Part 6: Private Sector Investment in the Transmission Network
The Making and Evolution of an Electricity Market: Unpacking the Nigerian Electricity Bill, 2021
In the fifth part of the multi-part series that unpacks the Electricity Bill, 2021, the long overdue incorporation of renewable energy within the Bill was highlighted alongside the implications for the industry.
In this sixth part, the incorporation and promotion of private sector investment in the transmission network as provided within the Bill is highlighted alongside the implications for the industry in terms of the ability to attract the much needed investments into NESI or otherwise, in a bid to educate readers on the process, evolution and dynamics of electricity markets.[1]
Interestingly, the Bill allows for investment in the national grid, subject to the accompanying regulations from the Nigerian Electricity Regulatory Commission (‘NERC’ or the ‘Commission’). Such investment can be undertaken by a successor transmission licensee for the expansion of the existing transmission network, upon approval from the Commission or by a non-licensee, either for the expansion of the existing network alongside the successor transmission licensee or independently as it relates to an Independent Electricity Transmission Network (IETN) as an Independent Electricity Transmission Network Operator (IETNO).
Although the promotion of private sector participation in existing and independent transmission network operations is commendable, from a technical perspective, the IETN/IETNO model will require significant amounts of investment, given the technical peculiarities of Nigeria’s power system, which is relatively small in terms of capacity (5GW). For effective wholesale competition to have meaningful effect given the market staging trajectory as envisaged within the Bill, there must be efficiency across all elements of the value chain. Competition must be balanced with transmission expansion within the system-planning framework.
The existing legal and regulatory framework as proposed within the Bill can be regarded as being not sufficiently robust, irrespective of the fact that the fundamental building blocks for allowing private sector participation are already in place, i.e. Transmission Use of System (TUoS) charges (with regulated transmission tariffs) which creates a clear revenue stream for private sector remuneration, the Grid Code establishing technical standards, operating and safety margins and planning processes; which is a necessary pre-condition for private sector participation, etc.
The Bill recognises various structures of financing for independent transmission projects including long-term concessions, project financing by private investors to finance, build, own and maintain parts of the network. The Bill allows for Federal or State Governments to enter a public–private partnership arrangement with private companies for investment in the transmission network. The financing structures as recognised in the Bill are commendable; however, the right enabling environment must be in place for the yields of the proposed structures to be actualised.
The modes of private sector participation anticipated within the Bill include:
Project Financing by private investors whereby such investors finance and build and/or own and maintain parts of the network.
Break up the Transmission Company of Nigeria (TCN) into Transmission Service Provider (TSP) and Independent System Operator (ISO) with TCN managing operations. The ISO will be helpful in allowing private sector investment as anticipated.
Concession or Lease Arrangements- long-term concession of new transmission lines or the creation of a BOT arrangement between concessioners and TCN.
Independent Power Transmitters, etc.
Other models of private sector participation in transmission include:
Unitary Privatisation whereby TCN is privatised partially or as a whole to a trade investor who would bring the required capital.
Government can create a separate creditworthy borrowing entity for the purpose of selling existing assets and procuring new assets. Being a credible offtaker, such entity would have access to financing using Buyer or Seller Credits or Operating Concessions that will not require FGN guarantees.
Management Contract with well-crafted performance targets and KPI’s which has clearly not worked in the Nigerian context, given past antecedents.
By the provisions within the Bill, the Commission is to ensure the fair spread of investments in the six geopolitical zones of Nigeria. The workability of this provision raises significant concerns given the varying tariffs and energy load allocation(s) across the geopolitical zones in the country, which will equate to differing investment forecasts in terms of timelines, risk profiles and return on investments.
Disputes relating to quality of electricity, safe, secure, and integrated operation of the national grid, etc., are to be referred to the Electricity Disputes Appeal Tribunal for settlement, prior to which time, the Commission may issue directions to be complied with by the concerned licensee, except determined otherwise by the Tribunal. It is important for the makeup of the Tribunal to be sufficiently vested with the required competence and capacity to resolve anticipated disputes.
Concluding Remarks
Transmission is a critical element of the value chain, and the Government needs to create the right enabling environment to promote and foster private sector participation in transmission to fully unlock the option of private sector financing for investment, because investors wishing to invest in the power sector will analyse the functionality of the entire value chain and where there is a perceived risk in one element of the value chain, the entire value chain would be undermined.
Key Takeaways
Ø Although the promotion of private sector participation in existing and independent transmission network operations is commendable, from a technical perspective, the IETN/IETNO model will require significant amounts of investment, given the technical peculiarities of Nigeria’s power system, which is relatively small in terms of capacity (5GW). In addition, there must be efficiency across all elements of the value chain which must be balanced with transmission expansion within the system-planning framework for the attainment of effective competition.
Ø The existing legal and regulatory framework as proposed within the Bill is not sufficiently robust. For private sector participation to thrive within the transmission segment of the value chain, there is a critical need for the appropriate robust laws and regulations to be put in place to ensure that there is an attractive investment climate in the sector.
Ø The financing structures as recognised in the Bill are commendable; however, the right enabling environment must be in place for the yields of the proposed structures to be actualised.
Ø The requirement for a fair spread of investments across six geopolitical zones in Nigeria must take into consideration the varying tariffs and energy load allocation(s) across the geopolitical zones in the country, which will equate to differing investment forecasts in terms of timelines, risk profiles and return on investments.
Ø The creation of an Electricity Disputes Appeal Tribunal is commendable. Nevertheless, it is important for the makeup of the Tribunal to be sufficiently vested with the required competence and capacity to resolve anticipated disputes.
[1] Electricity markets in the context of this brief speaks to the sector view as a whole, as opposed to the trading of electricity which exists as an activity within the sector.