A Review Of The Order On The Establishment Of The Independent System Operator For The Nigerian Electricity Supply Industry 2024

1. INTRODUCTION

In a landmark move set to redefine the landscape of the Nigerian Electricity Supply Industry ("NESI"), the Nigerian Electricity Regulatory Commission ("NERC") issued a transformative order effective May 1, 2024. This directive heralds the establishment of an Independent System Operator ("ISO"), marking a shift from the prevailing structure. Under the auspices of the Electricity Act 2023 ("EA 2023"), this mandate outlines a clear trajectory aimed at disentangling the roles of the System Operator ("SO") and Market Operator ("MO") from the purview of the Transmission Company of Nigeria ("TCN"). Therefore, it aligns with regulatory imperatives and underscores a commitment to fostering a more agile and responsive operational framework within the NESI. The order stipulates that the transition must be fully executed by August 31, 2024, and further mandates the TCN to relinquish its operational license to NERC, thereby granting increased autonomy to NERC and ushering in a new era of system management and efficiency. This article serves to delve into the intricacies of the order, expanding on the foundational parameters of establishing the ISO. By examining its provisions, we aim to unravel the blueprint for an entity empowered to independently oversee system operations, thus safeguarding the uninterrupted functioning of the NESI.

2. BRIEF BACKGROUND

The Nigerian Electricity Supply Industry Market Rules, which describe the progressive growthof the electrical power market with distinct features, regulate the NESI. The unbundling of the TCN, as mandated by the Electric Power Sector Reform Act (EPSRA), necessitated a notable degree of privatisation within the market. The prerequisites for privatisation included contractual integrity, implementation protocols, financial robustness, reasonable tariff structures, and strict adherence to grid codes and Market Regulations. A pivotal milestone in assessing the market's readiness for this transition occurred with the publication of the competitive market review by the NERC last year. This assessment revealed that the market had achieved a significant level of privatisation, thereby signaling its readiness for the Medium-Term Market phase, the subsequent stage in its evolution. It is accepted, however, that presently the NESI falls short of meeting all the prerequisites for significant privatization as stated in the EPSRA.¹ The procedure of TCN's unbundling was altered by the repeal of EPSRA and the adoption of the EA 2023. Without requiring significant privatisation, the EA gives NERC the power to order TCN to be unbundled at any moment. To evaluate the market's preparedness for TCN's unbundling and to identify the proper legislative form and organizational structure for the ISO, along with the ISO's governing system, NERC held a number of meetings with stakeholders.²

3. FUNCTIONS OF THE TRANSMISSION SERVICE PROVIDER, MARKET OPERATOR, AND SYSTEM OPERATOR

The TCN stands as an indispensable entity within the NESI and plays a crucial role in facilitating the transfer of power from generating companies ("Gencos") to distribution companies ("Discos"). It comprises three core business divisions: the Transmission Service Provider ("TSP"), SO, and MO. The TCN forms the backbone of the nation's electrical infrastructure.³ TSP is tasked with the development, modernisation, operation, and supervision of Nigeria's power transmission system. It assumes the responsibility for overseeing transmission facilities, grants network access to customers, assesses links to the grid,and collaborates with distribution and production corporations to design and expand the network.⁴ The System Operations (SO) division of TCN, which operates with a degree of autonomy, is responsible for the safe and reliable operation of the transmission service. It ensures system stability and security, maintaining consistent power supply and frequency levels. Additionally, it facilitates power market operations, regulates coded grids and operations, and analyses system data to optimise performance.⁵ Furthermore, under the provisions of the repealed Electric Power Reform Act of 2005, the Market Operations (MO) division systematically implements the NERC Market Rules. The MO is equally tasked with ensuring fair and efficient electricity trading, administers the market and enforces the Market Rules to uphold equitable practices.⁶

The roles of TSP, SO, and MO are integral to TCN's functioning. However, by August 2024, a new entity known as the Nigerian Independent System Operator ("NISO") will be fully operational. All resources, responsibilities, rights, and liabilities previously held by TCN's SO and MO will be transferred to NISO.⁷⁸

4. HIGHLIGHTS OF THE ORDER

The principal purpose of the order is to facilitate the establishment of an ISO. It addresses the need for clearer rules and a structured approach to managing the power distribution system.⁸ The order is designed to guarantee adherence to the EA 2023,⁹ which outlines detailed provisions for the incorporation, licensing, and governance structure of the ISO and the transfer of the TCN's finances and assets to the ISO.¹⁰ Other features of the Order are detailed below.

1. Incorporation of Company with the Corporate Affairs Commission ("CAC"): The Bureau of Public Enterprises ("BPE") is mandated to incorporate a private company limited by shares pursuant to the Companies and Allied Matters Act 2020 ("CAMA 2020") in order to execute and carry out the market and system-related functions specified in the EA 2023. This directive on the unbundling process was released by NERC based on the provisions of the EA 2023.¹¹
2. Name and Objects of the Company: The name of the company shall be the Nigerian Independent System Operator of Nigeria Limited ("NISO").¹² The objects of the NISO are stated in its memorandum of association, which encompasses contract negotiation, asset and liability administration, and market and system activity development for the benefit of stakeholders.¹³ The conveyance of all market and system operating liabilities as well as assets owned by TCN down to NISO is the responsibility of BPE. Instruments, contracts, and agreements for the operation of markets and systems fall under this category.¹⁴
3. First Subscribers of the Company: The first subscribers shall be Ministry of Finance Incorporated ("MOFI") and BPE.¹⁵
4. Deadline for Mapping out and Identification of Assets and Liabilities: The TCN is required to finalize the mapping process and assessment of its financial resources and liabilities associated with the SO and MO aspects of its operations, and submit this information to both the BPE and NERC by 30^th June, 2024.¹⁶ Transfer of all Market and System Operation Assets and Liabilities: Through the National Council on Privatization, BPE will supervise the transfer of all Market Operations (MO) and System Operations (SO) resources and liabilities form TCN to NISO.¹⁷ Ensuring the full enforceability of all bonds, investments, agreements, deeds, instruments, paperwork, and operational arrangements on NISO constitutes an integral aspect of this transfer process.¹⁸
5. Legal Action: Any lawsuit or other legal action pertaining to TCN's market and system activities would be maintained against NISO.¹⁹ In addition, no suit against NISO involving any transferred staff member, property, liability, right, or responsibility will be initiated after the expiration of the deadline for filing such an action.²⁰
6. Conditions of Employment: TCN's conditions of employment will remain in effect until NISO develops new terms of service, and relevant workforce shall be transferred to NISO on grounds that are equally favorable to those they had before their transfer.²¹ Additionally, until such circumstances are created, NISO will keep contributing to employees' pensions.²² The deadline for transfer to NISO: TCN's resources and liabilities are expected to be fully transferred to NISO on or before the 31^st of August 2024.²³ TCN has seven days following the date of completion to present its system operating license to the NERC.²⁴ Meeting this deadline ensures the timely completion of the transition process for the official transfer of TCN's operational responsibilities.. This marks the formal establishment of NISO as the autonomous entity responsible for market and system operations in the Nigerian power sector.

5. BENEFITS AND DRAWBACKS OF UNBUNDLING TCN

Unbundling TCN is poised to bring numerous benefits to the NESI. The division of responsibilities promises enhanced oversight and transparency, ensuring a more efficient and transparent electrical grid operation. This will improve integration, better network management, and heightened accountability. The transformation of TCN into TSP and ISO aims to address persistent issues within the network, such as operational deficiencies, system reliability issues, and organisational hurdles. This restructuring tackles these challenges head-on, fostering a more robust and dependable electricity infrastructure. Furthermore, Implementing Supervisory Control and Data Acquisition ("SCADA") can boost efficiency and decision-making while reducing disruptions and simplifying data analysis. Additionally, upgrading outdated cables is essential to enhance electricity flow across the system.²⁵ By bolstering investor confidence through equitable power distribution and fostering an environment conducive to expansion and development, this restructuring is expected to attract investments, spur innovation, and ensure long-term economic viability. This, in turn, is anticipated to stimulate growth, encourage creativity, and sector over time.²⁶

Unbundling TCN could also have several drawbacks. Firstly, establishing a new company entails significant additional expenses, encompassing administrative and regulatory costs for establishing new offices, IT infrastructure, and trademark registration. Moreover, acquiring advanced technologies, such as comprehensive SCADA capabilities enabling real-time grid monitoring and control, would require huge financial support from investors. Finally, the restructuring and the transfer of control over System Operations (SO) and Market Operations (MO) to NISO is not an issue that can be immediately resolved.

6. CONCLUSION AND RECOMMENDATION

TCN's restructuring marks a turning point in developing Nigeria's electricity sector, motivated by NERC's goal of increasing dependability and effectiveness. However, what iscritical to this project's achievement involvescareful planning, good execution, and enough funding. Even though there will undoubtedly be difficulties, this program is essential for boosting investors' trust and setting the stage for significant capital flow of funds. These changes can possibly strengthen transmission networks and promote the growth of creating resources, ensuring a more stable and reliable electricalsystem. The careful implementation of this restructuring scheme, which calls for an organised planoutlining the duties and roles for the new companies, is essential to this success. Furthermore, this Order is a major step toward improving Nigeria's power transmission administration. It aims to improve efficacy, build market trust, and enable a smooth transition by transferring assets to the ISO as well as offering clearer instructions. However, continued cooperation, increased capacity, and close monitoring are necessary to tackle obstacles and maximize ISO efficiency.

For successful implementation of the Order, ongoing stakeholder involvement is essential in encouraging cooperation between government organizations, companies, and competitors so as to tackle obstacles and secure an easy transition procedure. Also, adequate training and capacity building efforts should be put in place in order to provide the NISO all the requisite expertise and assets necessary to maximize its efficiency and increase its role in the power supply business. Furthermore, setting up periodic tracking and assessment processes, is a sine qua non for measuring the performance of the ISO and its effect on the electricity distribution system. This will allow for prompt changes and enhancements to be made, ensuring the ISO's continuous efficacy.

* Lilian Adat and Simbiat Abubakar Okwilague are Senior Associate and Executive Associate respectively at Alliance Law Firm, Lagos, while Atake Anthonia and Daniel Anagu are both Associates at the same law firm.

Footnotes

1. Nigerian Electricity Regulatory Commission, "Order on the Establishment of the Independent System Operator for The Nigerian Electricity Supply Industry ORDER NO: NERC/2024/45" < https://nerc.gov.ng/wp-content/uploads/2024/05/Order-on-the-Establishment-of-the-Independent-System-Operator-for-NESI-1.pdf> accessed May 30 2024.

2. Ibid.

3. Transmission Company of Nigeria, "About TCN" <https://www.tcn.org.ng/page_faq.ph>p accessed May 29 2024.

4. Transmission Service Provider, "About Us" <https://tsp.ng/#> accessed May 30 2024.

5. Nigerian Electricity Systems Operator, "History of System Operations" <https://nsong.org/AboutUs/History.aspx> accessed May 30 2024.

6. Ibid note 3.

7. Ibid note 1.

7

8. Paragraph 10(b), the Order.

9. Paragraph 10(a), the Order.

10. Paragraph 10(c), the Order.

11. Paragraph 10A, the Order.

12. Paragraph 10A(i), the Order.

13. Paragraph 10A(ii)(a), the Order.

14. Paragraph 10A(ii)(b-e), the Order.

15. Paragraph 10A(iii)(a-b), the Order.

16. Paragraph 10B, the Order.

17. Paragraph 10C, the Order.

18. Paragraph 10C(i), the Order.

19. Paragraph 10C(ii), the Order.

20. Paragraph 10C(iii), the Order.

21. Paragraph 10C(iii), the Order.

22. Paragraph 10C(iv), the Order.

23. Paragraph 10F, the Order.

24. Paragraph 10G, the Order.

25. Ibid note 25.

267.< em>Ibid note 1.

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.