Strategies for the Development of Electricity Trading Market in Nigeria

By:Engr Kelechi Eke

B.Eng, MBA, MNSE, MNIEEE, MNIM, CFM, PMP(Presented during the NSE 2015 National Engineering Conference)

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What Kind of Market?

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Introduction

Definition• Electricity trading market – value chain for the interaction of

demand and supply for the determination of market price of electricity

The nature of electricity• Unstorability - uneconomical to store; thus consume as it is

produced• Electricity supply exceeds demand – waste• Electricity demand exceeds supply – rationingFundamental objective of electricity trading market• Equitable distribution of electricity • Provision of electricity at affordable price• Efficient supply of electricity at market equilibrium price

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Societal Values of Electricity

Societal value Merit Good Social Good

Primary objective of electricity trading market

Efficient supply & distribution of electricity

Provision of affordable electricity to people

Private sector participation

Significant; profit-driven Minimal

State participation

Limited; often to correct market anomalies & to

ensure equitable distribution of electricity

Dominant; State-driven industry

Electricity pricing Market forcesState; little influence of market

forces

EconomyDeveloped economies;

capitalistDeveloping economies;

socialist

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Segments of Electricity Trading Markets

Power

GenerationPower

TransmissionPower

Distribution

Market structure Competitive

Strict monopoly

Regional monopolies

Market entry and exit Flexible Highly inflexible Less flexible

No. of players Many Very few Few

Degree of competition

Very competitive

Least competitive

Less competitive

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Categories of Electricity Trading Markets

• State enterprise trading market

• Free enterprise trading market

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State enterprise trading market

• Government operates and maintains most of the power infrastructure facilities

• Government participation – dominant ; sometimes, the sole player

• Regulator: Government

• Electricity trading price – determined by Government with little recourse to market forces

• Examples: NEPA, PHCN 7

Free enterprise trading market

• Deregulated market

• Significant private sector participation

• Electricity trading price – mimics market equilibrium price

• Regulator: Government

• Examples: UK and USA electricity trading markets

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Structure of Nigeria’s Electricity Trading Market

• Pre-Power Sector Reform Act 2005 – state enterprise trading market• State monopoly• Uncommercial tariffs

• N4/kWhr – N6/kWhr : single phase consumers• N6/kWhr – N8/kWhr : industrial consumers• N8/kWhr – N12/kWhr : single phase consumers• N10/kWhr : average cost of electricity generation

• Post-Power Sector Reform Act 2005 – free enterprise trading market?• Unbundling of PHCN into• 6Nos. GENCOs• 1No. Transmission company• 11Nos. DISCOs

• National Electricity Regulatory Commission (NERC)• Multi-Year Tariff Orders (MYTO) 9

Multi-Year Tariff Order (MYTO)

1st MYTO (1st June 2008 – 31st May 2013)• Levelised cycle cost of each generator/efficient new entrant using

Long Run Marginal Cost (LRMC) method• Excludes externalities (carbon tax) – constitutes major difference

with IEA, UK & Europe tariff methods• High exposure to vagaries of fuel prices (gas)• High exposure to exchange rate fluctuations

2nd MYTO (1st June 2012 – 31st May 2017)• To correct MYTO-1 flaws – exposure to fuel price & exchange rate

risks• Flexible to changes in fuel price & exchange rate

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Challenges with Nigeria’s Electricity Trading Market

• Inadequate power generation capacity• Generation : 3.7GW• Demand : 15GW

• Inadequate power transmission capacity• Capacity : 5.8GW• Needed : 9.3GW

• Inadequate power distribution capacity• Capacity : 8.4GW• Needed : 15.2GW

• Inadequate gas pipeline infrastructure

• Gas pipeline vandalization

• Poorly diversified developed energy sources

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Strategies for the Development of Nigeria’s Electricity Trading Market

• Investment in power infrastructure facilities – to increase capacity

• Investment in gas pipeline infrastructure facilities

• Adequate security and surveillance of gas pipelines

• Government incentives - to encourage participation of SMEs via Feed-in-Tariffs, etc

• Integration of RE (legislations and policies) – National Renewable Energy and Energy Efficiency Policy – to diversify power generation sources

• Strengthen National Grid infrastructure facilities to enable interconnection of RE generators

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Conclusion

• Electricity and SMEs – the hub of any economy

• Societal value of electricity

• Fundamental objectives of electricity trading markets

• Structure of Nigeria’s electricity trading market – MYTOs

• Challenges of Nigeria’s electricity trading market

• Strategies for the development of Nigeria’s electricity trading market

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