Practical Issues for Investors- The Declaration of Eligible Customers

Who Really is an Eligible Customer?

An ‘eligible customer’ is defined under Section 100 of the Electric Power Sector Reform Act (EPSRA), as an electricity customer/consumer entitled to purchase power from a licensee other than a distribution licensee. The effect of which is that an eligible customer may purchase electricity from a power generation company (whether it is a private independent power company or one of the legacy former government owned power generation companies) or other non-disco liensees, directly.

Specifically, Section 27 of the EPSRA empowers the Minister of Power (the “Minister”) to issue a directive to the Nigerian Electricity Regulatory Commission (“NERC”) stipulating the classes of people that constitute eligible customers. In furtherance of this power, the Minister, through a memo dated 28th of April, 2017 to the Vice Chairman of NERC, directed the classification of some electricity consumers as eligible customers. NERC is, however, expected to come up with a framework and order for the effective implementation of the directive of the Minister.

Those eligible customers who may purchase power directly from the generation companies include:

a) A customer or group of end-use customers registered with NERC for the purpose of eligibility, with consumption more than 2 MWhr/hr over the course of a period of one month, connected to a metered 11kV or 33kV delivery point on the distribution network of a licensee under a distribution use of system agreement with such distribution licensee, for the connection and for the delivery of electrical energy.

(b) A customer, or group of end-use customers registered with NERC for the purpose, connected directly to a metered 132kV or 330kV delivery point on the transmission network under a transmission use of system agreement for connection and for delivery of electrical energy;

(c) A customer or group of end-use customers registered with NERC for the purpose, whose consumption is more than 2 MWh/h over the course of one month, directly connected to a metered 33kV delivery point on the transmission network of a licensee under a transmission use of system agreement for the construction, installation and operation of the distribution system used to connect the customer to the 33kV delivery point, with the distribution licensee licensed to operate in the location where the customer and the 33kV delivery point are located;

(d) A customer or group of end-use customers registered with NERC for the purpose, whose consumption is more than 2 MWh/h over the course of one month, that is directly connected, through a metered delivery point to the generation facility of a generation licensee it intends to purchase electrical energy from, and has entered a bilateral agreement for the construction, installation and operation of the distribution system used to connect the customer to the generation facility with distribution licensee licensed to operate in the location where generation facility and the customer are located.

It is clear from section 27 of the EPSRA that the minister is empowered to declare eligible customer status. In fact, a critical review of section 25 of EPSRA, suggests that this should have occurred much earlier.

Likely Implications of the Declaration/ Directive- For the Discerning Investor (Current & Prospective)

With the declaration/ directive from the Minister, the structure of the Nigerian Electricity Supply Industry (NESI) is changing, as eligible customers, apart from Discos and the NBET can now procure Energy and Capacity from Generation companies different from a scenario where we had almost only the bulk trader and the distribution companies (to a more limited extent) as the first line purchasers of electrical energy and capacity. Necessary and consequential amendments will also be made to the Market Rules (the “Rules”) to incorporate a balancing mechanism for the NESI, during the transitional stage. Furthermore, there will be amendments to the Rules to allow bilateral contracts at this stage of the NESI.

With the declaration/ directive, it is expected that there will be more energy and capacity to be traded in the NESI. Additionally, more contracts will be executed and more participants should be involved in trading within the NESI, with liquidity improving and the market settlement becoming more advanced.

It is clear that the country is energy deficient and low off-take by the electricity distribution companies (amongst other issues with this group), gas constraints due to non-payment, or insufficient payment of, gas invoices, lack of confidence in electricity supply by electricity distribution companies, there are indeed opportunities for the discerning business person. This potential has always ben there, but the lack of Regulation to allow for eligible customer made it a rather dangerous venture and a few investors who had attempted same have had difficult stories to tell and the writer, indeed, knows a few of those.

With the declaration/ directive, there is more room for the private sector to play a role in addressing the energy deficit. It is apparent that Nigerians will pay for services/ electricity supply, provided they see efficiency and a system that works and ensures they have electricity supply. The discerning investor can also (especially with viable partnerships), provide a viable alternative to the manufacturing sector and the informal sector of the economy, such that the costs of production and doing business generally reduce. Ultimately, there will be more enterprises, lower cost of living with better quality of life for more people because of the existence of more jobs and the economy receives the much-needed support from the private sector and the private sector, in turn, makes profit.

NERC has also expressed its view that eligibility will encourage opening up third party access to transmission and distribution infrastructure as a precursor to full retail competition in the NESI. The writer also completely agrees with this view.

Practical Scenarios for Eligible Customer Electricity Supply Transactions

For transactions connected with supply of eligible customers, a number of scenarios are feasible and include a supply through an electricity distribution network such that a generation company wheels electricity to an eligible customer, via a distribution company’s network and in that scenario, the generation company will sign a Distribution Use of System Agreement with the relevant electricity distribution company and pay a tariff/ fee for using same.

Other scenarios could include embedding a generation company, within a customer’s premises (a within-the-fence scenario) or even having a situation where an eligible customer is fed from a pool through a distribution company’s network and where the customer is already connected to a 330kv or 132kv lines then there may be need to enter into arrangements which include payment for using the transmission system. It is also plausible that the eligible customer is directly connected to the electricity generation company and this would appear a workable scenario.

Your advisor (legal and or commercial) can provide further guidance and clarity on process, contracting matters, amongst others.

Conclusion

Whilst we await NERC’s framework for the practical workings of the eligible customer directive, it is pertinent to note that there are interesting prospects in connection with same and the directive, if well implemented, will go a long way towards reducing the energy deficit in Nigeria. The private sector, the Regulator-NERC, electricity consumers and the government all have crucial roles to play, towards ensuring the success of the directive and general policy in connection with eligibility in the NESI. As a result of the likely benefits of the policy on eligibility, it is germane that all hands are on deck to ensure the successful implementation of same. Further, steps should also be taken to prevent unnecessarily high wholesale energy cost which could be burdensome to electricity distribution companies.

Ayodele Oni

Ayodele Oni, (ayodele.oni@bloomfield-law.com), a commercial lawyer and Partner in a leading Nigerian law Firm, specializes in international energy (oil, gas and power) investment law & policy advising a number of electric power developers.