The Shift From The Interim Phase To Transitional Electricity Market

The highpoint of the Nigerian power sector reform process had hitherto been the November 2013 handover of successor Power Holding Company of Nigeria (“PHCN”) utilities to private sector investors. Not since the passage of the Electric Power Sector Reform Act in 2005 (“EPSRA”), had the Federal Government of Nigeria shown its firm commitment to true liberalization in the sector. In anticipation of a privatized electricity market, investors made good their commitments for the balance of the purchase price for the respective PHCN assets and moved to consummate all relevant Industry Agreements. The blueprint, as understood from the EPSRA and the Market Rules for the Nigerian Electric Supply Industry (“NESI”), 2009 (the “Market Rules”), was simple: subsequent to privatization, the industry will seamlessly transit from a “Pre-transition” stage to a contract-based market stage, “Transitional Electricity Market” (“TEM”).

However, owing to what the Nigerian Electricity Regulatory Commission (“NERC”) deemed as exigencies at the time, including the need to attain

certain Conditions Precedent (“CPs”) (as provided under the Market Rules) required to achieve TEM, the declaration of TEM was postponed for 15 months and an “Interim” stage was introduced to midwife the NESI’s transition.

Unresolved TEM CPs, as at the handover date, included formalization and effectiveness of trading arrangements by some Market Participants, the establishment of a dispute resolution panel and the System Operator developing, implementing and testing procedures needed to satisfactorily implement the Grid Code. Additionally, more central to the postponement of TEM was the non-attainment of some “informal CPs” – particularly, market liquidity. For the NESI to effectively function at TEM, all aspects of the power sector value chain must be adequately funded.

In this respect, sufficient revenue must flow from the Distribution Companies (“DisCos”), upwards to the Generation Companies (“GenCos”), and eventually, to the Gas (fuel) Suppliers as well as other ancillary service providers. Unfortunately, the NESI had not fared too well in this regard. From periods preceding the PHCN-era, the sector had been riddled with the problem of revenue shortage, stemming from mismanagement of funds, the inability to meter consumers for power wheeled out, the absence of appropriate revenue collection mechanisms and, to a large extent, electric power theft.

Although some Market Participants had seen the introduction of this stop-gap phase as an impediment to their investments, NERC had warned of the imminent collapse of the sector if TEM had been prematurely introduced. It contended that shortfalls in obligations, under TEM contracts, will inevitably lead to multiple defaults across the electricity value chain which will only serve to undermine the market’s integrity.

To address problems, particularly in relation to liquidity, minimum payment obligations (Baseline Remittances) were allotted to DisCos and deficit earning percentages (Allowable Revenue) were apportioned to GenCos and other Market Participants under the rules created for the Interim Phase.

Subsequent to achieving all relevant CPs (or attaining sufficiently acceptable levels thereof), NERC declared that TEM commence on February 1, 2015. The Market Rules describes this phase as being characterized by the entry of new generation, contract based arrangements for electricity and the introduction of competition.

Electricity trading arrangements, during this phase, are to be accomplished through bi-lateral transactions. This would involve the purchase of bulk power from the GenCos by Nigerian Bulk Electricity Trading Plc. (“NBET”), through Power Purchase Agreements (“PPAs”), and, subsequently, the resale of power to DisCos through Vesting Contracts. The declaration was however not made without making concessions for the pre-privatization issues which had hindered the development of the NESI. With respect to the problem of revenue,rebalancing and establishing a “cost reflective” tariff was adopted as an additional TEM CP. To this end, the Commission embarked on a minor review of the extant tariff methodology, MYTO II, with a view to re-assessing its compatibility alongside certain factors, including Aggregate Technical, Commercial and Collection losses, the prevailing exchange rate and fuel (gas) costs. TEM contract arrangements for the respective GenCos were also factored in during the revision. This way, NBET’s invoices to DisCos for power consumed will be reflective of PPA prices.

The NESI was also handed a lifeline by the Central Bank of Nigeria, through the Nigerian Electricity Market Stabilization Facility, to settle pre-privatization gas debts as well as all Interim Phase debts arising from DisCo Baseline Remittances. Furthermore, in a bid to prevent the delay of the NESI’s evolution, a supplementary order, made pursuant to the commencement of TEM, provides for a framework which addresses, amongst other things: (i) interim power sale arrangements for Niger-Delta Power Holding Plc. NIPP Plants whose privatization transactions are yet to be concluded; (ii) certain DisCos’ inability to provide payment guarantees as required under their TEM contracts; and (iii) unfulfilled obligations of the Market Operator and System Operator (said obligations now deferred as Conditions Subsequent to TEM).

The benefits of contract based electricity trading cannot be understated. TEM accords Market Participants enforceable obligations under their respective contracts. From a regulatory perspective, TEM ensures greater corporate discipline amongst licensees. Contractual trading also sufficiently shifts risk to parties who are best suited to shoulder such within the value chain, which in turn creates a measure of certainty for investment. Most beneficial of all, TEM forms a firm basis for guaranteeing an increase in electric power supply in Nigeria.

It is yet to be seen whether the NESI was well primed for its transition to TEM or whether its declaration had been prematurely induced.