Undoubtedly, if the government is to fulfil its international commitments to climate change mitigation and to guarantee energy security for the Nigerian populace without returning us to the literally “gloomy and dark” days under NEPA/PHCN, it must find a way of dynamically liberalising Nigeria’s electricity market well before Nigeria attains the much-coveted Holy grail.
The clamour for the liberalisation of the Nigerian power sector started reaching fever pitch towards the turn of the millennium. That was the time when the failures of the monopolistic state-owned utility, National Electric Power Authority (NEPA) became all too glaring. Daily power outages became the norm and the phrase “NEPA has taken light” was born. Sadly, most people of my generation have known nothing but these gloomy days.
So, what is electricity market liberalisation? Simply put, it is the process of opening the electricity market up for competition at the various levels – generation, transmission, distribution and supply, usually by allowing private sector participation in the market. Historically, most countries started their power sectors with monopolistic state-owned utilities like NEPA. This made privatisation the de facto starting point for most electricity market liberalisations around the world. Due to the 1989/1990 reforms, England is often cited as the doyen of modern day electricity market liberalisation.
Efforts to liberalise the Nigerian electricity market commenced in earnest with a decree in 1998. In recognition of the shortcomings and consequent ineffectiveness of this decree, the Olusegun Obasanjo regime developed and commenced the enactment of the 2005 Electric Power Sector Reform Act (EPSRA). The EPSRA laid down a clear path to the unbundling and subsequent privatisation of NEPA, done through the intermediate Power Holding Company of Nigeria (PHCN).
The formation of the PHCN marked the commencement of the government’s three-phase NEM liberalisation process. The unbundling and privatisation of PHCN assets, which was concluded in 2013 marked the end of the first phase and ushered in the start of the second phase. This aspect, known as the transitional phase, and was initially expected to last only 10 years. It was a phase necessitated by the financial unviability of the newly formed distribution/supply companies, also known as DISCOs.
It was rightly believed that the newly formed DISCOs did not have the financial abilities needed to enter multi-year Power Purchase Agreements (PPAs) with generation companies. PPAs are the main tool for wholesale electricity trading in liberalised markets. As a result, the Nigerian Bulk Electricity Trading Company (NBET) was formed to act as the non-profit middleman between the DISCOs and the generators. NBET was co-funded by the Nigerian government and the World Bank and is charged with entering PPAs with generation companies before reselling the electricity to DISCOs on a more short-term arrangement.
A common theme in most liberalised electricity markets is the lack of frontline government participation. The government’s role is often limited to regulation along the entire value chain but especially in the retail part of the market, in order to protect consumers. It is difficult to see Nigeria following the norm in this respect.
At the end of the transitional phase, expected to be much longer than the initial 10-year plan, the NEM is expected to enter into its final phase, becoming a fully liberalised wholesale and retail electricity market. This is the Holy Grail expected to guarantee the sustainable growth and development of the NEM on the long haul.
A common theme in most liberalised electricity markets is the lack of frontline government participation. The government’s role is often limited to regulation along the entire value chain but especially in the retail part of the market, in order to protect consumers. It is difficult to see Nigeria following the norm in this respect.
First, while the privatisation of all PHCN assets (except the transmission assets) signalled the federal government’s intention to abstain from frontline market participation, it would appear that other tiers of government, especially state governments are keen to explore avenues for direct participation in the market. Lagos, Rivers and Edo are just a few of the states that have developed and are developing Independent Power Projects for their respective states.
Even at the federal government level, the attempt to abstain from the market has not quite gone according to plan. With power generation being a highly capital intensive venture, there has been a real need for the Nigerian government to source foreign investments in the power sector because local companies simply cannot afford to do it alone. Although these foreign companies can single-handedly fund these projects, they continue to call for co-financing with the federal government; this gives them extra confidence in the market. It is however worth noting that the Nigerian government has only agreed to be a minority investor in these co-financed projects.
The other precarious issue for the government is the lack of the development of key power generation sub-sectors, especially the coal sector. In addition to natural gas, coal is the other resource, whose exploitation the government has publicly vowed to encourage for power generation in Nigeria. From an energy security point of view, the government’s stance is highly logical because Nigeria reportedly has large coal deposits. However, Nigeria’s coal power generation sector is virtually non-existent at the moment. Therefore, the government has to be willing to invest in it, through minority or majority co-financing, to convince private investors that it is a worthy endeavour.
…it is likely that the government would have to thrust itself into the frontline of generation technology selection for the respective private generation companies, thereby discarding, arguably, one of the most important features of a liberalised electricity market.
Looking further down the line, if indeed Nigeria gets the Holy Grail, the challenges for the government will take an all-different dimension. One of the key features of a liberalised power generation market is that companies get to independently decide what generation sources they would invest in. These decisions have to be balanced against many considerations such as, customer demographics, primary energy resource availability and costs, amongst other things.
The power to individually select the generation technologies that they invest in poses a unique challenge for the government. Unlike private companies that are usually driven by profits, the government has issues of energy security and environmental sustainability as some of its own primary considerations. Therefore, it is likely that the government would have to thrust itself into the frontline of generation technology selection for the respective private generation companies, thereby discarding, arguably, one of the most important features of a liberalised electricity market.
Not to worry though, this issue will not be unique to Nigeria. The governments of many developed countries, including England and Germany, have had to make a return to the frontline of their respective liberalised electricity markets because of the aforementioned conflict of interests. In the England, for example, the government recently had to enter a Contract for Difference (CfD) arrangement with EDF, a French owned utility, for it to build new nuclear power plants in the country by 2023. Without getting into the nitty-gritty of the CfD arrangement, unquestionably, it will enormously change the dynamics in the UK’s wholesale electricity market in the years to come.
…with most governments realising the lack of economic competitiveness of renewables, special measures such as Feed-in Tariffs (FiTs) and Renewables Obligations (RO) have had to be incorporated by these governments into their respective wholesale electricity trading markets.
Also, the push for renewables has also forced the hands of most governments. A liberalised market is expected to lead to “perfect competition”, thereby providing best value for customers. However, with most governments realising the lack of economic competitiveness of renewables, special measures such as Feed-in Tariffs (FiTs) and Renewables Obligations (RO) have had to be incorporated by these governments into their respective wholesale electricity trading markets.
The aforementioned trends would seem to suggest that the era of perfect market liberalisation is gone for good. It is virtually impossible for the government to leave supply mix determination in the hands of private companies as a fully liberalised market would require because the government’s primary concerns and those of the private companies could not be any more divergent. Undoubtedly, if the government is to fulfil its international commitments to climate change mitigation and to guarantee energy security for the Nigerian populace without returning us to the literally “gloomy and dark” days under NEPA/PHCN, it must find a way of dynamically liberalising Nigeria’s electricity market well before Nigeria attains the much-coveted Holy grail.
Yusuf O. Ali is a doctoral candidate in the Department of Engineering, University of Cambridge; you can reach him on e-mail at: yoa20@cam.ac.uk, and Twitter: @YalyAli
