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NERC Removes NBET from Discos’ Power Purchase Transactions

  • NERC has terminated NBET’s involvement in power purchase transactions between Discos and Gencos.
  • The new directive allows Discos to purchase electricity directly from Gencos, promoting bilateral contracting.
  • This shift aims to reduce the Federal Government’s fiscal exposure and foster market competition.
  • The transition to bilateral trading must be managed carefully to avoid market disruptions.
  • Robust regulatory oversight is essential to ensure fair competition and market stability.

Summary

  1. Directive Issued: NERC terminates NBET’s role in power purchase transactions.
  2. Objectives: Promote bilateral trading, reduce government fiscal exposure, and foster market competition.
  3. Historical Role of NBET: Established in 2010 to manage the electricity pool and provide financial guarantees.
  4. Electricity Act 2023: Mandates the transition to a more advanced market structure.
  5. Market Implications: Improved pricing, increased investment, and enhanced efficiency.
  6. Challenges: Transition management, regulatory oversight, and financial stability.
  7. Future Prospects: New trading licenses and market innovations.

Introduction

The Nigerian Electricity Regulatory Commission (NERC) has made a significant move in the Nigerian Electricity Supply Industry (NESI) by terminating the involvement of the Nigerian Bulk Electricity Trading Plc (NBET) in power purchase transactions between distribution companies (Discos) and power producers. This change is part of a broader effort to enhance the efficiency and competitiveness of the electricity market in Nigeria. The new order allows Discos to purchase electricity directly from generation companies (Gencos), eliminating NBET’s role as an intermediary. This article will delve into the implications of this directive, the motivations behind it, and the potential impact on the Nigerian electricity market.

The New Directive

Key Provisions

In its new order on the Transition of Bilateral Trading in NESI, released on Friday, NERC declared that Discos could now engage in direct electricity transactions with Gencos. This directive marks a shift towards a more decentralized and competitive market structure. The commission stated:

“NBET shall forthwith cease to enter into new contracts for the purchase and resale of electricity and ancillary services in the Nigerian Electricity Supply Industry.”

This order is in line with Section 7(2) of the Electricity Act 2023. According to NERC, any contract executed by NBET in violation of this order will not be approved by the commission and will be treated as an infraction subject to regulatory sanctions.

Objectives of the Directive

The primary goals of this directive are to:

  • Promote Bilateral Contracting: Encourage energy and capacity trading between generation and/or trading licensees and distribution licensees.
  • Reduce Government Fiscal Exposure: Limit the Federal Government’s fiscal exposure to market risks.
  • Foster Market Competition: Create a more competitive market environment by repositioning NBET from its current role as the sole bulk electricity trader.

NERC stated that this order would provide equal opportunities for all hydro and thermal Gencos with existing “take-and-pay” contracts with NBET to reduce their contracted capacities by trading directly with Discos on a bilateral basis. It will also transition the contractual framework for bulk energy trading in NESI to “take-or-pay” contracts, fostering increased certainty and market discipline among market participants.

Background and Context

Historical Role of NBET

NBET was established by the Federal Government on July 29, 2010, to act as a credible and creditworthy off-taker, receiving credit support and/or capitalization from the Federal Government to guarantee payments to Gencos. NBET was licensed as a bulk trader by NERC on August 23, 2011, with the mandate of procuring and selling bulk electricity and ancillary services to Discos.

NBET’s role has been critical in managing and administering the electricity pool in NESI. It has facilitated the development of bankable project-financed independent power projects by providing financial guarantees to Gencos. However, the Electricity Act 2023 mandates a shift from this transitional market stage to a more advanced market structure.

The Electricity Act 2023

The Electricity Act 2023 provides the legal framework for the development of the Nigerian electricity market. Section 7(2) of the Act states:

“For subsection (1) and in preparation for the initiation of medium-term and long-term Electricity Market stages as recognized under this Act, the commission shall, by its directive and within such period as it may specify, direct NBET Plc, the trading licensee holding the license for the bulk procurement and bulk sale of electricity and ancillary services, to cease, by its license, entering into contracts for the purchase and resale of electricity and ancillary services and to novate its existing contractual rights and obligations to other licensees.”

This provision underscores the need for NERC to transition the market towards bilateral trading and away from the single-buyer model.

Market Implications

For Discos

The new directive allows Discos to engage in direct electricity transactions with Gencos, potentially leading to more competitive pricing and better supply agreements. Discos can now negotiate contracts that better suit their needs and financial capabilities, without relying on NBET as an intermediary.

For Gencos

Gencos stand to benefit from this directive by securing more predictable off-take commitments backed by payment guarantees. This can enhance their financial stability and enable better planning for generation and gas availability. Gencos can also exercise their partial or full exit rights contained in their Power Purchase Agreements (PPAs) with NBET to contract directly with Discos, other bulk traders, and eligible customers.

Market Competitiveness

By removing NBET from the middle of power purchase transactions, NERC aims to create a more competitive market structure. This shift is expected to lead to:

  • Improved Pricing Mechanisms: Direct negotiations between Discos and Gencos could result in more competitive pricing.
  • Increased Investment: A more predictable and stable market environment can attract more investments in the electricity sector.
  • Enhanced Efficiency: The removal of the intermediary role of NBET can streamline the transaction process, reducing delays and bureaucratic hurdles.

NERC Removes NBET from Discos' Power Purchase Transactions

Challenges and Considerations

Transition Management

While the directive aims to create a more competitive market, the transition must be managed carefully to avoid disruptions. Both Discos and Gencos need to be prepared for direct contracting, including understanding the legal, financial, and operational implications.

Regulatory Oversight

NERC will need to ensure robust regulatory oversight to prevent market abuses and ensure fair competition. This includes monitoring contract negotiations, enforcing compliance with market rules, and addressing any disputes that may arise.

Financial Stability

The financial stability of both Discos and Gencos is crucial for the success of this new market structure. NERC and other stakeholders must work together to address any liquidity issues in the electricity value chain and ensure the continuous settlement of obligations to Gencos.

Future Prospects

New Trading Licenses

Since 2022, NERC has issued trading licenses to ten private companies interested in trading electricity bilaterally with Discos and eligible customers. This move indicates significant potential in wholesale electricity trade outside the NBET single-buyer pool.

Innovations in the Market

The transition to bilateral trading could spur innovations in the market, such as the development of new financial instruments, improved risk management practices, and enhanced service delivery to end-users.

Tables

Table 1: Key Provisions of the NERC Directive

Provision Description
Cease New Contracts NBET shall stop entering into new contracts for electricity.
Promote Bilateral Contracting Encourage direct transactions between Discos and Gencos.
Reduce Fiscal Exposure Limit government exposure to market risks.
Foster Market Competition Create a more competitive market environment.
Transition to Take-or-Pay Contracts Move from take-and-pay to take-or-pay contracts.

Table 2: Market Implications for Stakeholders

Stakeholder Implications
Discos More competitive pricing and better supply agreements.
Gencos Predictable off-take commitments and financial stability.
Market Improved pricing mechanisms and increased investment.
Regulatory Need for robust oversight to ensure fair competition.

Conclusion

NERC’s decision to remove NBET from Discos’ power purchase transactions marks a significant shift in the Nigerian electricity market. By promoting bilateral trading and fostering a more competitive market structure, NERC aims to enhance the efficiency, stability, and investment potential of the electricity sector. However, careful management of the transition and robust regulatory oversight will be crucial to realizing the benefits of this new market framework.