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Half-Empty Or Half-Full Glass – Partial Activation Of Contracts In The Nigerian Electricity Supply Industry Begins – Oil, Gas & Electricity



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The Nigerian Electricity Regulatory Commission (the
“Commission” or “NERC”) has commenced the
process to end the hitherto so-called “energy-only” or
“best endeavour” power supply arrangement associated with
most of the on-grid power generation companies (“GenCos”)
in the Nigerian Electricity Supply Industry (“NESI”).
Despite the execution of a fully termed Power Purchase Agreement
(“PPA”) with energy and capacity payment obligations
between some of the on-grid GenCos and the Nigerian Bulk
Electricity Trading Plc (“NBET”), the PPAs did not take
effect due to inadequate capacity to wheel the generated power to
consumers. For other GenCos, no PPAs were signed, and energy was
being supplied to the grid and paid for by NBET on a best endeavour
basis. In both cases, NBET would pay the GenCos only for the energy
that is dispatched. The impact of this was both on the consumers
and the investors – for consumers, a significant portion of
the generation capacity in the NESI were stranded and could not be
delivered; for investors, the investments in the generation
companies could not be recovered due to the sub-optimal utilisation
of the assets.

To address these, the Commission has resolved to implement a
phased activation of the contracted capacity under the PPAs between
NBET and each of the GenCos as part of a strategy to ensure
increased electric power supply across the value chain.
Essentially, the partial activation is designed to, amongst other
things, –

  1. enshrine market discipline among the NESI operators through the
    mechanism of liquidated damages for breach of service level
    obligations; and

  2. address the liquidity shortfall in the NESI by providing an
    effective payment security framework to ensure that all NESI market
    operators or vendors – gas suppliers, GenCos, the
    Transmission Company of Nigeria (“TCN”), and DisCos
    – are paid all due invoices in full.

In terms of designs, the Commission adopted the following
approach –

  1. provision of liquidated damages payable by contract parties in
    the event of default in service levels;

  2. capacity activated for each GenCo according to its dependable
    and tested ability; and allocated to each DisCo according to
    consumer spread and network capacity;

  3. inclusion of gas suppliers into the NESI payment waterfall to
    ensure guaranteed payment of gas, and to forestall outage due to
    gas interruptions for non-payment; and

  4. instituting credible and enforceable payment security
    arrangement that consists of the existing DisCos’ Account
    Administration and Payment Waterfall Framework and additional
    intervention funds from the Federal Government of Nigeria.

The key transaction agreements for this programmme are the
Partial Activation Agreement between NBET and GenCos, Power
Evacuation Agreement between TCN and GenCos, Gas Supply Agreement
between GenCos and gas suppliers, and Service Level Agreement
between DisCos and TCN (together, the “Agreements”).

In summary the key terms of the Agreements are as follows

  1. GenCos are to generate and make available consistently, the
    capacity that has been activated (the “Activated
    Capacity”) as well as the corresponding energy and NBET is
    obligated to pay for both the capacity and energy delivered;

  2. where the Activated Capacity is not made available to NBET due
    to reasons attributable to a GenCo, the GenCo shall pay liquidated
    damages to NBET for the shortfall;

  3. where the Activated Capacity is not made available to NBET due
    to reasons attributable to gas supply to the GenCos’ power
    plant, GenCos shall pay to NBET the liquidated damages of a sum
    equal to the liquidated damages provided in the GenCos’ Gas
    Supply and Transportation Activation Agreements (if any);

  4. where the Activated Capacity is not made available to NBET due
    to reasons attributable to any force majeure event affecting either
    of the parties, TCN, the gas supplier or the gas transporter,
    payment shall only be made for the actual capacity made available,
    and no liquidated damages shall be payable by the GenCos during the
    occurrence of such force majeure event;

  5. TCN has committed to evacuate each GenCos’ pre-agreed base
    load and peak load as approved by the Commission; and

  6. GenCos are required to submit a day-ahead nomination each in
    accordance with the PPA, Grid Code and Market Rules to the System
    Operator.

Whilst the System Operator’s daily report throughout the
first and second quarter of 2022 show that there is over 7,000MW
available out of the over 13,000 installed capacity, the Commission
seems to have only activated 5,300MW to safely accommodate any
unforeseen or potential technical constraint.

The key question arising from this programme is the classic
half-full or half-empty question. An optimistic view would be that
it is a significant step towards maximising the available resources
and capacity in the NESI to reduce the supply deficit. The opposite
view would be that the real challenge has not been addressed
– mobilising investment in critical distribution and
transmission infrastructure to offtake both available generation
capacity and enable additional generation capacity in the NESI.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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