Part 7: A Truly Independent System Operator
The Making and Evolution of an Electricity Market: Unpacking the Nigerian Electricity Bill, 2021
In the sixth part of the multi-part series that unpacks the Electricity Bill, 2021, the welcome development of private investment in the transmission network as incorporated within the Bill was highlighted alongside the implications for the industry.
In this seventh part, the establishment of an Independent System Operator within the Bill is highlighted alongside the implications for the industry, in a bid to educate readers on the process, evolution and dynamics of electricity markets.[1]
Commendably, the Bill makes provision for the incorporation of a corporate entity by the Transmission Company of Nigeria (TCN), to serve an Independent System Operator (ISO), tasked with carrying out market and system operation functions as allocated within the Bill. Once incorporated, the entity serving as the ISO is to apply to the Nigerian Electricity Regulatory Commission (NERC) for a license. TCN is required to transfer all its market and system operation functions to the ISO and become licensed solely as the Transmission Service Provider (TSP), responsible for transmission assets and liabilities and all attendant transmission infrastructure. The transition process to be handled by NERC is to take place no later than 12 months to the declaration of the Medium Electricity Market by the Commission.
The ISO by its objects can enter and negotiate contracts for the procurement of ancillary services with independent power producers, successor generation companies, etc. It is important that ancillary service contracts are awarded according to an open, transparent, and competitive manner.
In addition, the functions of the ISO include- planning, dispatch and operation of the power system, implementation of open access and new connections of equipment or loads in collaboration with the TSP, implementation, and enforcement of the Grid Code, demand forecasting, dispatch and generation scheduling, congestion management, undertaking real time operation and supervisory control and data acquisition system (SACDA), coordinating regional interconnectors, market administration including implementation of the Market Rules, administration of the Wholesale Electricity Market Settlement and Payment systems, managing contract imbalance quantities, etc.
Consideration needs to be given to issues relating to Grid Connection and Transmission Use of System (TUoS) factors as Grid Connection and TUoS (Transmission Use of System) may need to incorporate ISO Operating Agreements. Regional interconnections also need to be thoroughly considered and structured accordingly.
The ISO is subject to the National Code of Corporate Governance. The Governance structure of the ISO anticipated within the Bill is a ‘Government owned’ and ‘Government/Stakeholder led’ ISO, as the Bill anticipates that at the time of incorporation, the subscribers to the Constitutional Document of the ISO will be as directed by the Commission in consultation with relevant stakeholders. In addition, the ISO will be established by virtue of the Act. The Composition of the Board anticipates- a non-executive Chairman who may be the Minister, a Managing Director, four executive directors and four non-executive directors with at least 15-years cognate professional or management experience in an electricity generation, transmission, system operation or distribution company, a representative from the Ministry of Power, who is not to be below the rank of a director. The Board Nomination Committee to be established is also to include a representative of the Minister of Power, not below the rank of a director, to identify and recommend highly qualified candidates for appointment to the Board in a competitive and transparent manner. The deep level of involvement of the Minister of Power and the Ministry may undermine the independence of the system operator as anticipated.
A preferred option to guarantee the true independence of the ISO is a ‘Stakeholder owned ISO’ whereby the ISO is registered as a profit or non-profit institution and will be wholly owned by market stakeholders/participants (e.g., DisCos, GenCos), customer groups, non-profit entities e.g., PJM, California ISO, New York ISO, etc. In Argentina for example, the ‘New Electricity Law’ in 1992’ allowed for the Creation of an ISO (CAMMESA) in charge of both economic and technical system operation (SO/MO functions). The ISO’s creation strengthened regulatory roles, promoted economic efficiency, improved investment, and improved the competitive market. Pre-1992, the sector was largely government-owned, contributing to an inefficient market. Subsequently, the government introduced major changes by restructuring and privatising the sector. The creation of the ISO in Argentina was undertaken with minimal government involvement, in terms of the governance structure, as the ISO is 80% owned by market participants and 20% owned by the public ministry.
Concluding Remarks
The true independence of the ISO is critical for greater operational efficiency and autonomy of the ISO which will result in more efficient and less discriminatory operations of the users of the transmission network. Nevertheless, to attain this level of efficiency, the governance structure must accommodate the participation of all key stakeholders, properly licensed within the industry, while preserving transparency and effective independence from market participants. The less government interference, the greater chance of attaining anticipated efficiency levels. However, regulatory back-stop remains paramount in rule changes, dispute resolution and market surveillance. The regulator should have scope for intervention, but such interventions must be well-defined within the overall framework.
Key Takeaways
Ø An independent and efficient system operator is essential for establishing open access on the network, but the ISO must work with the Commission to enforce the market rules effectively. It is therefore commendable that the Bill legislatively establishes the independence and neutrality of the system operator but actual independence, and not just on paper is paramount.
Ø The ISO must operate with a high level of transparency. Market improvements must be discussed and developed with the participation of all stakeholders.
Ø The responsibilities of the ISO must be tailored to accommodate elements of bilateral contract trading in the market, particularly from a network congestion management perspective, given preferred generation dispatch schedules that characterize bilateral trades and spot transactions. Therefore, the ISO may need to own or lease must-run generation units and be availed with all the necessary information to enable it to create an information feedback loop and effectively undertake congestion management on the network.
Ø Ancillary Service contracts must be awarded according to an open, transparent, and competitive process.
Ø Grid Connection and TUoS (Transmission Use of System) may need to incorporate ISO Operating Agreement. Regional interconnections also need to be thoroughly considered and well-structured.
Ø The deep level of involvement of the Minister of Power and the Ministry under the proposed ‘Government owned’ structure may undermine the independence of the system operator as anticipated. A preferred option to guarantee the true independence of the ISO is a ‘Stakeholder owned ISO’ whereby the ISO is registered as a profit or non-profit institution and will be wholly owned by market stakeholders/participants (e.g., DisCos, GenCos), customer groups, non-profit entities e.g., PJM, California ISO, New York ISO, etc. In Argentina for example, the ‘New Electricity Law’ in 1992’ allowed for the Creation of an ISO (CAMMESA) in charge of both economic and technical system operation (SO/MO functions). Pre-1992, the sector was largely government-owned, contributing to an inefficient market. Subsequently, the government introduced major changes by restructuring and privatising the sector. The creation of the ISO in Argentina was undertaken with minimal government involvement, in terms of the governance structure, as the ISO is 80% owned by market participants and 20% owned by the public ministry.
[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.