DECENTRALISED ELECTRICITY MARKET(S): STATE INTERVENTIONS IN THE NIGERIAN POWER SECTOR
(CASE STUDY: LAGOS STATE)
The President of Nigeria recently assented to the constitutional amendment allowing States to participate/engage in value chain activities in the Nigerian Electricity Supply Industry (NESI), in areas covered by the national grid, thus creating an avenue for de-monopolizing the electricity value chain at the national level and allowing for a decentralised electricity market.
The state of the Nigerian power sector almost ten years post privatisation has not been commendable and has failed to meet post-privatisation expectations. With a population of over 200 million people, the national grid with an estimated average generation capacity of 4,000 MW struggles to serve the national economy, although the country has an installed generation capacity of about 12,954.40 MW and actual generation capacity stands at an estimated 7,652.60 MW as of March 2020, based on data from the Transmission Company of Nigeria (TCN). The country’s generation deficit in MW amounts to around 198,347.4 MW, going by the general rule of thumb based on Word Bank Estimates, that approximately every 1,000,000 people require 1000 MW of electricity.
The huge generation capacity deficit has stifled growth and development in the country but has on the other end of the spectrum spurred individual stakeholders and state governments to explore the creation of ring-fenced electricity markets for the production and supply of reliable energy. Championing the State interventionist approach is Lagos State. The Government of Lagos State recently developed the Lagos State Electricity Policy which serves as a framework document for the creation of the Lagos State Electricity Market.
Lagos is the commercial nerve center of and the most populous state in Nigeria. It has been posited that Lagos State would have been the fifth (5th) largest economy in Africa if it were a country. The State hosts over 2,000 industries and about 65% of Nigeria’s commercial activities. Lagos accounts for over 53% of manufacturing employment in Nigeria, which alone contributes to 7% of national GDP.
This depicts the sheer size of the population in the State which is set to witness explosive population growth and rapid expansion of urban eco-systems. Despite its buoyant population, energy supply is currently the state’s single biggest infrastructure and development challenge. The State through its resident Distribution Companies, relies entirely on the national grid which struggles to serve the entire national economy. Based on energy allocation from the grid, Lagos receives just about 1,000 MW for an average of no more than 12 hours daily, i.e., 12,000 megawatt-hours (MWh) for a population exceeding 27 million spread over what has been described as a comparatively compact land mass. This has resulted in an enormous capacity underutilization exceeding over 50% with significant impacts on the cost of industrial and commercial activities, thus depicting the huge potential for growth.
Based on a study conducted by the Lagos State Electricity Board (LSEB), the findings revealed that 15,000 MW of the estimated 45,000 MW of alternative power supply in Nigeria was located within Lagos State alone. There is therefore credible justification for the State to explore the creation of a unique electricity market separate from the national grid but still connected with the grid, i.e., a sub-national electricity sector independent from the national grid but serves the needs of its citizens to foster socio-economic growth and development for the State and the country at large. Other states such as Edo State are also considering the creation of its state electricity market. The recent amendment to the Constitution as assented to by the President gives further credence to state participation in electricity value chain activities in both areas covered by the national grid and areas not covered by the grid.
Lack of sufficient generation capacity has been a bane in the industry pre and post privatisation and it is the catalyst that has created other attendant challenges plaguing the industry, one of which is the illiquidity of the sector making it unbankable to attract sufficient investment.
The decentralised electricity market structure proposed by Lagos State can support with the drive for increased generation across the country translating to increased energy security and can also boost the liquidity of the sector, albeit on a defragmented basis across states, but the accumulated total will be to the benefit of the economy.
A decentralised structure will decrease pressure on the grid, thus decongesting the already constrained grid and allow for cheaper power to be supplied to vulnerable and life-line customers in unserved and underserved areas, and in effect promoting grid flexibility and reduction in grid expansion costs. In addition, it will allow states expand and explore their available energy mixes to undertake adequate system planning and demand forecasting, for example, Lagos State intends to deploy and utilise off-grid solutions (OGS) to electrify unserved and underserved areas via the use of clean energy products. This will create room for the State to deploy carbon pricing mechanisms, particularly carbon offsetting, by trading the clean energy attributes of electricity generated from renewable energy sources, thus earning revenue for the State, improving the living conditions of residents within the State, and supporting the country in meeting global climate change obligations. On a nation-wide scale, the utilisation of off-grid solutions across the respective states will spur increased job opportunities and more importantly, the resultant effect in totality will position the country’s objectives to align with its Energy Transition Plan and ultimately the United Nations Sustainable Development Goals, particularly SDG7 and SDG13.
As electricity markets advance within states, with commensurate improvements to the current grid bottlenecks on a national scale, the decentralised electricity market structure affords the opportunity for states to sell power to the grid. It also allows for sub-decentralisation within the States as residents will be able to undertake transactive energy, whereby producers and users of energy are able to transact with each other directly. Decentralisation of the electricity market will allow for better accountability and transparency and will promote and foster competition in the market which will in the long run influence electricity tariffs towards a downward trajectory.
Decentralised governance electricity market models are not novel concepts in terms of regulation of the markets. In the United States of America, the Federal government, through the Federal Energy Regulatory Commission, regulates interstate power sales and service. State governments, through their public utility commissions or equivalent, regulate retail electric service as well as facility planning and siting. Also, in India, the Constitution of India places electricity under the concurrent list. Therefore, both the Parliament (Union) and the State Legislatures (State) in India can legislate on matters relating to electricity subject to the law made by Parliament, which have precedence over the laws made by the State Legislature. There is therefore a Central Electricity Regulatory Commission, existing as the key regulator of the power sector and the State electricity Regulatory Commission, tasked with the responsibility of ensuring the generation and distribution of electricity in States and Union territories of India.
Irrespective of the increased flexibility and accountability anticipated from a decentralised market structure, such a structure also presents possible challenges and factors that need to be taken into consideration.
The Nigerian Electricity Supply Industry operates a single-buyer model and has recently welcomed the participation of eligible customers on a willing-buyer-willing-seller basis for the direct sale and purchase of electricity. The current federal structure is regulated by an independent regulator (i.e., Nigerian Electricity Regulatory Commission). It is important for the proposed sub-national market to be regulated, albeit at state level, to prevent abuse of market power by players in the state(s) which will have cost and social implications on its citizenry, particularly the vulnerable class of customers. State regulators will have to cooperate and work alongside the Federal regulator.
From a network perspective, the increased participants operating within the network will necessitate the need for an effective balancing system to avoid congestion on the network and possible system collapses. It would therefore be essential for states to cooperate with TCN on issues relating to network access and management such as third-party open access considerations, etc.
Other factors for consideration include: the existing regulatory, contractual and market structure and how state policies will align with and complement the existing structures; the interplay of the National electricity regulator and the State regulator(s) to ensure that there is no overlap of functions (e.g. licensing, tariff setting, etc.) and to avoid possible instances of ‘over-regulation’, as the National electricity regulator by law supersedes the State regulator, although the Constitution in Section 14(c) allows for the establishment within the State of any authority for the promotion and management of electric power stations established by the State and by the Presidential assent to the constitutional amendment allowing states participate in all facets of NESI value chain activities, this consideration becomes even more cogent.
Another important consideration is the existing licensed rights to the Franchise areas granted to the Electricity Distribution Companies operating in the respective states to ensure that there is no encroachment to the franchise areas and that consideration is given to the network expansion plans of the DisCos. Cooperation amongst all stakeholders is a key determinant of the success of the electricity markets on a national and sub-national level.
By the recent constitutional amendment allowing state participation in all facets of the NESI value chain and with the pending passage of the Electricity Bill currently before the House of Representatives, Lagos State and other intending states are in a unique position to create an effective sub-national electricity market. In developing a policy roadmap for implementation, the lessons from the national grid should be mapped out and avoided to enable the proposed sub-national electricity market achieve its intended objectives and in effect serve as a yardstick for other states and the national grid. Nevertheless, stakeholder cooperation and information transparency are paramount.