NESI and the 2023 Electricity Act

The Electricity Act, 2023, (“the Act”) was signed into law by His Excellency, President Bola Ahmed Tinubu, GCFR, on 6 June 2023. The Act was passed in light of the Federal Government’s initiatives to accelerate Nigeria’s energy transition process as well as consolidate the regulation of the Nigerian Electricity Supply Industry (NESI) for optimum functionality and effective service delivery.

Essentially, the Act, repeals the Electric Power Sector Reform Act, 2005, consolidates the laws relating to the NESI, and provides a comprehensive and institutional framework for the power sector in Nigeria. Areas covered by the Act include electricity generation, transmission, distribution, supply, trading, system operations, electricity offences and the enforcement of consumer rights and obligations.

It also makes provision for a holistic integrated resource plan and policy that recognises all the sources for the generation, transmission and distribution of electricity, including the integration of renewable energy into Nigeria’s energy mix.

The enactment of the Act marks the second of a three-stage reform process that started with the Constitutional Amendment to remove the constitutional restrictions on the States’ right to legislate for power generation, transmission and distribution and which will culminate in the enactment of electricity laws by the various houses of assembly for each State.

This article, therefore, is an overview of the provisions of the Act, in light of the reform proposals therein, factoring in the current state of play to ascertain the implications of its provisions on the structure, organisation and administration of the NESI.

Overview of the Electricity Act

 The main objective of the Act is to attract private sector investment into the value chain of the NESI by providing a comprehensive framework for the operation of “a privatised, contract and rule-based competitive electricity market in Nigeria through transformative policy and regulatory measures”.

The Act comprises of provisions relating to licensing for electricity generation, distribution and transmission as well as tariffs and subsidies, acquisition of land, renewable energy and rural electrification, consumer protection, offences and penalties.

In alignment with the constitutional amendment, the provisions of the Electricity Act apply throughout the Federal Republic of Nigeria with respect to all aspects of the power sector with the caveat that nothing in the Act will invalidate any law passed by the House of Assembly of a State or a collaboration between the State, the Local Government, and the Federal Government in relation to any aspects of the electricity market.

Notable reforms in the Electricity Act

The Electricity Act proposes consequential reforms in the power sector. These reforms are aimed at facilitating the effective progression of the electricity market into a more commercially driven phase. The key reforms are examined below, albeit, cursorily:

1. The National Integrated Electricity Policy and Strategic Implementation Plan

By Section 3 of the Electricity Act, the Federal Government is mandated to publish, through the Ministry of Power, a National Integrated Electricity Policy and Strategic Implementation Plan (NIEPSIP) in the Federal Government Gazette within one year from the commencement of the Act to guide the overall development of the electric power sector in Nigeria. Upon issuance, all project development in the electricity sector will be expected to conform with NIEPSIP as the applicable policy and implementation plan document for electricity in Nigeria. Some level of stakeholder input is also contemplated in the formulation of the NIEPSIP which shall be approved by the Federal Executive Council and reviewed after successive five-year periods.

Specifically, the NIEPSIP is to encompass aspects relevant to the development of the electric power sector in Nigeria such as; the utilisation of relevant resources (both renewable and non-renewable) for power generation, transmission, distribution and supply, electricity infrastructure, rural electrification, public private partnerships, waivers and subsidies and the overall development of the electricity value chain.

2. Development of a Competitive National Electricity Market

While recognising the legal validity of the evolution and reform of the electricity market from the vertically integrated structure, to the privatized structure – under the repealed Electric Power Sector Reform Act, 2005 (the repealed EPSR Act), and other subsequent institutional and legislative innovations, the Electricity Act sets the framework for the transition of the electricity market to the medium term and long-term electricity market stage under the oversight and supervision of the National Electricity Regulatory Commission (“the Commission”).

In addition, the Electricity Act provides that the sale and purchase of electricity and ancillary services during the medium-term stage shall be in accordance with the Market Rules and the Grid Code, and the Commission shall have the power to approve such amendments to the Market Rules to prescribe the preconditions for the declaration of the long-term market stage.

Specifically, the Act recognises the System Operator as the issuing and amending authority of the Market Rules and the Grid Code although subject to the approval of the Commission. Also, the Commission is imbued with the powers to issue directives specifying the class(es) of end-use customers to be designated as eligible customers at every market stage as well as issue directives to specify competition transition charges in circumstances where the designation of eligible customers would adversely affect trading or distribution licenses in terms of the reduction in electricity prices.

3. Incorporation and licensing of the Independent System Operator (ISO)

The Electricity Act mandates the Transmission Company of Nigeria Plc (“the TCN”), to take steps to incorporate an entity under an ownership and governance structure as the Commission may specify and such entity shall apply to the Commission to be licensed as an ISO to perform the market and system operation functions stipulated by the Act.

Further to the above, the Electricity Act requires that upon incorporation and licensing of the ISO, the TCN is to transfer all assets and liabilities pertaining to its market and system operation functions to the ISO. This implies that the regulation of existing transmission licenses will transfer to the ISO. Specifically, the functions of the ISO include the generation, and transmission scheduling, generation outage co-ordination and transmission congestion management, international transmission co-ordination, procurement and scheduling of ancillary services, system planning, administration of wholesale electricity market and such other activities as may be required for reliable and efficient system operation.

4. Establishment of relevant institutions of the electricity sector under the Electricity Act

The Electricity Act makes elaborate provisions for the establishment, administration, organisation, functions, and powers of relevant power sector agencies. Accordingly, the agencies established under the Electricity Act include the National Electricity Regulatory Commission (NERC), the National Hydroelectric Power Producing Areas Development Commission (N-HYPPADEC), the Rural Electrification Agency (REA), Nigerian Electricity Management Services Agency (NEMSA), National Power Training Institute of Nigeria (NAPTIN).

While these agencies are not all new, the Act makes specific provisions to ensure that all essential electricity-related agencies are brought under the umbrella of a single legislation.

5. Licensing Requirements

The Electricity Act reviews the licensing requirement for engaging in the business of electricity generation, transmission, distribution, supply, trading or system operation to accommodate the rights of States of the Federation to make laws and establish markets for generation, transmission, system operation, distribution and supply of electricity within their respective territories.

Specifically, the Electricity Act recognises the power of States to enact laws that allow a person to be licensed to construct own, and/or operate an undertaking for the generation, transmission, distribution, supply and sale of electricity, including the construction and operation of mini grid, independent electricity distribution network/independent electricity distribution operator (IEDN/IEDNOs) or its independent electricity transmission network operators (IETN/IETNOs) within the State.

Accordingly, the Act stipulates that the State Electricity Board shall have the responsibility to grant licences for mini-grids, IEDN/IEDNOs and IETN/IETNOs and provide framework for the operation of such licensees within the State. This implies that state authorities will now be responsible for the licensing of mini-grid projects within their area of jurisdiction.

In respect of already existing mini-grid projects deriving their licenses from the NERC, the regulation of such existing mini-grids will transfer to the State Electricity Board where the mini-grid is located.

Concerning electricity generation, the Electricity Act makes it the responsibility of the Commission to promote the generation of electricity from renewable energy sources and stipulates that in granting generation licences, the Commission shall promote embedded generation, hybridised generation, co-generation and the generation of electricity from renewable energy sources.

Essentially, the NERC retains the overarching generation licensor for power generation in respect of the national grid, while the State Electricity Boards will become the licensor for power generation within their respective states.

As regards electricity transmission, the Electricity Act empowers the Commission to issue IETN licence where there is no existing transmission facility or existing facilities require reinforcement to increase electricity access or connect new power generating facilities.

In addition, the Electricity Act now expressly approves private sector investment in electricity transmission, the grant of concession (or other commercial arrangements) to a non-licensee for the finance, construction, ownership and maintenance of a transmission network, as well as public private partnerships to facilitate the transmission of electricity

In respect of electricity distribution, the Electricity Act provides for a phase where distribution will be disaggregated into distribution and supply and each activity will be subject to the grant of a separate licence.

This is a novelle creation in the Act that will eventually see a separation of roles currently performed by electricity distribution companies into either distribution or supply licensee roles.

The Act further distribution or supply franchising arrangement between distribution or supply licensees and third parties within their respective coverage areas subject to the approval and regulatory oversight of the Commission.

In addition, the Act provides for the grant of IEDN and IEDNO licence within an area with no existing distribution system or where the existing distribution infrastructure is unable to meet the demands of such customers.

With respect to Electricity trading, the Act, while recognising the establishment of the institutional trading licensee – Nigeria Bulk Electricity Trading Company (NBET), which holds a bulk purchase and resale license for bulk procurement and bulk sale of electricity and ancillary services , provides that the Commission may direct the NBET to cease to enter into contracts for the purchase and resale of electricity and ancillary services and novate its existing contractual rights and obligations to other licensees within such period as the Commission may specify.

Furthermore, the Act empowers the Commission to issue such number of trading licences as it considers appropriate which shall authorise the trading licensee to enter novation agreements with the institutional trade licensee – NBET, for the novation of the contractual rights and obligations for purchase and resale of electricity and ancillary services as well as enter contracts with generation companies for the purchase and resale of electricity and ancillary services.

The Electricity Act further provides that any person who contravenes the provisions of the Act in respect of any of these licensing requirements, shall be liable on conviction to a fine of at least 10 (ten) times the application and license fees for the relevant licence contravened; imprisonment for a term not exceeding five years; or both such fine and imprisonment as well as an order for permanent forfeiture of the undertaking to the Commission.

In the second part of this article, we will review the implications of the reforms on the Nigerian Electricity Supply Industry.

Source: Analysis from Business Day