Earlier this year, on 19th May 2017, a critical step forward in the Nigerian Electricity market was realised, with the issuance by the Minister in charge of Energy of the directive on Eligible Customers (the "Directive"), specifying the classes of end-use customers that will be able to directly purchase electricity from licensees other than the sole incumbent distribution licensees (the "Discos").
The publication of the Directive has legally empowered NERC to frame and issue a specific regulation setting out the modalities and conditions of this new Eligible Customer regime.
After several months of consultation with various stakeholders, NERC published on the 1st November 2017 the expected regulation on Eligible Customers (the "Regulations")1.
These Regulations trigger the transition to an "open access" electricity Market in Nigeria, which shall provide new opportunities for IPPs project development and manufacturing industry in Nigeria. The success of this transition remains however subject to several questions, as set out below.
1. Eligible Customer criteria
The first end-use customers to benefit from the Eligible Customers regime are, as it was expected, the heavy and electro-intensive industries present in Nigeria. Several conditions are required to register before NERC as an Eligible Customer (the "Applicant"):
First of all, the Applicant must meet a consumption level of 2 MWh/h threshold over the course of one month, which remains a fairly reasonable threshold considering that heavy-industries start with a minimum of around 100-200 kW/h of monthly consumption, for a load profile of 500 kW, but can go up to several MWh/h monthly.
It is noteworthy that a group of end-use customers can apply by aggregating their consumption in order to meet the 2 MWh/h threshold, provided that (i) they are all connected to the same distribution network through the same feeder, (ii) they have incorporated a single SPV (which will legally become an Eligible customer) to execute the transaction documents on behalf of the concerned end-use customers during the lifetime of the PPA and (iii) each concerned end-use customer must have a minimum consumption of 500 kVA at each site located within the same geographical network.
Please note that in the case the Applicant is directly connected to the transmission network, the Applicant is exempted from the 2 MWh/h threshold requirement and may automatically register as Eligible Customers.
Secondly, the Applicant's facility must be already connected to (i) the distribution network, (ii) the transmission network or (iii) the transmission network through a dedicated distribution network, or connected (iv) to the generation facility through a dedicated distribution line which has been authorised by the relevant Disco in the area.
With regard to the above criteria, we assume that a fairly large number of industries present in Nigeria may qualify for the Eligible Customer regime especially in the chemistry and pharmaceutical industry, food and beverage manufactures or plastic and rubber products.
In practical terms, this means that the Eligible Customers will pay the generation licensees directly rather than the Discos for the electricity supply to them, and that the Discos will potentially lose revenue. We can understand that this Eligible Customer regime may be seen as a real threat towards the incumbent Discos and the investment capacities in distribution networks in Nigeria.
However, in our view, this opinion may be partially revised since recent surveys show that only 3-4% of the energy consumption of the Nigerian manufacturing industry is coming from grid-connected electricity and that a majority of companies are using captive generation. Additionally, Discos may also perceive new source of revenues due to the wheeling electricity going through their network from the generation licensee to the Eligible Customer and the collect of "wheeling charges". Finally there are great chances that the Discos may be selected as "supplier of last resort" in case of technical interruption of the initial supplier.
2. What are the conditions for registering as an Eligible Customer?
Any Applicant to the Eligible Customer regime shall fulfil the following contractual requirements as a precondition for registering by the Commission:
- Execution of a Power Purchase Agreement (guided by the Commission's standard template) with the prospective supplier. We expect the PPA templates not to be as heavy as the PPAs currently executed with the Discos in Nigeria (we worked on PPAs of around 140 pages in total, with standard annexes);
- In the case where the electricity supplied is wheeled through the distribution or transmission network, the execution of the Distribution Use of System ("DUoS") or Transmission Use of System ("TUoS") agreement;
- Where the electricity is directly wheeled through a dedicated distribution line, execution of a bilateral agreement with the Disco for the construction, installation and operation of a distribution system to be used for the supply to the customer
- Execution of market participation agreements with the Market Operator (Transmission Company of Nigeria is the current Market Operator until now);
- Execution of other agreements asprescribed by NERC.
Additionally, Applicants shall post a Letter of Credit or Bank Guarantee in favour of the Market Operator in accordance with the Market Rules to cover market administration charges, TUoS and DUoS charges and other charges as may be approved by NERC.
3. What are the conditions for selling to Eligible Customers?
Suppliers wishing to sell and supply electricity to Eligible Customers must be granted any of the following licenses: (i) a generation license (which means that generation facilities under 1 MW of installed power capacity cannot qualify since they have no generation license) or (ii) a trading license.
As a reminder, the generation license authorises the licensee to "construct, own, operate and maintain a generation station for purposes of generation and supply of electricity" and the trading licensee authorises the licensee to "engage in the purchasing, selling and trading of the electricity".
Additionally, in the case the supplier intends to wheel the electricity through an existing distribution or transmission network operated by a distribution or transmission licensee, it must enter into a Distribution Use of System ("DUoS") or Transmission Use of System ("TUoS") with the relevant operator in order to organise electricity delivery through the network.
In the case where the supplier intends to wheel the electricity through a dedicated distribution line, it must enter into a bilateral agreement for the construction, installation and operation with the relevant regional Disco, in order to be authorised to construct and operate this dedicated line the Disco has a regional monopoly for constructing and quoting the network, on the basis of its distribution license).
Although this has not been expressly mentioned in the Regulations but only in the Directive, the generation licensee will be required to reserve at least 20% of his generation capacity to the distribution or transmission licensee, under a bilateral agreement with a distribution or trading licensee, at a price that does not exceed the wholesale price or any other such clearing tariff set by NERC for the purpose.
4. How are the switching rules organised?
The switch of supplier by the Eligible Customer is subject to the following rules:
- NERC has approved all power purchase agreements with prospective suppliers before the commencement of service
- An Eligible Customer that intends to exit from a Disco's supply agreement shall provide a minimum of 3-month notice to the supplier. A waiver may be allowed for Force Majeure events but subject to verifications by NERC.
- An Eligible Customer wishing to reconnect to a Disco's supply network shall provide a minimum of 3-month notice of intent to allow for adequate planning, unless waived by the other party.
- An Eligible Customer that intend to switch suppliers shall inform the current supplier in writing of the intention to switch suppliers at an agreed date, subject to the termination clause under the PPA and NERC's approval of the new contract for supply.
4. How will the recent regime provide opportunities in Nigeria?
- Until now, the selling and purchase of electricity in Nigeria was rather restricted
Any IPP operating a power plant in Nigeria was required, as per section 26 (1) d of ESPRA, to sell electricity only to (i) the relevant Discos or (ii) the Eligible Customers.
However, since the Eligible Customers regime was not yet implemented, generation licensees were obliged to sell their production only to the Discos.
This meant that the generation licensees were required to sell electricity at a regulated tariff, under a regulated PPA, and sometimes under the rules of a tender process settled by NERC. In practical terms, and although this risk was mitigated by the "Availability Event" mechanism under the PPA entered into with NBET, generation licensees were facing power cuts and unreliability of the services provided by the Discos and were unable to inject their production in the grid and make it beneficial to end-use consumers.
On the other hand, end-use customers were required to purchase electricity for their needs only from their exclusive regional Disco. But due to irregular power supply and the need for manufacturing industries to sustain production, Nigerian industries resorted to the use of diesel and gas for their energy needs.
Although innovative legal and technical solutions were sought by IPPs and heavy-industries to escape from the poor quality of supply from Discos, such as the equal fragmentation under 1 MW of the generation plants on an industrial site in order to escape from the generation license requirement or the establishment of ring-fenced "industrial parks" for example, the vast majority of high-scale IPP projects were selling and delivering the electricity produced directly to the exclusive regional Discos.
- For the future, this new regime should enable new configurations
This new regime should liberalize the sell and purchase of electricity in Nigeria, bring (i) a better quality of supply to the customer and (ii) a higher bankability for IPP projects since the project does respond to an imperative economic need. From a commercial point of view, the Eligible Customer regime enables the generation licensees to benefit from lower risks in payment based on the creditworthiness of the Eligible Customer rather than the Discos.
As for the IPPs, it should be distinguished between the existing and the new generation facilities:
For the existing generation licensees: if they already supply electricity to distribution or transmission licensees through an ongoing PPA, they shall not be authorised to contract directly with any Eligible Customer regime. If not, they shall be authorised to sell to Eligible Customers. A solution for the existing IPP already engaged in a PPA would be the selling of any surplus or installing new generation capacities which would be legally eligible to the sale to Eligible Customers.
For the new generation licensees: they may engage in the direct selling of electricity to Eligible Customers either by wheeling the electricity produced through either
the existing distribution network until the Eligible Customer: in this case, the Eligible Customer remains dependent on the poor management and service delivery of the Disco and the payment of Transmission Use of System (TUoS) and Distribution Use of System (DUoS) charge by the Eligible Customer. On the other hand, it does not have to finance, build and operate the network.
a dedicated distribution line: in this case, the eligible customer will be required to enter a bilateral agreement for the construction, installation and operation with the relevant regional Disco which has the monopoly for distribution networks. Since this option may be burdensome for Eligible Customers, the generation licensee shall be authorised to contract on behalf of the Eligible Customer and thus provide turn-key solutions. In any case, this seems to be most efficient solution since generation licensees would in practice benefit from stable operation and efficiency due to the flatter load profiles of Eligible Customers (heavy-industries generally need power on a longer period and remain fairly uniform throughout the day) and lower technical losses.
As for Nigerian manufacturers, the Eligible Customer regime will likely lead to limited power cuts and limited unreliability due to the poor management of the incumbent Discos in Nigeria and probably foster the development of renewable energy projects on a large scale.
5. What are the pending Issues to be tackled before the full implementation of the Eligible Customer regime?
One of the first issues to consider would be the third-party access to the distribution or transmission system for wheeling the electricity from the generation licensee to the Eligible Client.
Indeed, it is noteworthy that Discos will remain a key player in the structure of the Eligible Customer regime and direct relation between the generation licensee and the Eligible Customer, even in the case where there is only a dedicated transmission line:
Wheeling tariffs should be regulated, published and available to all parties – and not only reference to the MYTO Tariff as it is currently provided, in order to foster transparency, avoid market distortions and ensure a fair and equitable charge for using the network.
The right of way for the deployment - by the operation licensee - of the dedicated transmission lines and payable to the Discos shall be limited or prohibited by NERC. Since the local Discos have a geographical monopoly for the construction and operation of distribution lines, NERC has noticed that Discos tend to charge without limitation the generation licensees for the deployment and operation of dedicated transmission lines.
A dispute resolution mechanism should be settled to aid speedy resolution of disputes that may arise with the Discos for the third party access to the grid, and should consider a timeline within which all disputes would be resolved. Regulations provide in Chapter VIII, section 27, that the party denied access may file a petition to the commission against the denial. Where a network licensee unduly refuses to allow third party access to an Applicant, the Commission shall issue an order granting access and sanction the licensee for the denial.
A second issue to consider would be the loss of customers and revenue for the Discos due to the direct supply of the Eligible Customer by the generation licensees. There is a risk for the Discos that their investments will be now focussed on rural and residential feeders with high fault, low payment and unpredictable consumption profiles. One of the solutions would be to compensate through (i) an increase of the wheeling charges, which are the TUoS or the DUoS, or (ii) a rebalancing of the electricity tariff for end-use customers in order to mitigate the losses of revenues from the exit of industrial customers.
A third issue to consider would be the appropriate process for migration, exit, notification and switching rules by the Eligible Customers. Although Regulations provide a specific framework for the switching, it is noteworthy that the basic rules for the termination of the current supply contracts with the Disco will be first found in the existing supply agreement itself! This will have to be attentively checked before engaging the migration process…