Assessment of Wholesale Competition in the Nigerian Electricity Market By U. D. Achinanya The Market Operator, PHCN, Nigeria 11/28/2007 WAPIC 2007, Abuja 1
Outline Wholesale Electricity Market:- Definition Wholesale market Competition: Conditions precedent Overview of the Nigerian Electricity Market Possible obstacles to the development of wholesale competition in Nigerian electricity Market Possible Problems of wholesale Market competition in Nigeria The possible Prospects Recommendations conclusion 11/28/2007 WAPIC 2007, Abuja 2
Wholesale Electricity Market (WEM):-definition In most cases, electricity is generated by a power company that ultimately will not deliver it to the end customer A single MW is frequently bought and re-sold a number of times before finally being consumed The WEM is a system for effecting bulk sale of electricity for re-sale The WEM is open to anyone who, after securing the necessary approvals, can generate power, connect to the grid and find a counterparty to buy the output 11/28/2007 WAPIC 2007, Abuja 3
Background to the development of wholesale competition in the electricity market Most electricity industries started as nationalized vertically integrated utilities responsible for four production processes of generation, transmission, distribution and supply There is the need to guarantee universal access to the grid Both generation and transmission are highly capital intensive, transmission is a natural monopoly Electricity cannot be stored, once produced it travel at the speed of light to the final consumers The further electricity transmitted, the greater the loss in efficiency 11/28/2007 WAPIC 2007, Abuja 4
Background to the development of wholesale competition in the electricity market (cont d) Demand for electricity varies on a near constant bases Weather and TV programs can cause changes in the demand curves Unless supply and demand are perfectly matched, either wastage or shortage could occur Difficulty in foreseeing changes in demand, to balance demand with supply made technical considerations dominate how electricity industry was run Governments acknowledged the strategic importance of electricity in the building of Nations economies 11/28/2007 WAPIC 2007, Abuja 5
Background to the development of wholesale competition in the electricity market (cont d) Over time however, technological advances made the task of predicting demand easier These developments led the proponents of liberalization to begin highlighting the efficiency and cost gains of a freer electricity market Increasing balance between technical and commercial considerations in the running of power industries 11/28/2007 WAPIC 2007, Abuja 6
Wholesale Market Competition: Conditions Precedent Identification and metering of the interface (trading) points in the market Development of an appropriate Market structure and an efficient Trading Arrangement consistent with competition Development of efficient Market Rules to guide market operations 11/28/2007 WAPIC 2007, Abuja 7
Wholesale Market Competition: Conditions Precedent (cont d) Industry restructuring: To separate the potentially competitive stages of the production process from those with natural monopoly characteristics, subject the later to regulatory oversight Establishment of an a truly independent Regulator to oversee the market development and ensure compliance with the rules Establishment of an adequate legal framework to back the institutions and their operations 11/28/2007 WAPIC 2007, Abuja 8
Overview of the Nigerian Electricity market Structure A WEM consisting of Eleven distribution companies Six generating companies from the existing generation facilities, scalable as more Govt. generators come in A Special Trader (Govt. entity to take care of existing IPPs whose PPAs are not consistent with the Market Rules) Service providers Transmission Services Provider (TSP) System Operator Market Operator 11/28/2007 WAPIC 2007, Abuja 9
Overview of the Nigerian Electricity Market UNBUNDLING OF PHCN 1 2..... 6 UNBUNDLING OF TCN G E N C O S TSP SO MO PHCN TCN 1 2.11 ISO D I S C O S TCN 11/28/2007 WAPIC 2007, Abuja 10
Overview of the Nigerian Electricity market (cont d) Structure A Retail Electricity Market (REM) demarcated along the boundaries of the distribution companies Provision for the entry of new IPPs into the Market Existence of an independent Regulator 11/28/2007 WAPIC 2007, Abuja 11
Overview of the Nigerian Electricity Market (cont d) Technical Generation capacity of 6,000MW, including IPPs (contributing 13% of total capacity). Hydro:Thermal generation mix is 30:70 A transmission grid with capacity for 7,000MW consisting of 330kv and 132kv systems A distribution network with capacity for 10,000MW, consisting of 33kv, 11kv and 415v systems 11/28/2007 WAPIC 2007, Abuja 12
Overview of the Nigerian Electricity market (cont d) Commercial Five million (5m) Customer connections load distribution 65% Residential 20% Commercial 10% Industrial 5% Export Monthly revenue of about $57m Total efficiency of about 75% Average end-user tariff of USD 4.6cents 11/28/2007 WAPIC 2007, Abuja 13
Possible obstacles to the development of Wholesale Competition in Nigerian Electricity Market Market Power Very few generating companies having the capacity to determine the market prices of electricity Short-run demand elasticity for electricity is very low, supply gets very inelastic at high demand levels particularly as capacity constraints are approached Excessive reliance on spot markets rather than forward contracts 11/28/2007 WAPIC 2007, Abuja 14
Obstacles (cont d) Market Design and Trading Arrangement Can a generator own all or part of the transmission assets? Should the market be built around a pool or should it rely on bilateral contracts? How should the scarce transmission resources be allocated? 11/28/2007 WAPIC 2007, Abuja 15
Obstacles (cont d) Number of generators No market design will work well if there are no adequate number of competing suppliers of generation services Regulation Regulatory institution that is heavily dependent on the govt. decisions and swayed by political forces Institution that is not properly staffed, does not have access to necessary information on costs, prices and service quality 11/28/2007 WAPIC 2007, Abuja 16
Possible Problems of wholesale competition in Nigeria Investments in Transmission and Distribution businesses Attracting adequate investments to reduce congestion in the transmission network and the bottlenecks in the distribution system will be a major challenge Size of the investment requirement Natural monopolistic nature of the network businesses is a disincentive (the functions cannot be duplicated) 11/28/2007 WAPIC 2007, Abuja 17
Possible Problems (cont d) Investments in new generation capacity Investors are generally looking for stable and predictable market conditions and long term contractual commitments before they will commit capital Creating appropriate incentives for investment in new generation capacities may be a problem under a competitive wholesale market that relies heavily on spot market prices Rural electrification Investments in the rural areas cannot be supported by the commercial factors which dominate competitive electricity markets Rural electrification is more of political and social welfare decision than economic 11/28/2007 WAPIC 2007, Abuja 18
Prospects of wholesale competition in Nigeria Transmission & Distribution network stability Revenue for the network operators depends on network availability Reduced network outages Pressure from the generators and providers of retail services System losses Losses result in networks due to Poor maintenance Use of antiquated equipment Theft of electricity Inefficient metering Losses will generally reduce since revenue depends on efficiency levels 11/28/2007 WAPIC 2007, Abuja 19
Prospects of wholesale competition in Nigeria (cont d) Performance of the existing generating plants Inefficient and uneconomic generating facilities will be retired and replaced with newer, more efficient facilities Because of the need to compete successfully, there will be high incentive for cost reduction Technology applications Most of the stock of the generating plants in service will be replaced with modern, efficient CCGT technology, also as gas price is increasing 11/28/2007 WAPIC 2007, Abuja 20
Prospects of wholesale competition in Nigeria (cont d) Wholesale prices of electricity With the entry of new generating capacities, suppliers expand, competition increases, forcing down wholesale prices Retail prices of electricity Wholesale prices constitute about 40% of the Retail prices of electricity With better regulation of the distribution and transmission charges, cost of supply will be further reduced 11/28/2007 WAPIC 2007, Abuja 21
Prospects of wholesale competition in Nigeria (cont d) Regional Trade Nigeria is a key player in the WAPP Wholesale competition in Nigeria will increase volume of physical and financial trade across borders with, and among, other West African countries Regulatory frameworks will be harmonized in the region Issue of licenses will be harmonized Uniform billing and settlement calendar will be adopted 11/28/2007 WAPIC 2007, Abuja 22
Recommendations Market power: efforts to be made to mitigate market power in the implementation of wholesale competition in Nigeria through structural remedies and mandatory forward contracts Market design: basic wholesale market design that accommodate bilateral and vesting contracts is considered most desirable for Nigeria Number of generators: conscious effort to be made to create a large number of competing suppliers of generating services 11/28/2007 WAPIC 2007, Abuja 23
Recommendations (cont d) A single transmission company, ownership of which is best under the state for adequate flow of investments and nondiscriminatory access to the generation and distribution companies To ensure incentives for sustainable investments in generating capacity, forward contracting commitments on the distribution companies should be imposed A good and truly independent regulatory institution should be created 11/28/2007 WAPIC 2007, Abuja 24
Recommendations (cont d) To continue to meet its social policy obligations to the people, govt. should develop a strategy for sustained development and expansion of rural access to electricity. The Rural Electrification Agency (REA) in the EPSR Act should be adequately funded to ensure execution of rural electrification projects, including development of renewable and off-grid sources of supply to the rural areas 11/28/2007 WAPIC 2007, Abuja 25
Conclusion Due to inadequate supply of electricity, high system losses, large scale customer dissatisfaction and low revenue collection characteristic of the Nigerian electricity industry, the FGN decided to apply structural, regulatory and market reforms to the electricity sector The resultant competitive wholesale market is expected to stimulate improved performance from the existing generators as well as mobilize investments in new generating capacities As more generators enter the market, competition will increase 11/28/2007 WAPIC 2007, Abuja 26
Conclusion (cont d) Combination of greater competition and increased supply will pull down wholesale prices, leading to a significant fall in the retail prices Efforts to create well functioning competitive wholesale market will meet a lot of obstacles and challenges Wholesale competition will generate its own problems In-spite of the challenges and problems, the FGN s restructuring, regulatory reform and development of competitive wholesale market for power is well advised. The program should go forward 11/28/2007 WAPIC 2007, Abuja 27
The End Thank you for listening 11/28/2007 WAPIC 2007, Abuja 28