Bilateral Trading

• Order No: NERC/2024/058 is regarding the transition to bilateral electricity trading in Nigeria.

Title

• Focuses on the transition to bilateral trading in the Nigerian Electricity Supply Industry (NESI).

Commencement

• The order takes effect from July 25, 2024.
• It remains in force until amended or revoked by a subsequent order from NERC.

Background

• Following the unbundling of the defunct Power Holding Company of Nigeria Plc (PHCN).
• In preparation for privatizing successor Generation Companies (GenCos) and Distribution Companies (DisCos).
• EPSRA provided for establishing a bulk trading company as an intermediary between GenCos and DisCos for energy procurement.
• This intermediary role continues until the DisCos attain the required creditworthiness for Power Purchase Agreements (PPAs).
• This aligns with section 25 of EPSRA.
• The Nigerian Bulk Electricity Trading Company Plc (NBET) was incorporated on July 29, 2010.
• The Federal Government of Nigeria created NBET to act as a credible, creditworthy off-taker and to be provided with credit support.
• The Federal Government's actions enable NBET to guarantee payments to GenCos.
• The NBET facilitates bankable project-financed independent power projects.
• NBET was licensed on August 23, 2011, as a bulk trader.
• Its key mandate is to procure and sell bulk electricity and ancillary services to DisCos.
• They are licensed pursuant to sections 25(a) and 68(2) of EPSRA and parts 5 and 7 of the Market Rules for Transitional and Medium-Term Stages of NESI
• NBET's license has a 10-year tenure and is subject to renewal as determined by the Commission.
• Energy and capacity contracted by NBET are vested onto DisCos based on the guaranteed share of capacity in the Vesting Contract (VC).
• The VC is an agreement between NBET and the DisCos.
• Stakeholder engagements resulted in renewing NBET's initial 10-year license upon expiration in August 2021, but only for a 3-year term.
• The continued role of NBET in the market has been a disincentive for the transition to bilateral contracting between DisCos and GenCos.
• This exposes the Federal Government of Nigeria (FGN) to the risk of revenue shortfalls beyond tariff support (subsidies).
• The Electricity Act 2023 (EA) directs the Commission to steer NESI's development from its current transitional stage.
• Section 7(2) of the EA allows the Commission to direct NBET Plc to cease entering into contracts for electricity purchase and resale.
• Direct NBET Plc to cease novating existing contractual rights and obligations to other licensees.

Trends in the Wholesale Energy Trading Segment of NESI

• Since 2022, the Commission has issued trading licenses to 10 private companies for bilateral electricity trading with DisCos and eligible customers.
• Interest indicates significant potential in wholesale electricity trading outside the NBET single buyer pool.
• The Commission has received requests for regulatory approval from DisCos to purchase electricity directly from GenCos or through other trading licensees.
• The Commission has received notifications from GenCos signaling their intention to exercise exit rights from their PPAs with NBET.
• In order to contract for electricity supply directly to DisCos, other bulk traders, and eligible customers, in furtherance of the provisions of the Act.
• A key incentive for GenCos to contract bilaterally for energy and capacity with DisCos is to secure satisfactory off-take commitments backed by payment guarantees.

Administration of PPAs

• In respect of the Plants, NBET has contracted a capacity for 304MW for each of the Plants(Omotosho Power Plc and Olorunsogo Power Plc).
• The PPA provides for a capacity charge of 186MW, representing guaranteed gas availability for the plants.
• 2023 records indicate an average availability of 106.6MW, a mismatch against the 186MW capacity payment attributable to gas shortage.
• Without guarantees to secure payment under the PPA, NBET waived the requirement for a firm gas supply agreement (GSA) by Pacific Energy Ltd.
• Payments for undelivered capacity are being eliminated for "take and pay" contracts.
• An earlier order was issued for the priority dispatch of APWAL and the hydropower GenCos.

Current State of Energy Trading with NBET

• The Power Sector Recovery Program (FSRP) has made progress in improving the sustainability of the NESI.
• Inadequate revenues to cover the value chain's funding requirement has continued since privatisation in 2013.
• Key factors include non-cost reflective end-user tariffs, untimely subsidy disbursement, and poor billing/collection by DisCos, causing market shortfalls.
• Without capitalisation by the FGN, NBET has relied on ad-hoc payments from budgetary appropriation, PSRP funding, and the Federal Government balance sheet.
• These challenges result in the inability to attract new IPPs under the "project finance" model.
• Best practice involves fully effective PPAs backed by effective fuel supply agreements (FSAs) and bank guarantees to cover payment obligations.
• Fully effective contracts backstopped by guarantees result in certainty in performance obligations of generation capacity, gas supply, and energy off-take.
• Also provides revenues to deliver on operational expenses and routine maintenance.
• As of June 2024, only 8 (29%) of the 28 GenCos trading with NBET have fully effective contracts backed payment guarantees.
• The other 20 grid-connected GenCos trade on a "Take and Pay" basis without payment guarantees creating operational challenges and growth in debt for grid energy.
• In 2024/Q1, only 23.25% of GenCos' gross installed capacity on best endeavour contracts was available for electricity generation during the quarter.
• Plant unavailability has exacerbated the supply/demand mismatch on the national grid.
• This increases the technical fragility of the grid, making it susceptible to system collapse and has led to dissatisfaction and payment apathy.

Objective

• The order seeks to steer the electricity market toward bilateral contracting for energy and capacity between generation and/or trading licensees with distribution licensees.
• It aims to limit the fiscal exposure of the Federal Government to market risks.
• To foster competition by repositioning NBET from its current role as sole bulk electricity trader.
• Provide equal opportunity for hydro and thermal GenCos with "take-and-pay" contracts with NBET to reduce electricity.
• Transition the contractual framework in NESI to "take-or-pay" contracts thereby fostering increased certainty and market discipline.
• Allows DisCos to explore opportunities for increased optimisation/firming up of their wholesale energy off-take.
• Reduces their vesting contract capacity with NBET for “take-and-pay” PPAs, thus providing improved quality of supply.

Commission Orders

• NBET shall cease entering into new contracts for the purchase and resale of electricity and ancillary services in NESI and will be subject to regulatory sanction.
• NBET shall continue to administer fully effective contracts with listed GenCos based on minimum "take or pay" capacities contained in their PPAs (NBET Firm Capacity).
• By virtue of the capacities contained in Table 1, the System Operator (SO) is directed to dispatch APWAL at a baseload equivalent to its minimum

"Take-or-Pay" Capacity

• "Take-or-pay" capacity of 360MW is the minimum capacity.
• Where other on-grid GenCos are unable to meet their contracted obligations, the SO may issue dispatch instructions to APWAL for increased generation.
• APWAL serves as the supplier of last resort for the affected GenCo(s).
• The affected GenCo(s) will be invoiced by NBET for the energy delivered on their behalf by APWALAll take and pay companies have 60 days to renegotiate existing agreements with discos.
• All other power plants with “take and pay” PPAs or interim energy sales agreements with NBET have 60 days to negotiate and contract with DisCos bilaterally.
• The contract can be for the capacity currently with NBET (“Contracted Capacity”).
• Commission's review of GenCo performance in Q1/2024 indicates an average plant availability factor of 23.25%.
• The contract capacity for the GenCos is based Schedule 1 of the order.
• GenCos must notify NBET of the capacities that have been traded bilaterally with DisCos/eligible customers by September 30, 2024.
• The approval of the Commission for the bilateral transaction will be required. Any residual capacity will be traded with NBET on an interim agreement basis. The same commercial terms apply as the current contract, as the gross residual capacity will be traded through NBET on a take-and-pay basis

Hydropower GenCos

• The hydropower GenCos should equitably make available their current contracted capacity with NBET to DisCos.
• The capacity will be apportioned based on the shared capacity as contained in the vesting contracts, provided that the net capacity being traded (MWh/h) is not less than the average capacity supplied to the DisCo by the hydropower GenCo in 2023.
• The maximum capacity a DisCo can trade in the bilateral market (BTE) is the difference between its energy offtake as contained in the July 2024 MYTO Order and its share of the NBET Firm Capacity in Table 2.
• Where the total capacity contracted from the firm capacity of NBET and bilateral contracts is lower than the committed capacity in the July 2024 MYTO Order, the deficit capacity will be fulfilled from the NBET interim pool on "take and pay" basis.
• Energy contracted bilaterally and NBET Firm Capacity shall be prioritised by the SO over residual “take and pay” capacity with NBET in the merit order dispatch of generation plants.
• SO will dispatch GenCos in the NBET interim pool to satisfy DisCos demands.
• Within 3 months of the commencement of all bilateral contracting, GenCos capacity under bilateral contracts will have GSAs on a "take or pay" basis with adequate provision for liquidated damages (LDs) for supplier defaults.

PPA Administration

• In the absence of a bank guarantee supporting the payment obligation of NBET under its PPA with Pacific Energy Ltd, payments will a waterfall system of payment is used. The payment obligation to Pacific Energy Ltd is "pari passu" The bilaterally contracted energy by DisCos is used for payment assurances.
• SO shall ensure that the Olorunsogo and Omotosho power plants operated by Pacific Energy Ltd are dispatched no lower than 186MW.
• Within 6 weeks the Comission the "take or pay" covering its capacity.
• Consequentially, since October 1, 2024, Pacific Energy Ltd will be be responsibile for availability of the plants.
• The availability for both plants will be determined on the basis of their combined mechanical and gas availability.
• Should the plants fail to achieve availability, the payment of liquidated damages to the market on the terms contained in the PPAs shall be in order
• In order to invoice energy
• Pursue the objective of steering the market to bilateral contracts.
• The firm contracts of NBET would be funded through the PRSP Financing Plan.
• The disbursement of DisCo funds wil be:
• Bilaterally energy traded between DisCos and GenCos
• Firm contracts with NBET and 5 GenCos
• NBET pool under the interim take and pay

Enforcement

• The firm's bilaterally contracted capacity by all DisCos shall be fully aligned with the allowed recoverable generation cost from the end-user tariffs of the DisCo thus mitigating the risk of payment default.
• Tariff reviews undertaken by the Commission will accommodate the the ensure DisCos has allowances

Schedule 1 Details

• Schedule 1 lists GenCo capacities available for offtake and the plant location
• The Contracted Capacity (MW) and Peak monthly average capacity (MW) in 2023
• Total: 9,297 3,216.41