Privatization of Electricity Industry in Nigeria: Lessons from Europe and United States of America

Electricity plays a pivotal role in global economic development; hence inadequate access to electricity hinders development in the developing countries; particularly in Nigeria compared to their developed counterparts.The most substantial effort towards tackling the electricity deficit commenced with the enactment of the Electric Power Sector Reform Act, 2005 (EPSR Act) which aims at privatizing the industry. Drawing lessons from the United Kingdom (UK) and the United States of America (USA),this paper attempts to critically examine the implementation strategies of the EPSR Act vis-a-vis the challenges being faced in bridging the reliable electricity supply gap.

Introduction

The importance of electricity in contemporary societies cannot be over-emphasised; given its use to heat or cool homes, run businesses, operate industrial machineries, computer systems and other devices – which save man-hours and expand production. Quoting Pascal Lamy, the author states that‘….energy remains the backbone of the world’s economies. If abundant, it has the power to facilitate development. If scarce, it makes the development challenges even more complex.’ Although, Nigeria is endowed with sufficient energy resources like oil and gas, coal etc., to generate and supply adequate electricity, it is ironically bedevilled with grossly inadequate electric power supply with attendant developmental challenges due to the epileptic nature of electricity supply. Efforts by the Federal Government of Nigeria to reform the sector are traced back to setting up of machinery in the year 2000 to liberalize the Nigerian Electricity Supply Industry (NESI) and allow private investments and management for efficient generation, transmission, distribution and supply of electricity to the consumers to ease the several developmental challenges. This article evaluates the implementation of the statutory and policy voyage from state monopoly towards privatization of the NESI.

After introducing the subject generally in section I, the article presents the reader, in sections II and III, with a short historical recall of the NESI for what the author calls ‘a background philosophical understanding of the industry’ and an Overview of the Structure of the NESI Privatization Law and Policy Strategy compared with that of the UK and USA. The author traced the history of electricity generation in Nigeria back to 1896 when it was first produced in Lagos and the first legislation in the NESI was the Electricity Act of 1929. He connects the overall discussion, through the myriad of challenges and attempts at overcoming them, to the interim market stage where the market has metamorphosed into a considerably privatised market.

To evaluate the implementation of the statutory and policy voyage the paper attempts to answer two questions: (1) Is the legal and policy framework of the privatization exercise robust enough to sustain a stable electricity supply market? (2) Measured by experiences from Europe and USA, how has Nigeria fared in the implementation of the privatization law and policy of her electricity supply? The central thesis of this paper which is the answer proffered by the author is that notwithstanding the current and likely legal, policy and regulatory challenges, the ongoing privatization of NESI is the proper path to improving and sustaining grid capacity, turning the light on and kick-starting economic growth in Nigeria.

In section IV subtitled “Phased Liberalization of the Nigerian Electricity market:Name change and operational Unbundling of the NESI”, the author situates the phases of liberalization within the global four key pillars of electricity reform i.e. (i) Formulation and government approval of the power reform policy (ii) enactment of the requisite law(s) to drive or implement the policy strategies (iii) unbundling of the government monopoly across the chain of production and supply, and (iv) divestment of government interests (ownership and control) of the unbundled electricity market. The critical roles of the unbundled PHCN and resultant Nigerian Electricity Liability Management Company (NELMCO), Transmission Company of Nigeria (TCN) the Nigerian Bulk Electricity Trading Plc (NBET Plc), the generation companies (GENCOs) and the distribution companies (DISCOs), market operators, the Nigerian Electricity Regulatory Commission (NERC) and other stakeholders are examined.

Due regard is given in the discussions to the present administration’s Roadmap on Power Sector Reform strategy that got the reform back on track in section V of the paper. Both local and International investors were assured of the creditworthiness of the distribution companies and bulk purchaser through the credit guaranty by the Federal Government to ensure that bulk purchaser (NBET Plc) and the DISCOs enter into Power Purchase Agreements (PPAs) with Independent Power Producers (IPPs) via the use of FGN-backed Letters of Credit (LC), to provide liquidity to NBET Plcthrough the World Bank PRG supported by FGN Indemnity, an arrangement which ensured that three months’ worth of PPA payments would be deposited in an escrow account backed by irrevocable LC, which in turn would be backed by PRG. The author asserts that evidently, learning a lesson or two from the California electricity crisis, the reform strategy understands that ‘without a pricing regime that supports financial viability of the sector, private sector investors would not invest in the market’ and so adopted an electricity tariff structure – the Multi-Year Tariff Order (MYTO) a 15-year tariff plan designed to be reviewed at five-year intervals to secure private sector participation in the privatization exercise. This tariff regime that allows licensees, who operate efficiently, to recover the full cost of their activities, including a reasonable return on capital is said to have ensured that the private sector is investing in the NESI.

Sections VI, VII and VIII undertake a comparative analysis of the National Grid, regulation and transmission and system operation architecture of the NESI vis-a-vis the experiences in the UK and USA; highlighting the role of the regulator -NERC via formulation and implementation of policies in ensuring ‘demand side management’, renewable electricity strategies, competition, and grid system management. The regulation by OFGEM in the UK and the Federal Power Commission, later renamed the Federal Energy Regulatory Commission (FERC) in the USA are adopted as a yardstick for measuring how NERC has performed so far. The regional approach to transmission and regulation management is considered a better option for Nigeria under the EPSR Act. Though, one notices the diversity of historical development and reforms of the electricity sector in the USA because of the federal tradition and the strong position of the Federating States in the USA system as being similar to Europe’s in many ways, the differences in models are however, still evident.

It is observed that the NESI structure of privatization and general policy directions apparently follows the England and Wales’s experience in terms of the stages of privatization, the Multi Buyer approach allowing both single and multiple buyers of electricity to operate side by side, making all the generation companies able to sell directly to the distribution companies, initially via the NBET Plc who will on-sell to the distribution companies, and later through PPAs at the Transitional Electricity Market (TEM) stage. The author also recommends the USA system where States authorities regulate the market within their respective borders and allow cross-border trade in electricity for the NESI.

Section IX titled “Regulation and competition (Efficiency of ‘demand side management’ of the market”explores the fact that the UK model of ‘legal unbundling’ and tight regulation guarantees open access more effectively than the USA’s concept of ‘functional unbundling’ and the author states that the operational/functional unbundling and privatization model adopted by the NESI via the EPSR Act is appropriate. This is because since the equal pricing for access to the grid in the functional unbundling does not guarantee non-discriminatory third party access, an integrated company is in a position to and often can charge equally overpriced access fees to its own electricity generators as well as to its competitors. Unlike the other 2 jurisdictions, NERC is solely responsible for regulation and enforcing competition to prevent market abuse until the Competition law is passed under the EPSR Act. In the author’s view, a better option for the Nigerian federation might be the tight regulation pattern of the EU and community or regional regulatory approach of the USA where NERC adapts FERC’s approach for regional operations. Either type of market regulation will serve the NESI significantly better. Thankfully, smart metering by the distributors and suppliers is already being aggressively addressed through formulation and implementation of policies and orders by NERC, in its capacity as the market regulator.

The author suggests in section X that embedded generation also called ‘on-site generation’ i.e. electricity that is directly connected to and evacuated through a distribution network, is a critical part of the envisaged privatized NESI in view of the alternative (and mostly renewable) sources of energy which Nigeria has in good measure as enabled by section 35 of the NERC (Embedded Generation) Regulations, 2012. The legal basis for off grid electricity generation, transmission and distribution and supply is laid down by section 62 of the EPSR Act, by which a person may construct, own or operate an undertaking for generating electricity not exceeding 1 megawatt (MW) in aggregate at a site or an undertaking for distribution for electricity with a capacity not exceeding 100 kilowatts (KW) in aggregate at a site, or such other capacity as the Commission may determine from time to time, without a licence.

Concluding in section XI in‘Looking ahead: Findings; Lessons and Recommendations’, one finds the author’ssummary of the discussions and highlights of the suggestions made. Political will, ideological reorientation of all stakeholders, continuous investments in infrastructures, gas aggregation, and prevention of gas pipeline vandalism, proper regulation, vertical unbundling of the NESI are some of the identified decisions driving the major changes and improving the NESI. This paper argues that judging from experiences of the US and EU (UK) vis-à-vis the Nigerian legal, political and economic structure, particularly their respective grid capacities at the time of privatization, much more sustained efforts will be crucial to generate and supply sufficient and stable electricity in Nigeria and Nigeria Dancing DISCO With Electricity By Prince Charles Dicksothe author cautiously affirms that the NESI privatization journey through the EPSR Act will hopefully, lead to ‘light’ at the end of the tunnel.

Published in Renewable Energy Law and Policy Journal 2014, 5(2), at pp. 136-149.

Peter Olaoye Olalere

Senior Associate with the Dispute Resolution Department of the firm.