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Background

The need to further decentralise what was hitherto perceived as a ‘centralised’ Nigerian Electricity Supply Industry (NESI) to give the sub-national governments clear regulatory autonomy over their respective states’ electricity markets has been pushed by different industry stakeholders for years. Consequently, the Constitution of the Federal Republic of Nigeria (Fifth Alteration) Act, No. 33, 2022 was enacted in March 2023 to amend the Concurrent Legislative List of the constitution. The constitutional amendment empowers the states to generate, transmit, and distribute electricity in areas covered by the national grid within their jurisdictions.

Following the constitutional amendment, the Electricity Act 2023 was signed into law by President Bola Tinubu in June 2023 to replace the Electric Power Sector Reform Act 2005 (EPSRA) as the governing law in the NESI. The legislation makes elaborate provisions on the decentralisation of the electricity industry and provides the procedure for the handover of regulatory powers from the federal regulator, the Nigerian Electricity Regulatory Commission (NERC) to the states regulators.

Following the above, different states of the federation, such as Imo, Kogi, Lagos, Edo, Kaduna, Oyo, Ekiti, and Enugu, have taken various steps to enact their respective state electricity laws with a view to assuming full regulatory control and have autonomy over their subnational electricity markets and have given notification to this effect to the NERC. These states have further requested the federal regulator to transfer regulatory authority over electricity operations in their jurisdictions to their respective state regulators. The transfer processes have been concluded for Enugu and Ondo states, with the NERC effectively ceasing to regulate their electricity markets.

Lagos State, on 29 November 2024, enacted the Lagos State Electricity Law and gave notice to this effect to the NERC, which has issued two Orders of Transfer of Regulatory Oversight of the Electricity Market in Lagos State from the Nigerian Electricity Regulatory Commission to the Lagos State Electricity Regulatory Commission, both dated 5 December 2024. The transfer orders mandate the electricity distribution companies operating in Lagos State, i.e., Ikeja Electric Plc and Eko Electricity Distribution Plc, to respectively incorporate subsidiaries that will assume the responsibilities for intrastate supply and distribution of electricity within the state, amongst other directives within a specified timeline.

Key Highlights

Objectives: The Lagos electricity law has as parts of its objectives to establish a Lagos Electricity Market that is commercially and technically sound, well-funded, and financially viable. It also seeks to establish a regulatory framework and licensing regime for the conduct of regulated activities in the state’s electricity market for the delivery of services to Lagos electricity consumers.

Establishment of the Lagos State Electricity Regulatory Commission (LASERC): Section 5 of the Lagos law established the LASERC as an independent regulatory body responsible for overseeing the electricity market in the state. It also outlines the authority of LASERC to regulate various aspects of the electricity market, including licensing, tariff setting, and compliance monitoring.

Establishment of the Lagos State Electrification Agency: The agency is established under section 121 of the Lagos legislation to work alongside the LASERC in implementing electrification projects aimed at improving access to electricity in underserved areas. It is also tasked with executing state policies related to electrification and renewable energy initiatives.

Section 124 of the law clarifies the collaborative relationship between the electrification agency and the LASERC, emphasising that both entities work together to achieve common goals related to electricity supply and electrification. The synergy between both institutions is aimed at ensuring that policies are effectively translated into actionable projects.

LASERC’s Regulatory Power: Sections 31(1) and 177(1) of the Lagos law state that, subject to prior stakeholders’ consultation, LASERC may make regulations and issue guidelines, rules, directives, decisions, orders and notices for the effective implementation of the provisions of the Lagos law and for the safe, reliable and efficient operation of the Lagos Electricity Market in accordance with the Regulations Approval Law, Laws of Lagos State 2015. The regulations law requires that regulations, such by LASERC, must be approved by the Lagos State House of Assembly.

Licensing Requirements for Existing Licensees: Section 49(2) of the Lagos electricity law states that any person carrying on regulated activities or operating an undertaking in the state must apply to LASERC for a license within three months of the legislation. However, we consider that this does not apply to persons or entities undertaking grid-connected activities.

Negotiation of License Agreements: Section 56(2) of the Lagos electricity legislation introduces a groundbreaking concept of license agreement, under which proposed licensees will negotiate the terms and conditions of their licenses with LASERC. This approach is innovative in Nigeria, as it deviates from the traditional model where regulatory agencies simply issue licenses with predetermined terms without input from the proposed licensees. By enabling negotiation, this provision fosters a more collaborative relationship between regulators and market participants, potentially leading to more tailored and effective regulatory frameworks that better address the specific needs and circumstances of the electricity market in Lagos.

Duration of Licence: By Section 60 of the Lagos law, the duration of licenses issued by LASERC cannot exceed 10 years.

Penalties for Non-Compliance: The Lagos State’s electricity law includes robust provisions criminalising activities such as electricity theft under Sections 30, 163, and 171.

Our Analysis

The Lagos law introduces some changes that differ from the extant federal legislation that regulates the NESI with the exception of the states that have assumed full regulatory control of their electricity markets. It also contains provisions that challenge the status quo. Some of the notable changes and their impacts are discussed as below.

Section 177(2)(d) of the Lagos law provides that the regulations made by LASERC may provide for the establishment of a framework for a regulatory sandbox for the Lagos Electricity Market. A regulatory sandbox essentially means a framework that allows entities to test-run innovative products, services, solutions, and business models. This is quite innovative as it permits entities to come forward with any innovative ideas they may have and receive regulatory approval for testing them.

Also, section 49(3) allows individuals to seek clarification from LASERC about any licensing requirements they are uncertain about.

Furthermore, Section 32 allows LASERC to create advisory forums through which electricity consumers, licensees, and other market participants may provide advice or recommendations for regulatory consideration. This provision enhances stakeholder engagement, ensuring that diverse perspectives are considered in making regulations, ultimately leading to more informed and effective policy outcomes.

We also note that the regulatory functions previously exercised by the National Electricity Management Services Agency (NEMSA) at the federal level are now allocated to LASERC at the Lagos State level. For instance, section 18(3)(g) of the Lagos electricity law empowers LASERC to inspect and certify electrical installations typically overseen by NEMSA at the national level. By doing so, the Lagos law seems to streamline the processes for compliance. However, it begs the question whether LASERC will have the competence and manpower to undertake these technical functions in the short- to medium-term.

Also, the above provision as it relates to projects or power plants that are connected to the national grid, begs the question about who the appropriate authority to certify the personnel working on such projects would be: NEMSA or LASERC.

A possible general drawback of the new legal order for the provision of electricity in Nigeria is that entities wishing to provide services across two or more states will need to navigate both state and federal regulations or various states and federal laws as the case may be. For example, if a company licensed by LASERC seeks to operate in another state governed by NERC, it must comply with both sets of regulations. This dual compliance requirement could create operational challenges and increase costs for businesses attempting to expand their services across the state lines.

Another point to note is that while Section 177(1) of the Lagos law grants the power to LASERC to make regulations and issue guidelines, it makes it subject to Section 1(1) of the Regulations Law, which provides that no regulation shall have effect unless it is laid before and approved by the Lagos State House of Assembly. This provision has the potential to hamper the regulatory autonomy and operations of LASERC.

We also observe a potential conflict between Sections 76(1)(b) and 80(2)(a) of the Lagos law on one hand, and section 63(2)(b) and (7)(b) of the federal legislation on the other hand, which grants NERC regulatory oversight over the generation, transmission, distribution, supply, and sale of electricity that occurs inter-state and transnational or activities utilising the national grid. For instance, while section 80(2)(a) of the Lagos law empowers a holder of a trading license issued by LASERC to engage in the bulk purchase of electricity from Generation Companies (GenCos), including those licensed by other regulators outside Lagos State, we consider that the scope of any trading license issued by LASERC should be limited to the purchase of electricity from GenCos operating within Lagos State that do not utilise the Transmission Company of Nigeria (TCN’s) infrastructure for power evacuation to offtakers. However, we are aware that there is no known case law at this time opining on the constitutionality of the power sharing arrangements between NERC and the various State Electricity Regulatory Commissions (SERCs) as expounded in the federal electricity Act, particularly regarding regulation of trading licensees operating within a state while utilizing TCN's network for their business operations. This analysis similarly applies to Section 76(1)(b) of the Lagos law, which permits transmission licensees regulated by LASERC to connect to the national grid/TCN network.

Another important point we noted from the review of the Lagos law is that the legislation limits the duration of licences issued by LASERC to a maximum of 10 years. But given the nature of power sector arrangements, which require execution of long-term Power Purchase Agreements of up to 20 – 25 years to enable investors pay up the debt for developing the power project and recoup their investments, the provision creates uncertainties for investors and, therefore, puts their investments at further risk. This is especially the case, as investors would lack certainty about whether their licences would be renewed at their expiration.

Finally, clarity is required on the import of section 74 of the Lagos law. The provision is to the effect that an entity who owns a captive generation plant in excess of 1MW and is not for personal use shall require a permit from LASERC. This provision is unclear as it seems to be suggesting that if the plant in excess of 1MW is for personal use, then no permit is required. On the other hand, the national regulations administered by NERC require permits for operating captive generation plants in excess of 1MW.

Conclusion

The Lagos electricity law is quite innovative in its provisions. If it is well implemented, the legislation will go a long way in alleviating energy poverty in the state. However, to bring the objectives of this law into reality, strong political will is required from governmental stakeholders, while ensuring that the environment is conducive for entities wishing to participate in the Lagos Electricity Market.

Detail Commercial Solicitors is distinct as Nigeria’s first commercial solicitor firm to specialise exclusively in non-courtroom practice. Based in Lagos, Nigeria’s business capital, DETAIL is totally committed to its clients’ business objectives and reputed for dealing with the minutiae. Email: info@detailsolicitors.com.