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NARUC/NIGERIA ELECTRICITY REGULATORY PARTNERSHIP
"BLINDED BY THE LIGHT" BY
NOEL A. OBIORA
A PRESENTATION ON THE IMPLEMENTATION OF A TRANSITIONAL
ELECTRICITY MARKET BETWEEN PRIVATIZATION AND A COMPETITIVE
MARKET1
DISCLAIMER
The opinions expressed in this presentation are those of the author, not necessarily the opinions of the California
Public Utilities Commission
A NOTE ON THE TITLE
The title of this presentation was borrowed from an article by Mary Bushnell on restructuring; as used in this
presentation, it is intended to reflect the notion that, that those who see an unfettered free market competition as
the panacea for all that ails regulated electricity monopoly companies are blinded by the light, because restructuring
holds on to and embraces effective regulation 2
PRESENTATION OUTLINE1. Basic architecture of all models for restructured
electricity markets
2. Basic architecture of Nigeria's restructuring model
3. Applying traditional restructuring architecture in the African Context
4. Examining the gap between the current state of privatization and the objective end state of competition in Nigeria
5. What should a transitional electricity market consist of?
6. Conclusion3
THE BASIC ARCHITECTURE OF ALL MODELS FOR
RESTRUCTURED ELECTRICITY MARKETS
• Vertical Separation of Generation, Distribution, Transmission Segments –
• Horizontal Integration of Transmission and Network Operations Covering the Geographic Area of the Intended Wholesale Market
• Creation of Wholesale Spot Energy and Operating Reserve Markets to Serve the Network
• Creation of Relevant Institutions to Facilitate and Oversee Access To Network, Market Operations, Forward Supply Commitments …
• Unbundling Retail Tariffs to Reflect the Separated Segments
Vertical Separation• Most Critical Element of Restructuring • Generation – Privatized and made competitive; – Focus on development of forward market
• Transmission – Government or privately owned, but regulated – Focus on building networks to facilitate market
• Distribution– Privately owned but regulated– Focus on expanding network access to facilitate free
flow
HORIZONTAL INTEGRATION; WHOLESALE SPOT MARKET; INSTITUTIONS; UNBUNDLING
TARIFFS
• Single Independent System Operator – Dispatch functions vs. Market Operations– Transmission planning and costing,
Congestion Management, Responsibility for reliability
• Determining the Model for Pricing– Load Aggregated Pricing; Ex-post Pricing;
Ex-ante Pricing• Market Monitoring, Rules; Market Power
Mitigation– Establishing Market Rules and Market
Power Mitigation and Other Opportunistic Behavior
• Effective, Alert, Fully Staffed Institutions
RE-TOOLING THE BASIC ARCHITECTURE OF THE RESTRUCTURING MODEL
“Any market you start with is going to be the wrong
market. That has been the case everywhere there was
a market”
Frank WolakHolbrook Working Professor of
Commodity Price Studies, Department of Economics
Stanford University
“If you are not cheating you are not trying to win”
Marty McSorleyProfessional Hockey Player
BASIC ARCHITECTURE OF NIGERIA’S RESTRUCTURING
MODEL• MARKET RULES 6.3
– 6.3.1 All electricity trading arrangements during the Transitional Stage will be consummated through contracts, and there will be no centrally administered balancing mechanism for the Transitional State Market
– 6.3.2 The Market Operator shall develop a Market Procedure for management of inadequate supply and shortage conditions during the Transitional Stage. This Market Procedure will allocate generation shortages proportionally among Load Participants and will be tested and improved during the Transitional Stages, and shall become part of the Grid Code at the start of the Medium Term Market• (a) This allocation of generation shortages shall take account
of Load Participations’ contractual rights
APPLYING TRADITIONAL RESTRUCTURING ARCHITECTURE IN
AFRICA
1. TECHNOLOGICAL CHALLENGE
2. INSTITUTIONAL CHALLENGES
3. BARRIERS TO ENTRY
4. RURAL FLIGHT AND URBAN CONGESTION
9
TECHNOLOGICAL CHALLENGE - THE AFRICAN CONTEXT
The very attributes of electricity, such as that it can’t be stored, must be delivered in as close
to real time as possible, which involves managing known generation to address
uncertainties coupled with known demand, technical demands of addressing imbalances
and loop characteristics of Network systems that require clearing purchases at several nodal points make the transition to a wholesale
competitive industry a very technical challenge in the developed world. In Africa this challenge
is even more daunting. 10
INSTITUTIONAL CHALLENGESThe development of competitive wholesale markets requires the establishment of several new functioning institutions that did not
exist with regulated monopolies, in place of entrenched bureaucratic interests that may not relinquish their roles too easily or may do so
by influencing the design to carve out and retain some aspects of the new institution’s roles in a different guise. Forming one of these
institutions is difficult enough but creating three or four while the regulator itself is a nascent development is very challenging.
Much of the problems of transitioning from traditional monopolies
to restructured markets in America have come from political pressures that forced deviations from otherwise known architecture to result in flawed processes designed more by lobbyists and labour unions than by regulators and economists. One study suggested that
in every state where wholesale markets were adopted, Enron was heavily involved in lobbying State politicians to influence the design 11
BARRIERS TO ENTRY
BARRIERS TO ENTRY ENSURE THAT ENTITIES AND INDIVIDUALS CAPABLE OF ACQUIRING THE
PRIVATIZED UTILITIES ARE THEMSELVES RICH POWERFUL “INSTITUTIONS” THAT CAN EXERT
POLITICAL AND ECONOMIC PRESSURES OF THEIR OWN; WITH A LARGE VULNERABLE CLASS OF
RATEPAYERS AND LOW PER CAPITA INCOMES ACROSS THE COUNTRIES, THE ABILITY OF THESE INSTITUTIONS
TO INFLUENCE THE NEW MARKET GOES BEYOND “MARKET POWER MANIPULATIONS” AND REQUIRE A STRONG AND DEDICATED REGULATOR TO PROTECT
RATEPAYERS
RURAL FLIGHT AND URBAN CONGESTION
THE DISTRIBUTION OF POPULATION IN AFRICA MOSTLY ALONG ECONOMIC NEEDS WITH SPARSE RURAL
POPULATIONS AND LARGE URBAN POPULATIONS MEANS THAT EXISTING ELECTRICITY INFRASTRUCTURE WOULD HAVE BEEN DESIGNED FROM A PERSPECTIVE
FAR FROM THE COMPETITIVE RESTRUCTURED MARKET CURRENTLY BEING INTRODUCED AND DELIBERATE
CONSIDERATION MUST BE MADE TO UNDERSTAND THE IMPLICATIONS, NOT JUST FROM A LEGACY
TRANSMISSION INFRASTRUCTURE PERSPECTIVE, BUT IN CONSIDERING WHO PAYS FOR THE DEVELOPMENT OF
NEW INFRASTRUCTURE AND HOW
THE GAP BETWEEN CURRENT STATE OF PRIVATIZATION AND
COMPETITION
1. UNIQUE NATURE OF NIGERIA’S TRANSITION2. THE GOAL OF RESTRUCTURING 3. RESOURCE ADEQUACY 4. INSTITUTIONAL CHALLENGES5. BUILDING INVESTOR CONFIDENCE6. RESOLUTIONS: THINKING OUTSIDE THE BOX
THE GOAL OF RESTRUCTURING
• BRING BENEFITS OF COMPETITIVE WHOLESALE MARKETS TO CONSUMERS: – LOWER TRANSMISSION AND GENERATION COSTS
• More efficient transmission network platforms because the must be kept at optimum performance level to deliver an effective market conditions
• Breaking up component segments of the electricity markets make market signals for the investment in each segment clearer and distinguishable– By contrast regulated monopolies are forever
robbing Peter to pay Paul
• SHIFT CERTAIN RISKS APPROPRIATELY TO PRODUCERS• ATTRACT INVESTMENT IN NEW INFRASTRUCTURE• ELIMINATE INEFFICIENCY
GAP ANALYSIS OF TRANSMISSION AND DISTRIBUTION COSTS
• LEGACY TRANSMISSION ISSUES– COST OF DEVELOPING EFFICIENT NETWORK
• INVESTMENT DECISION DRIVEN BY POLITICAL PRESSURES RATHER THAN MARKET SIGNALS– WHAT IS THE TRUE MARGINAL COST OF DISTIRBUTION
PLANTS THAT SHOULD BE PASSED ON TO RATEPAYERS
• LACK OF EMPERICAL DATA– EXPONENTIALLY INCREASES THE PROBLEM OF
ASSYMETRIC INFORMATION• EMPERICAL DATA
RESOURCE ADEQUACYResource adequacy measures the amount of capacity necessary to maintain reliability on the system in real time within a particular time frame, measured as a percentage of Peak Load.
Consists of: 1) Operating Reserves; and 2) Planning Reserves.
• Operating Reserves = Sufficient capacity to meet peak demand (+) reserves for unplanned outages [(Dependable Capacity – Reasonably Expected Resource
Outages)/Peak Load] – 1} x 100%.• Planning Reserves = Operating Reserves over the long-term +
Reasonably Expected Outages, which then includes planning for additional uncertainties such as hot weather PRM = [ (Dependable Capacity/Peak Load) – 1] x 100%
RESERVE MARGINThe delta between the amount of resources necessary
to achieve resource adequacy and the amount of resource necessary to meet Peak Load is the reserve
margin
Factors Modeled In Determining Reserve Margin Include:
1. Historical Plant Outage Rates;2. Size of Plants; 3. Thermal De-rates;4. Weather Conditions; 5. Transmission Contingencies
Plant as used here refers also to transmission lines
INSTITUTIONAL CHALLENGESNIGERIA
• Regulated vs. Competitive Segments– Are institutions sufficiently staffed and equipped to address the needs
of these different segments– Jurisdictional Considerations in the American Context – Economic Strength Considerations in Nigeria – [The Enron Problem]
• Divestiture vs. Operational Boundaries– Incentives for New Generation Resources– “Chinese Wall” – Hybrid Markets and Utility Ownership of Transmission
• Regulatory Commission vs. Bulk Trader– Administration of Contracts of Regulated Entities– Planning and Approval of Needed Generation– Allocation of costs and scarcity
INESTOR CONFIDENCE
“Ambiguities in retail procurement responsibilities, competitive retail market imperfections and regulatory opportunism and uncertainty affects contracting incentives and behavior and leads to too much short-term forward contracting and too little long term contracting. This undermines the development of liquid forward markets for energy and operating reserves which in turn reduces the ability of investors in new generating capacity to hedge market risks and increases their financing costs above what they would be if consumer and supplier risk preferences could be better matched.”
Paul JoskowProfessor, Massachusetts Institute of Technology
RESOLUTION: THINKING OUTSIDE THE BOX
• IN TANZANIA THE MARKET PRICE OF GAS IS BASED ON THE NEW YORK MERCANTILE EXCHANGE BOARD (NYMEX) INDEX
• RURAL FLIGHT AND URBAN CONGESTION: WOULD RELOCATION OF GOVERNMENTAL FACILITIES FROM CONGESTED CAPITALS TO RURAL AREAS HELP ADDRESS THE INFRASTRUCTURE GAP BETWEEN RURAL AND URBAN AREAS
• RURAL FLIGHT AND URBAN CONGESTION: INSISTING THAT UTILITY CUSTOMER SERVICE CENTERS MUST BE LOCATED WITHIN PARTICULAR DISTANCES OF SERVED POPULATION
• COORDINATING WITH OTHER AGENCIES AND POLICY MAKERS IN OTHER AREAS WHOSE DECISIONS MIGHT AFFECT THE POPULATION IN WAYS THAT INCREASE THE VALUE STREAM OF NASCENT ELECTRICITY UTILITIES, THEREBY SUBSIDIZING THE COST TO THE VULNERABLE POPULATION
• REDEFINING RESOURCE ADEQUACY AND ESTABLISHING STEPS FOR ATTAINING A TRADITIONAL RESERVE MARGIN AS A PERCENTAGE OF PEAK LOAD AS TIME GOES ON
WHAT SHOULD A TRANSITIONAL ELECTRICITY MARKET LOOK LIKE
• READINESS AND COORDINATION OF GOVERNANCE INSTITUTIONS
• TRANSPERENT SCHEDULES • REGULAR STAKEHOLDER CONSULTATION AND
UPDATES• DATA ADEQUACY• NETWORK AND INFRASTRUCTURE TEST RUNS OF
THE MARKET DESIGN• MEDIUM TO LONG-TERM PLAN SCHEDULES FOR
ENSURING THE EXISTENCE AND VIABILITY OF A LONG-TERM FORWARD MARKET
22
CONCLUSION
“Electricity restructuring and competition programs have inevitably been a process that invites a lot of learning by doing and
ongoing challenges to market rules, regulatory arrangements and governance
institutions”
Paul JoskowMIT