NERC’s new regulation to drive competitiveness, investment in Nigeria’s electricity industry

The eligible customer declaration by the Nigerian Electricity Regulatory Commission (NERC) recently has been seen as an alternative route to competitiveness and fresh investments in the Nigerian electricity supply industry (NESI), according to analysts at Detail Commercial Solicitors, Nigeria’s first commercial solicitor firm specialising exclusively in non-courtroom practice.

By the declaration, electricity customers who fall within any of the four “eligibility” categories would now be permitted to buy power directly from generation licensees and trading licensees (also known as suppliers).

The Detail analysts believe that the power sector requires such initiatives that will help ease the barriers to entry by interested third parties, which in turn could help drive more investment into the sector.

“In its transitional phase, the dividends of this regulation may not be easily quantifiable. It remains to be seen how the market will adjust as the implementation of the categories progress. The fact, however, remains that the sector is in dire need of more investment and flexibility, and this regulation may be the trigger to propel the industry towards the desired competitiveness,” they noted.

Prior to the declaration of the eligibility criteria, customers were only permitted to purchase electric power from licensed distribution companies (Discos); save for industrial, commercial, and residential customers (off-grid IPPs or captive generators) who generate their own power.

Following a nationwide stakeholder consultation held by the Nigerian Electricity Regulatory Commission (NERC), the Eligible Customer Regulation (“Regulation”) was issued on the 6th of November 2017.

Detail Solicitors however pointed out the regulation may impact negatively on the distribution companies (Discos) as it would result to a loss of majority of their highest-paying customers, including industrial clusters and residential estates, leaving them with lower-demand customers, who have minimal willingness to pay for electricity.

“This could potentially reduce Discos’ revenues, given that the market is insolvent with tariff shortfalls,” the said.

Specifically they referred to the loans the Discos have obtained from banks to fund their operations.

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“As of Q2 2017, the power sector had received over N466 billion worth of credit from banks. (National Bureau of Statistics) This is in addition to the tariff shortfalls estimated to be up to N460 billion (between January 2015 and December 2016).

“It is, therefore, not surprising that just a few days after the release of the Regulation, the Discos issued a notice of force majeure to the Bureau of Public Enterprise (BPE), arguing that the impact of the Regulation has resulted in a change of law that prevents them from fulfilling their obligations under the Performance Agreement. Although the BPE has rejected the notice, it remains to be seen how the next couple of months will pan out in the sector,” they highlighted.

They noted that although the regulation introduces alternative supply options for eligible customers, the current suppliers still have a crucial role to play as suppliers of last resort.

“For example, where a contracted supplier has failed to supply an eligible customer, a Disco can step in as a supplier of last resort, provided the eligible customer is within its network coverage area. The SOLR service is to be provided under a provisional arrangement at a mutually agreed price,” they stressed.

They however maintained that the major objective of the regulation is to facilitate competition in the supply of electricity and to promote the rapid expansion of generation capacity.

“In an ideal world, competition in the sector will help improve the quality of supply, increase efficiency, and liquidity for generation companies. However, this would be quite a challenge given the impact that the regulation could have on the Discos’ revenues.”

Other positives fro the declaration include fair and non-discriminatory access to transmission and distribution networks by the eligible customers, and the freedom to switch suppliers, adding that the eligible customer regime is not unique to Nigeria, as there are similar regulations in force in other countries.