NextierBy Daniel Agbor, Osasu Eghobamien and Uche Okoro
The Nigeria Electricity Market
Despite several successive governments’ attempts to develop the power sector over the past couple of decades, there has been little electricity supply progress. The government has enacted several reforms over the years to develop the electricity market. The National Electric Power Policy (NEPP) of 2001 led to the enactment of the Electric Power Sector Reform Act (EPSRA) of 2005, which provided the basis for the privatisation of the power sector. The Act also provided the policy framework for the regulation of the market via the Market Rules. These rules outline the conditions and timeline for the evolution of the market.
The reform act schedules the competitive electricity market to evolve through four stages; pre-Transitional, Transitional, Medium Term, and Long term. The market rules set out clearly defined conditions to meet before the initiation of any of each stage.
In the Pre-Transitional stage, the precursor Power Holding Company of Nigeria (PHCN) was privatised and unbundled. This stage evoked the establishment of performance incentives for distribution and generation and the implementation and testing of the Grid Code and Market Rules. The Transitional Stage marks the introduction of contract-based electricity trading and market competition. The Medium-Term Market will allow for some level of competition in the generation and retail subsectors. A centrally administered balancing mechanism will characterise this stage. The Long-Term Stage represents the market’s maturity stage, where full competition in both the generation and retail electricity markets.
Currently, the market is in the Transitional Market Stage (TEM). The Nigerian Electricity Regulatory Commission’s declaration of the TEM in February 2015 was contrary to the Electric Power Sector Reform Act (EPSRA) 2005, which provides for the Minister of Power to declare the market.
Declaration of the Transitional Electricity Market
The Transitional Electricity Market (TEM) marks the second stage of the Nigeria Power sector reform. It is the stage between a pure monopoly and a completely bi-lateral, competitive market. The market is characterised by contract-based trading between GenCos and DisCos. It intends to lead Nigeria’s Electricity Supply Industry closer to a bilateral, competitive market, where forces of demand and supply determined outcomes and promoted investor appetite[1]. The TEM phase was initially meant to begin with the handover of Power Holding Company of Nigeria (PHCN) assets to the private investors at privatisation. However, there was no declaration because some of the pre-transitional market conditions remained unfulfilled. Some of these unmet conditions included the lack of a cost-reflective tariff and the reset of the implementable DisCos baseline losses, among others.
Delay and the Interim Market Order
The interim period served as a cushion to prepare the market for the TEM. The sector had been privatised; therefore, it could not remain in the pre-transitional stage that is characterised by a vertically integrated market, although TEM preconditions were unmet. The interim rules were introduced in December 2013 to manage the sector’s revenue shortfall due to non-cost reflective tariffs and aggregate technical, commercial, and collection (ATC&C) losses. Transactions were operated without the enforcement of PPAs and vesting contracts. Instead, the regulator established a best endeavours framework where GenCos provided invoices with the NBET and DisCos remitted payments to the Market Operator (MO), system operator (SO), Transmission Service Provider (TSP), and the Nigeria Bulk Electricity Trading (NBET)[2]. Interventions funds were also provided to operators to compensate for the market revenue shortfalls[3] pending the establishment of working power purchase Agreements, vesting contracts, and cost-reflective tariffs. There were also limits to the allowable revenues for each participant.
Despite its allowances, the interim market was misaligned with investor expectations and financial models as a basis for which they invested. Therefore, the market looked forward to the declaration of the Transitional Electricity Market[4]. NERC declared the commencement of the TEM on 29 January 2015.
NERC released the TEM supplementary order upon declaration of the TEM according to the TEM order, market rules, and grid code. Section 8 of the order made trading provision arrangements for parties that did not meet the requirements for participating in the TEM. Some of these include trading arrangements for the generation plants owned by the Niger Delta Power holdings, for which privatisation transactions were yet to be completed, GenCos without effective PPAs, SCADA, among others.
Market Realities and TEM Fulfilment
When NERC issued an order announcing the TEM commencement, it justified its declaration by stating that the TEM precedent conditions outlined in the Market Rules have been met up to a satisfactory level to allow for evolution from the Interim Stage. Many market participants would argue that the current market realities did not reflect the market expectations during the TEM declaration. The state of contract enforcements, cost-recovery, dispute resolution, and increased market competition approach presents some of the compelling counter-arguments to the current claims.
Should the TEM be Reversed or Improved?
One may argue that the regulators’ declaration of TEM was premature and without consideration for the Act’s provisions. The provided analyses of the TEM indicate that some of the conditions for its declaration are still unmet, over five years into its declaration. Based on this premise, many within the government have argued for a reversal of the TEM and, ultimately, privatisation. While such arguments may seem logical due to market dissatisfaction, it is essential to consider the implications of a reversal. Policymakers should only take a position after considering its implications and alternatives.
Reversing the TEM would mean going back to the pre-transitional market, which was in effect before privatisation. Although privatisation has not yielded expected results, the effects of a reversal would be far worse than the current market situation. In effect, reversing the TEM would nullify the market rules since they provide for the transition stage and medium-term market. A reversal would mean that all provisions made in the market rules for applicable energy contracts, market operator functions, transmission service provider, market administration, and other ancillary services and their charges[5] would become of no effect.
Another option for the electricity market is to issue another interim rule as was done in 2013 between privatisation and the declaration of TEM in 2015. NERC may either issue another or re-activate what was previously issued. However, the downside of this option is market participants would likely relent on the little efforts currently being made, in silos notwithstanding, towards fulfilling the terms of the TEM. In essence, the Industry would retrogress, and government cost recovery bailouts would continue for as long as the interim rules are active.
In essence, the best way forward for the Industry is to strive towards meeting all TEM conditions. The challenges hindering market progress are less with the TEM provisions themselves than with how they have been implemented thus far. Liquidity, infrastructure, and capacity are the root issues that must be tackled to enable the progress to fulfil the TEM conditions. is approaching implementation is a positive note for the sector’s infrastructure development, considering its plans to install a functional SCADA system.
- There should be a clear scope of the panel’s involvement, influence levels, and limitations. Establishing these factors would help to focus the individual and collective capacity building needs of the panel.
Conclusion
The TEM was declared without fulfilling some of the preceding conditions with the expectations that they would be fulfilled afterward. Five years into the declaration, the TEM has not been successful thus far. The options for the Industry remain whether to reverse, extend, or improve the market to yield better results. Improving the market to fulfil outstanding requisites is the most feasible path forward for market progress. Therefore, root issues, including liquidity, infrastructure, and capacity building, must be tackled to adequately fulfil the TEM provisions on contracts, cost recovery, competition dispute resolution, and market coordination. Participants of the NESI must realise that the TEM is a contributory stage towards the development of a competitive market; hence, the Industry cannot reach a stalemate at this point. Therefore, all hands must be on deck to ensure its fulfilment before the Medium-Term Market declaration.
