Professor Omowumi O. Iledare
Introduction:
Mitigating power outages requires a fundamental transforvmation of socio-technical systems. What such transformation entails are, nevertheless, disputed, with diverse theoretical perspectives emphasizing different forms of change. Particularly for the power (electricity) sector, the use of distributed energy sources and commercial-scale energy technologies is envisioned as an alternative to large, centralized power plants and associated infrastructure needed to transmit and distribute electrons to customers . This technological shift towards spatially scattered system has received much attention, most times under the power sector decentralization of which Nigerian government is trying to do by amending the Clause in the Constitution of the Federal Republic of Nigeria.
Interestingly, there has been no expressed dissent to the signing of the amendment to Clause 14(b) in the Concurrent Listing in the Constitution of the Federal Republic of Nigeria as Amended. The amendment permits the constituent States in the Federal Republic of Nigeria to generate, transmit and distribute electricity in all areas within their jurisdictions. The signing of the amendment, publicly characterized as power decentralization amendment to the Constitution of Nigeria, complements the signing into law of the Petroleum Industry Act 2021, which provides a restructuring framework for the petroleum industry in Nigeria. That the President, Muhammadu Buhari, acquiesced to the Constitution Amendment is meritoriously laudable. The power decentralization amendment fits perfectly well, the energy transition planning agenda for the Republic. However, it would have been tremendously admirable too, if the National Assembly of the Federal Republic had been courageous enough to pass the Federalism Amendment to replace the prebendalistic and unitary governance structure of the Republic.
Certainly, it is important to recognize this positive movement in the right direction and that is what this power sector amendment to the constitution represents. Originally, as stated in Clause 14 (b) of the Concurrent List, “a House of Assembly may make laws for the State with respect to the generation, transmission and distribution of electricity to areas not covered by a national grid system within the State.” The “not” has now been removed, which means, State Governments can create laws to set up parallel operations in competitions with existing operations tied to a national grid system.
Intriguingly, though, a legitimate question to ask is why did no State Government do anything to generate, transmit and distribute power to areas not covered by a national grid system before this amendment to Clause 14 (b)? It may therefore be plausible to insinuate that it is less likely than not to see any meaningful actions from State Governments taking advantage of this amendment in the short run. The fact that the entire jurisdiction of a State is now opened for power competition, however, may in the long run facilitate abundant opportunities to enable nationwide market efficiency and effectiveness in the power sector, which have been elusive in the Republic.
The aim of this op-ed is to facilitate good understanding of the electricity market structure and market failures. Understanding the key concepts relating to the industry and tools required to making supply and investment decisions is key to avoiding the ‘NEPA’ dilemma in the State. The industry is highly technical and structurally complex to the extent that jumping into it without proper planning as State can be tragic to the State economy. Thus, State must come to terms and recognize that state-dominated electric power operation and decision-making is old-fashioned, inefficient and ineffective. Thus, taking advantage of the power sector decentralization calls for strategic thinking, competent workforce and regulatory frameworks that are flexible, dynamic, and business-friendly. State Governments with financial resources, technical skills, and transformational management mindset must be cautious in taking advantage of this amendment to avoid falling into a “National Electric Power Authority (NEPA) quandary at the State level.
The Benefits of Power Sector Decentralization:
The key rationale for electricity decentralization is to increase energy supply security. Traditional centralized electricity grids are vulnerable to natural disasters, cyber-attacks, and other disruptions. In contrast, decentralized energy systems can be more resilient, as they are less reliant on a single source of energy or a centralized grid. Further, decentralized energy systems can provide backup power during grid outages, reducing the risk of widespread blackouts. Another benefit of electricity decentralization is the potential for increased energy efficiency. Decentralized energy systems can reduce the amount of energy lost during transmission and distribution, which can account for up to 10% of total energy generation. In addition, decentralized power sector has the potential to bring about significant economic, social, and environmental benefits.
Electricity decentralization can also contribute to local economic development. Small-scale renewable energy projects can create jobs in manufacturing, installation, and maintenance. Moreover, decentralized energy systems can promote local ownership and control of energy resources, enabling communities to benefit directly from energy production. Decentralized energy systems can facilitate the integration of renewable energy sources such as solar, wind, and hydropower, reducing the reliance on fossil fuels. Moreover, distributed energy resources can enable energy consumers to become prosumers, generating their own energy and selling excess energy back to the grid. This can promote energy self-sufficiency and reduce greenhouse gas emissions
A Brief Overview of the Electricity Market System:
Postulating that before pragmaticism in any decision-making process, there must be a good understanding of what ought to be to guide decision-making processes. Thus, what ought to be in the electric market system is competition, which enables any seller of a commodity, energy services in this instance, to not charge more than another seller in the market, making all sellers in the market price takers. Participation in such a market is voluntary with zero barrier to entry. The market is efficient and effective in resource allocation and productivity to ensure consumer and producer surpluses are optimal; and though the pure market system is desirable, it cannot be mandated. Unfortunately, this market structure is an ideal market and I do not see its existence coming to life rapidly in any of the State in the Republic just because of the power sector decentralization amendment.
In fact, empirical evidence suggests it is less likely than not without the entrenchment of Fiscal Federalism in the Constitution in addition to what Bhattacharyya called basic market conditions. These market conditions include but not limited to perfect and costless flow of information and knowledge, absence of externality, and unimpeded transferability of resources. These requirements are certainly a tall order for all the States in the Republic under the emerging transition era. The underlying assumptions of perfect competition are easily violated in most markets and more so in the energy market landscape. Additionally, certain technical configurations and/or other features in the energy value chain, such as market conduct, ownership structure, capital intensity, make the desirable competitive model almost impossible in the aftermath of the Clause 14 (b) amendment. Thus, and unfortunately too, a monopoly market structure may be more likely than not to emerge in the States. Unlike the competitive market structure with zero barrier to entry and exit, a monopoly market structure has absolute barrier to entry making government intervention inevitable and consequential.
Government Interventions and Consequences in the Energy Sector
The electric power sector is very complex with features that make government intervention critically consequential in respect of optimizing the mutuality of interests among stakeholders. Also complex is energy pricing, which depends solely on economic principles without dismissing the importance of political expediency along the process. But the latter cannot unilaterally dominate the pricing process and disregards the former. While the aim of this op-ed is not necessarily to go into discussing the pricing complexity but to make the State aware of the need to be adequately prepared before venturing into what amendment to Clause 14 (b) offers. There are several opportunities available to a State Government to properly manage and have jurisprudence over the electric power operations in its State.
Bhattacharyya reechoed the International Energy Agency’s categories of available intervention options for Governments to adopt. They include administration, management, and ownership; economic and fiscal instruments; trading instruments; regulation; and research and development. The outright ownership and operation rights of power plants, transmission and distribution infrastructures, and marketing in competition by State Governments is worrisome to me because of the NEPA experience. Moreover, empirical evidence from the 1990s, after the electric power reforms and restructuring in Chile, suggests outright public ownership and right of operations of power plants and infrastructure by State Governments will look seemingly insensible to the reality of the emerging energy era. It is imperative, however, to understand that the apparent inevitability of government to correctly intervene in the market for energy services may not necessarily lead to the eradication of market failures.
While there is certainly no doubt that the ability of the energy market to allocate resources efficiently is delimited under a monopoly structure with its extreme anti-competitive behavior. However, using the market failures as a justification for government intervention is not a guarantee for finding optimal solution to market inefficiency. Perhaps and mostly because of rent-seeking, information irregularity problems, prebendalism, lack of understanding of the complexity of the electricity market issues and problems accordingly.
Regulatory Framework and Governance of the Electric Power Sector
As mentioned earlier, the power industry is complex and the optimization of its value chain to guarantee maximum mutual benefits for stakeholders is dependent on pricing mechanism. The prevailing natural monopoly market structure with its anti-competitive features calls for regulatory institutions and professionals with requisite knowledge and skills for effective management of the sector. It has been stated as a matter of fact the illogicality of State Governments in Nigeria to adopt outright ownership in an attempt to solve monopoly market failures, judging from antecedence of the NEPA. An effective State regulatory institution would be more rational than State ownership with rights of operation learning from the experience of NEPA. Experience shows that with effective regulations, a natural monopoly can be directed and coordinated to produce market outcomes that is efficiently tracked to achieve competitive market outcomes through the use of the intimidating powers of an agency of government.
The purpose of regulation in such cases is to control the behavior of a market agent to ameliorate the consequences of market failures irrespective of the sources as listed earlier. The ultimate aim of the regulator is to influence the decisions of an economic agent participating in the market system to minimize social welfare losses thereby maximizing mutuality of benefits. I hasten to suggest that following the pathway of public ownership of power plants and operation rights by State Governments because of the decentralization amendments is foolhardy. Perhaps an incorporated joint venture approach to achieve energy supply security goals is unobjectionable, because of capital intensiveness of the energy sector. Perhaps a vertically integrated monopoly with an effective and independent regulatory institution may also be attractive to optimize energy supply security in the constituent States of the Federation.
According to Bhattacharyya (Texas A&M ), adaptable regulatory interventions with an IJV in the power sector can be categorized into three main groups—economic regulation, industry conduct regulation, and social regulation. The first group, economic regulations, represents an attempt by the government or its agent to impose price or/and output restrictions in a non-competitive market environment to enhance economic efficiency and/or equity. Several alternatives exist in this group, which include the traditional cost of service regulation, incentive regulation, contractual regulation and operational conduct regulation. The second group characterized as industry conduct regulation to protect against anticompetitive practices; and social regulation on the other hand, though more pervasive, deals with anti-society behavioral stance.
Summary with Closing Remarks
This op-ed evaluates the operationalization of power sector decentralization along three core functional dimensions—political, administrative, and economic. Increased energy security, energy efficiency, and local economic development are some of the potential benefits of this transition. However, the transition to a decentralized energy system also presents challenges, such as the need for new regulatory frameworks and investment in new infrastructure. Also, a monopoly market structure is more likely to emerge in the States.
The clamor for deregulation in the more advanced countries where the decline of the natural monopoly structure is evident in the energy sector is quite understandable. For now, the applications of contestable market idea advanced to justify deregulation in the power sector is not applicable because of apparent barrier to entry, which to a large extent is present in the Republic not to talk of the States in the Republic. In fact, the Distributing Companies (Discos) in the Republic have monopoly features created by regulation with absolute barrier to entry and subsequently capturing huge consumer surpluses. Thus, I do not see a rapid adoption of electric power deregulation, which is different from decentralization, in the States of the Federal Republic of Nigeria. This observation is premised on the funding complexity of power plants and infrastructure deficiency in the constituent States and in the Republic itself. The fear of regulatory failure is also imminent, and one can only hope for effective manpower development and preparedness before rushing to nick the potential benefits inherent in the decentralization amendment, unprepared. The role of NERC is critical in this regard as well.
Finally, the apparent inevitability of government to intervene in energy market, especially, in pricing mechanism, because of monopoly, externalities, surplus energy sector rent, and public good misconceptions can also lead to government failures with significant social welfare losses in the energy sector in Nigeria. By addressing these challenges, policymakers and energy stakeholders can unlock the potential benefits of electricity decentralization and promote a sustainable and equitable energy future. The emerging energy landscape seems to make public ownership and operational right electric power plants and infrastructure less attractive than privately owned or/and IJV power business structure in the presence of effective and efficient regulatory institutions.