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The Act seeks to improve and promote private participation in the transmission segment of the Nigerian Electricity Supply Industry by permitting private investors and non-licensees to invest in the national grid and in the independent electricity transmission networks of the states.

Introduction

In 2013, the power generation and distribution subsectors of the Nigerian Electricity Supply Industry (NESI) were privatised. However, there has been increasing need to take further legislative actions to address some shortcomings that have persisted in the NESI post-privatisation. On 17 March 2023, the Constitution of the Federal Republic of Nigeria (Fifth Alteration) Act, 2023 (Constitution Alteration Act) was enacted into law. A key change in the NESI brought by the Constitution Alteration Act was amending the concurrent list to empower state governments to generate, transmit, and distribute electricity in areas covered by the national grid within their states as well as permitting states to make policies, laws, and regulations for the power sector within their domains. This effectively marked a stride towards the decentralisation of the NESI.

To create a harmonious implementation of the new legislation, and in furtherance of the goal of providing a framework to guide the NESI in its post-privatisation competitive phase, the Electricity Act, 2023 (the Act) was enacted into law on 9 June 2023. The Act repealed the Electric Power Sector Reform Act, 2005 (EPSRA). Amongst other things, the Act makes more elaborate provisions on the decentralisation of the NESI and consolidates extant legislation and regulations in the industry, in a bid to provide an omnibus regulatory framework for the NESI while encouraging private sector investment in the power sector.

In this article, we highlight some of the new provisions introduced by the Act, while analysing the impact of the new introductions on stakeholders in the power sector.

Key changes

a.    Decentralization of the power sector

Building upon the decentralisation of the power sector by the constitutional amendment, the Act further decentralises the power sector and endows states with substantial autonomy concerning legislation, licensing, and regulation of electricity operations such as generation, transmission, distribution, supply, and sale of electricity, within their boundaries. Sections 2(2) and 63(1) of the Act explicitly grants states the- power to legislate, establish local electricity markets, grant licenses, establish regulatory bodies to regulate electricity operations within their domains, and perform other regulatory functions.

Further to the above, sections 230(2) – 230(9) of the Act provide for the process for transition of regulatory functions from Nigerian Electricity Regulatory Commission (NERC) to a state electricity regulatory authority (state regulator) upon the enactment of a law to establish a state’s electricity market.

However, for states where no law has been enacted and no state regulator has been established, NERC will continue to be the substantive regulator for the industry in such states. Also, it should be noted that for inter-state or transnational distribution of electricity, NERC continues to be the substantive regulator for those activities.

b.    Introduction of Independent Electricity Transmission Networks.

Sections 63(2)(b) and 63(7) of the Act introduces a new licensing framework called the Independent Electricity Transmission Network (IETN) license for independent transmission of electricity in Nigeria. This is similar to the current Independent Electricity Distribution Network (IEDN) framework in the distribution segment of the NESI. IETN licenses issued by NERC grants the licensee the right to construct and operate a transmission network where there is no existing transmission facility or where there are existing transmission facilities that require reinforcement of the network. State regulators, where established, can also issue IETN licenses within their boundaries provided that such a state-issued IETN license does not permit the licensee to provide inter-state or transnational transmission of electricity in Nigeria.

c.    Open-ended duration of licenses

Section 72(10) of the Act provides that the tenure of a license granted by NERC will now be open-ended (i.e., without time duration) or will be valid for such duration as stipulated in such license. Formerly, licenses issued by NERC were to have a tenure of 10 years and extendable by an additional 5 years each. However, NERC reserves its discretionary power to cancel, suspend, amend, or renew any license taking into account the performance track record of the licensee, the nature of the undertaking, public interest, and the provisions of the Act relating to amendment, suspension, cancellation, or renewal of licenses.

d.    Private participation in electricity transmission

The new Act provides in sections 109(1) and 112 for investments into national grid/transmission networks by both Transmission Company of Nigeria (TCN) and non-licensees. Additionally, it establishes a foundation for collaborative efforts between federal or state governments and private enterprises, facilitating public-private partnerships to foster investment in transmission networks. These partnerships are required to be in line with the relevant framework on infrastructure concessions and public-private partnerships.

e.    Legislative recognition of electricity distribution franchising

Sections 68(4) and 68(5) of the Act formally recognises electricity distribution franchising (EDF) as a commercial arrangement within the NESI. Section 116(1)(c) of the Act further recognises EDF as an activity that will be subject to tariff regulation. However, the law provides that all such arrangements must be in accordance with approved franchising terms, models, and tariffs as may be approved by NERC within the respective coverage areas. The law also provides that the franchisee shall not be deemed as holding a distribution or supply license or sublicense, but rather would operate under the terms of distribution and supply licensee’s license, whichever is applicable, with the distribution and supply licensees being ultimately responsible for quality distribution and supply of electricity in their respective licensed areas of operational coverage.

f.    Promotion of renewable energy generation

The Act makes a concerted effort to amplify the utilisation of renewable energy sources by incorporating specific provisions that compel the engagement, growth, and financial backing of renewable energy initiatives. In fact, the Act dedicated the whole of Part XVIII of the law on promotion of renewable energy and energy efficiency. Notably, sections 72(2)(d), 80, 113(1), and 164 of the Act impose obligations on the power generation companies (GenCos) and the distribution companies (DisCos) within the NESI to generate electricity from renewable sources, procure renewable-energy-generated power, or secure relevant instruments representing renewable energy generation.
 
g.    Criminalization of electricity theft and other related offences

The Act goes a step further than the EPSRA in spelling out the specific offences and the corresponding penalties within the NESI. The EPSRA generally prohibited breach of any of its provisions, but the Act goes a step further by outlining specific offences such as electricity theft, meter tampering, damaging streetlights, disruption of power supply, and other related criminal acts as offences as well as stipulating economic reflective and more punitive penalties to deter offenders.

h.    Laying groundwork for a new trading license framework

The Nigerian Bulk Electricity Trading PLC (NBET) is currently the sole licensed entity for bulk electricity trading and ancillary services in the on-grid segment of the NESI. As per sections 7(2)(d) and 69(1) of the Act, NBET will eventually cease its trading in the NESI at a time determined by NERC. Upon the cession of its activities as the sole trading licensee, all existing contracts entered into by NBET will be novated to new trading licensees.

Commentary

The Act provides further legislative direction in the decentralisation of the NESI as envisaged in the Constitution Alteration Act. It introduces a dual regulatory framework in which states that have not yet formulated their electricity laws will be regulated by NERC or regulated by a state regulator where they have enacted laws governing their electricity market. This enables a smooth transition from a centrally regulated power sector to a more decentralised one. While the decentralisation of the regulatory authority may mean an increase in the cost of governance, it would result in a more tailored law and policy to address local issues on electricity more effectively. This also reduces the regulatory burden on NERC.

However, it is worthy of note that there are drawbacks to having a dual regulatory framework in the NESI:

a.    One of such drawbacks is that there would be a loss of uniformity in the regulation of the power sector in Nigeria. Where the federal and state laws and regulations differ significantly, this would increase compliance burdens on power project developers, especially those operating in multiple states. Such lack of uniformity would also apply in the regulation of electricity tariffs, which is currently only performed by NERC.

b.    Furthermore, where not properly delineated, the overlapping roles of the federal and state regulators in the NESI may result in conflict between the federal and state regulators. The possibility of duplication of functions between the federal and state regulators may not only further increase regulatory bureaucracy for obtaining relevant licences and approvals, but may also increase registration and filing fees, as well as result in regulatory uncertainty.

c.    Lastly, as states boundaries are to be delineated with a view to transferring to states the powers to regulate electricity markets within their boundaries, regulatory conflicts are bound to arise between competing states on who is the competent authority to regulate activities in areas in which boundary disputes exist between some states of the federation.

The Act specifically defines actions that constitute offences and imposes penalties to serve a deterrent effect. Offences were not clearly defined in the EPSRA and owing to changing economic conditions, some of said penalties lacked commiserate punitive measures to deter offenders. By clearly defining what constitutes offences and stipulating penalties for same, the Act is more likely to ensure compliance with its provisions.

The provisions of the Act also seek to improve and promote private participation in the transmission segment of the NESI by permitting private investors/non-licensees to invest in the national grid as well as allowing these investors to set up IETNs in states. These innovations show a clear intention of the government to improve the transmission segment of the NESI. These actions are expected to attract private investment, fostering transmission sector growth, and NESI performance enhancement.

The recognition of innovative business models like EDF and issuance of IETN licenses is also noteworthy. This development undoubtedly heralds the opportunity for enhanced private participation in the NESI and increased infrastructure development in distribution and transmission segments of the industry. In particular, NERC’s – and state regulators’ – power to issue an IETN license where there is no existing transmission facility or the existing transmission facilities require reinforcement and/or refurbishment will aid in reducing the amount of areas without grid connection.

Additionally, the Act further encourages investment in the sector by rendering the tenure of licence terms as open-ended. As such, licences for electricity projects undertaken in Nigeria are no longer fixed at ten (10) years but can now have an indefinite duration provided the project developers adhere to the requirements of law and the terms and conditions of their licenses.

It is laudable that steps have been taken to reshape the NESI in order to realign post-privatisation issues and expectations of stakeholders. However, in order to achieve the goals of the Act, it is imperative that there is cooperation between the federal and state electricity regulators in order to ensure that the parallel regulation of the sector achieves its objectives. While it is important that state electricity laws be tailor-made to solve a state’s peculiar issues, it is important that they are not so drastically different from the federal laws so as to cause a power tussle between the regulators. It is also important that state boundaries are clearly delineated so as to prevent encroachment into another jurisdiction and reduce incidence of ambiguous boundaries causing conflicts.

It is also recommended that NESI stakeholders continue to engage and lobby the federal regulators, particularly NERC, and the state governments on the need to ensure harmony and uniformity when enacting the different state laws with a view to limiting the areas of conflict between the respective states and federal laws.

Conclusion

The Act takes significant steps in making changes to the NESI to stimulate investment and participation. However, it remains to be seen how the parallel regulation of the electricity sector can be done without regulatory clashes between NERC and state regulators. This calls for collaborations between NERC and state regulators to avoid regulatory tussle among them.

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