APPRAISING THE NEW POLICY DIRECTIVE ON ‘ELIGIBLE CUSTOMERS’ IN

THE NIGERIAN POWER MARKET

June 2017 Newsletter

INTRODUCTION

On 15th May, 2017, the Minister of Power, Works and

Housing, Mr. Babatunde Raji Fashola issued a policy

directive to the Nigerian Electricity Regulatory Commis-

sion (NERC) declaring four categories of eligible custom-

ers in the Nigerian Electricity Supply Industry (NESI) in

accordance with Section 27 of the Electric Power Sector

Reform Act (EPSRA).

This major policy shift (though recognized by law) has

been stated as a reaction to the issue of illiquidity across

the entire value chain of the power sector. The illiquidity

challenge has been attributed to the failure of the Succes-

sor Distribution Companies (Discos) to adequately collect

tariffs from end-users, and remit payments to other par-

ticipants along the value chain.

The February 2017 payment details published by the Ni-

gerian Bulk Electricity Trading Plc (NBET), indicates that

the Disco with the highest remittance rate paid only 50%

of its February invoice to NBET; whilst the Disco with the

lowest remittance rate paid 16% of its February invoice

to NBET (http://nbet.com.ng/discos/). The reported av-

erage market remittance of the Discos to NBET as at Feb-

ruary 2017 was 33.29%.

The current liquidity squeeze has made the sector unat-

tractive for investment, as potential investors aim not

just to recover capital costs but also to make a return on

their investment. It has also led to two major financial

interventions by the government through the Central

Bank of Nigeria’s (CBN) Nigeria Electricity Market Stabili-

zation Facility of N213 billion, and the proposed CBN-

NBET Payment Assurance Facility of N701 billion.

SUMMARY OF POLICY DIRECTIVE

The Minister of Power issued a directive to NERC

specifying the classes of end-use customers that

constitute eligible customers pursuant to the

EPSRA. An eligible customer is a customer that

can purchase power from a licensee, other than a

distribution licensee (Section 100 of EPSRA).

The categories of customers who can now buy

power directly from the Generation Companies

(Gencos) as stated by the Minster are:

(a) Eligible customers comprising of a group of

end-users whose consumption is no less than

2MWhr/h, and are connected to a metered

11kV or 33kV delivery point on the distribu-

tion network, subject to a distribution use of

system agreement for the delivery of electri-

cal energy;

(b) Eligible customers who are connected to a

metered 132kV or 330kV delivery point on

the transmission network under a transmis-

sion use of system agreement for connection

and delivery of energy;

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(c) Eligible customers with consumption in excess of 2MWhr/h on monthly basis and connected directly to a metered 33kV delivery point on the transmis-sion network, under a transmission use of system agreement. Eligible customers in this category must have entered into a bilateral agreement with the distribution licensee licensed to operate in the loca-tion, for the construction, installation and opera-tion of a distribution system for connection to the 33kV delivery point;

(d) Eligible customers whose minimum consumption is more than 2MWhr/h over a period of one month and directly connected to the metering facility of a generation company. Such eligible customers must have entered into a bilateral agreement for the con-struction and operation of a distribution line with the distribution licensee licensed to operate in the location.

Based on the above classifications, eligible customers have been conferred with the legal right to have direct bilateral relations with power generators, and would not rely on a Disco for procurement of power, except for the requirement to connect to the distribution or transmission lines (as may be applicable) for the wheeling of power.

IMPLICATIONS OF THE POLICY DIRECTIVE ON THE

NESI

(a) Broadening the Off-Grid and Captive Power Market:

The recent policy directive presents an opportunity for existing captive or off-grid power plants to sup-ply power to single eligible customers (especially in the manufacturing sector), and groups of such cus-tomers who may be within the commercial, resi-dential, or industrial clusters. The eligible custom-ers would sign up to distribution or transmission use of system agreements, depending on the appli-cable categories under the policy directive.

(b) Sale of Stranded Power:

Several volumes of power generated by Gencos are stranded due to inadequate evacuation infrastruc-ture, and poor collection of tariffs. The new policy directive is expected to bring to the fore bilateral contractual arrangements between Gencos and eli-gible customers for the purchase of such stranded generation capacities.

We note, however, that the policy directive makes a statement which may appear to contradict its intention to tackle issues of stranded power. The directive states that at least 20% of the generation capacity added by the existing or prospective gen-eration licensees for supply to the eligible customer

must be above the requirement of the eligible

customer. The rationale for this statement is

not exactly clear, as it does not give an indica-

tion of the potential off-takers for the 20%

excess.

(c) Improvement of Genco Liquidity:

The illiquidity issues currently affecting the

Gencos are mainly based on inadequate re-

mittances by the Discos. The illiquidity could

potentially be improved by the new policy

directive, as Gencos may now contract with,

and collect tariffs directly from eligible cus-

tomers.

It is, however, important to note that the im-

provement of Gencos’ liquidity is hugely de-

pendent on what payment assurances the

Gencos are able to secure from the eligible

customers; as well as the ability of the Gencos

to collect revenues from the eligible custom-

ers. This is because the Gencos now bear col-

lection and payment risks. Gencos would,

therefore, need to put in place adequate

mechanisms to ensure optimal collection and

guarantee of revenues.

(d) Revenue of Successor Distribution Compa-

nies:

The categorization of eligible customers with

monthly consumption above 2MW may im-

pact on Discos’ revenues, given that collec-

tions from such customers may represent the

highest sources of revenues for the Discos.

The impact of creating this category of eligi-

ble customers is that large power consumers

such as industrial, residential, and commer-

cial clusters may connect directly to the

Transmission Licensee’s lines, and begin to

buy directly from Gencos. However, the Dis-

cos are still permitted to impose a wheeling

charge in the form of a Distribution Use of

System Charge on other categories of eligible

customers who would use the Discos’ net-

work.

We would like to note that the Discos had opposed

prior attempts by the Minister of Power to declare

the “eligible customer” status (http://

energymixreport.com/discos-not-exclusivity-

distribution-areas-fashola/). The Discos have stat-

ed that the high demand customers that may quali-

fy for eligible customer status are within their re-

spective franchise areas, and only the Discos may

deal with such customers on electricity transac-

tions. This position is arguable and has recently

been refuted by the Minister (https://

www.thisdaylive.com/index.php/2017/05/09/fg-

discos-dont-have-exclusivity-over-distribution-

areas/).

(e) Potential for Competition Transition Charges:

Following from (d) above (Revenue of Successor

Distribution Companies), it should be noted that it

is not all gloom for the Discos, as the EPSRA, in Sec-

tion 28, acknowledges that if as a result of the Min-

ister’s declaration of eligibility, decreasing electrici-

ty tariffs of the Discos results in inadequate reve-

nues to enable payment of its committed expendi-

tures or such Discos are unable to earn permitted

rates of return on their assets, the Minister may

issue further directives to NERC on the collection of

competition transition charges from consumers

and eligible customers. We await to see if this fur-

ther policy directive as prescribed by the EPSRA

would be initiated by the Minister for the benefit of

the Discos.

(f) Investment in Embedded Generation:

For some of the categories stated in (a), (c), and (d)

under Summary of Policy Directive above, the poli-

cy directive mandates that agreements should be

executed with the Discos to wheel the power gener-

ated to the eligible customers. This has similar indi-

cations with embedded generation. The policy di-

rective may, therefore, be the required catalyst

needed to incentivize Discos to promote embedded

generation and attract investment into the sector.

In view of this, the NESI can hopefully expect to see

the execution of more embedded power purchase

agreements between power developers and end-

users (who may be eligible customers) with the

resulting increase in installed capacity for the

country.

(g) Investment in Independent Electricity Distri-

bution Networks:

Another potential impact of the policy di-

rective on the NESI is with respect to Inde-

pendent Electricity Distribution Networks

(IEDN). The directive requires eligible cus-

tomers in categories (c) and (d) above, to en-

ter into a bilateral agreement for the con-

struction and operation of distribution lines

with the distribution licensee licensed to op-

erate in the location. This may imply that

where there is no distribution network in the

location, distribution networks may be devel-

oped to feed into the networks of the existing

Disco for supply of power to the end-users.

This aptly describes the Embedded IEDN as

defined under the NERC IEDN Regulations of

2012. The eligible customers connected to an

IEDN are required to pay a distribution use of

system charge to the IEDN Operator (Section

21(8) of the IEDN Regulations 2012). .

(h) Tariffs for Eligible Customers:

The policy directive also seeks to peg the

price of electrical power supply to eligible

customers by stipulating that the price cannot

exceed the average wholesale price of elec-

tricity charged by NBET. Thus, the prevailing

MYTO Tariffs would apply to these eligible

customers. This could be counterproductive

as the aim of the eligible customer regime is

to set the tone for liberalization of the sector

and thereby encourage willing-buyer, willing-

seller arrangements for which parties would

be free to negotiate and agree cost-reflective

tariffs outside of the MYTO

(i) Procurement of Electrical Power:

The NERC Procurement guidelines (2014) are

to the effect that buyers of electricity (in this

case both the Discos and NBET) can only pro-

cure power from a competitive process and

not from unsolicited bids, unless it is for a

good cause as approved by NERC. To the extent that the Minister’s declaration can be interpreted as expanding the scope of buyers of on-grid power, the status of the procurement guidelines would have to be reconsidered by the regulators.

CONCLUSION

The policy directive can be regarded as a good step in deepening the market and re-establishing confidence in the NESI. Gencos (on-grid, captive and off-grid) can now trade directly with end-users for the supply of power without necessarily contracting with the Discos except with respect to the use of Discos’ network (as may be applicable). This would improve the chances for the power generators to realize their capital and operational costs.

We hope to see how the policy directive would be prac-tically implemented by NERC in the coming weeks and months; which could be through regulation, orders, or further directives. Obviously, issues around (i) the po-tential impact of the directive on the Discos’ revenues; (ii) pricing of power to be supplied to eligible custom-ers by Gencos; (iii) contractual structures between Gencos, eligible customers, Discos and/or Transmis-sion Company of Nigeria; and (iv) pricing for use of the distribution and transmission networks; amongst oth-ers would need to be clarified and tested.

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