Eligibile Customer Declaration in NESI -Part 1 SWOT Analysis

By Idowu Oyebanjo

The declaration of eligible customers prior to the prevalence of conditions precedent as stated in the contract between FG and DisCos became inevitable because the DisCos have not been transparent with remittances of monies collected from consumers thereby worsening the illiquidity crisis in the electricity market within the Nigerian Electricity Supply Industry (NESI). In addition, DisCos have failed to invest in customer metering and the reduction of aggregate technical, commercial and collection losses as required by their distribution licencees. Federal Government (FG) has therefore invoked the eligibility customer clause according to section 27 of the Electric Power Sector Reform Act (EPSRA) 2005 under Ministerial directives. One can easily understand the FG trying to preserve the health of the sector. However, the initial reaction of the DisCos may be to cry foul. This may not be necessary as some of the transactions will still go through DisCos and TCN. It is therefore in order to evaluate the Strengths, Weaknesses, Opportunities and Threats in FG’s decision to allow GenCos to sell electricity “directly” to four categories of customers with average monthly consumption of 2MW and connected to the medium and high voltage segments of the electricity network. This in my opinion should be described as customers with minimum Authorised Supply Capacity (ASC) of 2MVA. This is equivalent to a consumption of 100 Amperes (unit of current) at 11kV.

Strengths

By declaring the eligible customers, Nigeria’s privatisation addresses the myth around subjecting a “natural monopoly” to economic regulation rather than competition in a privatised electricity supply industry by deepening competition in the electricity market of natural monopolies. Such competition or liberalisation will force the existing 11 DisCos to improve their operational efficiency and customer service. This will become a reference wherever matters of electricity regulation are being discussed in the world of power systems.

The advent of Distributed Generation and bringing of generation close to consumers will help to improve the liquidity of the electricity market and achieve the desired reduction in network losses more quickly if the scheme is properly implemented.

Overall, the declaration of eligible customers and full liberalisation offer many benefits to NESI, address some of the causes of the liquidity issues bedeviling the industry, re-establish confidence in NESI, send the right signals to potential investors, will create jobs in an improved manufacturing sector and therefore the economy, introduce competition in demand side as well as in distribution of electricity, improve operational efficiency, reduce network losses, encourage customer friendly operations, introduce innovation, end the era of unnecessary bailout funds and hopefully reduce cost of wholesale electricity in the long term.

Weaknesses

The main reasons for the inability of the DisCos to perform have not been tackled. They are technically and financially bankrupt. As it stands, government will need to fund metering of consumers and network infrastructural development by DisCos or wait for them to return the Asset to BPE for fresh investors with technical cum financial capability to take over the operation of the assets. Also, the government-owned TCN network is the Achilles heel of the electricity value chain. In the last three years of privatisation, investment in transmission and distribution infrastructure has not been made to facilitate the uptake of stranded generation capacity. In its current state, the transmission network is capable of wheeling a maximum of between 4,600 – 5,500 MW of electricity. Thus, this policy directive by government has the potential for the privatisation or concessioning of the transmission network to qualified investors. There are also the lingering issues of cost–reflective tariffs and base-line network losses which I must say are difficult to resolve.

Gas-to-Power initiatives in Nigeria need increased attention and dedication to ensure adequate investment in gas infrastructure is in place to deliver gas to thermal power plants dotted around the country without which there can be no increase in the quantum of electricity to be supplied to eligible customers. In addition, the incessant cases of vandalization of gas pipelines for economic sabotage has to be addressed by going to the root of the matter, meeting the yearnings and aspirations of agitators and stakeholders, accelerating the passage of the bill to out-law gas flaring and consideration of other alternatives such as mini-LNG, LPG, CNG for gas-to-power schemes.

Eligible customers are located in widely separated geographical areas, and more importantly, at considerable distance from existing GenCos. Thus, except independent power plants are sited near aggregated clusters of consumers, the scheme will be difficult to implement. It must be emphasised heretofore that implementation will have to commence gradually and in clusters in various parts of the nation for the positive impact to be felt. This aligns with our earlier proposition that regional network development along with distributed generation schemes provide the fastest means of ensuring incremental, stable and uninterrupted power supply in Nigeria.

 

…to be continued

Idowu Oyebanjo MNSE CEng MIET

NIGERIA RUSHES TO DECLARE ELECTRICITY MARKET

POWER SECTOR REFORM – NIGERIA IN A RUSH TO DECLARE AN ELECTRICITY MARKET

Those who are in charge of the Nigerian Power Sector reform are determined to progress towards the next crucial stage of declaring the electricity market that characterises a privatised electricity supply industry. I think this should not be the case as the Power System is not ready for it now. In a sense, Nigeria is in an advantageous position when it comes to Privatisation of the Electricity Supply Industry because it can learn from the mistakes and gains from advanced economies that pioneered the restructuring of electricity supply industries for over twenty years now. But will She? It appears not!

So what is an electricity Market?

Simply put, it is an arrangement to effect the sales, purchases and short-term trades of electricity. In this market, electricity, like every commodity, can be bought, sold and traded. Wholesale transactions in an electricity market are typically cleared and settled by a designated market operator or by an independent special-purpose entity charged exclusively with that function. The commodities within an electricity market generally consists of two types – namely, Power and Energy. Power in this case is the metered rate of transfer of electrical energy measured in Megawatts (MW) and Energy is the quantum of electricity that flows through a metered point for a given period and it is measured in Megawatts-hour (MWh). Contrary to common perception, a buyer of electricity is not purchasing Megawatt-hours of energy produced by a specific generation unit but the right to withdraw that quantity of MWhs from a specific location in the network and a seller is paid for injecting a certain quantity of MWhs into the grid at a specified location in the network. Thus, an electricity market is open to anyone including Generators, Power Marketers who buy and re-sell electricity, Independent Power Producers, providers of ancillary services such as Short-Term Operating Reserves (STOR), if they have secured appropriate licences to participate in the market.

What makes an electricity market different from other markets?

The electricity market shares several features with the Financial and Securities market. Participants buy and sell rights to inject and withdraw electricity from the Transmission Network, much as investors in securities buy and sell ownership shares of firms. The difference is in the physics of producing electricity. Virtually all electricity produced must be delivered to final consumers through the Transmission Network, and so the action(s) of other market participants directly impact the ability of a market participant to sell or consume electricity. One problem that comes to mind straight away is the status and reliability of the Transmission Network. Interestingly, although all market participants share a common interest in the reliable operation of the Transmission Network, they may often find it unilaterally beneficial to engage in anti-trust and anti-competition behaviours that degrade the overall reliability of the Transmission Network just to get financial advantage and create wealth for themselves. This will be particularly more destructive in an environment where corruption holds way. A popular trend is one supplier withholding capacity from the day-ahead market in order to increase the price it receives for the energy it sells. This can create a reliability problem for all other suppliers because the system operator will be unable to dispatch the necessary generation units to the levels needed to meet with real time demand without increasing the risk of system collapse.

Whereas antitrust and anti-competition laws are enough for securities and stock market, the required monitoring process for an electricity market is more involving. This is all the more so because, electricity market failures are more likely and substantially more harmful to consumers than other market failures because of how electricity is produced and delivered and the crucial role it plays in a modern economy. Hence, a prospective market monitoring process backed by the prevailing regulatory authority must be put in place at the start of the market.

One similarity between electricity market and the securities market is that the smooth running of the market requires both parties to each transaction to comply with all contractual obligations with maximum liquidity existing within the spot market. Further to this however, a necessary condition for an efficient wholesale electricity market is that participants produce or consume electricity under the terms and conditions specified in their bids into the market. Failure to comply with contractual obligations not only increases the cost to the violating firm on future transactions, it can also reduce the reliability of the Transmission Network and therefore the cost of other suppliers and load-serving entities transacting. It is instructive to mention that an effective electricity market will require sufficient liquidity to ensure that unexpectedly large transactions can take place at virtually any instant in time without causing substantial price movements. Otherwise, prices will be extremely sensitive to small changes in amount of energy purchased or sold in the market. This can also lead to the illiquidity of the forward market wherein, if either side of the market is uncertain about the terms and conditions of delivery of a forward contract for electricity, it will increase the cost of participating in the forward market and thus reduce the liquidity of the forward market.

Whereas participants in financial markets have different choices as regards how to obtain the commodity traded, buyers and sellers of whole sale electricity have no choice as to how to take or provide delivery of the electricity they have purchased or sold. All electricity must be delivered through a single Transmission Network serving a given geographic area. If the network is poorly operated, this increases the cost of participating in the wholesale electricity market for all entities. The spot market is always an alternative option available to buyers and sellers so it is the relevant opportunity cost of participating in the forward market. Consequently, there is much greater need for market monitoring in electricity markets relative to financial markets because one supplier’s privately profitable behaviour can significantly degrade the ability of another supplier to inject the energy it has sold or more importantly for consumers at certain locations in the network to withdraw energy they have purchased. As mentioned earlier, electricity markets require demand to equal supply at every instant of time at every location in the transmission network. But electrons flow according to the laws of physics and not according to the terms of a financial contract to the extent that a privately-profitable behaviour of one market participant that degrades system reliability can immediately reduce the ability of other buyers and sellers to fulfil their contractual obligations. Furthermore, if one market participant decides to misbehave and make more profit by injecting significantly more or less energy into the network than the system operator expects, this can limit the ability of other suppliers and load-serving entities to inject and withdraw energy from the network. Such profit-maximising strategies by participants in an electricity market make it a market requiring tough and consistent monitoring processes.

Finally, electricity is also unique in the sense that the technology of producing and delivering electricity places significant constraints on how wholesale electricity market can operate. For this reason, it is important to have a synergy between the design of the market protocols with the design of the engineering protocols used to operate the system. In this regard, there is need for both engineering and economics expertise to interact seamlessly to achieve a successful and efficient market monitoring process.

The afore-mentioned reasons underscore why electricity markets must be monitored to ensure there is liquidity both in the spot and short-term forward markets. Best results are achieved if this market monitoring process is independent of the system operator, the market operator and all other market participants.

No doubt, careful thoughts and well-thought out plans need to be put in place before declaring an electricity market. Nigeria, yet unable to make gas available to her starving gas power plants in-country, is not “ready” to declare an electricity market!

Idowu Oyebanjo, A Power System Engineer writes from the UK

oyebanjoidowu@yahoo.com

+447985682587

What is an Electricity Market?

An electricity Market – What is it?

The Nigerian Power Sector Reform reached another milestone with the “handover” of certificates of ownership to new owners of the privatised Power Infrastructure. The next crucial stage is the declaration of the electricity market that characterises a privatised electricity supply industry. In a sense, Nigeria is in an advantageous position when it comes to Privatisation of the Electricity Supply Industry because it can learn from the mistakes and gains from advanced economies that pioneered the restructuring of electricity supply industries for over twenty years now.

So what is an electricity Market?

Simply put, it is an arrangement to effect the sales, purchases and short-term trades of electricity. In this market, electricity, like every commodity, can be bought, sold and traded. Wholesale transactions in an electricity market are typically cleared and settled by a designated market operator or by an independent special-purpose entity charged exclusively with that function. The commodities within an electricity market generally consists of two types – namely, Power and Energy. Power in this case is the metered rate of transfer of electrical energy measured in Megawatts (MW) and Energy is the quantum of electricity that flows through a metered point for a given period and it is measured in Megawatts-hour (MWh). Contrary to common perception, a buyer of electricity is not purchasing Megawatt-hours of energy produced by a specific generation unit but the right to withdraw that quantity of MWhs from a specific location in the network and a seller is paid for injecting a certain quantity of MWhs into the grid at a specified location in the network. Thus, an electricity market is open to anyone including Generators, Power Marketers who buy and re-sell electricity, Independent Power Producers, providers of ancillary services such as Short-Term Operating Reserves (STOR), if they have secured appropriate licences to participate in the market.

What makes an electricity market different from other markets?

The electricity market shares several features with the Financial and Securities market. Participants buy and sell rights to inject and withdraw electricity from the Transmission Network, much as investors in securities buy and sell ownership shares of firms. The difference is in the physics of producing electricity. Virtually all electricity produced must be delivered to final consumers through the Transmission Network, and so the action(s) of other market participants directly impact the ability of a market participant to sell or consume electricity. One problem that comes to mind straight away is the status and reliability of the Transmission Network. Interestingly, although all market participants share a common interest in the reliable operation of the Transmission Network, they may often find it unilaterally beneficial to engage in anti-trust and anti-competition behaviours that degrade the overall reliability of the Transmission Network just to get financial advantage and create wealth for themselves. This will be particularly more destructive in an environment where corruption holds way. A popular trend is one supplier withholding capacity from the day-ahead market in order to increase the price it receives for the energy it sells. This can create a reliability problem for all other suppliers because the system operator will be unable to dispatch the necessary generation units to the levels needed to meet with real time demand without increasing the risk of system collapse.

Whereas antitrust and anti-competition laws are enough for securities and stock market, the required monitoring process for an electricity market is more involving. This is all the more so because, electricity market failures are more likely and substantially more harmful to consumers than other market failures because of how electricity is produced and delivered and the crucial role it plays in a modern economy. Hence, a prospective market monitoring process backed by the prevailing regulatory authority must be put in place at the start of the market.

Another similarity between electricity market and the securities market is that the smooth running of the market requires both parties to each transaction to comply with all contractual obligations with maximum liquidity existing within the spot market. Further to this however, a necessary condition for an efficient wholesale electricity market is that participants produce or consume electricity under the terms and conditions specified in their bids into the market. Failure to comply with contractual obligations not only increases the cost to the violating firm on future transactions, it can also reduce the reliability of the Transmission Network and therefore the cost of other suppliers and load-serving entities transacting. It is instructive to mention that an effective electricity market will require sufficient liquidity to ensure that unexpectedly large transactions can take place at virtually any instant in time without causing substantial price movements. Otherwise, prices will be extremely sensitive to small changes in amount of energy purchased or sold in the market. This can also lead to the illiquidity of the forward market wherein, if either side of the market is uncertain about the terms and conditions of delivery of a forward contract for electricity, it will increase the cost of participating in the forward market and thus reduce the liquidity of the forward market.

Whereas participants in financial markets have different choices as regards how to obtain the commodity traded, buyers and sellers of whole sale electricity have no choice as to how to take or provide delivery of the electricity they have purchased or sold. All electricity must be delivered through a single Transmission Network serving a given geographic area. If the network is poorly operated, this increases the cost of participating in the wholesale electricity market for all entities. The spot market is always an alternative option available to buyers and sellers so it is the relevant opportunity cost of participating in the forward market. Consequently, there is much greater need for market monitoring in electricity markets relative to financial markets because one supplier’s privately profitable behaviour can significantly degrade the ability of another supplier to inject the energy it has sold or more importantly for consumers at certain locations in the network to withdraw energy they have purchased. As mentioned earlier, electricity markets require demand to equal supply at every instant of time at every location in the transmission network. But electrons flow according to the laws of physics and not according to the terms of a financial contract to the extent that a privately-profitable behaviour of one market participant that degrades system reliability can immediately reduce the ability of other buyers and sellers to fulfil their contractual obligations. Furthermore, if one market participant decides to misbehave and make more profit by injecting significantly more or less energy into the network than the system operator expects, this can limit the ability of other suppliers and load-serving entities to inject and withdraw energy from the network. Such profit-maximising strategies by participants in an electricity market make it a market requiring tough and consistent monitoring processes.

Finally, electricity is also unique in the sense that the technology of producing and delivering electricity places significant constraints on how wholesale electricity market can operate. For this reason, it is important to have a synergy between the design of the market protocols with the design of the engineering protocols used to operate the system. In this regard, there is need for both engineering and economics expertise interacting seamlessly to achieve a successful and efficient market monitoring process.

The afore-mentioned reasons underscore why electricity markets must be monitored to ensure there is liquidity both in the spot and short-term forward markets. Best results are achieved if this market monitoring process is independent of the system operator, the market operator and all other market participants.

What Key Stakeholders should do now!

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The Nigerian Bulk Electricity Trading Company (NBET) began the much awaited steps towards the formal registration of participants in the Nigerian Electricity Supply Industry (NESI). A good start was to negotiate the Power Purchase Agreement (PPA) between International Oil Companies (IOCs) and the defunct Power Holding Company of Nigeria (PHCN).

NBET as the bulk electricity trader is a credit worthy off-taker. It will see to the timely implementation and respect of contracts on purchase and distribution of bulk electricity between the generation and distribution companies. As a bulk procurer and seller of electrical power and ancillary services from IPPs and successor Gencos, NBET on its part, is expected to give confidence to Gencos and Discos in terms of its ability to offset payments for power procured from the Gencos and Discos’ payment for power sold to them. In the event that a company breaches the terms of the vesting contracts entered into for example by delay in payment for power sold to it, the bulk trader is expected to offset payments due to the Gencos from which it procured power through its replenishing capitalisation fund at least until the electricity market is adjudged matured enough for both Gencos and Discos to trade directly. However, the capitalisation base of the Bulk Trader has severally been put to question by IPPs on the ground that $1 billion was not enough for a sector that is aiming to achieve 20,000MW within a very short time. The concern is that the capitalisation status of NBET is low and it sends the signals to investors that it is not strong enough to financially care for the obligations in the privatised electricity sector.

For the TCN, which is under a management contract by Canadian firm, Manitoba Hydro International (MHI), its failure to manage the grid system, either as a result of inherent internal politicisation of roles, resistance to MHI’s contract or lack of corporate governance in planning and execution of crucial transmission projects to boost the country’s weak transmission network, will most likely pit it against generation and distribution companies, which would not tolerate unnecessary laxity as frequently displayed by the TCN. Following the poor management track records of the PHCN, which the TCN was part of, the tendency of the company to relapse in its responsibilities, which are crucial to the growth of the power sector remains a real source of worry to stakeholders in that there is a covert gang-up by its “old war horses” to see that MHI’s efforts at enthroning transparent management of operations in the company do not see the light of the day. This may likely affect MHI’s operation, and the company may end up achieving very little before the three-year contract elapses. There is also the issue of incremental source of funding for transmission projects, which the TCN is expected to manage under the watchful eyes of MHI. Unless Manitoba compromises in view of pressures against it, these projects are expected to improve the confidence level in NESI.

The NERC on its part has the overall role of ensuring that possible competition in the sector are kept healthy while sanctioning errant activities of market participants either by withdrawal or suspension of their operational licenses. The commission will frequently review activities in the sector chiefly to ensure its smooth transition while participants work towards efficiency in the sector.

The Federal government wants to resolve all outstanding labour issues before handing over the assets. Labour unions in defunct PHCN claim that what the government has paid so far is terminal benefits to most of the staff in the Generating companies and have now started with colleagues in the distribution companies. The Discos are going to take much longer time and money. But nobody has been paid pension and the unions are insisting that the government must pay everything before handing over. Another issue the Federal Government wants to look into is the availability of Nigeria’s gas to power the Nigerian Power System!!

With the successful conclusion of the sale of the generation and distribution companies and eventual takeover by new investors, Nigeria’s Power Sector will be revitalised and expectations are that electricity-starved Nigerians will soon begin to enjoy regular power supply.

It must be mentioned though that no matter what the challenges are, the new dispensation would be better than where the country was coming from.