Feature: What Is Transitional Electricity Market And How Ready Is Nigeria?

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powergeneratorEjiofor Alike writes that declaring the move to the Transitional Electricity Market at this stage of the private sector-led power sector, without adequate supply of gas to the electricity plants may generate avoidable disputes

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In his renewed efforts to rescue Nigeria’s power sector from its current post-privatisation challenges, the Chairman of the Nigerian Electricity Regulatory Commission (NERC), Dr. Sam Amadi recently said the commission is set to ask the Minister of Power, Prof. Chinedu Nebo to declare the much-awaited Transitional Electricity Market (TEM), where market participants would be sanctioned for failing to meet their contractual obligations to other stakeholders.

Inaugurating a 12-man Dispute Resolutions Panel (DRP) set up by NERC as part of TEM’s conditions precedent (CPs) to mediate on conflicts of interests among market participants in Nigeria’s Electricity Supply Industry (NESI), Amadi told the minister that the country’s liberalised electricity market is ready to go into the TEM phase..

Amadi said by setting up the DRP, the regulatory agency had completed the last of all the formal condition precedent to the declaration of TEM.
He said the last of the CPs was actually the setting up a market DRP, adding that he expected TEM to take off in a matter of days.
On the issue of informal conditions precedent that were not listed in the current interim market rules but are necessary for the market to operate optimally, Amadi said they were being finalised by NERC.

He however, gave an assurance that the informal conditions were not tangible enough to hold back the declaration of TEM.
“By today’s event, we have met the last condition precedent for the commencement of the Transitional Electricity Market as prescribed by the market rules. Now that we have completed the last of the formal conditions’ precedents and we are effectively handling the informal CP NERC is poised to recommend to the minister of power to declare the commencement of TEM at a named date. In the days ahead, we will notify the minister of power to make such declaration. We are confident that the Nigerian electricity market is ready to successfully enter the transitional stage,” Amadi reportedly explained.

Insisting that the market was ready for the declaration of TEM, the NERC boss identified the formal CPs to include the approval of grid codes and market rules, establishment of an independent regulator, establishment of market operation and system operation with functional capabilities and the establishment of a market dispute resolution mechanism.

“Today’s celebration marks the completion of the CPs. NERC recognises that there are some informal CPs not listed in the market rules but necessary for the optimal working of the market. These include a fully cost reflective tariff, confirmation of reliable gas supply to power plants and validation of gas supply and power purchase agreements,” he added.

Amadi said the concerted efforts by NERC, Central Bank of Nigeria (CBN), Ministries of Power and Petroleum Resources to deal with the market’s legacy debt and revenue shortfall in a sustainable manner were focused on dealing with the informal conditions precedent.

Implications of TEM
Nigeria’s power sector is currently being operated under interim rule, where the market participants operate on the basis of best endeavour, without any regard for terms of the existing contracts.
Under the current operating conditions, market participants are not sanctioned for failing to meet their contractual obligations.
But when TEM is declared, all actionable agreements, which have been signed by the various market participants but are awaiting implementation, will be implemented.

For instance, the declaration of TEM will make it mandatory for the Nigerian Gas Company (NGC), a subsidiary of the Nigerian National Petroleum Corporation (NNPC), to be sanctioned in the event of failure to deliver on its gas supply commitments to the power producers, in line with the Gas Supply Agreement (GSA) signed in 2013.
With TEM also, any power generating station that fails to deliver on its electricity supply commitment to the national grid in accordance with the Power Purchase Agreements (PPAs) signed with the Nigerian Bulk Electricity Trading (NBET) Plc, otherwise called the Bulk Trader, will also be sanctioned.

The Distribution Companies are also expected to activate extant vesting contracts with NBET Plc, whereby NBET must meet its obligations to the Discos in terms of supply of bulk power for distribution.
In other words, market participants under TEM are obliged to commence full trading based on the rules of contracts and any breach of the contracts is effectively sanctioned.

Actionable agreements, which have since been signed but awaiting implementation, pending the declaration of TEM, include Transmission Use of Service Agreements (TUOS); Grid Connection Agreements; Ancillary Services Agreement; Power Purchase Agreements (PPAs); Gas Supply Aggregation Agreements (GSAAs) and Gas Transportation Agreement (GTAs).
The GSA obligates the gas supplier to provide the agreed minimum amount and quality of gas to the power producers.
The agreement also obligates the power producers to pay for gas supplied and provides for penalties for non-delivery of the required gas and non-payment for the gas delivered.

Lessons from power privatisation
In theory, the country’s electricity market seems to be ready for the declaration of TEM but practically, TEM will create confusion and disputes that will worsen the power situation in the country.
If declared under this present market conditions, TEM will create similar problems experienced in the privatisation process, which was implemented based on wrong indices that were theoretically correct but impracticable.

For instance, all the indices and projections on gas supply for which the privatisation process was based could not be realised, thus leading to the inability of the new investors to realise their revenue targets and other deliverables that would boost power supply.
The mistakes made during the privatisation led to a situation where the government hurriedly sold the assets of the defunct PHCN because it has no money to operate them.

Surprisingly, the same government that claimed that it has no money and that the private sector has limitless access to raise fund to manage the assets, later turned around to raise N213 billion loan for the same private sector that bought the assets.
This N213 billion loan has created an impression that it is people in the government that actually bought the PHCN assets but there is no evidence to link the people in government to the ownership of the PHCN assets.
It is a common knowledge that the privatisation process was rushed, making it impossible for both the regulator and the investors to foresee the challenges ahead and the government has to do anything within its mandate to ensure that the sector does not collapse, hence the N213 billion loan given to the new investors.

Dangers of Rushing into TEM
As pointed out earlier, with all relevant agreements signed and all conditions precedent met, the electricity market seems to be theoretically ready for TEM but this is far from the practice.
But the problem of inadequate gas supply to the generation companies, which is yet to be resolved, is the greatest challenge facing the country’s power sector and this will make TEM ineffective.
Without gas, the generation companies cannot meet their obligations to the bulk trader that sells power in bulk to the distribution companies.

This will also make the bulk trader unable to meet its contractual obligations to the distribution companies, which will also not be able to sell enough power to realise their revenue targets to invest in infrastructure that will boost power supply.
So, shortage of gas supply in the event of TEM will lead to chain reactions and also generate trade disputes among the market participants, which will impact negatively on power delivery to consumers.

Of all the agreements that are awaiting implementation, the Gas Supply Agreement (GSA) poses the greatest threat to the declaration of TEM because of the persistent interruption in gas supply to the power producers.
With a shortfall of over one billion cubic feet of gas per day to run the available capacity in the power plants, there will be serious disputes in the market as NGC will not be able to meet its contractual obligations.

This will lead to payment of huge penalties by both the NGC and other market participants that will be affected by shortage of gas.
Apart from the refusal of the international oil companies (IOCs) to invest in domestic gas supply due to the low price, gas shortage to the power generating plants has been blamed on the persistent sabotage of the Escravos-Warri-Lagos Gas Pipeline network by vandals and restive  communities around Ogidigben, Ajadiabo, Escravos, Gbaramatu and Ugborodo areas in Warri South West Local Government Area of Delta State.

The plan by Chevron Nigeria Limited to pipe 350 million standard cubic feet of gas per day additional commitment into the domestic market was effectively stalled for several months because of the vandalism of the Escravos pipeline network.
Though NERC recently increased the price of gas-to-power from $1.5 per thousand cubic feet to $2.5, local and foreign investors are clamouring for about $5 or $7 to keep it at par with export price.

However, the Chief Executive Officer of Egbin Power Plant, Mr. Mike Uzoigwe told THISDAY at the weekend that the declaration of TEM would create bankable electricity market for the benefits of all the stakeholders.
Uzoigwe noted that “if the power sector is allowed to remain where it is at the moment, it will not take us to anywhere.”
“If I am paid for the power I generate, I will have more money to buy more gas and generate more power. In other words, if I generate power and they pay me for it, I will generate more power. If the gas producers and investors are paid for gas, they will be encouraged to produce more gas,” he said.

On the claim that the IOCs and the local investors will not supply enough gas to the NGC for the generation companies and this will lead to breach of contractual obligations under TEM, Uzoigwe stated that the investors would start to invest in domestic gas if they have concrete assurance that they would be paid.
“When the investors see that there is a good domestic market, where they will be paid promptly, they will invest in gas. The important thing is for people to build more power plants; let people pay for the power they consume. We need to try TEM because if we remain where we are, it will not take us anywhere,” he said.

Dispute Resolution Panel
Though NERC said the country’s electricity market was ready for TEM, the establishment of a 12-man Dispute Resolution Panel (DRP) by the regulatory agency was a strong indication that the agency was aware that the declaration of TEM at this stage would generate crisis in the market.
To mediate on conflicts arising under TEM , NERC has inaugurated a 12-man panel, led by a dispute resolution counsellor, Dr. Mamman Lawan, who is an academic from the Bayero University Kano.

Other members include, Nnenna Ahakannah, Ejekam Nnenna, Adeyemi Oyedele, Hussani Mohammed, Boma Ozobia, Adeyemi Akinsanya, Tamuno George, Sadiku Folorunsho, Olufunmi Roberts, Okechuckwu Chiazor, Ezekiel Osarieme and Augustine Mamadu.
The members of this 12-man panel, who are on a five years, two renewable terms tenure of appointment are engineers, economists and legal practitioners, who had undergone screening on conflicts of interests.
To avoid usurpation of the regulatory powers of NERC, the agency has clarfied that while the panel is mandated to mediate on matters relating to the market codes, it would not be allowed to entertain any matter relating to amendment of the market rules and charges of the market and system operators.

NERC also clarified that though the awards of the panel would remain final with regards to the market’s dispute resolution mechanism, the decision of the panel is still subject to further judicial reviews as the case maybe and in line with the country’s laws.
But irrespective of the assurances given by NERC, the declaration of TEM, without effectively addressing the challenge of inadequate gas supply to the power generating plants, will set many market participants on a collision, with its attendant consequences on the stability of the market and effective delivery of electricity to Nigerians.

However, Amadi told THISDAY at the weekend that TEM would not be declared until the gas problem was settled.
“What is the gas problem? It is not necessarily that there is no sufficient supply of gas for power plants. It is the fact that there is no bankable quantity,” he added.

Babatunde Akinsola
Babatunde Akinsolahttps://naija247news.com
Babatunde Akinsola is aNaija247news' Southwest editor. He's based in Lagos and writes on the Yoruba Nation political issues, news and investigative reports

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