TRANSITION TO STATE ELECTRICITY MARKETS IN NIGERIA

Introduction

The Nigerian Electricity Supply Industry (“NESI”) is currently undergoing a transition as sub nationals based on recent constitutional amendment[1] to establish and regulate their own electricity markets. This was further strengthened by the enactment of the Electricity Act of 2023 which was assented to by President Bola Ahmed Tinubu. Consequent upon the foregoing, the Nigerian Electricity Regulatory Commission (“NERC”) has granted regulatory approvals to six states — Enugu, Ekiti, Ondo, Imo, Oyo and Edo, which marks a significant milestone in the decentralization of Nigeria’s power sector. This transition offers opportunities for states to craft policies that enhance energy access, stimulate economic growth, and improve the quality of life for the citizens.

Legal Framework

The legal premise being rooted in the Fifth Alteration to the 1999 Constitution and the Electricity Act of 2023. These reforms grant states the authority to legislate on electricity generation, transmission, and distribution within their territories. The constitutional amendment also removes electricity supply from the Exclusive Legislative List, allowing states to play a direct role in the sector.  By the provisions of Section 230(2) of the Electricity Act, a State may, at any time, enact a law, by whatever appellation, to provide for the establishment of a state electricity market. Additionally, the State may establish a state electricity regulatory authority for the State (“the State Regulator”) and appoint a governing body and staff for the said entity. It is expected that the State Regulator would be established by virtue of the law enacted by the relevant State. Upon completing the foregoing, the State may deliver a formal notification of the events above and request NERC to transfer regulatory authority over electricity operations in the State to the State Regulator.

This framework also includes provisions that ensure a smooth transition from federal to state control. States must notify the Nigerian Electricity Regulatory Commission (NERC) of their intention to regulate their markets and complete the transfer of regulatory authority within six months. The recent transfer of regulatory authority from NERC to six states underscores the readiness of these states to manage their electricity markets effectively, marking a crucial step in Nigeria’s journey toward decentralized energy governance.

Steps Required for Authorization by the State Government

For a state government to successfully establish its electricity market, several key steps must be followed:

1. Legislative Action: The state must pass legislation that creates the regulatory framework and establishes a regulatory body to oversee market activities. This body will be responsible for setting tariffs, licensing operators, and ensuring compliance with safety and environmental standards.
2. Notification and Transition: The state must formally notify NERC and other relevant stakeholders of its intention to take over regulatory responsibilities. The state regulatory body must be operational within six months of this notification, at which point NERC will transfer its regulatory functions.
3. Infrastructure Development: States need to invest in the necessary infrastructure for power generation, transmission, and distribution. This includes upgrading existing facilities and building new ones to meet local demand.
4. Capacity Building: States must ensure that their regulatory bodies are staffed with qualified professionals who have the technical and managerial expertise needed to oversee a complex electricity market.
5. Stakeholder Engagement: It is crucial to engage with all stakeholders, including local communities, businesses, and potential investors, to build support for the new market framework and ensure its success.

Basis of an Effective State Power Policy

An effective state power policy must be built on comprehensive planning and strategic foresight. The key elements of such a policy include:

1. Demand Assessment: States must conduct thorough assessments of their current and future electricity needs. This includes considering population growth, industrial development, and urbanization trends.
2. Regulatory Clarity: A clear and transparent regulatory framework is essential for attracting investment. This includes setting tariffs that reflect the true cost of electricity production while ensuring affordability for consumers.
3. Investment Protection: To attract foreign and domestic investment, states must offer legal protections against expropriation and provide mechanisms for dispute resolution, such as international arbitration clauses.
4. Technology Integration: States should leverage modern technology to enhance the efficiency of electricity generation and distribution. This includes adopting smart grid technologies, renewable energy sources, and advanced metering infrastructure.
5. Capacity Building: Continuous training and development for regulatory staff and market participants are vital for maintaining a well-functioning electricity market.
6. Environmental Sustainability: States must ensure that their power policies align with environmental goals, such as reducing carbon emissions and promoting renewable energy. This includes setting targets for renewable energy generation and implementing incentives for clean energy investments.
7. Public-Private Partnerships: Collaborations between the government and private sector can facilitate infrastructure development and innovation in the power sector. States should create frameworks that encourage private investment in power generation, transmission, and distribution.

Case Studies of Effective Implementation

1. India: India’s electricity sector provides a valuable case study for Nigeria. The country’s electricity market was decentralized in the early 2000s, allowing states to regulate their power sectors. States like Gujarat and Tamil Nadu have successfully implemented state-specific policies that have significantly improved electricity access and reliability. Gujarat, for example, has become a leader in renewable energy, particularly solar power, due to its state-level policies that incentivize investment in solar energy infrastructure.
2. Brazil: Brazil’s electricity market has long been decentralized, with state governments playing a significant role in regulating electricity generation, transmission, and distribution. The state of São Paulo, for instance, has effectively managed its electricity sector by attracting private investment and fostering competition. This has led to improved service delivery and has positioned São Paulo as one of the most economically developed states in Brazil.
3. United States: The United States operates a highly decentralized electricity market, with states having significant authority over their electricity policies. Texas, through its Electric Reliability Council of Texas (ERCOT), manages its electricity grid independently from federal oversight. Texas’ state-specific approach has enabled it to attract substantial investment in renewable energy, particularly wind power, making it a leader in renewable energy generation in the U.S.

These case studies demonstrate that decentralization, when coupled with strategic planning and investment in infrastructure, can lead to significant improvements in electricity access, reliability, and economic growth. Nigeria’s states can learn from these examples to develop effective policies that attract investment and drive sustainable development.

Conclusion

The transition to state-regulated electricity markets in Nigeria represents a significant opportunity for states to address their unique energy challenges and drive economic growth. By developing and implementing effective power policies, states can ensure a reliable supply of electricity, attract investment, and improve the quality of life for their residents. As electricity becomes increasingly critical to economic development and political stability, state governments must prioritize energy policy as a key component of their governance strategy. This transition, if managed effectively, has the potential to reshape Nigeria’s electricity landscape and contribute to the nation’s overall development. The recent approval by NERC for six states to regulate their electricity markets is a step in the right direction, demonstrating the potential for success as Nigeria embarks on this transformative journey.

 

[1] See the 5^th Alteration of the 1999 Constitution