On 15th May, 2017, the Minister of Power, Works and Housing, Mr. Babatunde Raji Fashola, issued a policy directive to Nigerian Electricity Regulatory Commission (NERC) declaring four categories of eligible customers in the Nigerian Electricity Supply Industry (NESI) in accordance with Section 27 of the Electric Power Sector Reform Act (EPSRA).
This major policy shift (though recognized by law) has been stated as a reaction to the issue of illiquidity across the entire value chain of the power sector. The illiquidity challenge has been attributed to the failure of the Successor Distribution Companies (Discos) to adequately collect tariffs from end-users, and remit payments to other participants along the value chain.
The February 2017 payment details published by the Nigerian Bulk Electricity Trading Plc (NBET), indicates that the Disco with the highest remittance rate paid only 50% of its February invoice to NBET; whilst the Disco with the lowest remittance rate paid 16% of its February invoice to NBET (http://nbet.com.ng/discos/). The reported average market remittance of the Discos to NBET as at February 2017 was 33.29%.
The current liquidity squeeze has made the sector unattractive for investment, as potential investors aim not just to recover capital costs but also make a return on their investment. It has also led to two major financial interventions by the government through the Central Bank of Nigeria’s (CBN) Nigeria Electricity Market Stabilization Facility of N213 billion, and the proposed CBN-NBET Payment Assurance Facility of N701 billion.
Summary of Policy Directive
The Minister of Power issued a directive to NERC specifying the classes of end-use customers that constitute eligible customers pursuant to the EPSRA. An eligible customer is a customer that can purchase power from a licensee, other than a distribution licensee (Section 100 of EPSRA).
The categories of customers who can now buy power directly from the Generation Companies (Gencos) as stated by the Minister are:
(a) Eligible customers comprising of a group of end-users whose consumption is no less than 2MWhr/h, and are connected to a metered 11kV or 33kV delivery point on the distribution network, subject to a distribution use of system agreement for the delivery of electrical energy;
(b) Eligible customers who are connected to a metered 132kV or 330kV delivery point on the transmission network under a transmission use of system agreement for connection and delivery of energy;
(c) Eligible customers with consumption in excess of 2MWhr/h on monthly basis and connected directly to a metered 33kV delivery point on the transmission network, under a transmission use of system agreement. Eligible customers in this category must have entered into a bilateral agreement with the distribution licensee licenced to operate in the location, for the construction, installation and operation of a distribution system for connection to the 33kV delivery point;
(d) Eligible customers whose minimum consumption is more than 2MWhr/h over a period of one month and directly connected to the metering facility of a generation company. Such eligible customers must have entered into a bilateral agreement for the construction and operation of a distribution line with the distribution licensee licenced to operate in the location.
Based on the above classifications, eligible customers have been conferred with the legal right to have direct bilateral relations with power generators, and would not rely on a Disco for procurement of power, except for the requirement to connect to the distribution or transmission lines (as may be applicable) for the wheeling of power.
Implications of the Policy Directive on the NESI
(a) Broadening the Off-Grid and Captive Power Market:
The recent policy directive presents an opportunity for existing captive or off-grid power plants to supply power to single eligible customers (especially in the manufacturing sector), and groups of such customers who may be within the commercial, residential, or industrial clusters. The eligible customers would sign up to distribution or transmission use of system agreements, depending on the applicable categories under the policy directive.
(b) Sale of Stranded Power:
Several volumes of power generated by Gencos are stranded due to inadequate evacuation infrastructure, and poor collection of tariffs. The new policy directive is expected to bring to the fore bilateral contractual arrangements between Gencos and eligible customers for the purchase of such stranded generation capacities.
We note, however, that the policy directive makes a statement which may appear to contradict its intention to tackle issues of stranded power. The directive states that at least 20% of the generation capacity added by the existing or prospective generation licensees for supply to the eligible customer must be above the requirement of the eligible customer. The rationale for this statement is not exactly clear, as it does not give an indication of the potential off-takers for the 20% excess.
(c) Improvement of Genco Liquidity:
The illiquidity issues currently affecting the Gencos are mainly based on inadequate remittances by the Discos. The illiquidity could potentially be improved by the new policy directive, as Gencos may now contract with, and collect tariffs directly from eligible customers.
It is, however, important to note that the improvement of Gencos’ liquidity is hugely dependent on what payment assurances the Gencos are able to secure from the eligible customers; as well as the ability of the Gencos to collect revenues from the eligible customers. This is because the Gencos now bear collection and payment risks. Gencos would, therefore, need to put in place adequate mechanisms to ensure optimal collection and guarantee of revenues.
(d) Revenue of Successor Distribution Companies:
The categorization of eligible customers with monthly consumption above 2MW may impact on Discos’ revenues, given that collections from such customers may represent the highest sources of revenues for the Discos. The impact of creating this category of eligible customers is that large power consumers such as industrial, residential, and commercial clusters may connect directly to the Transmission Licensee’s lines, and begin to buy directly from Gencos. However, the Discos are still permitted to impose a wheeling charge in the form of a Distribution Use of System Charge on other categories of eligible customers who would use the Discos’ network.
We like to note that the Discos had opposed prior attempts by the Minister of Power to declare the “eligible customer” status (http://energymixreport.com /discos-not-exclusivity-distribution-areas-fashola/). The Discos have stated that the high demand customers that may qualify for eligible customer status are within their respective franchise areas, and only the Discos may deal with such customers on electricity transactions. This position is arguable and has recently been refuted by the Minister (https:// www.thisdaylive.com/index.php/2017/05/09/fg-discos-dont-have-exclusivity-over-distribution-areas/).
(e) Potential for Competition Transition Charges:
Following from (d) above (Revenue of Successor Distribution Companies), it should be noted that it is not all gloom for the Discos, as the EPSRA, in Section 28, acknowledges that if as a result of the Minister’s declaration of eligibility, decreasing electricity tariffs of the Discos result in inadequate revenues to enable payment of its committed expenditures or such Discos are unable to earn permitted rates of return on their assets, the Minister may issue further directives to NERC on the collection of competition transition charges from consumers and eligible customers. We await to see if this further policy directive as prescribed by the EPSRA would be initiated by the Minister for the benefit of the Discos.
(f) Investment in Embedded Generation:
For some of the categories stated in (a), (c), and (d) under Summary of Policy Directive above, the policy directive mandates that agreements should be executed with the Discos to wheel the power generated to the eligible customers. This has similar indications with embedded generation. The policy directive may, therefore, be the required catalyst needed to incentivize Discos to promote embedded generation and attract investment into the sector. In view of this, the NESI can hopefully expect to see the execution of more embedded power purchase agreements between power developers and end-users (who may be eligible customers) with the resulting increase in installed capacity for the country.
(g) Investment in Independent Electricity Distribution Networks:
Another potential impact of the policy directive on the NESI is with respect to Independent Electricity Distribution Networks (IEDN). The directive requires eligible customers in categories (c) and (d) above, to enter into a bilateral agreement for the construction and operation of distribution lines with the distribution licensee licenced to operate in the location. This may imply that where there is no distribution network in the location, distribution networks may be developed to feed into the networks of the existing Disco for supply of power to the end-users. This aptly describes the Embedded IEDN as defined under the NERC IEDN Regulations of 2012. The eligible customers connected to an IEDN are required to pay a distribution use of system charge to the IEDN Operator (Section 21(8) of the IEDN Regulations 2012).
(h) Tariffs for Eligible Customers:
The policy directive also seeks to peg the price of electrical power supply to eligible customers by stipulating that the price cannot exceed the average wholesale price of electricity charged by NBET. Thus, the prevailing MYTO Tariffs would apply to these eligible customers. This could be counterproductive as the aim of the eligible customer regime is to set the tone for liberalization of the sector and thereby encourage willing-buyer, willing-seller arrangements for which parties would be free to negotiate and agree cost-reflective tariffs outside of the MYTO.
(i) Procurement of Electrical Power:
The NERC Procurement guidelines (2014) are to the effect that buyers of electricity (in this case both the Discos and NBET) can only procure power from a competitive process and not from unsolicited bids, unless it is for a good cause as approved by NERC. To the extent that the Minister’s declaration can be interpreted as expanding the scope of buyers of on-grid power, the status of the procurement guidelines would have to be reconsidered by the regulators.
The policy directive can be regarded as a good step in deepening the market and re-establishing confidence in the NESI. Gencos (on-grid, captive and off-grid) can now trade directly with end-users for the supply of power without necessarily contracting with the Discos except with respect to the use of Discos’ network (as may be applicable). This would improve the chances for the power generators to realize their capital and operational costs.
We hope to see how the policy directive would be practically implemented by NERC in the coming weeks and months; which could be through regulation, orders, or further directives. Obviously, issues around (i) the potential impact of the directive on the Discos’ revenues; (ii) pricing of power to be supplied to eligible customers by Gencos; (iii) contractual structures between Gencos, eligible customers, Discos and/or Transmission Company of Nigeria; and (iv) pricing for use of the distribution and transmission networks; amongst others would need to be clarified and tested.
Source: Financial Nigeria