The last two decades has heralded significant reform-driven activity in Nigeria’s power sector. The thrust of these activities focuses on transitioning the industry from a government-owned vertically integrated monopoly to a fully liberalised, private sector-driven competitive market. The need for reform has been predicated on the dwindling quality and quantity of services in the sector. Before the commencement of the current reforms, the Nigerian power sector had been plagued with challenges including inadequate power generation capacity, insufficient and inefficient transmission and distribution infrastructure, lack of capital investment, high incidence of power theft, high aggregate technical commercial and collection losses; infrastructure vandalism and inadequate legal and regulatory framework to support a private sector-driven market.
The Reforms
To begin the reforms, the government first focused on the most critical issues, including capital investment and restructuring. The focus aimed to bridge the capacity shortfall and allow private sector participation. The Federal Government constituted the Electric Power Implementation Committee (EPIC) through the National Council on Privatisation (NCP) to undertake a comprehensive study of the electricity industry. The key objective of the EPIC was to prepare a power policy blueprint that will define the government’s new direction for the electric power sector.
The National Electric Power Policy 2001
One of the key outcomes of the EPIC was the declaration of the National Electric Power Policy (NEPP) in 2001. The NEPP document provided the foundation for liberalising the electricity industry, attracting private investment and enabling competition amongst market participants.
The policy envisaged a three-stage development of the electricity market, characterised by changes in the legal and regulatory environments. The stages include transitional, medium-term and long-term.
The transitional stage was to herald the entrance of private power generation, corporate restructuring, unbundling and privatisation of all thermal power plants and the transfer of distribution companies to the private sector. Trading arrangements during this stage were to be made through contracts. Also, energy allocation or rationing would be a crucial feature of the market, considering the limited supply of electricity.
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The end of the transitional market would lead to the second stage. This stage is the medium-term market, which is to be characterised by the beginning of competition amongst power generation companies. Besides, energy trade between power generation and distribution companies will be based on effective bilateral contracts established without an intermediary.
The long-term market, which is the last stage, envisages that the various power generation, transmission and distribution companies will be operating optimally and with full retail sales competition. Also, there will be economic pricing of electricity to cover the total costs of supply, including expectations of a reasonable risk-adjusted rate of return on capital. The market would also provide the opportunity for large industrial consumers to choose their suppliers, and there will be a well-developed wholesale market with formal membership rules, procedures, etc.
The principles set out in the NEPP were captured in the Electric Power Sector Reform (EPSR) Act which was passed into law in March 2005. Like the NEPP, the Act set the foundation for the development of the electricity market. The Act provided the details of steps to end the Federal Government monopoly in the power sector, thus opening up the sector to private sector investment and management.
The Electric Power Sector Reform Act 2005
As a foundation document, the Act provided a defined path for the series of activities required to actualise the plans set out in the NEPP. In this regard, the Act provided the process for the formation of companies to take over the functions, assets, liabilities, and staff of the National Electric Power Authority (NEPA). The Act further gave the Nigeria electricity Regulatory Commission (NERC) powers to provide for the licensing and regulation of the generation, transmission, distribution and supply of electricity; enforce such matters as performance standards, consumer rights and obligation; and to provide for the determination of tariffs. The Act defined the criteria of entry and exit in what should be a rule-based non-discriminatory electricity market. It also provides a framework for setting the standards relating to customer services which have now been developed as various regulations, orders and guidelines by the Nigerian Electricity Regulatory Commission (NERC).
Furthermore, the Act also gave NERC general powers to develop a competitive electricity market. It established the framework for the Power Consumer Assistance Fund (PCAF), which should help subsidise electricity bills for underprivileged power consumers. The Act also provided for the establishment and governance of the Rural Electrification Agency. The agency is to administer the Rural Electrification Fund, which is to be used amongst others to promote, support and provide rural electrification programmes through public-private partnerships.
Implementation of the EPSRA
In furtherance of the tenets of the Act, NEPA was commercialised and renamed Power Holding Company of Nigeria (PHCN) as a holding company for the assets, liabilities, employees, rights and obligations of NEPA. In November 2005, NEPA was unbundled into 18 new successor companies comprising of six generation, one transmission and eleven distribution companies. Further to the objective of establishing a long-term electricity market, NERC was established as the sector regulator to implement the provisions of the Act. The power sector’s privatisation in 2013 was undertaken to move the market to a private sector-driven competitive market, in line with the objectives of the reform programme.
As part of the reform processes, NERC established the framework for regulating electricity tariffs. The framework, Multi Year Tariff Order (MYTO), was first established in 2008 and had the most recent review in September 2020. The tariff framework is meant to ensure fair returns for investors and also incentivise improved quality of service to electricity consumers. Ideally, the tariff should be one of the main incentivising factors to attract private sector investment to spur growth in the sector. However, the lack of strict adherence to the required reviews of the tariff has been cited as one of the main contributors to the current market shortfall and liquidity issues.
NERC has also developed several regulations, codes, guidelines and orders to provide for a rule-based regulation of the electricity market. However, lack of adherence to the various rules by the various players in the sector has contributed to impeding market development along the path envisaged by the NEPP.
Are the Foundations Strong enough?
From the above, it will be apt to conclude that both the NEPP and the EPSRA provide a good foundation for the growth and development of a liberalised and competitive electricity market. Key steps taken in implementation of the tenets of these documents point to a good foundation. One of these steps includes the provision of clearly defined non-discriminatory rules of entry and exit. Another is the early establishment of a holistic approach to balancing electricity tariffs to ensure a fair and cost-reflective tariff regime capable of sustaining the NESI while at the same time attracting investment into the sector. Subsequently, NERC has further to its powers under the Act made several regulations, rules and orders for the administration of the electricity market.
Whilst several problems continue to plague the sector several years after the privatisation of the industry ranging from the market liquidity issues to associated challenges; it is clear from the preceding analysis that the underlining documents for the power sector reform provide an excellent foundation to build a virile and robust electricity market. The government, electricity regulator and the market participants must adhere to the rules provided in the Act to ensure that the objectives of liberalising the sector are achieved.
