The Making and Evolution of an Electricity Market: Unpacking the Nigerian Electricity Bill, 2021
Part 3: Market Stages- Phased development of the Electricity Market
In the second part of the multi-part series that unpacks the Electricity Bill, 2021, we explored the institutional framework for the Nigerian Electricity Supply Industry (NESI), as revamped within the Bill and the attendant impact of the proposed framework on NESI.
In this third part, we will delve into the proposed market stages within the provisions of the Bill, vis-à-vis the existing provisions in the Electric Power Sector Reform Act (EPSRA) (2005) and proffer recommendations for the effective phased development of the electricity market. The aim is to educate readers on the process, evolution, and dynamics of electricity markets.[1]
The Bill in recognising the legal validity of the evolution and reform of NESI, makes provision for the development of a competitive electricity market. Innovatively, the Bill seeks to delineate the market staging of NESI, recognising the pre-privatisation and privatisation phases within the Electric Power Sector Reform Act (EPSRA) (2005), with the introduction of a rule and contract-based electricity market together with the interim, pre-transitional and transitional rules introduced to regulate the interim, pre-transition and transitional stages of the market.
Furthermore, commendably, the Bill makes provision for the long-term electricity market stage (which was absent in EPSRA) following the medium term stage of the market, in addition to other stages as may be prescribed by the market rules or based on an amendment to the rules as approved by the Nigerian Electricity Regulatory Commission (NERC or the Commission). The Medium Term Electricity Market as anticipated will allow for bilateral contract wholesale competition without the presence of a single buyer (i.e., the Nigerian Bulk Electricity Trader [NBET]). The Long Term Electricity Market will welcome the introduction of retail competition, which will allow for the licensing of suppliers as envisaged in the Bill, in addition to other expected market outcomes. The Bill anticipates an amendment to the Market Rules to prescribe the pre-conditions for the Long-Term market.
These developments will provide the much needed clarity in the industry, given the existing grey areas in the EPSRA which are at odds with the Market Rules, thus creating statutory inconsistencies between the Act and the Market Rules regarding the market staging progression.
Within the provisions of EPSRA, the market stages are broadly divided into: (i) competition during the pre-privatisation stage under Section 25 of the Act; and (ii) competition during the post-privatisation stage under Section 26 of the Act to be preceded by a declaration by the Minister of Power that a more competitive market is to be initiated. The Market Rules on the other hand makes provision for three (3) stages regarding the implementation of a competitive market, at the same time setting out the features and conditions precedent of each stage. The stages as provided in Rule 6 of the Market Rules are: (i) Pre-Transition Stage, (ii) Transition Stage; and (iii) Medium Term Stage. While the Act provides a broad framework regarding the market stages, it fails to clearly spell out and delineate the parameters for competition during the post-privatisation stage and there is also no clarity as to the specific period within the various market stages that qualifies as the more competitive market anticipated to be declared by the Minister within the provisions of the Act.
Within the Bill, sufficient clarity has been provided as the Commission is responsible for advising the Minister on the end of the transitional electricity market and the establishment of the operational dates for the Medium and Long-Term Markets, following the satisfaction of the pre-conditions for the operationalization of the anticipated market stages. The declaration of the Medium-Term market is now the responsibility of the Commission alongside the newly factored Long-Term Market, unlike EPSRA that vested such power with the Minister. As the regulator of the industry, the Commission is best placed to assess the conditions of the market as it progresses along the expected market maturity stages.
It is therefore commendable that the Bill has provided the much needed clarity forming the basis for assessing the pre-requisites for the market transition process in NESI and providing a basis for ascertaining the roles that market participants are expected to undertake in each period/market stage, thus creating a platform for a clear and effective market transition process, subject to the right indices being in place and strategically implemented across the value chain spectrum.
The Commission is to ensure a phase wide development of the Nigerian electricity market from the current transitional electricity market stage to the medium-term and long-term electricity market stages.
There are generally six (6) stages in an electricity market progression which need not be followed in a linear progression, but in the case of Nigeria and Sub-Saharan Africa, it has been recommended that the steps be followed in a linear progression, given the nascent state of market development. Given the promulgation of the Eligible Customer Regulation in Nigeria, a seventh (7th) step, though interim, may need to be recognised within the Nigerian context. The Bill makes provision for the Commission to issue directives specifying the class or classes of end-use customers that may from time to time constitute eligible customers at every market stage, following its assessment/monitoring of the electricity market development. The Commission is responsible for the declaration of ‘eligibility’ at each market stage, a deviation from the provisions in the EPSRA that vested eligibility declaration with the Minister. Furthermore, the Bill allows the Commission to review any class or classes of eligible customers already declared by the Minister prior to the commencement of when the Bill is enacted into law.
In progressing along market stages, best practice recommendations should be considered including:
Ø For an effective transition to wholesale power markets, a fully competitive generating sector with multiple sellers and buyers interacting in the marketplace is a requirement as it will aid in the determination of the equilibrium price and quantities.
Ø Careful design of the reform/transition is required and there should be scope for dealing with design flaws and setting-in problems.
Ø Wholesale market design should be guided by four principles- short-term efficiency, demand side participation, open access and a workable framework for supply adequacy.
Ø In encouraging wholesale competition, system reliability must be preserved.
Ø Demand side management in addition to supply side management is essential for the attainment of a competitive wholesale market.
Ø Retail competition should be implemented after wholesale power markets are functioning well to keep costs and prices down as was the case in the UK.
Ø Competition should be introduced gradually to the wholesale power trade, given the absence of the necessary conditions for open competition in power markets.
Ø Conditions should exist for the establishment of a liquid balancing market to facilitate bilateral trading.
Ø Market monitoring and regulatory oversight are important for successful power market reforms/transition processes.
In the Nigerian context and by extension Sub-Saharan Africa, given the nascency of the respective power sectors, the existing limiting factors to market progression will need to be addressed including- (a) lack of active contracts in the market which is a pre-requisite for progressing to the medium-term market resulting from: (i) capacity shortage and infrastructure challenges, (ii) network challenges, (iii) regulatory inconsistencies, (iv) liquidity issues, (v) lack of effective payment security and guarantees to backstop payments in the respective Power Purchase Agreements, (v) lack of effective payment discipline across the value chain, etc. To move forward, several pre-conditions must be fulfilled including:
· Active contracts
· Credit-worthy off-takers
· Cost-reflective market-based tariffs
· Balancing market
· Adequate generation to meet demand all year
· Adequate transmission capacity, etc.
It is hoped that the Bill following several re-engineering processes hinged on additional considerations will successfully be passed into law and implemented in its entirety across the electricity value chain.
Key Takeaways
Ø Consistency and alignment between primary and secondary legislation(s) regarding the phasing of market staging is essential, to prevent any potential dichotomy and misinterpretation and to ensure that there is clarity of process and the roles of the various players and stakeholders involved in the market staging progression.
Ø The declaration of the attainment of the respective market stages should be the responsibility of the regulator and not the Minister. As the regulator of the industry, the Commission is best placed to assess the conditions of the market as it progresses along the expected market maturity stages.
Ø Although there are generally six (6) stages in an electricity market progression, the conditions of the market may necessitate the inclusion of additional stages such as the recognition of Eligible Customers within the market stages in Nigeria.
Ø In the Nigerian context and by extension Sub-Saharan Africa, given the nascency of the respective power sectors, the existing limiting factors to market progression will need to be addressed.
Ø To move forward, several pre-conditions must be fulfilled including- Active contracts, Credit-worthy off-takers, Cost-reflective market-based tariffs, Balancing market, Adequate generation to meet demand all year, Adequate transmission capacity, etc.
Ø Careful design of the reform/transition is required and there should be scope for dealing with design flaws and setting-in problems.
Ø In progressing along market stages, best practice recommendations should be considered as enumerated in the brief.
[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.