Tgenerating station in the country was built in Lagos.

Transcription

1 HISTORY OF THE NIGERIAN ELECTRICITY SUPPLY INDUSTRY (NESI): he evolution of the Nigerian Electricity Supply Industry (NESI) can be traced to 1896 when the first power Tgenerating station in the country was built in Lagos. The power generating station which was built and managed by the Public Works Department (PWD) had an installed capacity of 20MW. A second power plant was built between 1921 and 1923 with an installed capacity of 14MW. Six years later, in 1929, the Nigeria Electricity Supply Company (NESCO) was established as the country's first electricity utility company and with it came the construction of a hydroelectric power station at Kurra Falls, South-East of Jos, Plateau State, Nigeria. At the time, electricity supply was mainly for offices and quarters of members of the colonial government offices as well as a few influential Nigerians.

2 In 1950, the colonial government passed the Electricity Corporation of Nigeria (ECN) Ordinance No. 15 of 1950 in a bid to coordinate electricity generation and facilitate its supply to as many Nigerians willing to pay for it. A year later, ECN took over the assets of NESCO as well as other power generating assets of the colonial government. In 1956, the ECN established the Ijora B hydroelectric power station in Lagos with a capacity of 2MW to which 30MW will be added in 1961 and another 30MW in 1962 as well as an additional 36.5MW in The Federal Government established the Niger Dams Authority (NDA) in 1962 to oversee the development and management of hydro power stations inherited from the colonial government. The NDA was tasked with building and operating power generating stations and transmission lines while the ECN was responsible for the distribution and sale. Power generated by the NDA was thus sold to the ECN at utility voltages. The first 132KV line was constructed in 1962, linking Ijora Power Station to Ibadan Power Station. This was generally deemed to be the first real breakthrough for the country in the area of power generation and transmission. The now defunct National Electric Power Authority (NEPA) emerged in 1972 from a merger of the ECN and NDA pursuant to Decree No. 24 of 1972, following the recommendation of a Canadian consultancy firm, Showment Limited to the effect that vesting the production and distribution of electricity in one entity would result in increased efficiency which as witnessed in later years failed to achieve the desired effect and led to the privatisation of the sector. NEPA began operations in 1973 with four (4) major power stations, namely: Ijora thermal station, Delta thermal station, Afam thermal station and Kainji hydro power station with a total installed capacity of 532.6MW, serving more than 2 million customers. Persistent challenges with power supply in the country motivated calls for the liberalisation of the sector in respect of which a major step was taken in 1998 with the amendment of the Electricity Act 1990 via the Electricity (Amendment) Decree 1998; and the NEPA Act 1990 via the NEPA (Amendment) Decree The amendments removed NEPA's monopoly over electricity generation and allowed for private sector participation. Notwithstanding the amendment of the laws, the power sector was still characterised by poor operational performance. As of 1998, total installed generation capacity was 5,888MW, of which 60 per cent was provided by thermal plants while the remaining 40 per cent was provided by the hydro power stations, and the maximum generation capacity availability was put at 3,355MW. This range of the maximum generation capacity in terms of availability has remained the reality of the power sector as at today due to the failure to address the inherent problems that existed preprivatisation and which still exists and plagues the value chain post-privatisation. The situation became even more critical when only 19 of the 79 power-generating units in the country were operational by Efforts to address the challenges began in 2001 when the administration of former President Olusegun Obasanjo administration came up with the National Electric Power Policy. The key recommendations of the policy included the establishment of a regulator for the electricity industry, the privatisation of the Power Sector and the development of market trading design and new rules, codes and processes. One other significant step taken by the Obasanjo administration was the initiation of the National Integrated Power Project (NIPP) in The NIPP project initially comprising seven (7) medium sized gas-fired power stations located in gas producing states was conceived as a means of addressing the issues of low power generation, to boost the nation's overall generating capacity and end gas flaring from oil exploration in the Niger Delta region. However till date, the NIPP plants are barely operating at optimal levels, hence the drive of the Federal Government to sell majority of the plants. Additionally, the lack of an adequate gas pricing regime makes investment in gas production unattractive. The Federal Government moved a step further to draft the Electric Power Sector Reform Bill which was passed into law in 2005 and is now known as the Electric Power Sector Reform Act (ESPR Act) 2005, the principal legislation in the industry. The Act paved the way for the metamorphosis of NEPA into the Power Holding Company of Nigeria (PHCN) and the formation of 18 successor companies comprising six (6) Generation Companies, the Transmission Company of Nigeria (TCN), and 11 Distribution Companies between November 2005 and November THE PRIVATISATION CONTEXT The objectives of the EPSR Act in unbundling the PHCN could not be immediately accomplished due to a number of challenges such as the failure to establish a bulk purchaser in line with the provisions of the Act, failure to address investors' concerns about the creditworthiness of the Th i s me mo r a n d u m h a s b e e n p r e p a r e d b y Ge o r g e Et o mi & Pa r t n e r s ( GE& P ) t o g u i d e a f o r e i g n c o mp a n y w i sh i n g t o d o b u si n e ss i n N i g e r i a.

3 distribution companies/bulk purchaser during their eventual transition to financial viability; operational and financial risks to potential acquirers of successor companies posed by the failure to reach an agreement with the labour unions on the settlement of outstanding arrears (of salaries, pensions and other benefits) and on severance pay; as well as the uncertainties generated by the delay in operationalising the Nigerian Electricity Liability Management Company (NELMCO). As such, the President Goodluck Jonathan administration intensified the reform efforts by launching the Power Sector Roadmap in August The roadmap created a timeline for the privatisation of the PHCN successor companies to commence by December Bids were to be submitted by July 2012 and approved by the National Council on Privatisation (NCP) by October Negotiations and Completion of Industry Agreements were scheduled for January and February 2013 respectively. Payment of the 30% Share Sale Purchase was to be effected by March 2013 while payment for 70% Share Sale Purchase was to be accomplished by August The Federal Government ensured the completion of the first phase of the privatisation process and on November 1, 2013 handed over eleven (11) distribution companies (DISCOs) and six (6) generation companies (GENCOs) to private investors. The Bureau of Public Enterprises (BPE) put the total sale figures of both the GENCOs and DISCOs at $3.9 billion (about N768.3 billion). One of the major criteria for selecting the preferred bidders in the DISCOs privatisation process was the determination of the most aggressive but feasible ATC&C loss reduction trajectory over a five year period. The ATC&C loss reduction is also the criterion to determine the performance of the business operations of the new owners as enshrined in the Performance Agreement. There was however some uncertainty around the baseline data from which the aggregate losses were calculated during the privatisation process as the parameters used were not realistic, hence the tariffs were not reflective of the high losses in the system, as such the DISCOs were collecting less revenue than what was needed to cover their costs in full. The baseline figures were to be fed in once cost reflective tariffs were in place to reflect actual ATC&C loss levels. The tariff assumptions were however not correctly trued-up and as such, tariffs as at today are not truly reflective of costs occasioned by factors stated below. Following the conclusion of the pre-transitional stage and after a few years of a slow market development coupled with the need to fulfil some of the conditions precedents for the disbursement of the CBN-NEMSF 1 Facility, the NERC declared the market fit to move to the next stage of the market which is the Transitional Stage whereby all trading arrangements were to be consummated through contracts. Prior to this time, in a bid to cater to the liquidity issues, NERC implemented a set of Interim Market Rules (i.e. Interim Rules Period) to manage the limited liquidity in the market and as such allowed for partial non-payment of invoices. The Interim Rules Period (IRP) following several extensions ended in January 2015 and ushered the introduction of the Transitional stage of the market, i.e. the Transitional Electricity Market (TEM). To this end, NERC issued an Order directing the commencement of the Transitional Stage Electricity Market on 29th January, On 18th March, 2015 NERC issued a Supplementary Order on the commencement of the Transitional Electricity Market (TEM) which was declared to commence on 1st February, The order contained additional guidelines in addition to the provisions contained in the original Order of 29th January, for the effective administration and operation of the TEM. Industry observers are however convinced that the appropriate factors allowing for the declaration of the TEM were not yet in place before the Commission made the declaration. This has in effect led to the institution of several court cases by key stakeholders in the value chain against the government. The Medium Term Stage is to follow the transitional stage and should witness retail competition as well as competitive entry into the market. Progress to this stage may however be hampered if current overwhelming challenges faced by the sector are not addressed. STRUCTURE OF THE N IGERIAN ELECTRICITY SUPPLY IN DUSTRY VALUE CHAIN The Nigerian Electricity Supply Industry (NESI) is largely thermal based, meaning that most (85%) of the power plants in Nigeria are fuelled by gas. The other fuel sources

4 are hydro, solar and few other renewables which constitute a minority component of the entire energy mix in Nigeria. The structure of the entire value chain of the NESI is made up of: Gas Producers and Transporters: The gas producers are drawn mostly from the International Oil Companies (IOCs) who provide the gas used in driving the power plant turbines. A Gas Sale and Purchase Agreement (GSPA) is typically executed between the Gas producer and the Generation Company for the purpose. Generation Companies (GenCos): The Generation Companies own the power plants which are used to generate power for grid or off grid supply. Transmission Company of Nigeria (TCN): The Transmission Company of Nigeria (TCN) is responsible for managing the grid network and is solely owned by the government of Nigeria. Nigerian Bulk Electricity Trading Company Plc (NBET): The Nigerian Bulk Electricity Trading Company Plc. (NBET) is the licensed trader for the Nigerian Electricity Supply Industry (NESI) responsible for providing credit enhancement by backstopping the payment obligations of the Distribution Companies (DisCos) to the Generation Companies (GenCos). NBET typically executes a Power Purchase Agreement (PPA) with the GenCos and a Vesting Contract with the DisCos. The Electric Power Sector Reform Act, 2005 (EPSRA) envisages that NBET's role will cease when the Electricity Market becomes competitive and the DisCos become financially viable to efficiently remit receipts (monies obtained for the end users) to the NESI. Distribution Companies (DisCos): The Distribution Companies (DisCos) are responsible for receiving electric power allocated to their network for onward supply to the end user. The DisCos are required to remit receipts to keep the entire value chain of the NESI viable. REGULATORY INSTITUTIONS AND FUNCTIONS There are a number of institutions with roles and responsibilities within the NESI, some of which include: 1. Ministry of Power, Works and Housing: The ministry through the Minister of Power has the responsibility of providing policy guidance for the NESI; section 33 of the Electric Power Sector Reform Act, 2005 (EPSRA) empowers the Minister to issue general policy directions to the Commission on matters concerning electricity, including directions on overall system planning and coordination which the Commission shall take into consideration in discharging its functions under section 32(2); 2. Nigerian Electricity Regulatory Commission (NERC): This is the main regulator for the NESI established by virtue of section 31 (1) and (2) of the Electric Power Sector Reform Act, 2005 (EPSRA) and headquartered in Abuja. It has the main responsibility of licensing and regulating persons engaged in the generation, transmission, system operation, distribution, and trading of electricity in Nigeria; 3. Nigerian Electricity Management Services Agency (NEMSA): The Agency was established pursuant to the NEMSA Act, 2015, and is often regarded as the technical partner with Standard Organization of Nigeria (SON) for standards in the power sector. NEMSA has the duty of technical inspection, testing and certification of all categories of electrical installations, electricity meters and instruments and other materials to ensure the efficient production and delivery of safe, reliable and sustainable electric power supply and to guarantee safety of lives and property in the NESI and for other related matters; 4. Rural Electricity Agency (REA): This agency was set up pursuant to section 88 (1) of the Electric Power Sector Reform Act, 2005 (EPSRA) to administer the Rural Electrification Fund (REF), which is a designated fund to promote, support and provide rural electrification programmes through public and private sector participation in order to achieve more equitable regional access to elec tric ity, maximize the ec onomic, soc ial and environmental benefits of rural electrification subsidies, promote expansion of the grid and development of off-grid electrification and stimulate innovative approaches to rural electrification. 5. Energy Commission of Nigeria (ECN): The Energy Commission of Nigeria (ECN) was established in 1988 with the statutory mandate for strategic planning and coordination of national policies in the field of energy. It was established in line with the declaration of the Heads of The

5 Economic Community of West African States in 1982 for the establishment of an Agency in each member state charged with the responsibility of coordinating and supervising all energy functions and activities. The functions of the ECN include, but are not limited to, the following: I. Serve as a centre for gathering and dissemination of ii. iii. iv. information relating to national policy in the field of energy; Inquire into and advise the Government of the Federation or the State on adequate funding of the energ y s ec to r inc lud ing researc h and development, production and distribution; Monitor the performance of the Energy sector in the execution of government policies on energy; Serve as a centre for providing solutions to interrelated technical problems that may arise in the implementation of any policy relating to the field of energy. 6. Niger Delta Power Holding Company (NDPHC): The NDPHC is a special purpose vehicle jointly owned by the three tiers of government (Federal, State and Local). It is charged with the responsibility for the implementation of the National Integrated Power Project (NIPP). The Government conceived the NIPP in 2004 as a fast-track government- funded initiative to stabilize Nigeria's electricity supply system. Wholly-owned subsidiaries of NDPHC own each of the ten (10) power generation stations that have been developed under the NIPP. 7. Operator of the Nigerian Electricity Market (ONEM): This institution is licensed to function as the Market Operator of the wholesale electricity market of the Nigerian Electricity Supply Industry (NESI). It is responsible for the operation of the electricity market and settlement arrangements. A key function of the ONEM is the administration of the metering system among generation, transmission and distribution companies. 8. Nigeria System Operator (NSO): This is a body licensed to provide system operation services to the Nigerian Electricity Supply Industry (NESI). The NSO is primarily responsible for the planning, dispatch and operation of the transmission system. It is also responsible for the security and reliability of the electricity network grid. 9. The Gas Aggregation Company Nigeria Limited (GACN): This body was incorporated in 2010 for the purpose of stimulating growth of natural gas utilization in the Nigerian domestic market. GACN was formed in line with statutory requirement of the Nigerian Domestic Gas Supply & Pricing Regulations, 2008 and is the vehicle for the implementation of the Nigerian Gas Master Plan (NGMP) commercial framework. The NGMP requires the establishment of a Strategic Aggregator for the domestic gas market, whose responsibilities will include, among others: 1. Processing requests from gas buyers; 2. Managing allocation of gas to buyers; 3. Facilitating Gas Sale and Aggregation Agreement (GSAA) negotiations; 4. Managing escrow accounts on behalf of gas sellers; 5. Managing dispute resolution process for stakeholders. 10. The National Power Training Institute of Nigeria (NAPTIN): This body was established in 2009 to serve as a focal point for human resource development and workforce capacity building, and act as a research centre on matters relating to power in Nigeria. A key objective of the Institute is to design, develop and deliver a wide variety of training courses that will enhance the skills and capacity of both technical and non-technical power utility personnel. 11. The Nigeria Electricity Liability Management Company Limited (NELMCO): This body was established in 2006 as a company limited by guarantee, to assume and manage the non-core assets, all liabilities and other obligations that would not be taken over by the successor companies. This is to ensure that the successor companies are not encumbered by these liabilities at takeoff. The NELMCO is mandated to: 1. Assume and administer the stranded liabilities of PHCN pursuant to the provisions of EPSR Act; 2. Assume and manage pension liabilities of employees of PHCN; 3. Hold the non-core assets of PHCN, sell or dispose or deal in any manner for the purpose of financing the repayment of the pension liabilities of employees of PHCN; 4. Take over the settlement of stranded PHCN's Power Purchase Agreement obligations and other legacy debts as may be determined by the National Council On Privatization within the Nigeria Electricity Supply Industry (NESI); and

6 5. Manage and supervise the management of contractual arrangements arising from the assumption of stranded liabilities of PHCN. 12. Nigerian Bulk Electricity Trading Plc (NBET): This is a government-owned public liability company. The Bureau of Public Enterprises and Ministry of Finance Incorporated are its two shareholders with shareholding of 80% and 20%, respectively. The NBET, established in line with the provisions of the EPSR Act, is an electricity trading licensee that engages in the purchase of electrical power and ancillary services (from independent power producers and the successor generation companies) and subsequent resale to distribution companies and eligible consumers. The role of NBET is essentially to give credit enhancement to the NESI by the execution of bankable Power Purchase Agreements (PPAs) with the Independent Power Providers (IPP). It is currently the sole electricity buyer, however it is envisaged that the distribution companies upon attaining commercial viability, will also be able to procure power directly from the generation companies. Funding Arrangements, etc. The Regulation for License and Operating Fees (2010) stipulates the non-refundable processing fee for the license application. THE REGULATORY FRAMEWORK FOR THE POWER VALUE CHAIN Constitution of the Federal Republic of Nigeria (1999 CFRN as amended) The Constitution of the Federal Republic of Nigeria (CFRN) provides the legal framework for the Nigerian Electricity Supply Industry (NESI) from which all other laws derive their existence. Part II of the Concurrent Legislative list of the Constitution of the Federal Republic of Nigeria, (1999, CFRN as amended) provides as follows: 13. The National Assembly may make laws for the Federation or any part thereof with respect to- THE LICENSING PROCESS The licensing process under the NESI is governed by the NERC Application for Licenses (Generation, Transmission, System Operations, Distribution and Trading) Regulation This regulatory instrument defines the procedure for applying for electricity licenses for generation, transmission, system operations, distribution and trading activities within the NESI. The Regulation stipulates the manner, form and accompanying documentation required to be submitted by an applicant for a license to operate in NESI. It provides the procedure for grant or refusal of applications, amendment, renewal, cancellation, suspension and withdrawal of application for licenses for electricity undertaking under the NESI. (a) (b) (c) (d) electricity and the establishment of electric power stations; the generation and transmission of electricity in or to any part of the Federation and from one State to another State; the regulation of the right of any person or authority to dam up or otherwise interfere with the flow of water from sources in any part of the Federation; the participation of the Federation in any arrangement with another country for the generation, transmission and distribution of electricity for any area partly within and partly outside the Federation; Schedule 1B in the Regulation contains requirements for applications for generation licenses with specific requirements per plant type. There are also general requirements expected to be fulfilled such as legal, financial and technical requirements which cover areas such as- Certificate of Incorporation, Audited Financial Statements and Accounts of the Company for the last 3 years, Land documentation, Environmental, Social and Health Impact Assessment (ESHIA), Feasibility Studies, Evacuation Study, Tariff Methodology and Calculation, Cash Flow Projections, Business and Investment Plans, Details of experience in and knowledge of the electricity industry, Contractual documentation- Fuel Supply and Transport Agreement, (f) the regulation of the right of any person or authority to use, work or operate any plant, apparatus, equipment or work designed for the supply or use of electrical energy. By virtue of paragraph 14 of the Concurrent Legislative list, State Governments in Nigeria have been empowered to make legislations in respect of electricity subject as provided by the Constitution as follows: 14. A House of Assembly may make laws for the State with respect to (a) electricity and the establishment in that State of electric

7 power stations; (b) the generation, transmission and distribution of electricity to areas not covered by a national grid system within that State; and (c) the establishment within that State of any authority for the promotion and management of electric power stations established by the State. Given that electric power issues can be legislated upon by the National Assembly, pursuant to its constitutional powers, the National Assembly enacted the Electric Power Sector Reform Act, 2005 (EPSRA, 2005) to govern the Nigerian Electric Supply Industry (NESI). The EPSRA, 2005 establishes a regulator (Nigerian Electricity Regulatory Commission, NERC) for the NESI and empowered same to enact regulatory instruments for shaping the NESI. The EPSRA, 2005 provides that any contravention of the Act or any regulation hereunder amounts to an offense which is punishable on conviction where no specific penalty is prescribed to a fine not exceeding one hundred thousand naira (N100, 000) or imprisonment not exceeding one year or both for a first offender but for subsequent convictions for a fine not exceeding five hundred thousand naira or imprisonment not exceeding three years or both. Electric Power Sector Reform Act (2005) The Act is the supervening law governing the sector. It is the primary legislation for the sector. Prior to its enactment, electricity was regulated by the Constitution of the Federal Republic of Nigeria 1999 (the 1999 Constitution ), the Electricity Act, Cap 106, Laws of the Federation of Nigeria (LFN) 1990 (as amended) and the regulations made pursuant thereto. Other relevant legislations included the National Electric Power Authority Act, Cap 256, LFN 1990 (as amended); the Energy Commission of Nigeria Act, Cap 109, LFN 1990 (as amended) and the Utilities Charges Commission Act No. 104 of 1992; the Electricity (Amendment) Act No. 28 of 1998; and the National Electric Power Authority (Amendment) Act No. 29 of The EPSR Act made provisions for the formation of companies to succeed the defunct National Electric Power Authority (NEPA); established the Nigerian Electricity Regulatory Commission (NERC) as the industry regulator; empowers NERC to: issue licenses and regulations for power generation, transmission, distribution and supply; to enforce performance standards; to provide for the determination of tariffs which are fair to customers and sufficient to allow for reasonable earnings; and for other related matters. The Act preserved all contractual arrangements which were in place prior to the initial transfer date of the assets and liabilities of NEPA to the Power Holding Company of Nigeria (PHCN) established by the Act as the initial holding company. The Act also facilitated the transfer of the employees of NEPA first to PHCN and subsequently to the successor companies to the PHCN when unbundled. These provisions were understandably made to prevent labour disputes and litigation over contract terms. Other laws and regulations applicable to the sector include t h e : Pu b lic En t e rp ris e s ( Priv a t is a t io n a n d Commercialisation) Act, CAP P38, LFN (2004); Environmental Impact Assessment Act (EIA), Cap E12 LFN (2004); National Environmental Standards and Regulations Enforcement Agency (Establishment) Act No 25 of 2007; National Domestic Gas Supply and Pricing Regulations; National Domestic Gas Supply and Pricing Policy; Roadmap for Power Sector Reform of 2010 (Roadmap), the Grid Code, the Market Rules the Nigerian Electricity Management Services Agency, Act, 2015, etc. In keeping with its mandate under sections 32 and 96 of the EPSRA, 2005, NERC has formulated a number of regulatory instruments impacting on the NESI. Some of these regulatory instruments will be highlighted below. NERC (Permits for Captive Power Generation) Regulations (2008) The Regulation defines captive power generation to mean: generation of electricity exceeding 1MW for purpose of consumption by the generator, and which is consumed by the generator itself and not sold to a third-party. Regulation 3 provides that an intending captive generator shall apply for, and obtain, a permit before engaging in selfgeneration. Where the permit-holder intends to supply a surplus not exceeding 1MW to a third party, the written consent of NERC must be obtained. On the other hand, where the surplus exceeds 1MW, a generation license must be obtained from NERC in compliance with S.62 (2) of EPSRA, Nigeria has promising captive market opportunities that developers/investors can tap into for good returns on

8 investment. Captive power generation is about the most widely used form of off-grid structure in Nigeria, deployed by companies and large organizations in driving industrial processes, in view of the less procedural formalities required to undertake captive power projects. NERC Embedded Generation Regulation (2012) and Independent Electricity Distribution Networks Regulations (2012) The Regulations provide the conceptual frame-work of embedded power and independent distribution networks in Nigeria. Regulation 35 of the NERC (Embedded Generation) Regulation 2012, which is the interpretation section of the Regulation provides thus: Embedded Generation or EG means the generation of electricity that is directly connected to and evacuated through a distribution system Regulation 35 also defines Independent Electricity Distribution Network or IEDN to mean: distribution system not directly connected to a transmission system operated by the System Operations Licensee Under the said Regulation, Isolated IEDN: means an independent electricity distribution network in the urban or rural area that is not connected to an existing distribution network. Thus isolated IEDN can be located either in the urban or rural area in order to facilitate energy access to areas that have been unserved. With regard to the NERC Regulations for Independent Electricity Distribution Networks 2012, Regulation 3 defines the following networks: Independent Electricity Distribution Network or IEDN (which has already been defined by Regulation 35 of the NERC (Embedded Generation) Regulation 2012), Embedded IEDN, Isolated off-grid rural IEDN and Isolated off-grid urban IEDN. Embedded IEDN: means an IEDN connected to a distribution network that is connected to the transmission system operated by the system operation licensee. Isolated off-grid rural IEDN: means an IEDN in a rural area which is not connected to a distribution network that is connected to the transmission system operated by the system operation licensee. Isolated off- grid urban IEDN: means an IEDN in an urban area which is not connected to a distribution network that is connected to the transmission system operated by the system operation licensee. EG and IEDN offer tremendous investment opportunities for power sector investors in view of the prospect of circumventing the challenges associated with on-grid supply and the proximity of power generation to demand centers. N ERC Re gula tion on N a tiona l Conte nt Developments for The Power Sector (2014) On 24th December 2014, pursuant to sections 32(1) and 96 EPSRA, NERC passed the Regulation on National Content Development for the Power Sector. The objective of the Regulation are as follows: 1. Ensuring deliberate utilization of Nigerian human and material resources, goods, works and services in the industry; 2. Opening of the NESI at all levels of its complexity to involve Nigerian people and expertise; 3. Building capabilities in Nigeria to support increased investment in the industry; and leveraging existing and future investment in the NESI to stimulate the growth of Nigerian and enterprise located Nigeria. Regulation 8 requires licensees to maintain a Nigerian Content Plan for major projects and as such priority consideration should be given to local capacity, i.e. Nigerian workers, technologies and consultants over foreign counterpart. On the other hand, regulation 9 (g) provides that where there is inadequate local capacity for any contract to be undertaken, NERC may grant approvals for waivers to adopt foreign expertise for up to 3 years. NERC Regulation on Procurement of Generation Capacity (2014) The Regulation aims to ensure capable developers are involved in the Nigeria Electricity Supply Industry (NESI)

9 through the procurement of additional generation capacity. The Regulation provides for the processes to be used by a buyer in procuring additional electricity generation capacity. The objectives of the Regulation are: (e) regarding the costs that their consumption imposes on the licensees' business; Avoid undue discrimination between consumers and consumer categories; and 1. To establish a systematic, transparent and competitive process that provides reasonable assurance that a buyer procures additional generation capacity at least cost to consumers, consistent with generation capacity expansion plans reviewed and approved by NERC; 2. To ensure that the firms contracted to provide new capacity have the necessary technical expertise, financial resources and industry experience to carry the defined generation project to a successful completion; 3. To minimize opportunities for financial manipulation, fraud or corruption of any kind during the resource acquisition process; and To facilitate the involvement of the private sector in the provision of generation capacity to a buyer, on the basis of rules that provide certainty and transparency and fairness of the generation procurement process and its outcome. THE PRICING FRAMEWORK FOR THE NIGERIAN ELECTRICITY SUPPLY IN DUSTRY (N ESI) The Multi Year Tariff Order (MYTO) provides the framework for regulating the price of electricity in Nigeria. Section 76 of the Electric Power Sector Reform Act, 2005 provides the foundation of the tariff methodology for generation and trading, transmission, distribution and system operation. The regulation of prices for licensed electricity activities is expected to be in accordance with one or more methodologies adopted by the NERC. The tariff methodologies shall: (a) (b) Allow a licensee that operates efficiently to recover the full costs of his business activities, including a reasonable return on the capital invested in the business; Provide incentives for the continued improvement of the technical and economic efficiency with which services are provided; (f) Phase out or substantially reduce cross subsidies. The pricing framework for NESI is regulated by the provisions of MYTO, implemented via the subsisting MYTO model. MYTO sets the wholesale and retail prices in the Nigerian Electricity Market (NEM). TRAN SACTION / IN DUSTRY AGREEMEN TS AN D CO MMERCIAL AGREEMEN TS IN N ESI Beyond the regulatory framework underpinning the Nigeran electricity supply industry, there are a number of key industry/transaction/contractual documents that also govern the relationship amongst stakeholders within the industry such as the Power Purchase Agreement, Vesting Contract, Grid Connection Agreement, the Use of Transmission Network System Agreement, Shareholders' Agreement, Performance Agreement, Gas Sale and Purchase Agreement, Put and Call Option Agreement, etc. A few of these agreements are explained below. Power Purchase Agreement (PPA): The Power Purchase Agreement (PPA) is the legal instrument which contains the terms and conditions upon which power is bought and sold. In the Nigerian power sector as it currently stands, the two main parties to a PPA for on-grid power are the GENCOs/IPPs and the Nigerian Bulk Electricity Trader (NBET). NBET is a state owned entity that purchases power in bulk from Generation companies through the PPA and resells power purchased from the GENCOs to the Distribution companies (DISCOs) through Vesting Contracts. As well as playing its function of buying and reselling power, NBET also functions as a bridge between the DISCOs and the GENCOs. The Nigeria Electricity Market (NEM) is yet to be truly competitive where market forces determine the price of electricity. This is due to the illiquidity in the sector, as many sector participants do not have the financial capacity to actively participate in the market especially in terms of fulfilling payment obligations. (c) (d) Provide incentives for the continued improvement of the quality of services; Give consumers economically efficient signals NBET thus ensures that the generation companies receive remuneration for the power produced. As the agreement that is most critical to any power project, the PPA must be bankable before any power project would come on-stream. Investors must be able to first recoup their

10 investment and also make returns on investment. In ensuring the bankability of a PPA, any investor must be careful to look at the following terms amongst others: 1. Tariff/Tariff Structure: A clear tariff structure must be adopted. In negotiating the tariff structure, a dual pricing mechanism is usually adopted. The first is Capacity Charge, to cater to fixed cost; whilst the second is the Energy Charge, which takes care of variable cost such as fuel costs and actual energy taken by the buyer. In a situation where energy is not dispatched but capacity exists, the capacity charge would continue to be incurred. This ensures that there will be constant revenue/cash flow which is comforting to investors in a power project. 2. Deemed Commissioning: In a PPA, deemed commissioning could be achieved when certain milestones have been reached. Once such milestone(s) has been reached, Capacity Charges start to be incurred by the off-taker. The purpose is to ensure a steady revenue stream for the project to start receiving income and for repayments of debts plus interests. 3. Buy-out/Buy-out Prices: Termination clauses in PPAs may lead to buy-outs by the purchaser of power which may be triggered by either party depending on the event of termination. Lenders like comfort that all outstanding debts be included in the buy-out price. 4. Assignability/Step-in Rights: This enables lenders, financiers, sponsors etc. to step into and take control of the project by effectively adopting the position of the IPP. Vesting Contracts These are the contracts executed between NBET and the DisCOs for the resale of power. Just like the PPA agreements between NBET and GenCOs, the DisCOs are to provide Letters of Credit from commercial banks or financial institutions to NBET as financial security cover for the trading of electricity. It is also important to note that the terms of the Vesting Contracts/Agreements are tied back to back to the terms of the PPAs, hence any default on the part of the DisCOs within the terms of the Vesting Contracts/Agreements affects the terms of the PPAs, i.e. a Buyer (DisCO) default in the Vesting Contract/Agreement can directly or indirectly occasion a Seller (NBET) default within the PPA. Also, the take-or-pay payments made by NBET in the PPA to the GenCOs are pass through costs to the DisCOs in the Vesting Contracts/Agreements. Gas Sale and Purchase Agreement (GSPA): This is simply an agreement for the sale and purchase of gas between gas suppliers and GENCO's. In Nigeria however, the Gas Aggregation Company Nigeria (GACN) acts as an intermediary between the gas suppliers and purchasers. The company ensures that gas is supplied to strategic sectors in the economy and also ensures fulfillment of the domestic gas supply obligations of the natural gas producers. Some Key Clauses in the GSPA include: Take or Pay: This obliges a buyer to take a predetermined quantity of gas or pay for same if not taken. For the seller, this is to ensure regular source of income, usually for repayments of loans and to meet other obligations such that it is not in breach of its obligations under other contracts, where a buyer fails, neglects or refuses to take a pre-determined quantity of gas. Shortfall Gas: This is simply gas supplied after the original contracted quantity nominated by the buyer is supplied and such original quantity is less than the nominated quantity. Therefore, the gas supplied to meet the quantity agreed upon in the GSPA is termed Shortfall. Gas Specification: The general rule is that gas must conform to a contract specification. Where this is not the case, the buyer would negotiate a right to reject the gas or take the gas at a discounted price. Where the gas is rejected because it is off spec any gas eventually supplied could be termed as shortfall gas, as the seller would be deemed as not meeting its obligations to supply the nominated quantity on the agreed date. Make-Up Gas: This is somewhat related to Take or Pay. In this instance a buyer pays for gas without actually taking the gas already paid for. Overtime time this can lead to a gas surplus/reserve situation where the gas purchaser can start to take gas free (only paying the difference between the amount he had paid for the gas and the current price, where there has been a price increase) up to the amount of the make-up outstanding from the previous years during the life of the contract. Put and Call O ption Agreement (PCOA): In the event of an early termination of the PPA through the mechanism of a put and call option agreement, the PCOA

11 allows the project company to 'put' the plant (or its shares) to the government in nearly all circumstances where the PPA is terminated early (including in circumstances where there has been a prolonged gas supply failure). In these circumstances the government is obliged to pay a 'purchase price', which, at a minimum, covers the outstanding debt. Power Project Development Other agreements that are essential from a power project developer/investors point of view are: 1. Project Documentation; 2. Risk Documentation; 3. Security Documentation; 4. Finance Documentation Project Documentation The main documentation under this category include: I. Land Document of Title; II. Engineering Procurement and Construction Contract EPC Contract; III. Technical Services Agreement TSA; IV. Management Services Agreement MSA; V. Owners Engineer Agreement; VI. Construction Insurance; VII. Long Term Services Agreement (LTSA); VIII. Operations & Maintenance Agreement (O&M) IX. Put Call Options Agreement PCOA; X. Gas Supply Agreement GSA & Gas Transportation Agreement GTA; XI. Grid Connection Agreement, Ancillary Services Agreement, Transmission Line & Substation Extension Agreement; Typically these are the documentation requirements that will form the basis of successful negotiations with the Nigerian Bulk Electricity Trading Plc., (NBET) on the Power Purchase Agreement (PPA). Importantly, the project developer must advisedly obtain other regulatory approvals and permits to ensure compliance with the laws of the land. Risk Documentation The main documentation under this category will be: I. Internatio nal Bank Fo r Rec o nstruc tio n and Development (IBRD) loan risk cover; II. Multilateral Investment Guarantee Agency (MIGA) political risk insurance cover; III. Operational insurance cover from local and global reputable insurance companies; IV. Federal government guarantees, etc. Power projects in developing countries are usually fraught with risks from political, feedstock, construction, maintenance, environmental, completion, operational to foreign exchange risk, with Nigeria not least immuned. In light of the risk posed to the development of projects, developers will advisedly seek ways to cover every possible risk segment anticipated in order to give credit enhancement to the project and ensure it succeeds. With a reputable and experienced co-developer, the initial development risk associated with delaying power projects in reaching financial close in Nigeria just like other developing countries can be mitigated. Security Documentation I. Borrower Offshore Bank Account Security Agreement; II. Borrower Offshore Assignment Agreement; III. Shareholder Share Pledge; IV. Offshore Subordinated Loan Assignment Agreement; V. Offshore Security Trust Deed; VI. Subordination Agreement; VII. Share Retention Agreement; VIII. Hedging Agreement; IX. Inter-creditor Agreement. The various security documents show the means by which the banks and financiers will secure the recovery of debt and equity capital of the project. Finance Documentation I. Development Finance Institution (DFI) Loans Agreements; II. Commercial Bank Loans Agreements; III. Mezzanine and Senior Finance Loans Agreements; IV. Equity Finance Agreements such as Joint Development Agreement (JDA), Development Cost Loan Agreement (DCLA), Shareholder and Subscription Agreement (SSA). It is instructive to note that one of the key milestone to cross

12 in the development of project is the execution of the finance documents. This stage is commonly known as achieving financial close. In order to reach financial close the project developers must have packaged the project in such a way that it will be regarded as bankable upon scrutiny by the financiers. Direct Agreements Since power projects are usually limited or non-recourse finance projects (without a balance sheet), projects are designed to allow for step in rights to be exercised by the mandated lead arrangers (MLAs) in order to recoup money lent in the event the default in performance by the project sponsors. To this end, a direct agreement is entered with all the counterparties to the transaction to secure the exercise of the right of the financiers to step into the shoes of the sponsor. The direct agreements will be as follows: I. PCOA Direct Agreement; II. PPA Direct Agreement; III. EPC Direct Agreement; IV. O&M Direct Agreement; V. LTSA Direct Agreement; VI. GCA Direct Agreement; VII. GTA Direct Agreement; VIII. GSPA Direct Agreement. DISPUTE RESOLUTION IN NESI The Electric Power Sector Reform Act, 2005 (EPSRA), recognizes the potential for disputes in the power sector and makes provision for addressing disputes, between the different players in the sector. Section 1 of the EPSRA provides that: Subject to section 10(7) (i), any cause of action or proceeding which existed or was pending by or against the initial holding company immediately before the subsequent transfer date shall be enforced or continued, as the case may be, on or after the subsequent transfer date by or against the date designated successor company in the same way that it might have been enforced or continued by or against the initial holding company The section contemplates two scenarios: 1. The existence of a cause of action; 2. The pendency of proceedings by or against the initial holding company which was in existence prior to the privatization of the Nigerian Electricity Supply Industry NESI. Section 46(1) (2) (3) (4) (5) of the EPSRA provides as follows: (1) The Chairman shall ensure that all Commission decisions and orders: (a) Contain the basis for the decision or order; (b) Are properly recorded in writing; and (c) Are accessible to the public at reasonable times and places. (2) The Commission shall issue written reasons in respect of any decisions or orders affecting the existing rights of any person, if the affected person requests such written reasons. (3) The Commission may issue written reasons in respect of any other decision or order as the Commission deems necessary. (4) Every recommendation, declaration, decision or order of the Commission, if purporting to be signed by a person describing himself as the Vice-Chairman acting in the capacity of the Chairman, shall unless, the contrary is shown, be deemed to be made by the Commission and to have been so signed and maybe proved by the production of a copy thereof purporting to have been so signed. (5) The Commission may make interim orders pending the final disposition of a matter before it. The purport of the above provision no doubt is the vesting of quasi-judicial powers in the Commission. Quasi-judicial powers may be defined as those powers exercised by an administrative/government agency which: 1. Ascertains certain facts; 2. Holds hearings; 3. Weighs evidence; 4. Makes conclusions from the facts as a basis for their official action, and 5. Exercises discretion of a judicial nature. Decisions of the Commission are not final and must necessarily be subjected to the prerogative jurisdiction of the High Courts. However, the EPSRA is silent on whether reference to High Court in the section means the State High Court or the Federal High Court. Interestingly, from the provisions of

13 Section 251(1) (p) and (r) of the 1999 Constitution of The Federal Republic of Nigeria ( 1999 Constitution ) it may be extrapolated that reference to High Court in the EPSRA means Federal High Court. Rehearing and Appeals: Section 50 of the EPSRA provides that any person who is aggrieved by the decision of the Commission may apply to the Commission for review of the decision, order or refusal where the issue involves the following: (a) (b) (c) (d) (e) (f) (g) A decision of the Commission not to issue a license; Any term or condition of a license issued to him, or refusal by the Commission to amend a license; The cancellation of a license; The grant or refusal by the Commission to grant any application or authority in terms of this Act; The outcome of any arbitration or mediation by the Commission of a dispute between licensees; A decision of the Commission with respect to prices or tariffs; Any other decision of the Commission; Section 50(2) of the EPSRA goes further to provide that the Commission may reconsider, vary or rescind its decisions before issuing a final decision, in accordance with such procedures as the Commission may establish; provided that such review or reconsideration shall be completed within 60 days of the date it is requested. By virtue of section 6(6) (a) (b) of the 1999 Constitution, any aggrieved person shall have unimpeded access to a competent court of law. Within the dynamics of the power sector value chain, the mechanisms for resolving disputes are as follows: Dispute Resolution O ffices (DRO) The heart of every Discos business is hinged on interaction with customers with disputes occurring on a recurring basis based on the complaints raised by customers in line with Section 3(5) of the Customer Complaints Handling: Standards and Procedures Regulation (2006) which mandates that all complaints must be lodged firstly in writing with the Customer Complaints Unit of the Distribution Licensee. N ERC Customer Complaints Forum The Forum was set up by NERC to hear and resolve customer complaints in the operational area of every Disco by virtue of the Customer Complaints Handling: Standards and Procedures Regulation (2006). Dispute Resolution Panel (DRP) In line with Section of the Market Rules, the DRP was constituted by NERC as part of the conditions precedent for the declaration of the Transitional Electricity Market (TEM) to resolve disputes among market participants in the sector. INNOVATIONS AND FUTURE OUTLOOK OF THE N IGERIAN ELECTRICITY SUPPLY IN DUSTRY (N ESI) With the current ongoing and planned developments for the Nigerian power sector, the future outlook of NESI can be analyzed as being bright especially given the current Power Sector Recovery Programme initiated by the Federal Government with support from the World Bank and also the plethora of power projects springing up despite the challenging regulatory environment. Due to the current challenges of illiquidity and infrastructure deficiencies plaguing the power sector, off-grid power project initiatives are gaining huge momentum in the sector in order to increase generation capacity and improved energy access. Interestingly, the recent regulation on Eligible Customers offers investors and stakeholders the opportunity to invest in generation and trade electricity on a willing buyer willing seller basis directly with certain categories of eligible customers. The regulation has the potential to unlock innovation and competition within the NESI and ultimately provide stability in the Nigerian Electricity Market (NEM). Recently, the World Bank has expressed willingness to provide support to the Federal Government in revamping the power sector via the Power Sector Recovery Plan (PSRP ) which provides a clear policy commitment on placing the NESI on the path of recovery and stability. POWER SECTOR RECOVERY PLAN (PSRP) The PSRP was approved by the Federal Executive Council (FEC) sometime in March 2017, with an abridged version released to the public in April The PSRP represents a series of carefully thought out policy actions, operational, governance and financial interventions required to be