Halting Bilateral Negotiations: Another Example of Unpredictable Regulatory Environment under NERC

The Nigerian Electricity Regulatory Commission (“NERC”) recently announced the lifting of its Suspension of the Regulation for the Procurement of Generation Capacity, 2014, which basically prohibited the Bulk Trader, the Nigerian Bulk Electricity Trading Plc (“NBET”) from procuring electricity in any other manner except through a competitive tender process. The suspension of the application of the Regulation was effective from June 2015. The consequence of the suspension was that Independent Power Producers could approach NBET to bilaterally negotiate the bulk supply of electricity without having to go through a bidding process, and pursuant to this, a number of Power Purchase Agreements (“PPAs”) were in the process of negotiation. In lifting the ban, NERC mandated NBET, with effect from the 1st of July, 2016, to cease to negotiate PPAs with unsolicited electric power project developers and stipulated that all other energy projects currently being negotiated with NBET (outside the 400MW approved for exclusive bid among the renewable energy projects) in advance stage of negotiation shall be subject to competitive procurement and shall be prequalified for the subsequent rounds of competitive bidding to be conducted by NBET pursuant to the Regulations.

The need for careful regulation and monitoring of unsolicited proposals is clear. Most importantly, the regulator has a responsibility to protect consumers from having to pay an unreasonably high premium for electricity usage by preventing developers from gold plating commercial bids. This is guaranteed by subjecting the procurement process to a competitive tender process. We do not however, consider the abrupt halting of advanced PPA negotiations with NBET and mandating their conversion into a competitive bidding process as the optimal solution. It suggests a careless indifference to regulatory certainty – a necessary ingredient for investor confidence in a heavily regulated industry such as the electricity industry. This is imperative as the country needs to harness every available means of securing power supply to boost itsgeneration capacity.

What options are available to NERC?

The optimal solution is for NERC to seriously consider a complete reversal of this decision as it relates to energy projects in advanced stages of negotiations with NBET. In reversing this decision, NERC may wish to stipulate what should be considered as an advanced stage of negotiation. For instance, developers who have met most of NBET’s requirements for unsolicited power supply, which is a six (6) step process, should be permitted to finalize and execute their PPAs with NBET. Such a developer would have scaled through the first four (4) hurdles and completed its bid for the appointment of an Engineering, Procurement & Construction (“EPC”) Contractor and O&M Contractor in addition to having its Long Term Service Agreement (“LTSA”) and the Operation & Maintenance (“O&M”) Agreement executed or close to execution.

However, where NERC is determined to maintain its stance and subject all unsolicited bid negotiations to a competitive process, certain protections or concessions should be afforded these developers, some of which are highlighted here. As noted above, for its due diligence exercise, NBET has a Step by Step Guide for Unsolicited Power Procurement which is similar in some respects to the procedure for competitive tender and requires a number of commitments from the developer, both financial and technical.

To compensate such developers, we recommend the following:

Since bidders under a competitive tender process are only awarded the project if they win the bid (and some of the developers may be small and not particularly suited to participating in a competitive bidding process), a certain level of compensation for project preparation efforts should be factored into NBET’s subsequent round of competitive bidding. Such compensation could take the form of a premium to be attached to the developer’s bid during bid evaluation i.e., applying a margin of preference or percentage bonus point to the developer’s bid, reimbursing the developer for properly audited and reasonably incurred cost of project preparation and automatic shortlisting.

We note that the automatic shortlisting option has been factored into NERC’s Notice which provides that the developers’ projects shall be prequalified for the subsequent rounds of competitive bidding to be conducted by NBET pursuant to the Regulations, thus ensuring that they automatically qualify for the bidding rounds. However, we believe this is not adequate and this concession should be applied in conjunction with another compensation mechanism such as applying a margin of preference or percentage bonus point to the developer’s bid. A reasonably percentage should be determined to avoid negating the competitive nature of the procurement process.