Introduction
The Electric Power Sector Reform (EPSR) Act, enacted in 2005, created the Nigerian Electricity Regulatory Commission (NERC) and established the framework for the privatization and operation of state-owned generation and distribution companies. Following global dialogues on the transition to clean energy and the need to tackle other sectoral drawbacks, it became expedient to review the existing legal framework of the Nigerian Electricity sector. To this end, the Electricity Bill (the Bill) is being proposed at the National Assembly to repeal and replace the EPSRA by setting the stage for the Medium and Long Term Market as well as establishing a viable structure to support Nigeria’s energy transition.
This article highlights salient provisions of the Electricity Bill and analyses its impact on the Nigerian electricity sector:
Framework
The Bill provides a framework for operating a privatized, contract and rule-based competitive electricity market. It gives clarity and unanimity between statutory and regulatory provisions on the transition from the Transitional Electricity Market to the Medium Term and Long Term electricity market. As a result, we expect to see bilateral contracts between Distribution Companies (DICOs) and (GENCOs), more market flexibility and competition. The Bill advocates for the preparation of a National Integrated Electricity Policy and Strategic Implementation Plan (NIEPSIP) within one year of enacting the Act, focusing on renewable energy sources, private sector participation, and rural electrification.
Independent System Operator (ISO)
The Bill provides for incorporating an ISO by NERC, who shall take over the market and system operation role of the Transmission Company of Nigeria (TCN.) By implication, the TCN will operate strictly as a transmission service provider that manages only transmission assets and liabilities. This is a commendable development as it takes the system and market operation out of the purview of the TCN, an entity wholly owned by the government. Furthermore, with similar models in France and the UK, the ISO model aligns with global best practices and will foster confidence in the electricity market amongst investors and other stakeholders, including consumers. Ultimately, this development will promote efficiency, transparency and accountability in the system and market operations of the sector[1]. The government can then focus on improving the already dilapidated transmission networks.
The Electricity Appeal Tribunal
The Electricity Appeal Tribunal entertain appeals from the decision of NERC. Appeals from the Tribunal goes to the Federal High Court on points of law. Unlike the EPSRA, the Bill specifically provides for an appeal to the Tribunal against NERC’s decision on the issuance of licenses and other matters. With a clear hierarchy on the resolution of the dispute, the tribunal will allow for expertise in adjudicating power sector disputes whilst avoiding delays typically associated with the usual courts. However, it will be critical to ensure that there are no clashes between the provision of the Bill on dispute resolution and the dispute resolution mechanisms established by several NERC regulations. For instance, the Metering Code, Distribution and Grid Code provide for dispute resolution panels within their framework.
In the same vein, there should be an alignment with the NERC Customer Complaints Handling: Standards and Procedures, 2006 on procedures for the resolution of complaints. The above notwithstanding, the Bill, when passed, shall have the force of law and will supersede contrary provisions of any regulation.
Electricity Supply
An improvement to the EPSRA is the introduction of a new value chain, “electricity supply”. This makes 6 (Six) operations subject to NERC’s licensing regime; generation, distribution, trading, transmission, system operator and “electricity supply”. At the initial stages of implementation, the existing DISCOs will continue to operate as both supply and distribution licensees (i.e. the current mode of operation)
However, NERC is empowered at any market stage to disaggregate the license into two separate licenses of distribution and supply. Thus, treating both activities as separate and distinct operations within the electricity market. Essentially, there will be distribution licensed companies and supply licensed companies.
A transfer scheme will be initiated for the disaggregation of successor distribution companies such that the functions, property, interest, liabilities and assets relating to the supply of electricity will be transferred to a different entity to be incorporated by the DISCO. Upon conclusion of the transfer scheme, the successor distribution companies will cease to carry out supply activities and operate strictly as distribution companies, while the new entity will be granted a distinct electricity supply license.
If properly executed, introducing “electricity supply” as a distinct operation will improve efficiency and promote competition and consumer satisfaction. It should be noted that the Bill does not clearly define the difference between distribution[2] and supply[3] in the context of the electricity market. The clarity in this regard is required to ensure certainty and proper implementation.
Renewable Energy
As the drive towards the transition to clean energy continues, the renewable energy space is expected to scale. The Bill empowers NERC to grant multiple generation licenses to independent power projects to generate power from renewable and nonrenewable sources[4].
Subject to NERC’s directive, one of the conditions for granting a generation license may include an obligation to purchase from renewable sources or to generate power from renewable sources.
Generation companies can meet this obligation by owning renewable energy sources, purchasing power generated from renewable sources, or owning another renewable energy instrument. This mandatory obligation is also applicable to distribution and supply licensees to promote energy production from renewable energy sources.
Further, commercial activities in the renewable energy industry will be categorized into generation, distribution, sales, installation and any other as may be determined by the NERC. The Ministry of finance is required to introduce tax incentives for the generation and consumption of power from renewable energy sources. This is akin to countries like the United States of America, where a 26% federal solar tax credit is granted to incentivize the transition, and unused tax credits are rolled over for a maximum of 5years.[5]
From the market perspective, we expect to see the development of more renewable energy projects and trading in renewable energy attributes (e.g. RECs) to meet the required demands from GENCOs and DISCOs. In general, incorporating renewable energy into the country’s energy mix on a large scale can potentially help Nigeria deal with energy poverty and allow its economy to leapfrog towards a prosperous and sustainable future.
Electricity Trading
Unlike the EPSRA, the Bill contains more elaborate provisions on trading licenses. NERC shall have the power to grant as many trading licenses as it deems fit depending on the stage of the electricity market. The trading licensees can purchase, sell and resell electricity and other ancillary services. Trading licensees can enter into a novation contract with NBET[6] to novate their rights under power purchase agreements. The trading licensee can then resell such power under the novated agreement. In addition, trading licensees can purchase power directly from successor generation companies and independent power generators for the purpose of reselling.
This new provision anticipates the transition to a competitive market where electricity trading will be full-fledged, thereby opening up the electricity market to more players.
Independent Electricity Transmission Licenses
The Bill introduces a regime for Independent Electricity Transmission Network License (IETNL) to cover areas where there is no transmission network, and an extension is required to increase electricity access. IETN will also be granted where a transmission network exists, and reinforcement is required to connect to a new power generation capacity. This is a new niche for investors and may be structured as concessions, Build Operate and Transfer (BOT), e.t.c. IETN licensing will assist with the rapid improvement and expansion of the transmission network whilst giving room for private sector participation within the sector.
Cancellation of Licenses
One of the grounds for license cancellation under the EPSRA is where the financial position of the licensee is such that he is unable to fully and efficiently discharge the duties and obligations imposed by the licence. The Bill proposes an exception and states that cancellation will not apply where the failure of a licensee to carry out its obligation is due to the failure of a government agency or other licensees to carry out their responsibility or comply with their obligations as provided in the law.
The exception can serve as a defence to licensees faced with the penalty of license cancellation and whose circumstance falls within the exception. Investors can be assured that their licenses will not be revoked where the default is as a result of the acts or inactions of other market participants.
Expansion of the scope of the Rural Electrification Agency (REA)
The scope of the Agency has been expanded to include renewable energy. It is to be renamed- “Rural Electrification and Renewable Energy Agency and charged with the additional responsibility of promoting the Federal Government’s initiatives and policy on renewable energy and energy efficiency. In addition, state Rural Electrification Board and Local Government Rural Electrification Committees will be set up to collaborate with the Agency in its activities.
A Fund is to be created for the Agency, and eligible customers and licensees are required to contribute to the Fund at a rate not exceeding 5% of the cost of electricity generated from renewable sources or as may be determined by the Commission. Failure to contribute attracts a 10% penalty on the principal sum and interest at a prevailing rate. However, a defaulter shall be given an opportunity to explain the reason for default before a final verdict on penalty is given.
Regarding the sensitive state of the Nigerian Electricity Sector, the imposition of a mandatory contribution of 5% (of the cost of RE generated power) and the existing obligation to contribute to the Power Consumers Assistance Board will be onerous on the licensees. This additional fiscal burden may work against the government’s objective of scaling renewable energy.
Other General Provisions of the Bill
- The Bill makes elaborate provisions on various forms of offences and penalties. Offences include electricity theft, theft of electricity materials and installations, meter interference or bypass, interference with the licensee’s work, and purchase of stolen electricity.
- There will be a Federal Power Task Force to oversee the prevention and enforcement of offences.
- Electric lines or power plants situated in a land not belonging to the licensees shall not be subject to attachment by order of the court. This provision protects the interest of landowners who may be other persons other than the licensees.
Analysis of Success Factors
There is no gainsaying that the Bill contains very laudable provisions from the foregoing. However, implementation will be largely dependent on the government’s political will to create the enabling environment and appropriate framework to support these innovations. One must also examine the market readiness to accommodate these developments. This is a critical issue worth considering given the recent arguments on the license renewal of the bulk trader (NBET). The debate centred around the readiness of the Nigerian electricity market to transition to a bilateral and fully competitive market.
Relatedly, the adoption of a competitive and cost-reflective tariff is vital to attracting investments in the areas of deployment of renewables and expansion of grid infrastructure. This is hinged on the fact that tariffs are the major source of revenue for the sector. Foreign Direct Investment (FDI) is often directed to markets that show potential for profit maximization, risk reduction and competitive advantage. From the commercial standpoint, it is imperative to tackle some fundamental price distortions, such as subsidies. The government may need to consider setting up a more structured subsidy scheme such as the Power Consumer Assistance Trust Fund (PCAF) to provide support to the poor and vulnerable who may not afford cost-reflective tariffs. Other fiscal incentives such as tax exemptions can be introduced to cover the reduced price of energy services to the vulnerable.
In closing, a major factor to the realization of Bill’s objective is the independence and audaciousness of the regulator to do the needful. NERC must cultivate the drive to see policies and regulations through without bias whilst guaranteeing seamless processes and fair competition in the electricity market.
Endnotes
[1] ISO coordinates, controls, and monitors the operation of the electrical power system, usually within a single state. Typically, they manage the power grid from a set of computer consoles within a control centre. The market Operator is responsible for determining the optimal generation schedule in order to minimize production costs and to balance the demand and generation. Wholesale transactions (bids and offers) in the electricity market are typically cleared and settled by the MO.
[2] Electricity distribution is responsible for the network of power lines, underground cables, substations etc., that get electricity to consumers. They generally do not relate with consumers directly as they focus mainly on providing and maintaining their distribution networks
[3] Electricity supplier is the company that relates to consumers. It coordinates the transaction of getting power from a generator to the consumer. The supplier bills the consumer and include a small percentage which will go back to the local electricity distribution company and other players to cover the total cost of electricity.
[4] Section 66
[5] https://www.energy.gov/eere/solar/homeowners-guide-federal-tax-credit-solar-photovoltaics
[6] Nigerian Bulk Electricity Trader