Power
ERERA renews its commitment in Regional Electricity Regulation
ABUJA – The performance in the power sector across the 15 ECOWAS Member States has been consistently unsatisfactory over the years. Despite implementing power sector reforms aimed at stimu…
ABUJA – The performance in the power sector across the 15 ECOWAS Member States has been consistently unsatisfactory over the years. Despite implementing power sector reforms aimed at stimulating private sector participation and liberalization, national power utilities in the region have not been able to attract a significant level of private investment. In fact, the national power utilities have continued to be under-capitalized in addition to charging rates below cost, hence they have not been able to access financial markets or attract investors for maintenance and expansion projects.
It is believed that over 60 per cent of the region’s electricity generation capacity runs on petroleum fuels and, as such, any escalation in oil prices has a devastating effect on most of the economies in the region. Furthermore, most of the national electricity markets are too small for any meaningful gain from economies of scale. Against this background, the region’s power utilities face enormous challenges in providing quality energy services to existing consumers and expanding coverage. Therefore, the desire of Member States of ECOWAS to develop electricity interconnections through the joint implementation and sharing of primary energy resources of the region is being progressed to address the sector challenges.
ECOWAS Initiatives in the power Sector
But first what has ECOWAS done in response to this prime concern? The initiatives of ECOWAS date back to its regional Energy Policy of 1982 that seeks to harmonize Member States’ energy policies and increase collective energy autonomy. However, the Community’s instrument that has given impetus to the regional energy programme, and particularly free wheeling and dealing in energy goods and services, is the ECOWAS Energy Protocol that was adopted by the Heads of States and Government of ECOWAS in 2003.
The various actions undertaken since have resulted in the establishment of the following specialized institutions of the Community: the West African Gas Pipeline Authority (WAGPA), the West Africa Power Pool Secretariat (WAPP Secretariat) and the ECOWAS Regional Electricity Regulatory Authority (ERERA), for the establishment and supervision of the regional electricity market.
The establishment of WAPP in 1999 by ECOWAS Heads of State and Government was a tactical move to create a regional market in the true sense of the word. However, the development of power interconnections goes hand in hand with an institutional requirement to efficiently manage transactions between States. There are two dimensions to this institutional approach: firstly, the establishment of the necessary legal and regulatory framework to promote long-term cooperation in the energy sector within Member States and to attract investments. The 2003 ECOWAS Energy Protocol is classical here.
The Second dimension relates to oversight and supportive frameworks for stakeholder activities. This meant putting in place a regional regulatory body, the initial foundations being the adoption, in January 2008, of the Supplementary Act establishing ERERA. Under this Act, ECOWAS leaders endorsed the requirement for an independent, credible and transparent regional regulatory authority to develop a regional power market for West Africa. This institution then became responsible, explicitly, for providing oversight for contractual arrangements, management and dispute resolution, sector performance evaluation, as well as access to the regional electricity transmission system.
ERERA was created to regulate cross-border electricity exchanges and give support to national regulators of the electricity sub-sector of Member States. It has committed to building a strong institution which is credible, respectable and able to develop a strategic vision and sustainable regulatory and legal instruments to attract the much-needed investment into the regional electricity sector.
Since its establishment and with very limited resources, ERERA has contributed a lot in the implementation of the roadmap leading to the regional electricity market. The perfect illustration of this contribution is the adoption of the Directive on the organization of the regional electricity market in June 2013 by the Council of Ministers of ECOWAS.
Need for Regulation to Speed up Development of the Regional Electricity Market
The Directive on the organization of the regional market provides for a gradual progression towards this market so that national power utilities can adapt in a flexible and rational manner, thereby taking into consideration the diversity of their current organizational statuses. It lays out the general principles governing the Regional Power Market as defined by the ECOWAS Energy Protocol.
All sector operators will have to comply with the principles and rules of the regional market, with a view to achieving a competitive, efficient, and sustainable electricity market. Since electricity transmission networks are natural monopolies, the main challenge to speeding up regional market development lies in how much trust is placed in the ability of operators to regulate the interplay of competitive forces and manage their trade contracts. This form of regulation of cross-border electricity trade calls for coherent regulatory decision-making, a necessary requirement for guaranteeing the efficiency of trade contracts binding interconnection developmental activities.
Issues at Stake for ERERA
The first issue at stake stems from the fact that the institution is still in its infancy (the institution’s Regulatory Council was only set up in January 2011) and relates to its institutional capacity to impose itself as an indispensable player for the development of cross-border trade. One of the necessary pre-requisites for technical regulation and efficient trade in regional exchanges and market surveillance is for ERERA to build up its expertise and that of the national regulatory authorities in the Member States.
ERERA will then need to ensure that consolidating and fast-tracking cross-border trade is carried out with a minimum of regulatory risk for all stakeholders in the market, which means providing the best contractual arrangements between Member States’ national operators. The end-result is to promote transparency in cross-border power trade and create transparent, predictable, and harmonized regulatory practices in West Africa, attract capital to the region for sector development and ensure that maximum benefit accrues to electricity consumers.
Regional regulation is therefore at the heart of the process for supporting cross-border power exchanges and must go hand in hand with support to national power regulators in ECOWAS Member States. Regional regulation is thus bound to yield results since its very efficiency builds trust and facilitates public-private partnerships, without which the massive investments required for market development would be difficult to attain.
According to reports, Nigeria’s population may face more challenging times ahead as electricity tariffs are projected to increase by over 40 percent in the near future.
This rise in tariffs could ultimately result in the elimination of all energy subsidies in the country.
Currently, the electricity sector relies on a monthly subsidy of approximately N50 billion, stemming from a shortfall in revenue.
The tariff hike, scheduled to take effect from July 1, will pose another significant test for President Bola Ahmed Tinubu’s administration and its ongoing market reforms.
The government has already taken steps to remove subsidies on Premium Motor Spirit (PMS) and implemented a floating exchange rate for the national currency.
These decisions have added complexity to the price-setting process of the Nigerian Electricity Regulatory Commission (NERC) and its 2022 Multi-Year Tariff Order (MYTO).
Despite power sector players failing to meet the target of supplying a minimum of 5,000 megawatts, even after signing contracts with the Nigerian Electricity Regulatory Commission (NERC), the current Service Based Tariff (SBT) is based on an exchange rate of N441/$ and an inflation rate of 16.97 percent.
According to NERC’s directives in 2015, the average tariff for distribution companies (DisCos) and different categories of end-users was N25 per kilowatt, as per Order 198/2020, which came into effect on September 1, 2020.
However, in the MYTO for 2022, the average tariff increased to N60 per kilowatt across all customer categories, and in the most recent update, it stands at N64 per kilowatt.
The determination of the 2015 tariff relied on a foreign exchange rate of N198.97/$, which increased to N383.80/$ in 2020 and further to N441.78/$ in 2022. In terms of inflation, the 2015 MYTO utilized an 8.3 percent rate, which rose to 12 percent in 2020 and reached 16.97 percent in 2022.
Currently, the inflation rate stands at 22.41 percent, and experts predict it could reach 30 percent by the end of June, considering the floating of the naira and the removal of subsidies on Premium Motor Spirit (PMS).
The tariff determination process takes into account various factors, including the significant metering gap of over seven million, gas prices, losses within the system, and the actual generation capacity. These elements play a role in determining the final tariff.
As anticipated, NERC had projected that the tariff for July 2023 would eliminate subsidies and introduce increases to the previously frozen tariff bands D and E.
These adjustments were intended to raise the bands from N54.59/kilowatt to N62.16 for band D and from N48.37/kilowatt to N61.16 on average. Moreover, the average increase across all bands was expected to reach N67/kilowatt.
However, due to the ongoing floating of the naira and the significant inflationary pressures, it is now projected that the new average tariff will need to be approximately N88/kilowatt for the power sector to recover its costs.
According to energy lawyer Madaki Ameh, the continuous and frequent increases in power tariffs are akin to a form of blackmail against electricity consumers.
Amen said “Indexing the cost of electricity on the dollar is a huge mistake because most of the inputs for electricity supply are local. The DisCos are also holding Nigerians to ransom by failing to increase the supply base, thereby spreading the tariffs across a broader spectrum of consumers to reduce the unit cost of electricity.”
He insisted that as long as there remain many unmetered consumers and many others not connected to the grid at all, the few consumers on the grid would continue to be subjected to unjust tariffs, which are not reflective of the quality of service delivered.
Ameh hoped that the signing into law of the new Electricity Act would mark “the beginning of light at the end of the long tunnel of inefficient and epileptic power supply in Nigeria.”
Segun Ajibola, the former President of the Chartered Institute of Bankers of Nigeria (CIBN) and a professor of Economics at Babcock University, highlighted that there remains a gap between the cost of electricity and the value it provides in exchange.
“Nigerians are still struggling to keep pace with the cost of energy for business and household use. If the electricity tariff goes up as envisaged, the question remains if there will be value for the quantum of electricity so paid for.
“The truth remains that if electricity supply is constant, of the right quantity and quality, the envisaged upward review in the tariff will be gladly absorbed by the populace,” he said.
Lanre Elatuyi, an Electricity Market Analyst, expressed that the recently implemented tariff rate would have significant implications. He emphasized that the devaluation of the Nigerian currency poses a major challenge for companies with dollar-denominated loans to repay.
He said “They will need more naira today to buy a dollar. They need to manage their exposure to foreign exchange risk. Even operators of hydro plants pay their concession fees in dollars. So, wholesale electricity price will be adjusted upward and this will get to the end users’ tariffs too.”
Senator Shehu Sani, a prominent Nigerian lawmaker has accused President Muhammadu Buhari’s government and state governors of secretly selling five power generating plants without disclosing the utilization of the funds received.
He disclosed this in his Twitter handle on Monday.
Senator Sani, known for his outspoken nature and activism expresses his concerns over the alleged undisclosed sale of the power plants.
He claimed that the government, in collaboration with state governors, had carried out the transactions without informing the Nigerian public about the purpose of the funds acquired from the sale.
The post reads “Buhari’s Government in collaboration with the State Governors quietly sold the five power generating plants without telling the country what the money was used for.
The Vice President of Nigeria, Prof. Yemi Osinbajo, has inaugurated the Afam 3 Fast Power 240-megawatt turbine project in Rivers State.
The project, which is a subsidiary of the Transcorp Group located in Oyigbo, on the outskirts of Port Harcourt in the state, was unveiled during a ceremony that took place on Tuesday.
The event, which was attended by several dignitaries, including the Chairman of Transcorp Group, Tony Elumelu, and other top officials, saw the Vice President arriving at the venue in a chopper at exactly 11:35 am.
Upon his arrival, he was escorted into the premises where he officially inaugurated the project.
During his speech at the event, he disclosed that the acquisition of the project was approved by the National Council on Privatisation (NCP) and the acquisition cost was ₦105.3 trillion.
Osinbajo further emphasized that the successful completion of the project is a significant breakthrough in Nigeria’s power sector.
In his address, Osinbajo said, “In 2020, electricity subsidies reached N584 billion, but service-based tariffs have led to a doubling of collection in the Nigeria Electricity Supply Industry from N40 billion in 2020 to N80 billion in the first quarter of 2023.
“If this trajectory continues, the Nigeria Electricity Supply Industry will be able to pay for itself. Our administration has also created programs for off-grid for electrification. Rural Electrification Agency now has the capacity to provide electricity supply on a first-class basis.
“We are on track to electrify all Nigerians in the next decade. However, we will not make progress if our gas supply does not improve. The gas supply challenges are hampering improvements.”
He further lauded General Electric, the National Council on Privatization (NCP), and the host communities for their contribution to the completion of the Afam 3 Fast Power 240-megawatt turbine project in Rivers State.
Osinbajo highlighted that the successful completion of the project will significantly increase the country’s power supply capacity, leading to a better quality of life for Nigerians.
In November 2020, the federal government and the Transcorp Power Consortium signed a share sale and purchase agreement in relation to Afam Power Plc and Afam 3 Fast Power Limited.
The National Council on Privatization approved the privatization of the Afam Power Plant back in August 2017, which triggered a competitive bidding process involving 12 prospective investors.
After careful consideration, Transcorp Power Consortium emerged as the preferred bidder with a combined offer of N105 billion.
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