By Ani Nkem Nnenne
The Nigerian electricity landscape has been undergoing significant transformations in alignment with the country’s goal of promoting a competitive national electricity market. The EPSRA 2005, now repealed by the Electricity Act (EA) 2023, made provisions for the systems and processes to be set up to ensure the validity of the electricity sector’s pre and post-privatization activities. One of the post-privatization requirements was the establishment of the Nigerian Bulk Electricity Trading Company (NBET).
NBET was incorporated on July 29, 2010, and is 100 percent owned by the Federal Government of Nigeria. NBET is the bulk buyer of power generated and fed into the National Grid by generation companies (GenCos) through a Power Purchase Agreement (PPA). The power purchase agreement executed between GenCos and NBET provides guidelines that govern transactions between GenCos and NBET. NBET operates as the wholesaler of power purchased from GenCos to distribution companies (DisCos) through a vesting contract. Vesting contracts govern transactional relationships between DisCos and NBET. Consequently, NBET acts as a middleman whose primary function revolves around ensuring the stability and financial viability of the electricity market by guaranteeing payments to GenCos, thereby sustaining electricity generation and supply.
The Nigerian post-privatisation electricity market is categorised into four stages: the pre-transitional, transitional, medium-term, and long-term market stages. Presently, the Nigerian Electricity Supply Industry (NESI) is undergoing the transitional market stage. This transitional stage is characterised by completely withdrawing NBET from the market and ensuring more participation from private participants. So, the lifespan of NBET was anticipated to be temporary and should cease to exist upon NESI’s transition to the medium-term market stage, in line with the provisions of Section 7(2)(d) of the EA and the market rules. NBET’s license as the exclusive bulk trader within the NESI is slated to expire by November 2024. In anticipation of NESI’s impending transition to a medium-term electricity market stage, NERC is empowered to issue directives instructing NBET to cease entering into new agreements and novate or transfer existing NBET contracts to other duly licensed entities. This directive reflects the evolving landscape of the Nigerian electricity market, emphasising the need for increased competition and private-sector participation.
As the Nigerian electricity market progresses to the next market stage, NBET’s role is under scrutiny, particularly regarding its long-term sustainability and relevance. Given NBET’s crucial responsibility over the years, is the NESI ripe for NBET’s exit from the market? Can the NESI succeed without NBET’s operations in its market design?
The debate surrounding NBET’s future revolves around its effectiveness in fulfilling its intended role within the NESI. Advocates for NBET’s exit argue that the company has failed to act as a creditworthy off-taker, inhibiting market dynamism and hindering the realisation of economic benefits envisaged under the PPAs. They contend that removing NBET from the equation would enable stakeholders to engage more freely, promoting innovation, competition and efficiency within the market. Additionally, they stress the importance of developing a comprehensive strategic plan to facilitate a seamless transition to a more competitive market structure. Therefore, extending NBET’s license is deemed unnecessary in light of these considerations.
Conversely, opponents of NBET’s exit caution against premature dissolution, citing the company’s pivotal role in mitigating payment risks for DisCos. They argue that transferring these risks to GenCos could destabilise the market and undermine investor confidence. Furthermore, they emphasise NBET’s contributions to market stability and investor assurance, highlighting the need to address underlying structural issues before contemplating its exit. In addition, NBET’s presence as a reliable off-taker, backed by the federal government instils confidence in investors to engage in the power sector. Extending NBET’s license ensures the sustained confidence of investors and enhances sector sustainability.
In any case, legal considerations further complicate the discussion surrounding the NBET’s novation process. Section 7(2)(d) of the EA mandates NBET to transfer its contractual rights and obligations to other licensed entities upon NERC’s directive. However, ambiguity persists regarding the identity of these “other licensees” and the criteria for their selection. Clarifying these aspects ensures a smooth transition and minimises market disruptions. Section 232 of the EA 2023 defines a “licensee” as any person who holds a license or is deemed to hold a license issued under Part VI of the EA or any other relevant provision of the act. These include electricity generation, transmission, distribution, supply, or trading licenses. In determining which licensee is contemplated under Section 7(d), the TCN and the GenCos are not contemplated under this provision. The primary responsibility of TCN is not to engage in the sale of electricity. GenCos cannot buy and sell electricity among themselves. Therefore, “other licenses” in section 7(2)(d) implies either DisCos or trading licensees.
There are indications that NERC will likely extend trading licenses to distribution companies (DisCos) and prospective private entrants. The initiation of a pilot programme introducing bilateral contracting within select DisCos confirms that NERC is embracing innovative approaches to foster efficiency and competition within the electricity market. Bilateral contracting illustrates a framework wherein electricity generation companies (GenCos) directly establish contractual arrangements with designated DisCos for electricity provision, thereby circumventing NBET’s role as an intermediary.
Furthermore, there are conditions precedent stated in sections 7(2)(a)–(c) of the Electricity Act that NERC has to ensure it satisfies before the proposed NBET winding down and utilisation of its authority under Section 7(2)(d) of the Electricity Act. Additionally, there must be adherence to the conditions precedent for declaring a medium-term market stage, as outlined in Appendix 1 of the Market Rules for Transitional and Medium-Term Stages of the Nigerian Electricity Supply Industry (the Market Rules) 2014.
The readiness of NESI for NBET’s exit depends on various factors, including considerations regarding the emergence of the state electricity market, regulatory frameworks, infrastructure, and the capacity of market participants. A well-planned transition implementation strategy is imperative to mitigate potential risks and uncertainties associated with NBET’s exit. This strategy should address existing contractual gaps, resolve institutional misalignments, and build the capacity of market participants to operate efficiently in a post-NBET environment. NBET and NERC must establish a clear and well-thought-out mechanism for winding up the bulk traders’ activities.
With the emergence of the State electricity market introduced by the Electricity Act of 2023, states are boldly developing their own electricity market. Another crucial question emerges: Should states incorporate the NBET market design in setting up their state electricity? The peculiarities of each state need to be considered. The suitability of this choice depends on each state’s unique circumstances and should emphasise the need for tailored approaches to electricity market development or design.
In conclusion, while the prospect of NBET’s exit presents challenges and opportunities for NESI, careful deliberation and strategic planning are essential to navigate this transition successfully. A collaborative approach with industry stakeholders is crucial to ensure Nigeria’s electricity sector’s seamless and sustainable evolution towards a more competitive and resilient future
•Ani Nkem Nnenne is a legal consultant and energy sector specialist. She can be reached via email: [email protected]