The Making and Evolution of an Electricity Market: Unpacking the Nigerian Electricity Bill, 2021
Part 4: Expanded Licensing Framework
In the third part of the multi-part series that unpacks the Electricity Bill, 2021, the market stages within the Bill in comparison with the provisions in the Electric Power Sector Reform Act (2005) was analysed, alongside recommendations for the phased development of the market.
In this fourth part, the licensing framework as expanded within the Bill will be 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]
Commendably, the Bill recognises and makes provision for the new business of electricity supply which is absent in the provisions of EPSRA. To this end, the Commission at any stage of the market that it considers appropriate can recognise electricity supply as a separate activity from distribution and thereafter issue a directive for the disaggregation of distribution licenses into supply and distribution licensed companies, following which the Commission will effect a transfer scheme for such license disaggregation.
The Commission is also empowered to issue licences to independent distribution network operators to construct, own, operate, maintain, or procure the construction and maintenance of independent electricity distribution network, within an area with no existing distribution system or where the existing distribution infrastructure owned by the distribution licensee is unable to meet the demands of customers.
This framework envisages the existence of multiple service providers available for choice by customers, which in effect speaks to Retail Competition Models in power markets. The model anticipates large customers becoming eligible to procure power from licensed suppliers, who in turn procure power directly from existing or new entrant generators. This eventually trickles down to medium sized customers and eventually all customers who will be free to obtain energy from suppliers. At this point and as anticipated within the Bill, the distribution companies will no longer have customers (as their business will be split into Distribution and a separate licensed activity of Supply) and will focus on network operation.
As it currently stands in Nigeria, various market structures towards the transition to a market with multiple service providers are already in place under the auspice of the Eligible Customer/’Willing-Buyer/’Willing-Seller’ framework, albeit still at its infancy in terms of actual implementation in the market. Therefore, it is anticipated that the market will progress and deploy retail competition models. However, several pre-conditions must be fulfilled, which are outside the scope of this brief.
A relevant case study deploying the retail competition model is the United Kingdom (UK). In the UK where a retail competition model operates, the structure accommodates competition in the retail end of the value chain by separating between distribution and retail. In the UK, the distribution network is managed by the Distribution Network Operator (DNO) who owns and operates the power lines and infrastructure that connects homes and commercial properties to the electricity transmission network. They are responsible for the distribution of electricity from the national transmission grid to homes and businesses but are usually prevented from supplying electricity which is usually done by a separate electricity supply company (chosen by consumers) who makes use of the distribution network. Under this structure, customers usually have a choice to switch suppliers, but are unable to switch DNO’ unless they move to a new area and will therefore need to contact the local DNO that operates in the new area. Although in Nigeria, the Bill anticipates a similar structure, several issues will need to be addressed beforehand, relating to operative issues, switching efficiency, metering, etc., to facilitate future opening of the market towards forms of retail competition at the anticipated future date.
The Bill in addition, vests the Commission with the power to grant multiple generation licenses to independent power producers for generation of electricity from renewable and non-renewable sources, subject to conditions stipulated by the Commission.
The Bill also makes provision for the power of the Commission to issue independent electricity transmission network (IETN) licenses, where there is a need to extend the transmission network or the existing transmission facilities require reinforcement of the transmission network to connect new power generating facilities. Nevertheless, the jurisdiction of the IETN license is restricted to greenfield sites in cases where no transmission network exists. Independent electricity transmission network operators are referred to as Independent Electricity Transmission Network Operators (IETNO). The jurisdiction of the IETNO’s license to cover green field sites within the IETN license (essentially off-grid), presents an opportunity for State Governments to secure IETNO licenses to extend the grid within their respective States; and if the constitutional amendment bill is passed, this opportunity will extend to all areas whether covered by the national grid or otherwise. This constitutional development, if successful will present additional opportunities for States to reinforce existing transmission networks within their States. However, it is important to bear in mind that countries that have the IETN/IETNO model in place built their power systems adopting this model from the onset with separate networks/owners (e.g., Germany and Argentina). Hence, from a technical perspective, the Nigerian grid is stated as being relatively small in terms of capacity (5GW), thus, adopting a new model will also require significant amounts of investment.
Distribution Licensees are by the provisions of the Bill permitted to also hold trading licenses, which allows such licensees to purchase power for resale from another trading licensee.
Trading licensees issued by the Commission within the Bill allows the licensee to enter into novation agreements with NBET for the novation of contractual rights and obligations for purchase and resale of electricity and ancillary services.
The Bill prohibits any licensee from claiming ‘exclusivity’ which has been a subject of debate in the industry. This prohibition is at par with what obtains in India where there are no general provisions regarding the nature of the licence issued. The Commission is authorised to grant a license to another person for like purpose and where there is no express indication, a licensee is barred from claiming exclusivity, unless where permitted by the Commission.
Interestingly, the Bill permits the Commission to cancel a license if in its opinion the financial position of the licensee has and will continue to hinder performance of the licensed activity by the licensee unless where the licensee’s inability to discharge its obligations under the license, hinged on the licensee’s financial position is occasioned by non-compliance by other government agencies or licensees with their responsibilities as envisaged in the Bill or other Regulations.
Regarding license tenures, the Bill makes no specific provision but innovatively states that the tenure or duration of a license may be open or valid for a duration stipulated in the license granted by the Commission. This provision will lay to rest the existing provision in EPSRA in Section 72(1) that stipulates a license validity period of 10 years, with a possible extension by the Commission for an additional period not exceeding five (5) years, thus implying a total license tenure of 15 years in aggregate (i.e., 10 years grant plus 5 years renewal). The open licensing tenure provision proposed by the Bill will bolster investor confidence and provide financiers and contracting entities with the comfort required to factor the long-term nature of electricity industry projects.
Concluding Remarks
The sector wide expansion of the licensing framework, alongside the removal of license tenure barriers is a step in the right direction in attracting investments into the sector if the Bill is passed into law. Nevertheless, various network planning studies and possible configurations/reinforcements will need to be undertaken to achieve the intended investment objectives. This in turn requires additional simplification of the legal and regulatory processes and standardisation of attendant processes and documentation, in order not to deter investors and defeat the overall aim of the Bill.
Key Takeaways
Ø The Bill recognises and makes provision for the new business of electricity supply which is absent in the provisions of EPSRA.
Ø The Commission is also empowered to issue licences to independent distribution network operators to construct, own, operate, maintain, or procure the construction and maintenance of independent electricity distribution networks.
Ø This framework envisages the existence of multiple service providers available for choice by customers, which in effect speaks to Retail Competition Models in power markets. As it currently stands in Nigeria, various market structures towards the transition to a market with multiple service providers are already in place. A relevant case study deploying the retail competition model is the United Kingdom (UK). Although in Nigeria, the Bill anticipates a similar structure, several issues will need to be addressed beforehand, relating to operative issues, switching efficiency, metering, etc.
Ø The Bill in addition, vests the Commission with the power to grant multiple generation licenses to independent power producers for generation of electricity from renewable and non-renewable sources.
Ø The Bill also makes provision for the power of the Commission to issue independent electricity transmission network (IETN) licenses. The jurisdiction of the IETNO’s license to cover green field sites within the IETN license (essentially off-grid), presents an opportunity for State Governments to secure IETNO licenses to extend the grid within their respective States; and if the constitutional amendment bill is passed, this opportunity will extend to all areas whether covered by the national grid or otherwise. However, it is important to bear in mind that countries that have the IETN/IETNO model in place built their power systems adopting this model from the onset with separate networks/owners (e.g., Germany and Argentina). Hence, from a technical perspective, the Nigerian grid is stated as being relatively small in terms of capacity (5GW), thus, adopting a new model will also require significant amounts of investment.
Ø Distribution Licensees are by the provisions of the Bill permitted to also hold trading licenses.
Ø Trading licensees issued by the Commission within the Bill allows the licensee to enter into novation agreements with NBET.
Ø The Bill prohibits any licensee from claiming ‘exclusivity’ which has been a subject of debate in the industry.
Ø Regarding license tenures, the Bill makes no specific provision but innovatively states that the tenure or duration of a license may be open or valid for a duration stipulated in the license granted by the Commission.
[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.