Power agreements on hold as electricity market fails to kick off

Delay in the declaration of the transitional electricity market (TEM) is holding down the implementation of several agreements, including power purchase agreements (PPAs), gas supply aggregation agreements (GSAA) and gas transportation agreements (GTAs), which would have unlocked the potential of the Nigerian electricity supply industry, BusinessDay investigations show.

Industry analysts say the delay is capable of stalling the inflow of the much-needed funds and capacities into the sector as it increases the risk profile of the sector.

TEM represents the intermediate step to move the electricity market in an orderly manner from an integrated whole utility to a fully competitive market structure with more differentiated players.

For instance, the declaration

of the TEM would make it mandatory for the Nigerian Gas Company (NGC), a subsidiary of NNPC, to be penalised in the event of failure to deliver on its gas supply commitments to the power producers, in line with the Gas Supply Agreement signed in 2013.

Also, any power-generating station that fails to deliver on its electricity supply commitment to the national grid, according to the PPA signed with Nigeria Bulk Electricity Trading plc (NBET), will also be sanctioned. This means NBET will not be paid for power not supplied to the distribution companies (Discos) that ultimately lose revenue for failing to supply improved electricity to households and businesses.

Other agreements that have been signed but are yet to be operational as a result of the delay in the declaration of TEM include transmission use of service agreements, grid connection agreements and ancillary services agreement.

“The primary implication of the failure to declare the transitional electricity market is that the market participants have no currently enforceable and risk-allocated contractual basis for enforcing performance from one another as the suite of bilateral and other contracts among these parties stand suspended until TEM is declared,” said Ayodele Oni, an energy law and policy expert and senior associate in the law firm, Banwo & Ighodalo.

The declaration of the TEM is expected to kick-start a fully contracted and rules-governed electricity market wherein the sanctity of contracts shall be full to protect market liquidity and incentivise increased investment.

“Investors and financiers are already reluctant to release funds because there is no TEM,” said Bismarck Rewane, chief executive officer of research firm, Financial Derivatives Company Limited.

Business Monitor International (BMI), in its newly released Nigeria Power Report Q3 2014, said, “Although Nigeria’s power asset privatisation drive continues to gain momentum and the outlook for the sector is upbeat, we reiterate that investment in the domestic power sector remains fraught with risk.”

The TEM, which was originally scheduled to be declared on March 1, 2014, was put on hold to ensure that all the condition precedents before it comes on stream are fully satisfied.

“We have made progress on the condition precedents, and the transitional electricity market will be declared this year. We have advised the minister and the minister is monitoring the market. It is the statutory function of the minister to declare,” Eyo Ekpo, commissioner, market, rates and competition, Nigerian Electricity Regulatory Commission (NERC), told BusinessDay.

He said the ongoing tariff review process, which is one of the last two critical things that need to be done, was in the final stages.

“By the beginning of October, we would have concluded the consultation process and known what the tariffs will be,” Ekpo said.

NERC had in June approved a new electricity tariff following the conclusion of the first review. Ekpo said the commission was also working with the Central Bank of Nigeria (CBN) to make the electricity market more attractive as a commercial prospect.

“We are working with the CBN on what we call electricity sector stability, which includes a number of measures that will change the commercial perception as regards the stability of the market, ensure that we are able to deal with all our outstanding liabilities and ensure that the market is put on a firm footing that will enable us to go forward as a bankable market,” he said.

In its Nigeria Power Report Q2 2014, BMI said government’s decision to delay the launch of the TEM was something that could weigh on investor sentiment.

“The TEM was to have marked the first stage of the three-step process under which Nigeria will gradually introduce liberalisation. The TEM will introduce competition into the market,” the report said.

Apparently, part of the cause of the delay of TEM is the fact that power generation in the country has not reached the expected level. Daily power generation, which is supposed to be 4,875 megawatts (MW) hour/hour based on the Multi-Year Tariff Order, was 3,887.9MW as at September 7, 2014.

Gas supply, which has continued to put a damper on generation capacity, has seen some improvement in recent times.

BMI said “a failure to secure adequate gas feedstock remains the biggest risk to Nigeria’s efforts to ramp up power generation capacity, which is needed to meet pent-up demand”.

The Electric Power Sector Reform Act (EPSRA) 2005 established three market stages that define gradual competitiveness in the power privatisation market, which include TEM, mid-term electricity market and final/mature electricity market.

The TEM stage is characterised by the initial/official migration of the electricity market from a largely monopolistic structure to at least a competitive one.