Recently, there were stakeholders’ engagements organized by the Nigerian Electricity Regulatory Commission [NERC] on whether to renew the Nigerian Bulk Electricity Trading license. This generated lots of arguments for and against among the industry stakeholders and market participants. Though not confirmed, there is a rumour that NBET’s license has been extended for another three years.
Though Nigeria has partially liberalized her electricity market with the unbundling of the old NEPA, there still exists a monopoly in wholesale electricity trading as evident in the single buyer model of the wholesale market where NBET- a state owned entity is the single buyer.
The Nigerian Bulk Electricity Trading Plc (NBET) was established to purchases electricity from the generating companies through Power Purchase Agreements (PPAs) and sell to the distribution companies through Vesting Contracts.
NBET was established to increase investors’ confidence in the Nigerian Electricity Supply Industry- (NESI) by shielding the Gencos – and by extension, protecting the natural gas producers from market risks. However, NBET has been unable to shield Gencos and gas producers from the liquidity crisis that has plagued the industry.
Not only has NBET’s mission proved unsustainable as it has never for a time been able to fulfil its obligations to the Gencos, its inhibitive monopsony has curtailed investments in the sector.
The single buyer model started in the 1990s mostly among the developing nations. The essence was to increase generating capacity by authorizing private investors to build power plants to generate and sell power to the national grid. The generated power is sold through a long term power purchase agreements- PPAs which include take-or pay and capacity charges to protect investors from market risks.
This model is supposed to be a transitional arrangement before the conditions for a competitive wholesale markets are satisfied. The reality of the liquidity problems this model has created in the Nigerian power sector shows this is no longer sustainable, and the much awaited conducive time for the market to transit to a more competitive one may never come.
The single buyer model has many drawbacks especially in a nation like ours where there is weak regulation, corruption, and lack of any credit policy to mitigate counterparty risk in the power sector.
First, power purchase agreements-PPAs in single buyer model creates a contingent liability for the government whenever NBET is unable to honour its obligation to the power generating companies. This has been the case in our market because the distribution companies-Discos hardly remit up to 40% of energy sold to them due to their high ATC&C loss. This was why the federal government had to release 1.3trillion naira Payment Assurance Guarantee to the sector. This payment was inevitable because of formalized guarantee agreements and a breach would have undermined the government’s creditworthiness. This is a huge sum the country would have spent on health, education, or roads.
Second, this model weakens the motivations for power distribution companies to collect and remit payments from the customers. The state owned- NBET won’t dare take a politically unpopular action against any delinquent distribution companies as the government still retains 40% ownership in these companies. Over the years, collections and remittance by all the Discos have been abysmal and when the few performing Discos see that there is no repercussion for the poor performing ones, the incentive to improve collections weakens. Though the Vesting contracts between NBET and the Discos are backed by some sorts of payment guarantees, but there is no evidence of those guarantees being enforceable.
Third, this model makes it easy for the government and some influential parties to influence or intervene in the dispatch of generation. The guideline for economic merit order dispatch mandates the hydro plants to be utility must run generation. It is weird that the most expensive thermal plant in our generation portfolio has a dispatch rate higher than some hydro plants.
When Azura-Edo IPP began ramping up its electricity sale volumes, there was a simultaneous winding down of electricity sale volumes from the state-owned Niger Delta Power Holding Company (NDPHC). Today, we have many NIPPs lying dormant and has been put up for sale by Bureau of Public Enterprise-BPE because NBET lacks the fiscal capability to enter into power purchase agreements with them.
Fourth, decisions about adding more generation capacity are often made by government officials who do not have to bear financial consequences of their actions. Where investors who have backers in government find government assurance attractive, there is always a bias to increase generation capacity. Our installed generation capacity is about 13,500MW but our baseload demand hovers around 3500-4500MW and peak demand has not exceeded 5800MW. Despite the stranded capacity of about 8000MW, there are still several calls for increased generation. With assured capacity payments for the existing stranded capacity, it is not economically wise and sustainable for NBET to continue to be the sole buyer in the wholesale market.
Lastly, this single buyer model increases the probability that under pressure from vested interests, government will indefinitely delay the next step towards a fully liberalized electricity market. It is not surprising that many clamoured for the renewal of NBET’s license making excuses of financial non-viability of the Discos and non-readiness of the market for full competition.
The government tried to address the challenges associated with the single buyer model with the introduction of Eligible Customers’ Regulation. This was aimed at allowing the creditworthy large users like industrial customers and residential estates to buy electricity from the generators through bilateral contracts. Sadly, we haven’t progressed with this policy due to many reasons.
Allowing power generators to sell electricity directly to distribution companies and eligible customers eliminates most of the drawbacks of single buyer model. Though the bilateral contract model also poses some challenges because even with the best forecast and load analysis, electricity generation and consumption of sellers and buyers hardly match the contracted amounts. A balancing market administered by the System Operator is to be created to maintain balance at real time.
It is inevitable that the Nigerian electricity market needs to transit to bilateral contracts and allow full competition in the wholesale market.
The generating companies are hemorrhaging with huge debts and as long as they can’t sell their stranded capacity or get paid for energy sold as at when due- government’s bail out becomes inevitable to avoid total collapse of the industry. There exists in the market unmet and unfulfilled energy demand by many industrial and commercial customers who presently rely on captive generation.
The regulator-NERC has to be brave and allow competition in the wholesale market for Discos and these creditworthy large electricity users to contract bilaterally with the Gencos, otherwise- the government may still be providing subsidy for the cash trapped power sector.
Lanre Elatuyi- Electricity Market Analyst.