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DisCos’ Plan To Buy Power From GenCos Hits Hurdles

Electricity sector operators are negotiating bilateral contracts to enable power purchase agreements in the contract market phase set to begin in July, and parties to these negotiations said that there are knotty issues.
Some of the highly indebted distribution companies (DisCos) have not made adequate investments in their networks including installing meters in their substations to capture the amount of electricity they receive. Also, the Transmission Company of Nigeria (TCN) lacks the capacity to wheel all the contracted power, making agreements difficult to reach.
The Nigerian Electricity Regulatory Commission had planned to move the electricity market into a full Transitional Electricity Market (TEM) Phase, which is the intermediary step between an integrated total utility and a fully competitive market structure with more varied market players, structured to bring competition into the market.
After TEM, a multiple buyer model is supposed to follow and this allows customers and DisCos to buy electricity through bilateral contracts with the bulk trader, in addition to buying directly from generation companies (GenCos) and independent power producers.
In the electricity value chain, the government is the wholesaler. GenCos are producers, while DisCos are retailers. Bilateral arrangements are meant to remove the wholesalers in the value chain and allow the retailers and producers to interact directly and freely, analysts say.
This was supposed to have happened in July 2022 but the market was not ready. Now it seemed ready to kick off, with implications for customers, both residential and industrial.
“This will translate to consumers having more hours of electricity available, which might impact the price they are currently paying. The cost of a kilowatt per hour will increase,” said Habu Sadik, a financial analyst and energy sector expert.
Sadik said the bilateral stage will be brutal and effective. “A DisCo can use any method possible to recover their money because failure to do that will put them out of business.”
It would also open up the sector as DisCos would find value in delivering better supply to customers with the ability to pay including estates and companies.
Three DisCos – Eko Electricity Distribution Company, Ikeja Electric, and Abuja Electricity Distribution Company – have recently been instructed by NERC, the regulator, regarding the implementation of bilateral contracts with GenCos.
These negotiations are contending with inefficiencies that have been glossed over in the electricity sector for a long time, according to some parties who did not want to be mentioned as they are not authorised to disclose the negotiations.
The existing contracts in the Nigerian energy supply industry see the Nigerian Bulk Electricity Trading Plc (NBET), the manager and administrator of the electricity pool in the industry, buy energy and capacity from 26 generation plants owned by the respective GenCos that have contracts with NBET.
Some GenCos have power purchase agreements; others have interim agreements executed pending formalisation on power purchase agreements (PPAs). The electricity purchased by NBET through PPAs are resold to DisCos through vesting contracts and transported on a physical network that forms the electricity value chain. Other contractual arrangements include gas supply agreements, gas transportation agreements, and grid connection agreements.
One key challenge is developing a mechanism for the conversion of vesting contracts into bilateral agreements between GenCos and DisCos.
The process for such migration or procurement is a crucial factor that needs to be managed within such a framework, experts say.
For these contracts to work and the market to be liquid, DisCos must be credible off-takers and other parties must be credit-worthy.
This has not been the case in the sector. Market collections by DisCos have been largely inefficient. The total revenue collected by all DisCos in the fourth quarter of 2022 was N243.65 billion out of N332.28 billion billed to customers, translating into a collection efficiency of 73.33, according to the regulator’s
latest report.
Under the bilateral agreement, DisCos have to fully collect for the value of the energy it received, so a sticking point is who settles the differential since NBET would no longer provide a guarantee.
In the interim, the Nigerian government has set a N5 billion Gas Stabilisation Fund to guarantee gas supplies to the power sector but it’s yet to make a difference. GenCos have been unable to ramp up generation as gas companies demand upfront payment due to an inability to settle previous debts.
Another sticking point is acceptable tariffs that would guarantee commercial returns. NERC is required to recognise any bilateral rates that are agreed upon when a DisCo chooses to purchase electricity from a GenCo or an independent power producer, provided that the procurement process is conducted prudently, even when the agreed prices are higher than the MYTO benchmark price for generation.
The challenge is some operators cannot justify the basis for the tariff they are proposing. According to MYTO rules, operators must show evidence of investment into the network before making claims and the regulator must be satisfied that the costs were indeed inputs towards the service. In this vein, the NERC would not recognise N50 million executive car purchase as part of expenses that would be factored into tariff computation.
Some of the inefficiencies covered up because the NBET was around are now getting enough sunlight and causing disagreements. The TCN, for example, claims to have the capacity to wheel over 7,000MW of power generated daily but in reality cannot wheel more than 4,500MW without the grid collapsing and would be required to repay other operators if it failed to wheel all the energy generated.
After the Partial Activation exercise, which was overseen by NERC and the NBET with the goal that at least 5000MW of power was generated, paid for in full, and successfully delivered to consumers daily with effect from July 1, 2022, failed, the bilateral power contract has come into play.
One key benefit of this phase, according to energy lawyers at Oake Legal, is that it will enshrine market discipline among the industry operators through the mechanism of liquidated damages for breach of service level obligations.
Source: Businessday

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