commission have the technical wherewithal to ensure the success of the process? I believe all these factors have to be pondered on and addressed or the ISO will be another recorded failure.

Conclusion

The NESI is critical to the socio-economic development of the Country and therefore a high level of performance is expected of it. The role of the SO in ensuring the sector performs efficiently cannot be overemphasised as it is responsible for guaranteeing the reliable delivery of electricity to consumers, businesses and industries, through the management of the power grid. This, therefore, calls for a system operator that is not only efficient but also reliable. The SO as presently constituted have proven to be inefficient which necessitates a transition to an Independent System Operator following the design of the EPSRA. The ISO presents many advantages. For one, it is expected that the ISO would be in the position to source the funds to deploy SCADA which is currently lacking in the sector. NERC however, has a role to play in ensuring the successful unbundling from an SO to an ISO. The commission can start by aggressively pursuing the implementation of the scheme.

 

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