By Gideon Osaka
On Tuesday, October 22, 2024, marked a historic turning point for Nigeria’s electricity supply industry as the first-ever state electricity regulatory commission officially assumed regulatory oversight of a sub-national electricity market in the country.
Valuechain reports that the historic event followed the expiration of the transition period for the transfer of regulatory oversight from the Nigeria Electricity Regulatory Commission (NERC), the nationally recognized regulator, to a state agency. The transfer was from NERC to Enugu State Electricity Regulatory Commission (EERC) in Enugu State, the first in the country to be handed the regulatory power over its electricity market by NERC (April) and the first to commence the development of a sub-national electricity market in both Nigeria and Africa. In other words, the development positions Enugu as a trailblazer in developing sub-national electricity markets across Africa.
Before the full take off by the EERC on October 22, NERC had also in August granted autonomy to six other states who are now in queue to take off after Enugu officially. The states are Ekiti, Ondo, Imo, Oyo, Edo, and Kogi. After confirming that these states have established their electricity regulatory agencies, they will now regulate the electricity markets within their borders. The transfer of powers from NERC signifies the dawn of a locally managed and tailored approach to electricity regulation, as mandated by the Electricity Act 2023.
With the official take-off of the EERC, the commission immediately issued a license to Mainpower Electricity Distribution Limited, an EEDC subsidiary set up to take over the operations of EEDC in Enugu State from Wednesday midnight (October 23). Fedikore Limited, the first Independent Power Project (IPP), was also issued a license to build a power plant with a nameplate capacity of 10 megawatts. What the recent development means for Enugu is that the EERC will now oversee electricity generation, transmission, distribution, and retail, ensuring that Enugu’s unique needs are at the forefront of regulatory policies. It is the same situation for other states that will assume full regulatory oversight in the coming months.
This shift from federal to state control of the power sector is widely considered a positive development because one of the significant issues plaguing the sector has been the fact that centralized control has not effectively addressed regional power challenges. With more states taking over fully in the months to come, Nigeria’s longstanding power challenges, which have persisted for years without a clear solution, might now be addressed. With autonomy, states can now provide tailored solutions to meet their specific electricity needs. States could explore other ways of improving electricity by investing in alternative energy sources mostly off-grid like solar or wind to increase supply.
When it all started
On March 17, 2023, then-President Muhammadu Buhari assented to a Bill which allowed States to enact laws across the electricity value chain in their States. Subsequently, on June 9, 2023, President Bola Ahmed Tinubu assented to the Electricity Act, 2023, which effectively repealed the Electric Power Sector Reform Act of 2005.
Section 230(2) of the Act prescribes the procedure for the establishment of a State electricity market and the regulation of electricity operations. It provides that a State may, at any time, enact a law, by whatever appellation, to provide for the establishment of a State electricity market.
In addition, the State is also required to establish its State electricity regulatory authority and appoint a governing body and staff for the said entity. Upon completing the foregoing, the State may deliver a formal notification and request the NERC to transfer regulatory authority over electricity operations in the State to the State Regulator.
Within forty-five (45) days of receiving formal notification of the enactment of the law, NERC is mandated to develop and provide the State Regulator with a draft order outlining a plan and timeline for the transfer of regulatory responsibilities from the Commission to the State Regulator. This transfer is required to be completed within six (6) months from the date the formal notification was delivered to NERC.
The Electricity Act makes it clear that once the transfer of regulatory oversight to the State Regulator is completed, NERC will no longer have any regulatory responsibilities for electricity market activities carried out solely within the State. These regulatory responsibilities will now rest with the State Regulator and the additional successor company, including the assets, liabilities, employees, rights, and obligations associated with the transferred operations.
According to the Act, however, NERC will maintain control as the central regulator with oversight on the inter-state/international generation, transmission, supply, trading, and system operations.
Implications for electricity customers, state economy
While state regulation of electricity offers promising opportunities, it also introduces some potential risks. Those who have argued against state regulatory oversight of the electricity market, based such arguments on the fact that state governments lack the expertise, resources, and infrastructure necessary for effective regulatory oversight. Others hinged their argument on the fact most states are too poor and it is wrong to immediately create a market where a vast majority of the population are poor and can’t pay any unreasonable tariff that would attract investors.
With state autonomy over the electricity market, residents naturally will wonder whether this will lead to lower electricity tariffs compared to what is currently obtained. Currently, Nigerians pay as much as N209 per kwh for Band A, a significant increase from the previous rate of N68. The federal government currently subsidises electricity costs for customers in service bands other than Band A to keep the prices relatively low. Valuechain reports that not too many states may be able to afford these whooping billions of naira subsidies monthly, hence, citizens under Bands B-E may witness upward tariff adjustments to reflect the true cost of a kilowatt of energy.
Under the new regimes, state regulators have the exclusive responsibility of determining and adopting an end-user tariff methodology. The final end-user tariffs approved by the state regulator will be the exclusive tariffs that apply and all tariff policy support (or electricity subsidy) for end-use customers in the state will be the responsibility of the state government. Now that states have the authority to set electricity tariffs, several factors will determine future rates: If states invest in upgrading or reviving their grid infrastructure, residents may face higher electricity tariffs. States prioritizing efficiency could reduce electricity costs. For instance, if Enugu State reduces transmission losses, it could lower tariffs for consumers. Again, if Ondo introduces higher tariffs than neighbouring Ekiti, it could create confusion for businesses operating in multiple states.
Speaking at the PwC’s Annual Power & Utilities Roundtable (14th edition) on the need to have diverse pricing models even within a state and the potential fairness concerns it may present, the Ondo State Commissioner for Energy and Mineral
Resources, Engr. Razaq Obe said the state will not directly invest in projects but create a friendly environment to attract and protect investor interests.
According to him, “Achieving this will depend on creating public awareness and facilitating behavioural change by reframing electricity as a service from the people (“Ina Aye”) and not a benefit from the government (“Ina Ijoba”) to foster a sense of responsibility.
Another significant concern to state regulation of the electricity sector is the possibility of inconsistencies in policies. For instance, the Minister of Power Adebayo Adelabu was reported to have said that the federal government had suspended the issuance of regulatory autonomy to states emphasizing that the initial approval was poorly timed and unnecessary. According to the minister, an adequate understanding of the transfer of regulatory oversight of the electricity market to states is imperative for the survival and sustainability of the nation’s power sector.
While speaking at the 8th edition of the Africa Energy Market Place (AEMP) in Abuja on May 17, the minister was quoted thus; “With everything centralised for a single regulator, we have a myriad of issues.
“Now we tend to create a regulatory framework across 36 states, it is something that we must do in a highly systematic and strategic manner. We need just a couple of states as a pilot, which is why I halted granting of further regulatory autonomy to states,”
Additionally, without adequate funding, states may struggle to maintain or upgrade their electricity infrastructure, leading to blackouts. Beyond tariff problems, technical challenges could remain a critical obstacle to a stable and effective electricity market in states. The national grid is already outdated, prone to collapse, and lacks the resilience needed to cope with increasing demand. The transmission component of the value chain is still being operated by the federal government, therefore, frequent grid collapses, as experienced several times in October, underscore the fragility of Nigeria’s electricity system.
Lastly, some States do not fully understand the extent of the obligations they are taking on when they establish or seek to establish a State electricity market before they embark on such a venture because establishing an electricity market is beyond building electric power plants and/or providing Irrevocable Standing Payment Orders which certain States have done in the past in support of power plant developers to encourage the development of such independent power plants. It is a more elaborate process which will comprise both wholesale and retail markets.
The bumpy road ahead
It is important to note that the pathway to stable, affordable power is a long one, and these states will need to carefully manage the transition to ensure that it benefits everyone. There are a lot of challenges that may arise at the current implementation stage.
As observed by EERC, the transition “will come with challenges, from addressing service disruptions and high electricity costs to combating energy theft and vandalism.”
It is important that state governments exercise caution and carefully assess their preparedness for implementation, says PwC during its Annual Power & Utilities Roundtable (14th edition), held on Thursday, 30, November 2023, under the theme “The Electricity Act 2023: Powering Nigeria”.
For states still considering whether to adopt the Act, PWC warns that adopting the Act will incur significant costs, from engaging legal and commercial advisors to investing in technology, and human resources, and establishing state-level structures. To minimize these costs and maximize potential benefits, states should conduct a comprehensive evaluation of their electricity market and network infrastructure, accompanied by detailed technical and commercial feasibility studies.
Giving his reasons why further regulatory autonomy to states will be halted to allow a comprehensive understanding of the electricity market, Minister of Power, Adebayo Adelabu, added “The fact that we gave a state regulatory autonomy doesn’t mean that it’s just about distribution of electricity but it is regulation across the value chain. Generation within your territory, transmission within your territory, and distribution in your territory, including tariff setting,”
For example, he said Lagos State has almost over 40 per cent of national consumption in terms of electricity distribution.
“The moment you take over the regulatory activities of Lagos State, when we talk about tariff, about subsidy, it will be on your neck as a state. I do not know the balance sheet you want to leverage to guarantee the necessary settlements on a monthly basis.
“So we all have to sit down and let everybody have a complete understanding of what this means. And we will know if we are ready to have full autonomy or it will be a partial autonomy for the meantime before we achieve a mature electricity market,” he said.
He noted that most stakeholders underestimate the capacity required to have regulatory authorities in 36 states, including the FCT.
“Each state that takes up regulatory oversight must have a framework and structure to prevent energy theft, vandalism and enough capital for continuous investments and maintenance of infrastructures,” he said.
Furthermore, the State would need to establish regulatory bodies and other pertinent institutions, including an Independent System Operator (ISO) and potentially relevant commercial entities as per the proposed market structure. The State ought to also create support structures to complement these institutions, which could involve emergency response systems, technological infrastructure, and other necessary components.
For the state regulators to effectively regulate and drive the electricity sector forward, a multi-faceted approach will be necessary. The state government must invest in infrastructure modernization, support metering systems, and local capacity-building in the power sector. In parallel, state regulators need to foster greater collaboration between DisCos, GenCos, and consumers, ensuring that tariff adjustments are transparent and justified by improved service delivery.
The future of the electricity market depends on how quickly the states can overcome these persistent challenges. For now, state regulators will be caught in a delicate dance—attempting to balance the demands of consumers and operators while grappling with systemic technical and infrastructure deficits. Only time will tell if the state regulators can deliver on their mandate.