It has recently been reported that the last condition precedent, which is the constitution of DRP has been fulfilled. However work is still ongoing on implementing a cost reflective tariff that would ensure that the Discos are capable of paying for their operational expenses, the bills of the value chain upstream as well as a decent rate of return. This has resulted in another tariff increase effective from Tuesday 22nd of December 2014 applicable only to commercial customers and not residential customers.
The Interim Rules came into effect on the Handover Date, with a first version published on the 3rd of December, 2013 and an amended version published on the 22nd of April, 2014. The Interim Rules apply to energy produced and delivered, associated services and cover all electricity taken from the transmission system by the distribution companies during the Interim Period.
The main objectives of Interim Rules are to establish a framework to govern trading arrangements during the Interim Period when the PPA’s between the privatised successor generation companies and Nigerian Bulk Electricity Trading Plc (NBET) and Vesting Contracts between NBET and the privatised PHCN successor distribution companies will not be effective; manage the revenue shortfall in the industry by determining the revenue allowable to participants and service providers; establish the payment arrangements and flow of funds from Discos through the Market Operator to all beneficiaries; and establish the sources of funds required to ameliorate the probable shortfall in revenues collected by the Discos during the Interim Period.
During the Interim Period, the Successor Companies and other electricity generators will continue the existing Pre-Transition Electricity Market trading arrangements whereby PHCN Successor Discos shall receive invoices from and will make payments to the Market Operator for power received from the successor generation companies and other Independent Power Producers. The Discos will also be required to make payments to the Market Operator for the regulatory charges as well as service providers’ charges (Market Operator, System Operator, Transmission Service Provider and NBET).
Owing to the current cash shortfall in the electricity sector, which has resulted from an insufficient tariff, the cash collected during the Interim Period from end users is much lower than expected and inadequate to cover all the Discos costs. Inevitably, the current revenues of the Discos are lower than earlier projected, which prevents them from paying in full their bills to the Market Operator; and the Market Operator consequently cannot pay in full the bills to the Gencos, who will also be unable to pay Gas Suppliers in full. Therefore, the Market Operator has to apportion the allowable revenue to Market Participants and Service Providers during the interim period. This has culminated in a substantial amount of debt over 196 Billion Naira owed to the Gencos, Gas Suppliers and includes the shortfall in revenues to the Discos. The accumulated debt in the sector is one of the primary objectives for the intervention by the Central Bank of Nigeria (CBN) in the form of the CBN Nigerian Electricity Market Stabilization Facility (CBN-NEMSF) to pay off the existing debts up to December 2014 to ensure that TEM commences in a financially healthy and stable market.
Another major challenge with the framework under the Interim Rules is that the Market Participants operate more on a best endeavours basis without any regard for the existing contracts. Currently, the Market Participants are not being sanctioned for being unable to meet their contractual obligations which will not be the case at TEM.
- Contractual Arrangements: All electricity trading arrangements will be consummated through contracts and there shall be no centrally administered balancing mechanism for the Market. During TEM, Power Purchase Agreements, Vesting Contracts and Gas Supply Agreements which were executed during the privatization process which govern and support the purchase and sale of the electric power will become effective. Key to these Agreements being effective is the provision of Letters of Credit by the Discos to NBET which will in turn backstop the guarantees to be issued by NBET to the Gencos. The Gencos are also expected to provide guarantees for gas to Gas Suppliers.
- Market Structure: it is expected that the Market Operator shall develop a Market Procedure for the management of inadequate supply and shortage conditions during the Transitional Stage. The System Operator on the other hand will allocate generation shortages proportionally among loads 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.
- Market Surveillance Panel: Under TEM, the initial Market Surveillance Panel will be constituted. The Panel shall amongst other things be responsible for monitoring the behavior of Market Participants and report acts of abuse or possible abuse of market power to the NERC.
- Dispute Resolutions Panel: Under TEM, a Dispute Resolutions Panel will be constituted to mediate on conflict of interests among Market Participants in the NESI.
- Novation of existing IPP PPAs: It is expected that by TEM the Legacy PPAs entered into by IPPs such as Shell and Okpai would have been novated to NBET who would take the place of PHCN as the off taker for the power generated.
- Effective and Operational NERC Codes and Rules: it is expected at TEM that NERC’s Codes and Rules would not only be effective but be operational amongst Market Participants and Service Providers. The Codes and Rules include: the Grid Code, Metering Code, Distribution Code, Health and Safety Code and Market Rules.
- Multiple Buyer Model: Subsequently after TEM is in place, it is envisaged that the Multiple Buyer Model proposed in the Roadmap to the Power Sector Reforms will take effect. This model provides for, not only NBET procuring power from the Successor Generation Companies and the Independent Power Producers, but to the extent that they are able to, the distribution companies and eligible customers will be allowed to procure power bilaterally alongside the Bulk Trader.
A fundamental expectation of TEM for all stakeholders is that this phase will ensure strict accountability of the Market Participants. Under TEM, the Industry Agreements will become effective and Market Participants are obliged to commence full trading based on these agreements and will be sanctioned for failing to meet their contractual obligations to other stakeholders. For instance, Gas Suppliers will be penalized / sanctioned in the event of a failure to deliver on their gas supply commitments to the power producers, in line with the Gas Supply Agreement they have signed. Failure of the Gencos to meet their supply commitment obligations will also be met with consequences as provided for in their PPAs with NBET including non-payment for energy not supplied NBET. NBET would not be paid for power not supplied to the Discos, who will ultimately lose revenue for failing to supply improved electricity to the end users.
It is also expected by the Investors that there would be a fully cost reflective tariff in place that would ensure investor full cost recovery and confidence for financing and investment in the sector.
The above expectations are desirable, however, in light of the current realities, particularly the need for a cost reflective tariff and gas challenges; there is a need for a firm achievable strategy or plan to address these challenges highlighted. Without cost reflective tariffs and sufficient supply of gas, the value chain will be stunted, and power delivery to the electricity consumers will be negatively impacted.