CEM REPORT, ENERGY | In a significant development, Nigerian power distribution companies (DisCos) have been granted approval by the regulatory body to directly procure electricity from producers, signaling a pivotal shift in the country’s power sector dynamics.
After over a decade of relying on an intermediary, the Nigerian Bulk Electricity Trading Plc (NBET), DisCos are now empowered to engage in bilateral contracts with generation companies (GenCos). This move comes after the privatization of DisCos and GenCos in 2013, marking a departure from the previous vesting contract regime overseen by NBET.
The Nigerian Electricity Regulatory Commission (NERC) unveiled this transformative decision in the Multi-Year Tariff Order 2024. The order recognizes the need for DisCos to secure bilateral contracts, fostering a seamless exit from NBET’s vesting contract regime.
Ayodele Oni, an energy law expert and partner at Bloomfield Law Practice, emphasized the significance of this change, stating, “This is in preparation for the transition of the bulk trader, NBET.”
The Multi-Year Tariff Order also stipulates a revision to DisCos’ partially contracted capacity (PCC), ensuring a minimum energy offtake. The directive mandates DisCos to secure adequate bilateral contracts, reducing their exposure to volumetric energy risks.
Under the new order, DisCos will have no recourse to claim revenue shortfalls arising from generation shortfalls, effective January 2024. They are also obligated to continually procure additional energy volumes, promoting a steady migration of customers to higher service bands.
Notably, the move towards bilateral contracts aims to eliminate middlemen, enhance accountability, and facilitate direct trading between GenCos and DisCos based on actual capacities and agreed terms.
Ayodele Oni highlighted the positive outlook towards this initiative, anticipating the dissolution of NBET in 2024. However, DisCos indebted to the market is expected to enter payment arrangements with NBET and the new contracting party.
“This initiative eliminates middlemen, builds accountability, and allows GenCos, DisCos, and GasCos to trade bilaterally based on their actual capacities,” Oni affirmed.
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Already, nine GenCos and 16 offtakers, including two DisCos, have ongoing bilateral contracts. Industry watchers describe this development as a game-changer that could finally bring about the competition and efficiency the sector has needed for years.
Despite potential short-term increases in residential customers’ electricity costs, maximum demand customers stand to benefit from improved supply. The move towards direct procurement is viewed as a positive step, fostering competition, efficiency, and accountability in Nigeria’s power sector.
However, challenges such as liquidity issues and revenue collection persist, emphasizing the need for robust service level agreements and accountability across all parties involved.
Prospective Impact of DisCos New Contract Status
Niyi Fagbemle, senior project manager at Sofidam Capital, sees the potential for DisCos to negotiate lower prices with independent power producers (IPPs) compared to fixed tariffs charged by NBET. Direct procurement also opens avenues for diversifying power sources, tapping into renewable energy options offered by IPPs, and potentially increasing overall generation capacity.
As Nigeria embarks on this paradigm shift in its power distribution landscape, the industry anticipates positive transformations that could reshape the future of electricity supply in the country.
