Introduction
Pursuant to the Electricity Act, 2023 (the "EA")1, the National Electricity Regulatory Commission (the "NERC" or "Commission") issued an order dated 30 April 2024 titled – Order on the Establishment of the Independent System Operator for the Nigerian Electricity Supply Industry (the "Order") - to mandate the Bureau of Public Enterprises (the "BPE") to incorporate a private company limited by shares as an Independent System Operator ("ISO").
The ISO is expected to perform all Market Operations and System Operations functions for the Nigerian Electricity Supply Industry (the "NESI") stipulated by the EA. The Order also directs the TCN to transfer all aspects of its System Operations and Market Operations functions, including assets and liabilities relating to the said functions, to the ISO by the completion date of 31 August 2024.
While the Order took effect on 1 May 2024, an ISO is yet to be incorporated, and the completion date is just around the corner. This article will examine the rationale behind the Order and its implications for the electricity supply industry.
Background
The Transmission Company of Nigeria Plc (the "TCN") was incorporated in November 2005 in the lead-up to the unbundling of the defunct Power Holding Company of Nigeria (PHCN) pursuant to the enactment of the Electric Power Sector Reform Act, 2005 ( the "EPSRA Act"). Under the EPSRA Act, the Commission granted the TCN two separate licenses: the Transmission Service Provider (TSP) Licence and the System Operations Licence.
The TSP Licence grants the TCN responsibility for wheeling high-voltage power across the country, overseeing and approving grid connections, and ensuring the overall development of the transmission network. The System Operations Licence permits TCN to operate as the System Operator (SO) and the Market Operator (MO) for the NESI. As SO, the TCN is responsible for coordinating the electricity system with specific functions, which include ensuring compliance with and enforcement of the Grid Code, monitoring transmission system parameters, maintenance and enhancement of power generation and transmission system reliability and stability, design, installation, and maintenance of the Supervisory Control and Data Acquisition (SCADA) facilities for effective Grid operations, etc.
As MO, the TCN is responsible for the administration of the Nigerian Electricity Market (NEM). In this regard, the functions of the TCN include being responsible for the efficient, transparent, and non-discriminatory administration of the NEM, implementation of the Market Rules, facilitation of a sustainable competitive NEM, administration and organisation of NEM participants, administration of electricity market payment and settlement system, etc.
However, it was always the intention that when the NEM is sufficiently developed, the Commission would eventually separate the TSP functions of the TCN from its System Operation and Market Operation functions. Evidently, in the opinion of the Commission, this intention seems to have crystallised, especially with the enactment of the EA, which provides clear guidelines for the incorporation, governance structure, and licensing of the ISO, as well as the transfer of the assets and liabilities of TCN's Market and System Operations unit to the ISO further to the issuance of a directive by the Commission.
Against this backdrop, the Commission issued the Order, which became effective on 1 May 2024, directing the incorporation of an ISO to carry out System Operation and Market Operation functions for the NESI.
Incorporation of the ISO
The Order stipulates that the BPE shall, not later than 31 May 2024, incorporate a private company limited by shares to carry out the System Operation and Market Operations functions stipulated in the EA and the terms and conditions of the System Operation Licence issued to the TCN. The said ISO shall, subject to name availability at the Corporate Affairs Commission (CAC), be known as the Nigerian Independent System Operator of Nigeria Limited ("NISO"), with the BPE and Ministry of Finance Incorporated (the "MOFI") as initial subscribers.
The objects of the ISO listed in the Order include (1) holding and managing all assets and liabilities pertaining to System Operations and Market Operations, (2) carrying out all System Operation and Market Operation-related contractual rights and obligations novated to it by the TCN, (3) entering into contract for procurement of ancillary services and (4) generally carrying out System Operation and Market Operation functions as specified under the EA and the terms of its licence in the interest of market participants and other system users.
Furthermore, the BPE is required to conclude the transfer of all the System Operation and Market Operation assets and liabilities held by TCN to the ISO. Furthermore, to ensure the preservation of institutional knowledge, the Order mandates the transfer of existing employees and contracts from the TCN to the ISO through its transition and saving provisions.
The conclusion of the transfer of all the System Operation and Market Operation assets and liabilities held by the TCN to the ISO is expected to be completed by 31 August 2024. After that, TCN is expected to relinquish its System Operation Licence to the Commission within 7 (seven) days of the completion date.
ISO models around the world
There are different models for structuring and organizing electricity markets worldwide, with system operations, market operations, and transmission provider functions either performed by a single entity or split among several entities in different combinations. The new structure envisaged by the Order is popular in countries with similar electricity laws and markets, like Nigeria. For example, Australia operates a similar model with the Australian Energy Market Operator ("AEMO") as the ISO. The AEMO is responsible for regulating the generation and transmission of electricity and managing the National Energy Market ("NEM"). AEMO was established in 2009 and initially regulated only the Eastern and South-Eastern markets before the Western Australian market was included in 2015. The AEMO monitors the supply and demand of electricity, as well as planned and unplanned outages, and generally works to enhance power generation. The AEMO is responsible for optimizing the market and creating an enabling environment for the participation of energy companies and investors. The AEMO has been largely successful in creating healthy competition, providing consumers with diverse options, and ensuring a reliable electricity supply and 100% access to electricity in Australia.
Another country operating a similar model is the United Kingdom, with its Electricity Systems Operator ("ESO") as the ISO. The ESO was established in 2019 as a separate company unbundled from the National Grid Electricity Transmission ("NGET"), part of the larger National Grid Group. This was done due to the increase in complexity of the electricity generation and transmission systems in the country to improve transparency and competition in the market. The ESO has created and operates a booming energy market and has introduced market reforms, leading to more accessible and quicker absorption of renewable energy companies, which serve the goal of total transition to renewable energy sources. The ESO is regulated by the Office of Gas and Electricity Markets ("Ofgem"). With 37 active electricity supply companies in the country, the UK maintains 100% access to electricity for all consumers, with renewable energy options.
The United States operates an exciting model with multiple ISOs, established by Orders 888/889 of the Federal Energy Regulation Commission ("FERC"), to provide comprehensive and non-discriminatory access to electricity across the country. The FERC also established Regional Transmission Operators ("RTOs"), which operate on a more thorough, regional basis. The California ISO ("CAISO") and the New York ISO ("NYISO") are examples of ISOs that regulate electricity within states, and the Southwest Power Pool ("SPP") and PJM are RTOs covering multiple states per company. There are 10 ISOs and RTOs across the United States, with competitive prices and 100% access to electricity.
Implications of the Order on the Nigerian Electricity Supply Industry
It is apparent from the preceding section that unbundling TSP and MO/SO functions by the Order would create a model that enhances the reliability of electricity supply and the robustness of the market. Broad implications of the Order on the electricity supply industry in Nigeria will include;
- Unbundling of the Transmission system
Giving effect to the letters and spirit of Part IV (Sections 15 – 32) of the EA, the Order provides clear guidelines for incorporating the ISO and transferring all System Operations and Market Operations functions from TCN to the ISO. To this end, a private limited liability company to be known as Nigerian Independent System Operator of Nigeria Limited (subject to name availability) was to be incorporated by the BPE no later than 31 May 2024 to carry out the System Operation and Market Operations responsibilities for the NESI, but there is no indication that this company has been incorporated yet. The immediate implication of this unbundling process is that TCN will now only be responsible for TSP functions while all other aspects of its operations relating to System Operations and Market Operations, including personnel, systems, assets and liabilities, etc, will be transferred to the ISO.
- Compliance with global best practices
By this Order, NERC is seeking to bring the administration of the NESI in line with global best practices, particularly given the success of the ISO model in many countries, some of which we examined in the preceding section of this article. Countries with similar electricity laws and markets organised in a federal structure, like Nigeria have all adopted models with an ISO and TSP function separated from MO/SO functions with great success. Many of these countries enjoy 100% energy access within their territories and can attract significant investment in transmission infrastructure.
- Independence of the System Operator
The new structure will ensure independence for the System Operator in the administration of the electricity system and marketThe short-term phase of the electricity market had a restricted percentage of private participation in the value chain, with transmission preserved 100% for government ownership and control. The current phase of the market envisages more bilateral arrangements, private participation in transmission, and even a separation of supply and distribution functions. This more developed market stage requires a system operator that will be free from ownership and management functions concerning the Grid and, therefore, can devote all of its resources to performing the MO/SO functions. In this structure, independence refers to a system operator distinct from the TSP, who will remain another market participant.
- Increased investor confidence.
Furthermore, the establishment of the ISO will further bolster the confidence of investors and other market participants in the administration of the NEM. The System Operator and Market Operator functions will now be the responsibility of an independent body established for that purpose, not essentially the responsibility of a department in a fellow market participant, as was the position prior to the Order.
Also, with the ISO's independence, it will be better positioned to access the funding needed to boost the system operation infrastructure, especially in the areas of deployment of SCADA systems, implementation of generation dispatch tools, provision of ancillary services, etc., which have been lacking largely because of the funding challenges generally experienced by the TCN.
- Encourages sector specialisation>
This impending excision of operation and regulation responsibilities from the TCN will allow the TCN to focus on attracting investment into expanding and increasing the efficiency of the Grid as a TSP. TCN would be able to concentrate on building and maintaining the Grid while the ISO, unburdened of ownership and maintenance responsibilities, would independently manage the relationships among the various market participants by enforcing and implementing the Grid Code and the Market Rules.
The Order can be accessed here.
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