In March 2020, the Nigerian Electricity Regulatory Commission (NERC), introduced three (3) key policy & regulatory initiatives which suggest that the electricity distribution companies can charge higher tariffs in certain areas, if they improve the quality and reliability of supply of premium power. NERC also suggests with its “willing buyer and willing seller” policy that the market is open to new investors.
In this BD Legal #Digital Conversations, Sola Arifayan, Partner, OAKE Legal as moderator and other esteemed luminaries, Olasupo Shasore, SAN, Partner, Africa Law Practice; Dolapo Kukoyi, Partner, Detail Commercial Solicitors, and Dr. Ayodele Oni, Partner, Bloomfield Law Practice, discuss how these initiatives impact potential investors, customers and other participants of the sector.
Dolapo Kukoyi, referring to the initiatives as “stop gap efforts” by the government to make the best out of the situation said,
“For the customers, there is a clear deficit in power supply and these initiatives give the consumer comfort because they would have a choice of suppliers and will pay based on the service they receive. However, this has limited coverage because isn’t a sustainable solution for universal electrification. For the electricity distribution companies, these initiatives allow them to sell their product at a cost-reflective tariff in certain areas, subject to NERC approval. It also presents them with opportunities for investments while resolving problems of universal electrification.”
Shasore, SAN stated that the sector market is over-regulated, under-invested and yet under-commercialized and the flow of independent power projects envisaged hasn’t happened because the electricity distribution companies have been hesitant to accept embedded generation projects. He noted that governments, at both federal and state levels are still key drivers of our economy and need to overcome the fear of getting involved in the market.
“I would love to see more state governments getting bolder in the market, delving into projecting delivery, because where private sector money is risk-averse, the government can de-risk the market easily because they are better able to absorb shocks, understand and iron out issues. State governments, in particular, need to understand that they are closer to the populace”
Kukoyi agreed that the market is over-regulated, recommending, however, that the government and the regulators need to hands-off more until there is more innovation and creativity in the market- regulations are impractical when businesses aren’t growing, and residents self-generate.
Dr. Oni noted that newer investors are interested in mini-grids targeting the ultimate consumers, and excluding distribution companies who have proven difficult to negotiate with because of DUS rates. He added,
“I don’t think anyone should even be on the grid. Energy federalism, I think is something worth considering. In areas where we could have certain sources of energy, we can concentrate on those. I’ve seen distribution companies looking at that service level, considering premium power sort of arrangement.”
Panellists also noted that some distribution companies are adopting the concepts of mini-grids and are considering electrifying their customers along different segments. Others are becoming open to embedded generation, outside the grid.
One of the key challenges in the sector is the perception of sector monopoly by the distribution companies which has presented a significant barrier to financing and investing in the sector. Dr. Oni noted that a distribution license from a central federal authority does not grant exclusivity. He added,
“Though it may seem unfair because of the initial investments, I’ve looked at the terms and conditions of licenses and I’m not even sure there’s such a term as monopoly in those terms or amongst those terms… maybe people could argue that distribution companies are natural monopolies of some sort. But if there was monopoly, you won’t have the IEDN, or these newer regulations. The privatization could have been done a bit differently, maybe government should have had more skin the game, or rather than pay money to immediately take over the assets, money could have been paid into an escrow account, with a five-year plan that matched that amount. Secondly, the sub-franchising regime coming up, could be beneficial for distribution companies by providing room for collaboration.”
Kukoyi agreed with Dr. Oni on the need for collaboration noting that any distribution company not considering collaborating will ultimately die or be taken over. She added that another issue in the sector is the significant trust deficit between the distribution companies, government, regulators and customers.
“From the government’s perspective, the private sector was invited to invest in the electricity sector, to put in investment and counting the years, the partnership hasn’t produced desired results. On their part, the distribution companies are saying that they entered the transaction on certain promises (e.g. a subsidy that will work for this time), but those expectations remain unmet. And for the customers, with all the policies and transactions, there is still no electricity.”
Shasore, SAN added that another huge challenge in the sector is the government’s huge indebtedness to operators.
Panellist agreed that there is a huge share opportunity in the industry for off-grid and renewable energy projects, and tech-support services for the sector such as payment systems. Sola Arifayan, in wrapping up the session noted the need for smarter regulations to eliminate regulatory interference on matters better handled by commercial players in the sector. He also emphasized the need for less reliance on the federal government as the Constitution provides for electric power regulation and investment by the state government. Concluding, he said,
“where 200million Nigerians are underserved and up to 60% of the population is without access to electricity there is massive investment opportunity, however investors need to be somewhat clear on the part of the sector that they want to play and the rules that apply”.