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If anything, energy, like roads and other infrastructure, could become a bargaining chip, a political carrot, and a reward for voting patterns at the state level.
The reassignment of the electricity and rail industries from the exclusive to the concurrent list in 2023 was major news. At least it looked so at the time. One year on, very little subnational activity has been undertaken in rail. Not so for the electricity sector. States have taken multiple steps intending to generate, transmit, and distribute electricity within their boundaries. While commendable, the opportunity, if mishandled, could end up saddling the country with 36 or fewer regulatory agencies overseeing mini versions of Nigeria’s current inefficient electricity sector. This note addresses factors to look out for.
Nigeria endured 46 national grid collapses between 2017 and 2023. And another six between January and April 2024 alone. Beyond the frequent collapses, electricity generation (at 2,000-4,000 MW) remains grossly inadequate, with nearly 40% of Nigerian households and businesses relying on generators; a reliance that costs an estimated $14bn annually in fuel expenses. Then came the recent 240% hike in prices, for Band A users at least. While the hike was reportedly restricted to customers who enjoy at least 20 hours of electricity per day, a significant chunk of non-Band A users continue to pay excessively thanks to the scourge of estimated billing which affects 55.5% of electricity consumers in Nigeria. Finally, the transmission subsector faces its challenges, including outdated transmission lines, inefficient grid designs, and maintenance issues.
In light of the above challenges across the entire electricity value chain, and the significant revenue opportunities as evidenced by spending on alternative energy, there is no gainsaying the need for reforms, and disruption. The passage of the Electricity Act 2023 was a major step and should be commended. Among its provisions include empowering states to regulate electricity generation, transmission, and distribution within their boundaries. Secondly, it reduces excessive requirements for captive production by businesses and households. Finally, it retains the National Electricity Regulatory Commission’s (NERC) powers to regulate interstate and international electricity generation, transmission, and distribution. As the foregoing shows, regional-level collaboration by neighboring states might be precluded, save for future amendments. This leaves each state to harness opportunities within its boundaries. With their newfound powers, what should states do?
In the past weeks, NERC completed the transfer of regulatory oversight to two states (Enugu and Ekiti). Other states are at various stages in setting up their regulatory regimes. We expect to see more transfers in the coming months. However, beyond creating domestic laws and taking on oversight responsibilities, the challenges mentioned above bedeviling the sector remain and might be worse under some states. Thus, there is the need to develop a regulatory regime that addresses these challenges, spur innovation, and attract much-needed private capital into the sector.
A fundamental question that must be addressed is the status of energy. Each state would have to determine whether energy is a commodity to be freely bought and sold albeit within a regulatory regime or a public good to which residents are entitled regardless of their ability to pay. This divergent view of energy remains a key impediment to attracting private finance to the sector. The devolution of the sector from federal to state oversight doesn’t in itself address the question. If anything, energy, like roads and other infrastructure, could become a bargaining chip, a political carrot, and a reward for voting patterns at the state level. This could hamper states’ ability to attract private financing without which a vibrant state-led electricity sector might remain a potential on paper.
Beyond addressing the status of energy, there is an urgent need to close the large unmetered customer gap. At nearly 56%, this number negatively impacts revenue projections, especially in states’ bid to attract financing. With their newfound powers, states can negotiate better contracts with meter manufacturing companies, both local and international, to ensure ample availability to meet customer demands. This could be combined with meter loans, whether funded by states or third parties, thereby increasing the number of people and small businesses, able to access these meters. Large-scale access to meters enhances revenue predictability for power companies while protecting consumers against excessive billing. A successful solution to the meter problem could address a key impediment in the industry.
Finally, as states embark on regulating and building the energy sector in their domain, they need to resist the urge for excessive centralization, limited choices, and near-zero competition. A regulatory regime that spells out entry requirements for potential players, ensures transparency in the application and approval process, and encourages continued innovation, competition, and activity by diverse players could set the new regime apart from what Nigerians have experienced until now.
A key provision that could be considered is net metering. This is a mechanism that allows private producers of energy (households and SMEs) to sell excess electricity to the state grid or peers. The credit earned by the sellers would be applied to their utility bills or converted to extra revenues. Beyond net metering, the seamless incorporation of diverse energy sources should be encouraged. From solar, through micro hydro systems, to wind and biomass, each state could harness an energy mix for which it has comparative advantage, thereby ensuring consistent supply and lower prices. Finally, states have the opportunity to build a people-oriented energy sector. By encouraging active participation by residents through schemes like net metering and utility bonds, residents will likely see the need for a competitive and market-based sector that benefits everyone.
The Electricity Act, a key demand by states and industry stakeholders, was finally passed. In the absence of state-level legacy issues, each state can build an electricity sector that ensures access to constant electricity for families and businesses, provides favorable conditions for large-scale economic growth, and reduces the impact of fossil-powered generators on the environment and people’s health. However, there is also the danger of recreating mini versions of the market and regulatory regime that existed before now. Hopefully, states will choose the former. Our team is ready to work with states, local and international investors, and other stakeholders to design a regulatory regime that works well for everyone. Contact us today!
The Dangote Refinery helped crash diesel prices in the local market. The refinery is expected to introduce gasoline (PMS) into the local market in a week. Notwithstanding the challenges faced by the new refinery, it has had some positive impact on the local energy market. We’re closely watching potential price adjustments in the gasoline market in the coming weeks.
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