However, the big elephant in the room is how the policy would be implemented, particularly the DUoS for eligible customers at 11KV and 33KV served by DISCOs, as well as the potential revenue shortfall that may further weaken already financially stressed Discos. We await NERC’s move.
On May 19, 2017, the minister for Power, Works and Housing, Mr. Babatunde Fashola (SAN) invoked the Eligible Customer Declaration in accordance with Section 27 of the Electric Power Sector Reform Act (EPSRA) 2005. The EPSRA 2005 is the “constitution” of the Nigerian Electricity Supply Industry (NESI).
Who is an Eligible Customer?
The EPSRA defines an “Eligible Customer” as an end user customer that is, pursuant to the declaration of the minister (in accordance with Section 27 of the Act), eligible to purchase power from a licensee of NERC, other than a Distribution Company. In other words, once declared an eligible customer, that end-user customer can directly enter into a power purchase contract with a GENCO for power supply and ceases to be a customer of the Distribution Company.
Is an eligible customer different from an end user customer who procures power from a captive power licensee? Well, it’s a matter of semantics. However, the eligible customer declaration in this instance may be applicable to end user customers being able to procure power directly from on-grid licensees.
Summary of the Eligible Customer Declaration
The EPSRA grants the minister for Power discretionary powers to decide who an eligible customer is. Further to the minister’s declaration, the four categories of end user customers who are eligible customers are as follows:
1. A group of end-user customers registered with NERC with monthly consumption above 2MW and connected to a metered 11KV or 33KV delivery point on the distribution network of an electricity distribution company;
2. End user customers with monthly consumption above 2MW and connected at 132KV or 330KV on the transmission network;
3. End user customers with consumption above 2MW and connected at 33KV on the transmission network;
4. End user customers with consumption above 2MW and who are located near a GENCO or generation facility.
The declaration of 11KV and 33KV customers of DISCOs with monthly consumption above 2MW as eligible customers is a game changer for the power sector, particularly for DISCOs. It potentially impacts their largest revenue source, albeit negatively. However, GENCOs.
According to the information on the NERC’s website, “this policy directive is expected to bring in new and stranded electricity capacities with the generation companies… Capacities already being wheeled to the national grid cannot be sold to eligible customer”. The above policy statement is not too clear on what is meant by new or stranded capacities. Does this mean additional generation above a GENCO’s contract capacity with the NBET or it means the differential between a GENCO’s available generation capacity and its installed nameplate capacity? For instance, while Egbin can produce 1,320 MW, with a contract capacity of about 1,100 MW with the NBET, based on its PPA, Egbin’ produces less than 700MW due to gas and transmission constraints. Over 600MW is constrained or stranded. Can Egbin dedicate this stranded 600MW to supplying eligible customers?
Or it could mean that Egbin GENCO and other Successor GENCOs would have to procure new (additional) generation capacity above their contracted capacities with NBET, to sell to eligible customers? If this interpretation is correct, then the earliest period that eligible customers can procure power from Successor GENCOs could be no earlier than two to three years time, considering how long it takes to procure new generation capacity.
Hopefully, the declaration would address some of the liquidity/revenue shortfall in the sector, particularly for GENCOs and their gas suppliers who have been the parties that have suffered the full brunt of the revenue shortfalls. But there is a caveat – it depends on the ability of GENCOs to collect such revenues from eligible customers.
Lastly, the declaration seeks to peg the price of electrical power supply by licensees to eligible customers. According to the policy directive, the price cannot exceed the average wholesale price of electricity charged by NBET. In our view, benchmarking the price of supply to eligible customers against NBET’s wholesale price would be counter–productive to both the GENCOs and the eligible customer. NBET’s wholesale price is a blended price of power generation from different energy sources and power producers, and factors in other variables as well. What may be more amenable to both the eligible customer and the GENCO is for the policy to create a willing buyer, willing seller market for eligible customers. The policy directive is silent on the Transmission Use of System (TUoS) and Distribution Use of System (DUoS) costs, as well as cost recovery mechanism for additional infrastructure required to allow an eligible customer receive supply either directly from the transmission network or directly from a GENCO facility.
Consequence of the Declaration
The consequences of the declaration will vary from DISCOs, GENCOs and TCN. There are also likely tariff consequences for retail customers as well. We itemise some of these consequences to DISCOs, GENCOs, TCN and the potential impact of the policy on electricity tariffs.
GENCOs
Overall, the net effect of the policy is positive to GENCOs and their gas suppliers. GENCOs now have the ability to contract directly with large electricity customers, particularly industrial and manufacturing customers. However, the side effect is that it may jeopardise or put captive and embedded power plants/off-grid IPPs at risk. Thus we advise that the policy also explicitly cover captive and embedded IPPs.
Hopefully, the declaration would address some of the liquidity/revenue shortfall in the sector, particularly for GENCOs and their gas suppliers who have been the parties that have suffered the full brunt of the revenue shortfalls. But there is a caveat – it depends on the ability of GENCOs to collect such revenues from eligible customers. Thus GENCOs now have collection/payment risks.
The policy may lead to increased generation capacity, as GENCOs would potentially ramp up their generation capacities to provide supply to eligible customers. Nevertheless, the price setting mechanism that would make it attractive for GENCOs to invest in additional generation capacity under the policy is crucial. It needs to be on a willing buyer, willing seller arrangement.
Transmission Company (TCN)
The TCN (Transmission Services Provider (TSP) to be precise) is key to the success of the eligible customer declaration. Under the Transmission Use of System (TUoS) agreement, we rightly reckon that there would be minimum service levels, agreed to between the TSP, eligible customer and the GENCO, which the TSP and the GENCO would need to adhere to, with consequences and penalties for non-adherence. If properly implemented the policy would lead to more grid stability and enforcement of grid rules.
DISCOs
For DISCOs, rather expectedly, this policy may not be good news for them. They, obviously, could lose a good number of their large customers, and the revenues from these customers. Most of the customers affected by the declaration are Maximum Demand (MD) customers, and this category of customers generate more than 60 percent of the revenue of DISCOs.
Secondly, the eligible customer base potentially affected by the declaration is quite broad. As stated on the NERC website, “the first category of eligible customers include a group of end-users registered with NERC and connected to a metered 11KV or 33KV delivery point on the distribution network of an electricity distribution company and with consumption in excess of 2MW on monthly basis”. This means that large housing estates and commercial establishments, such as the 1004 Housing Estate in Victoria Island, VGC; Banana Island estates; Redeemed Camp; Brains & Hammers City; Lekki Gardens estates; “Shoprite” malls, and other large residential estates and malls can chose to connect directly to a GENCO, so long they are registered with NERC as a group of end users. While it may be bad news to DISCOs, it is good news to these categories of customers who may enjoy more reliable grid power and a reduction in their operating costs per savings on diesel power generation. Note the deliberate use of the word “may”.
We reckon there would be a re-balancing of electricity tariffs very soon to adjust for the cross-subsidy gap, as well as other implications of the policy on the MYTO retail tariffs, such as the reduced customer base, reduced operating and capital expenditure for DISCOs and potential reduction in allocated power.
However, we must stress that an eligible customer is under no obligation to contract with a GENCO for supply. As Mr. Fashola stated at the Jos Stakeholder Meeting, the eligible customer declaration is not compulsory and applies to only customers who think they would benefit from it.
It’s not all doom and gloom for DISCOs. Other than customers connected directly to the transmission system, eligible customers at 11KV and 33KV would need to enter into an agreement with DISCOs, called Distribution Use of System (DUoS) to get supply from GENCOs. Thus DISCOs expectedly would still earn the percentage of the revenues due to them from the overall electricity tariff. However, the DUoS may likely come with minimum service level expectations that DISCOs would have to meet to ensure that such customers get supply directly.
But without doubt, DISCOs would lose revenues from their large customers connected directly to a TCN line, either at 11kV, 33KV or 132KV. Abuja DISCO comes to mind as one that could be highly impacted by this policy.
On a “brighter side”, DISCOs may not need to worry too much about the immediate implementation and impact of the policy, particularly if Successor GENCOs need to invest in new generation capacity outside of their available capacity or contract capacity with NBET.
Impact on Electricity Tariffs
In general, retail electricity customers may likely pay higher electricity tariffs as elements of existing cross subsidies in the MYTO tariff methodology could be eliminated by the direct sale of power to eligible customers, particularly MD customers, whose payments subsidise electricity tariffs for the lower customer tariff classes. Most large industrial customers of DISCOs were already taking alternative supply from captive IPPs, thus the impact on DISCO actual collections (not tariff) by their eligible customer status, may be somewhat muted.
We reckon there would be a re-balancing of electricity tariffs very soon to adjust for the cross-subsidy gap, as well as other implications of the policy on the MYTO retail tariffs, such as the reduced customer base, reduced operating and capital expenditure for DISCOs and potential reduction in allocated power. But the policy should hopefully make DISCOs focus on efficiency and improving their service delivery, as they now have competition from GENCOs.
The EPRSA 2005 does give a bit of reprieve to beleaguered DISCOs. Sections 28 and 29 of the Act anticipated a potential revenue shortfall that may arise from the declaration. Section 28 creates a new electricity charge called the competition transition charge, to be paid by electricity consumers and eligible customers, to cover for any revenue shortfall arising from Section 27.
In other words, tariffs may likely increase with this declaration. This isn’t good news to retail electricity customers!
Conclusion
In summary, the declaration of the eligible customer policy is a good and much awaited policy of government, signaling the fact that government would no longer tolerate poor service delivery and dwindling revenue collection by DISCOs. According to NERC, “it is expected that this policy directive will bring some element of competition into a natural monopoly electricity market as electricity distribution companies might be compelled to adopt creative marketing strategy and be more efficient in their service delivery as they stand to lose some of their big [time] customers to generation companies”.
However, the big elephant in the room is how the policy would be implemented, particularly the DUoS for eligible customers at 11KV and 33KV served by DISCOs, as well as the potential revenue shortfall that may further weaken already financially stressed Discos. We await NERC’s move.
Odion Omonfoman is an energy consultant and the CEO of New Hampshire Capital Ltd. He can be reached on orionomon@outlook.com.
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