Theoretical basis for successful electric power sector reforms (Part 2)

As stated in the last edition, research (particularly by R. W. Bacon and J. Besant-Jones) shows that the process of a full electric power reform program for a government-run power sector typically consists of what can be described as ‘the four pillars of reform of a government-run electric power sector’. Most successful reform processes undertaken in connection with formerly State-run electricity sectors have been built around these basic elements, with the detailed design of each program reflecting the particular circumstances of the country and its electricity sector. These pillars will now be briefly examined.

Design of Power Policy

This involves the development and approval of a power policy by the central government. The power policy provides comprehensive strategies for power sector reform and the political-will needed to sustain the reform process. In Nigeria, the National Electric Power Policy (NEPP) approved by the Federal Executive Council in 2001 provided the critical areas that needed to be remedied in the Nigerian Power Sector and made recommendations which have been incorporated in the Electricity Reform Act. The policy is typically the starting point and provides the broad guidelines for the reform program.

Enactment of Relevant Legislation

Following the development of a power policy, there is need for the enactment of relevant legislation necessary for implementing the said policy. This is necessary because policies require a legal instrument for their implementation. With the enactment of the “Electricity Reform Act 2005 by the National Assembly, it is safe to conclude that the relevant legislation for the implementation of the policy has been put in place. The Electricity Reform Act provides a regulatory framework within which all the relevant institutional, commercial and other operational aspects of the Nigerian Electric Power Sector would function.

Unbundling the State Monopoly

Upon enacting the relevant legislation, the next step is typically, to unbundle the integrated organization of electric power supply and establish a market, such that electricity is traded on a willing buyer-willing seller basis and at arm’s length. This is a cumbersome process that will involve separating the once vertically integrated business unit into more nimble and work specific business units. The Nigerian State monopoly, NEPA, was de-established and an Initial Holding Company, the Power Holding Company of Nigeria (PHCN), was established and unbundled into 18 successor companies comprising 6 Generation Companies, the Transmission Company of Nigeria (TCN), and 11 Distribution Companies between November 2005 and November 2006.

Divestment of Government Interest

The fourth and final step is the divestment (partial or complete) of the State’s interest in much of the electric power value chain and market generally. This is best done in a phased manner that considers the ability of the newly emerged entities to raise finance and apply the relevant technology to improve the power supply situation. The FGN is presently concluding the divestment of a portion of its interest in the successor PHCN companies, through share sale and the grants of concession.

The 4 pillars have been adopted in the on-going reforms in the Nigerian Power Sector dealt with extensively in this text. However, a good understanding of the design of the emerging Nigerian electricity market is important for a thorough appreciation of the reforms in the power sector.

DESIGN OF THE NIGERIAN ELECTRICITY MARKET

The Electricity Reform Act provides for a phased and strategic implementation of the power sector reforms until an optimal capacity generation and full competitive market is achieved. The Nigerian Power Sector is expected to evolve through the following stages:

Pre–Transitional Stage

This is the natural stage of the electricity industry during its early reform implementation. This is the stage to implement, test, make operational and improve the Grid Code and the Market Rules. During this stage, all preparatory work will be done for the electricity market to start up in its Transitional Stage. We are currently in the late pre-Transition Phase.

Transitional Stage

This stage is characterized by demand exceeding supply. All trading is also to be made through contracts and in this regard, the Bulk Trader established by the Federal Government of Nigeria is responsible for the bulk purchase of electricity for re-sale to electricity distribution companies. Furthermore, existing electric power will be traded through vesting contracts. The conditions and prices of vesting contracts will not be freely negotiated but will be transparent and competitive. The mechanisms for entering the market (new Power Purchase Agreements) are also being executed under this stage.

Medium Term Stage

This stage marks the beginning of retail competition in the market and will be characterized by competitive entry into the market. Furthermore, contracts will be negotiated freely and such contracts may include financial contracts such as derivative contracts. During this stage, there is expected to be a centralized merit order dispatch by the System Operator, where electricity generation companies must submit the dispatch nomination (availability, constraints, costs/ prices) to be used in the security constrained economic (least cost) dispatch mechanism. What the foregoing means, is that power generation companies with the least prices (due to lower costs) are given priority and are dispatched first.

Long Term Stage

This is similar to the medium term stage but characterized by fully competitive generation and retail supply, and greater freedom by eligible consumers to choose their suppliers. The operation of the market and inevitable use of third party access contracts will virtually eliminate switching costs and reduce the use of long term contracts in favour of the spot market.

The model currently being effected by the federal government of Nigeria is a model that has succeeded in several other countries and the writer does believe that, with more political commitment, more would be achieved in the power sector. For more information on this topic and the electric power sector, read the text ‘The Nigerian Electric Power Sector: Policy. Law. Negotiation Strategy. Business’ (www.nesi.com.ng) by Ayodele Oni.

Ayodele Oni, (ayodeleoni@yahoo.com), a solicitor, specializes in international energy (oil, gas & power) investment law and policy.