Effective July 25, 2024, the Nigerian Electricity Regulatory Commission (“NERC”) has directed the Nigerian Bulk Electricity Trading Company PLC (“NBET”) to cease entering into new contracts for the purchase and resale of electricity and ancillary services in the Nigerian Electricity Supply Industry (“NESI”). The Order on the Transition to Bilateral Trading in the Nigerian Electricity Supply Industry (the “Order”) halts NBET’s role as the intermediary for energy transactions between electricity Generation Companies (“GenCos”) and Distribution Companies (“DisCos”). As such, GenCos and DisCos can and are expected to now enter into bilateral agreements for the sale and purchase of electricity.

The Order is in accordance with section 7 (2) of the Electricity Act 2023 (the “Act”), which provides that:

“For the purpose of subsection (1) and preparatory to the initiation of medium-term and long-term Electricity Market stages as recognised under this Act, the Commission (NERC) shall by its directive and within such period as it may specify, direct NBET Plc, the trading licensee holding the licence for the bulk procurement and bulk sale of electricity and ancillary services, to, in accordance with its licence, 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”.

Background

NBET was incorporated by the Federal Government of Nigeria (“FGN”) to act as an intermediary between GenCos and DisCos, being a credible and creditworthy off-taker and to be provided with credit support and/or capitalisation by the FGN to guarantee payments to GenCos while facilitating bankable project-financed independent power projects.

Objective of the Order

The Order aims to reduce the FGN’s fiscal risk by promoting bilateral energy and capacity contracts between generation/trading and distribution licensees. It seeks to enhance market competition by repositioning NBET from its role as the sole bulk electricity trader and allows hydro and thermal GenCos to trade directly with DisCos. Also, the Order transitions bulk energy trading to “take-or-pay” contracts for increased market certainty and discipline, while enabling DisCos to optimize their energy off-take and improve supply quality to end-users.

State of Energy Trading with NBET

The NESI has faced persistent financial challenges since its privatisation in 2013. Despite the Power Sector Recovery Program (“PSRP”) making some improvements, problems like non-cost reflective tariffs, slow subsidy payments, and poor billing by DisCos created significant revenue shortfalls. Without Federal Government capitalisation, NBET depended on temporary payments and support from programs like the World Bank’s PSRP.

This lack of stable funding prevented NBET from attracting new power producers. Industry best practices involve fully effective power purchase agreements with payment guarantees, but only 8 of 28 GenCos have such contracts. Most GenCos operated on a “take-and-pay” basis without guarantees, causing operational challenges and debt growth. According to the Order, as of June 2024, only 23.25% of the gross installed capacity of GenCos on these contracts was available for electricity generation, contributing to grid fragility, system collapses, and customer dissatisfaction.

Key Provisions of the Order and their Implications

1. Transition from NBET to Bilateral Contracting

With the NBET ceasing to be an intermediary, GenCos can now enter into bilateral power purchase agreements with DisCos. As provided under section 19 (D) of the Order, all power plants with “take-and-pay” power purchase agreements or interim energy sales agreements with NBET are given sixty (60) days from the commencement date of the Order to negotiate and contract with DisCos the capacity currently with NBET (“Contracted Capacity”), on a bilateral agreement basis.

A key incentive for enabling bilateral contracts between GenCos and DisCos is to ensure satisfactory off-take commitments backed by suitable and adequate payment guarantees, thus enabling a more predictable power ecosystem.

2. Payment Hierarchy and Revenue Collection

Bilaterally traded energy will be prioritised as provided under Section 19 (N) of the Order. Thus, for energy invoicing and settlement, the Order provides that the disbursement waterfall of the DisCo revenue collections for energy/capacity payments shall rank as follows:

• Bilaterally traded energy between DisCos and GenCos.
• Firm contracts of the NBET with five (5) GenCos.
• NBET pool energy under interim “take-and-pay” framework power purchase agreements.

Section 19 (N) (iii) of the Order also provides that, in its monthly tariff reviews, NERC shall continue to consider and accommodate changes in macroeconomic indices to ensure that a DisCo’s allowed tariff is sufficient to meet its contracted bilaterally traded energy costs.

3. Gas Supply Agreements

Section 19 (L) of the Order requires that within three (3) months of the bilateral contracting, GenCos should support their capacity under bilateral contracts with firm Gas Supply Agreements (“GSAs”) on a “take-or-pay” basis with provisions for liquidated damages for supplier defaults to sustain the bilateral market.

Conclusion

1. GenCos may actively seek and negotiate bilateral contracts with DisCos that are going concerns, as the payments for bilaterally traded energy between GenCos and DisCos are given priority in the disbursement waterfall of the DisCo revenue collections.
2. GenCos may negotiate and contract any Contracted Capacity with DisCos on a bilateral agreement basis within sixty (60) days of the Order.
3. GenCos are mandated to support their capacity with GSAs with robust “take-or-pay” provisions within three months of bilateral contracting, as this is crucial in maintaining generation capacity and meeting contractual obligations. Firm GSAs will also enhance negotiating position in bilateral contracts.