Alternative Energy & Power 2020

Last Updated July 22, 2020

Nigeria

Law and Practice

Authors



Streamsowers & Köhn is a mid-sized Nigerian law firm, comprising six partners and about 30 lawyers. The firm’s energy and natural resources practice group covers power, oil and gas, and mining matters, and the firm plays a significant role in developing and interpreting the regulatory framework in these sectors. The energy and natural resources practice group has advised the Central Bank of Nigeria and the Nigeria Electricity Regulatory Commission on the NGN213 billion Naira Electricity Market Stabilisation Facility. The Energy and Natural Resources Practice Group possesses a thorough knowledge of the legal and regulatory framework governing the energy sector and has developed competencies in advising on multi-dimensional energy transactions across the value chain of the oil and gas and energy sectors. The firm provides legal advisory services and business support to clients including multinationals, indigenous oil and gas companies, and new entrants in the power sector.

The Nigerian Electricity Supply Industry (NESI) is comprised of a number of fully unbundled power entities across the value chain and an independent regulator, the Nigerian Electricity Regulatory Commission (NERC). NERC is empowered to regulate the generation, transmission, distribution and supply of electricity.

The NESI (covering power generation, transmission, distribution and supply) is governed primarily by the Electric Power Sector Reform Act (EPSRA or the Act), which was enacted in 2005.

The EPSRA was passed for the purpose of unbundling the erstwhile vertically integrated state-owned Nigerian Electricity Power Authority (NEPA), creating an independent regulator for the industry (NERC) and achieving liberalisation of the market. The Act also introduced several reforms in the NESI, as follows:

  • the formation of 18 successor companies from the unbundled NEPA and the privatisation of the successor entities except the Transmission Company of Nigeria (TCN);
  • the establishment of the Rural Electrification Agency (REA) and a rural electrification fund; and
  • the establishment of the Power Consumer Assistance Fund (PCAF).

The Federal Government of Nigeria (FGN) employed several methods for the privatisation of the resulting successor entities – ie, core investor sales, asset sales, management contracts and concessions. The current ownership of the successor companies depends on the modality of the privatisation employed in respect of the particular assets vested in the companies. For example, the hydro generation plants were concessioned for a 15-year period to various investors, while the other generation plants were privatised via asset sales and the distribution companies were privatised under a core investor sale. There are also a number of independent power producers (IPPs) duly licensed by NERC for the generation of power, including the Azura power plant, which is the first project-financed power generation plant in Nigeria.

The transmission service remains within the control of the FGN under a management contract awarded to a private sector operator.

While the EPSRA is the primary legislation governing the sector, there are numerous regulations and policies that apply to the power sector.

To prevent the emergence of vertically integrated entities in the NESI, the ESPRA prohibits any licensee from the acquisition, purchase or otherwise of any other licence from a person that is in the business of electricity generation, transmission, system operation or trading, except as permitted under the Act.

The ownership of power utilities in Nigeria is organised as follows.

State-Owned: Transmission

The TCN is wholly owned by the FGN and is the entity responsible for electricity transmission in Nigeria. Pursuant to the privatisation of the Nigerian power sector, the TCN was created to manage the electricity transmission network. It is licensed by NERC to provide electricity transmission, systems operations and electricity trading.

Accordingly, the TCN is comprised of three operational departments: transmission service provider (TSP), system operations (SO) and market operations (MO). The TCN was initially run under a management contract by Manitoba Hydro International for a period of three years. Upon termination of the management contract, the management and operation of the Transmission Company of Nigeria reverted to the FGN.

State-Owned: Generation

Afam Power Plc is one of the successor generation companies, which was not privatised and is still owned by the FGN.

Investor-Owned Companies

NERC is empowered to issue generation and distribution licences under the EPSRA. The initial licences following the privatisation were issued to the successor generation and distribution companies.

Investor-owned: generation

Investor-owned successor generation companies in Nigeria include:

  • Egbin Power Plc;
  • Kainji Hydro Electric Plc;
  • Sapele Power Plc;
  • Shiroro Hydro Electric Plc; and
  • Ughelli Power Plc.

At the time of writing, there are several NERC-licensed IPPs operating in different parts of the country. The generation licences issued by NERC are for on-grid, off-grid and embedded power generation.

Investor-owned: transmission

No investor-owned company transmits power in Nigeria.

Investor-owned: distribution

No distribution network is wholly owned by investors.

Investor/State-Owned

Generation and transmission

No generation or transmission assets are jointly owned by investors and the FGN.

Distribution

The distribution of electricity in Nigeria is carried out by the 11 successor distribution companies (“Discos”). The Discos are all jointly owned by the FGN and private investors, with each investor holding 60% and the FGN the remaining 40%. They are as follows:

  • Abuja Electricity Distribution Company Plc;
  • Benin Electricity Distribution Company Plc;
  • Eko Electricity Distribution Company Plc;
  • Enugu Electricity Distribution Company Plc;
  • Jos Electricity Distribution Company Plc;
  • Ibadan Electricity Distribution Company Plc;
  • Ikeja Electricity Distribution Company Plc;
  • Kaduna Electricity Distribution Company Plc;
  • Kano Electricity Distribution Company Plc;
  • Port Harcourt Electricity Distribution Company Plc; and
  • Yola Electricity Distribution Company Plc.

Of the 11 Discos, the Yola Disco has been repossessed by the FGN following the exercise of the put-call option by the investor due to insurgency within its franchise area.

Sale of electricity

The sale of electricity is conducted by the Nigerian Bulk Electricity Trading Plc (NBET or the Bulk Trader), a bulk trader licensed by NERC. The generation companies (“Gencos”) sell power generated in bulk directly to NBET, while NBET sells on this power to the Discos and other eligible customers. This arrangement was designed to guarantee the demand and supply of electricity. NBET enters into power purchase agreements (PPAs) with the Gencos for the bulk purchase of power, and enters into vesting contracts with the Discos for the resale of electricity. Transmission from the Gencos to the Discos is done by the TCN, which executes grid connection agreements with the Gencos and enters into transmission agreements with the Discos.

Electricity sales to end-users are undertaken by the Discos within their area of operations. Payment for electricity is made by consumers to the Discos, and is then remitted to NBET for settlement of all invoices along the value chain to the various market participants.

Generally, there are no specific laws that promote or restrict foreign investment in the NESI. During the privatisation era, bids for successor companies were made by both foreign and local companies, with the emphasis on the bidder who could offer the most value. In reality, most of the core investments in the successor companies were in the form of foreign direct investment (FDI).

Post-privatisation, the FGN has taken steps to attract FDI into the sector by creating policies to improve financial rewards for investors. The primary benefit to investors is the implementation of the Multi Year Tariff Order (MYTO), which is designed to create a cost-reflective tariff that accounts for operating costs and guarantees capital recovery, incentivising efficient operations based on the best capabilities and technology.

NBET was licensed to guarantee offtake and the resale of power generated until such time the Discos become credit-worthy and capable of entering into bilateral contracts with the Gencos.

In addition, the general incentives for investment come in the form of tax breaks, which also apply to other sectors of the economy. For example, companies manufacturing transformers, meters, switch gears, control panels, etc, are guaranteed a three- to five-year tax holiday. Foreign investment in a NESI is generally subject to the usual foreign investment laws, guidelines and incentives. An investor in a NESI is ordinarily required to set up a company in Nigeria to carry on the intended business. The desired investment may then be brought in by way of either an equity investment, a loan to the local company or a mix of equity and debt. This equity or loan may take the form of cash or equipment.

Such FDIs are protected under Nigerian Law, as are investments in other sectors. The Constitution of the Federal Republic of Nigeria 1999 (as amended) generally prohibits the seizure and forfeiture of a citizen’s property, but provides for a procedure to divest a person of his property. Furthermore, Section 25 of the Nigerian Investment Promotion Council Act encourages foreign investment in Nigeria and assures foreigners that such investments are preserved from expropriation or compulsory acquisition by any government of the Federation, except in situations where such acquisition is in the national interest or for a public purpose and under a law that makes provision for (a) payment of fair and adequate compensation and (b) a right of access to the courts for the determination of the investor’s interest or right and the amount of compensation to which the investor is entitled. Nigeria is also a party to several bilateral investment promotion and protection agreements and treaties, which signal its efforts to attract and protect foreign investment.

Every investor in the power sector is guaranteed access to the Nigerian courts, as well as arbitration of the parties’ choice. Foreign arbitral awards can be enforced in Nigeria since Nigeria is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).

As there are no sector-specific laws that deal with the sale or transfer of power assets, any such sale or transfer is subject to regular Nigerian laws governing those types of transactions, such as the Companies and Allied Matters Act, the Investment and Securities Act and the Securities and Exchange Commission (SEC) Rules where the entity is a public company.

Specifically, Section 69 of the EPSRA prohibits transfers or assignments in any form of power assets and licences without the consent of NERC. The NERC Order on the procedure for obtaining the approval of the commission for the assignment/ceding of a licence, transfer of undertaking or change in shareholding of licensed entities under Section 69 of the EPSRA regulates the transfer of assets or interests in assets in the NESI.

NERC has also issued guidelines for the determination of fit and proper entities and persons engaged in electricity undertakings in the Nigerian electricity supply industry, which sets out the minimum standards to be met by any individual or corporate entity that undertakes any aspect of the regulated electricity business, takes any directorship or executive management position in an electricity licensee and takes more than 5% equity in an electricity licence. Under said guidelines, corporate persons must have technical and financial capacity and must be able to establish a sustainable business. The applicant must also satisfy personal and corporate governance requirements.

The objective of these regulations is to prevent vertical arrangements in the NESI, which can defeat the purpose of the unbundling effort, and to foster competition in the NESI. The EPSRA is especially attentive to crossholdings or ownership between licensees, and mandates that applicants for licences must disclose their interest in any other licensee where such holding is at or above 10%.

The newly enacted Federal Competition and Consumer Protection Act 2019 (FCCPA) prohibits restrictive agreements and abuses of dominant position resulting from a sale or merger of business entities. The FCCPA also provides for notification of any mergers or arrangements that meet certain thresholds. Section 93 (1) of the FCCPA provides that all mergers occurring in Nigeria shall be notified for review to the commission, which may or may not approve the proposed merger.

The determination of electricity supply adequacy and generation planning and development falls within the purview of the TCN, as does transmission system planning and the development and enforcement of system reliability standards.

The TCN’s functions are primarily to build, operate, expand and upgrade transmission facilities for the efficient and effective transmission of generated electricity, to create adequate network redundancies to ensure at least 99.9% reliability and to reduce transmission losses to less than 5%. In summary, the central role of the TCN is to ensure grid functionality and reliability.

The TCN houses three different entities licensed by NERC:

  • the transmission service provider (TSP) constructs, maintains and operates the transmission infrastructure, provides for secure reliable evacuation of power and establishes new interconnection points;
  • the system operations (SO) undertake system operations and administration of the wholesale electricity market, in addition to enforcing the grid code and market rules. The SO drafts and implements operating procedures that may be required for the proper functioning of the SO-controlled grid; and
  • the market operations (MO) are responsible for the administration of the wholesale electricity market, the implementation of the market rules and settlement arrangements.

Of the three arms listed above, the SO is the one most directly responsible for transmission system administration. The SO is a semi-autonomous sector of the TCN, whose functions include:

  • monitoring system parameters while identifying the requirements for maintaining system reliability and stability;
  • maintaining and enhancing system reliability, stability and security;
  • ensuring a stable frequency within the operational limits, with guaranteed voltage at all levels and uninterrupted power supply with minimal loss;
  • conducting system studies, fault analysis, load flow analysis and planning of the power system (real time and future);
  • facilitating merit order dispatches;
  • facilitating the operation of the power market through bilateral exchange;
  • the design, installation and maintenance of supervisory control and data acquisition (SCADA) and other communication facilities for effective grid operations; and
  • enforcing the grid code and operational procedures.

There have been no material changes in the primary law governing the NESI. However, NERC has issued several regulations and guidelines that are instrumental to the development of the power sector, with the most recent being the Meter Asset Provider (MAP) regulations. The MAP regulations aim to encourage the development of independence and competition in the provision of meters and the elimination of estimated billing practices, and to attract private investment to provision of metering services and close the metering gap through accelerated meter roll-out. Other regulations issued by the NERC can be accessed at the NERC’s website: www.NERCng.org/index.php/home/operators/rcs.

In addition to the above, there is a bill pending before the National Assembly that seeks to amend the EPSRA. The objective of the amendment is to provide for NERC’s effective supervisory role over the distribution companies through the provision of a regulation for tariff increments, consumer education and alternative energy sources for sufficient power supply and other related matters.

At the time of writing, there have been no significant policy changes with regard to the NESI.

The NESI has certain characteristics and faces several challenges that are unique to it. One major feature of the NESI is the existence of NBET, which was designed to function as an interim body to guarantee demand and supply of electricity pending the declaration of full competition in the market. To guarantee performance of its functions, NBET is supported by the FGN and The World Bank through the issuance of credit enhancement guarantees. NBET exists to reassure investors.

Another unique feature of the NESI is the lack of active contracts. In spite of the declaration of the transitional electricity market (TEM), the PPAs and vesting contracts signed with the successor companies are still not active. Invariably, this has resulted in defaults on invoices, accumulated losses and the emergence of FGN bailouts. The first of these was introduced in 2014 and termed the Central Bank of Nigeria–Nigerian Electricity Market Stabilisation Fund (CBN-NEMSF), which was designed to plug the losses incurred during the interim rules period, estimated at NGN213 billion (which was then about USD1.4 billion, but was quickly eroded by exchange rate depreciation), and was targeted at gas suppliers, Gencos and Discos. The success or otherwise of the CBN-NEMSF is arguable.

In addition to the CBN-NEMSF, the FGN has also introduced the payment assurance facility (PAF) – worth NGN701 billion (about USD2.3 billion) – to guarantee the payment of the Gencos’ invoices. The PAF was introduced in 2017 and is managed by NBET. Like the CBN-NEMSF, the PAF is described as a loan to NBET to meet its obligations and is to be paid back over an agreed period.

The impact of the COVID-19 pandemic on the alternative energy sector of Nigeria cannot easily be assessed or measured. Policy response and drive for the sector are largely focused on mainstream electricity generation. The immediate impact of the pandemic on the alternative energy sector will be a lack of investment to drive projects in that sector. Furthermore, the remarked lack of effective legislation or policy on renewables that codifies all available policies and incentives to help attract investments in the sector is a detrimental factor to the development, deployment and integration of renewable energy sources in the energy mix of the country. A second effect of the pandemic on alternative energy will be the reassessment and reduction of the national budget due to loss of revenue to the government occasioned by the pandemic, which will reduce the amount of money available to the government to fund projects in the alternative energy space. Finally, the economic impact of the pandemic on individuals and companies alike has seen the reduction or deferment of projects, especially projects of this nature, which can be capital intensive.

The structure of the NESI may be described as progressively competitive within the wholesale market, currently based on the single buyer model and co-ordinated by NBET. See nbet.com.ng/. Section 68 of the EPSRA provides for the licensing of bulk purchases to resale licensees, who have the right to purchase power and ancillary services from successor Gencos and IPPs, and to resell them to Discos and other eligible customers.

The price of wholesale electricity is largely determined by the PPAs on a Genco-by-Genco basis. Although NERC issues Gencos with tariffs, this merely forms the baseline for the Gencos’ tariffs and does not indicate the actual cost of wholesale electricity. In addition, these contractual rates are reviewed monthly, taking into consideration the prevailing exchange rate, the rate of inflation and the current price of gas. Consequently, the price varies from Genco to Genco.

NBET is empowered to sell electricity to the various Discos and, upon reconciliation with the MO, settles the relevant market invoices. The MYTO for the respective Discos approved by NERC sets out the tariff applicable to each Disco.

In carrying out its functions, NBET has entered into several PPAs with successor Gencos and IPPs, who are paid for energy generated and capacity maintained, whether this was commensurate with the energy generated or not. In recent times, NBET has entered into energy-only PPAs. While these PPAs still carry a capacity component, the payments made are equivalent to the energy generated. The result of this is that the NESI consists of only these two types of PPAs.

The overarching intention of the privatisation initiative was that the NESI should be wholly and independently governed by market forces. To ease the sector into a fully deregulated market, the ESPRA set out three transition stages for the NESI:

  • the transitional electricity market (TEM) stage, which is characterised mainly by the introduction of competition into the market, with an unbundled service structure, a more formalised market and contract-based transactions;
  • the medium-term market (MTM) stage, which shall be characterised by full wholesale competition in the market. It is expected that this stage will feature more competition in generation, a centrally administered balancing mechanism for the market and limited retail competition; and
  • the final market (FM) stage, which is characterised by full wholesale and retail competition – ie, a fully competitive generation and retail electricity market. The market will be fully governed by bilateral contracts.

Nigeria currently supplies power to Togo, the Benin Republic and Niger under bilateral agreements entered into between the governments of Nigeria and the respective countries. The responsibility for managing and administering these agreements has been assigned to NBET by the FGN.

The supply mix for the NESI comprises thermal, hydro and solar generated power. At the time of writing, NBET’s website states that the energy mix in Nigeria comprises hydro (1936 MW), solar (1080 MW) and gas/thermal (11,560 MW) sources. Although NBET reportedly signed about 14 solar PPAs to promote on-grid solar projects, none of these PPAs has achieved financial success. However, there are several mini solar projects in Nigeria for the supply of power to homes and businesses on an isolated level.

For the purpose of this publication, we concentrate on hydro and thermal sources. NBET currently has three hydro PPAs and nine thermal PPAs. There is also the famous Azura PPA entered into with Azura Power for the development of the Azura-Edo IPP Project, the first project-financed electricity IPP in Nigeria.

There are no specific laws governing market concentration limits in the NESI. However, the NERC is empowered by the EPSRA to enforce competition in the electricity sector. The NERC is also responsible for ensuring that the abuse of market power is prevented or mitigated. Thus, the NERC has the authority to:

  • investigate and/or request information from licensees;
  • undertake inquiries; and
  • establish or contract with an independent entity to provide monitoring services.

Furthermore, the NERC can issue cease-and-desist orders to discontinue certain behaviours, impose penalties, levy fines and make any other orders consistent with discharging its role as regulator.

The EPSRA contains basic provisions to determine anti-competitive behaviour. Generally, anti-competitive behaviour will be considered in the context of market power, exclusivity or disparate treatment. The major indicators are:

  • the ability of a seller or group of sellers to maintain prices above a competitive level; and
  • the ability to maintain stable prices while reducing the quality of product or service provided over a significant period of time.

The recently enacted FCCPA also empowers the eponymous commission established under it to detect anti-competitive behaviour.

Given Nigeria’s status as a fossil fuel dependent economy, the development of a climate change policy and response strategy is critical to the FGN. One of the key pillars of the government’s vision 20:2020 is investment in low carbon fuels and renewable energy. Accordingly, the Federal Executive Council has approved a national adaptation strategy and plan of action on climate change for Nigeria (NASPA-CCN) as a national document for implementing climate change activities in Nigeria. The NASPA-CCN is in line with the United Nations framework convention on climate change and the Kyoto Protocol. In addition, the legislative arm of government, the National Assembly, has ratified the United Nations Framework Convention on Climate Change, the Paris Agreement and the Kyoto Protocol, making them binding under domestic law. Additional laws and policies that deal with climate change in Nigeria include:

  • the National Environmental Standards and Regulations Enforcement Agency Act (NESREAA), section 7 of which mandates the agency to enforce compliance with the provisions of international agreements, protocols, conventions and treaties on the environment. The NESREAA also issued the National Environmental (Energy Sector) Regulations, 2014 for the power industry;
  • the Environmental Impact Assessment Act;
  • the Harmful Waste (Special Criminal Provisions etc.) Act;
  • the Nuclear Safety and Radiation Protection Act;
  • the National policy on Climate Change Nigeria 2013;
  • Nigerian policy on the environment;
  • Nigeria Agenda 21; and
  • Nigeria Vision 20:2020.

There is a climate change bill pending before the National Assembly that seeks to establish a legal framework for climate change. The relevant URLs on climate change laws in Nigeria include the following:

Carbon Emission Limits

The plans and policies adopted by the FGN are all geared towards bringing about a transition to a low carbon economy and, in that regard, the nationally determined contribution under the Paris Agreement is Nigeria’s commitment to the unconditional reduction of greenhouse gas emissions by 20% below business as usual projections by 2030, and a conditional contribution of a 45% reduction, based on commitments with international support.

Mechanisms Used to Limit Carbon Emissions

While Nigeria does not have a set emission threshold, it has adopted the clean development mechanism (CDM) under the Kyoto Protocol to help limit carbon emissions. The CDM is designed to encourage investment in and the transfer of environmentally safe technologies that reduce emissions of greenhouse gases.

Carbon-based power generation in Nigeria emanates from two sources: coal and gas fired plants. All the coal fired power plants built in Nigeria between the 1920s and 1950s have been retired, albeit not by any deliberate policy. Today, all thermal power generation plants are gas fired. There is no specific legislation that encourages the early retirement of carbon-based electricity generation.

NERC has issued a number of regulations to promote the development of alternative energy sources in Nigeria. The regulation on feed-in tariffs for renewable energy sourced electricity in Nigeria (REFIT) was issued in 2015 with the aim of providing a feed-in tariff that encourages new renewable energy development by creating a long-term financial incentive to investors who generate renewable electricity, offering a standardised and streamlined process to do so, thereby easing the entry of the new systems.

In addition to the REFIT Regulations, NERC has also issued the following:

  • mini-grid regulations, which provide the framework for the registration and operation of mini-grids in Nigeria; and
  • independent electricity distribution network (IEDN) regulations, which regulate the licensing and operation of independent electricity distribution network systems.

These regulations were enacted to encourage the development and deployment of alternative energy sources. Other FGN policies include:

  • the national energy policy, 2015;
  • the national biofuel policy and incentives, 2007;
  • the national economic empowerment and development strategy (NEEDS), 2004;
  • the renewable electricity policy guidelines (REPG), 2006;
  • the renewable electricity action program (REAP), 2006;
  • the national renewable energy and energy efficiency policy (NREEEP), 2015;
  • the national renewable energy action plan for 2015–30; and
  • the renewable energy master plan (REMP).

REMP seeks to increase the supply of renewable electricity from 13% of total electricity generation in 2015 to 23% in 2025 and 36% by 2030. It is expected that renewable electricity would then account for 10% of Nigeria’s total energy utilisation by 2025. The plan sets out installed capacity targets for suitable renewable energies, as follows:

  • small hydro: 600 MW in 2015 and 2,000 MW by 2025;
  • solar PV: 500 MW by 2025;
  • biomass-based power plants: 50 MW in 2015 and 400 MW by 2025; and
  • wind: 40 MW for wind energy by 2025.

REMP also targets higher electrification rates, from 42% in 2005 to 60% in 2015 and 75% by 2025.

There are also financial incentives to introduce the development of alternative energy sources under the different policies. Incentives include guaranteed price and priority access to the grid, renewable energy feed-in tariffs and the obligation of Discos to source at least 50% of their total commitments from renewable energy, among others.

Several FGN agencies are charged with co-ordinating renewable energy technology and making it more accessible. For example, the REA is charged with providing decentralised energy solutions through renewable energy technology, with the aim of reducing unserved and under-served locations in Nigeria.

Investment in renewable energy technology is driven by the private sector, with support from government agencies where necessary. This support may be in the form of payment support to private companies investing in renewable energy from funding secured by the government from the AfDB and The World Bank. There are no specific subsidies for power generated from alternative or renewable energy sources.

The EPSRA regulates the construction and operation of electricity generation facilities in Nigeria, and provides that no person shall construct or operate power generation facilities without a licence granted by NERC for that purpose. A generation licence entitles the holder to construct, own, operate and maintain a generation station for the purposes of the generation and supply of electricity. The licence is issued for a duration of ten years and is renewable for a further term of five years. Generation licences have been issued to successor generator companies and IPPs in Nigeria.

In furtherance of this responsibility, NERC has issued the following regulations and guidelines relating to the application for licences:

  • the NERC Application for Licences (Generation, Transmission, System Operations, Distribution and Trading) Regulations 2010, which cover the procedures for the application and obtaining of licences issued by NERC, and their renewal, extension, suspension, cancellation and withdrawal;
  • the Guidelines on Derogation from Technical Codes and Standards in Electricity Generation, Transmission, Distribution and Supply in Nigeria, which summarise the application and review process for derogation from technical codes and standards in relation to electricity generation, transmission and distribution licences; and
  • the NERC Reporting Compliance Regulations 2009, which prescribe the approved format for issues that must be reported (ie, issues with legal, financial, engineering and safety standards of generation and transmission by Discos in the NESI).

The NERC Application for Licences (Generation, Transmission, System Operations, Distribution and Trading) Regulations 2010 detail the manner and form in which applications for generation licences shall be made, together with the relevant procedure, information and documentation required to support the various kinds of licence applications and the form of the proposed business plan for an IPP intending to set up business in Nigeria.

A company wishing to construct and operate a generation facility exceeding 1 MW in aggregate will need to apply in writing for a generation licence from NERC by completing and submitting an application form in the required format with accompanying documents and a non-refundable processing fee. The application will go through the process of evaluation by the three divisions of NERC: legal, engineering and market competition. Upon satisfaction that all the relevant information has been provided, NERC shall notify the applicant that the application has been filed and request that the statutory public notice should be published. The publication of the notice shall be made at the applicant’s cost within 30 days and in at least two daily newspapers in order to give members of the public the opportunity to raise any objections. NERC shall grant or refuse the application after due consideration of the application.

The applicant is expected to have conducted an environmental impact assessment (EIA) in respect of the projected area of operation or where the proposed generation capacity is less than 10 MW, as well as an evaluation of how effluents and discharges will be handled. The applicant is also expected to have an off-take agreement in place or an arrangement with a power purchaser. Where the applicant proposes to supply power to the grid, a PPA will have to be entered into with NBET.

The EPSRA outlines the following terms and conditions that may be imposed on a licensee:

  • a requirement for the licensee to enter into agreements with other parties for the provision or use of electric lines, etc, operated by the licensee;
  • a requirement that the licensee purchases power and resources in an economical and transparent manner;
  • a requirement that the licensee refers disputes for arbitration, mediation or determination by the commission;
  • a prohibition from assigning or transferring the licence or its generation business to another entity without NERC’s prior written consent;
  • a prohibition on changes to the ownership structure exceeding 5% of authorised share capital without notifying NERC at least 30 days prior to the proposed changes, and obtaining NERC’s consent to such changes;
  • a requirement to insure all generating station equipment and facilities;
  • a requirement for a licensee who owns more than 10% of the shares in a company and who holds another licence issued by the commission to divest itself of said shares or adhere to a code of conduct determined to be in the public interest;
  • a requirement to make reasonable provision for the facilitation of rural electrification, having due regard to the tariff methodology;
  • a requirement to provide information to the commission on a periodic basis;
  • compliance with termination or amendment conditions;
  • restrictions on generating beyond the capacity for which the licence was issued, and restrictions on generating outside the specific site in relation to which the licence was issued;
  • a requirement to pay operating charges, as specified in the regulations for licence and operating fees, at the end of each month and to pay the prevailing inter-bank lending rate +1% interest charged in respect of delayed payments;
  • a requirement or exemption to prepare and submit to the commission accounting information in respect of each year; and
  • a requirement to comply with the market rules to the extent applicable.

The licensee can apply for an amendment at any time in the prescribed form described in the regulations. Also, NERC can amend the conditions upon its own initiative or upon receipt of a complaint if it is satisfied that:

  • any circumstance exists that renders it necessary and in the public interest to amend the licence;
  • the licensee is unable to meet certain requirements set by the commission in the terms and conditions;
  • the licensee has defaulted in complying with certain provisions of the Act, regulations of the commission, market rules and network codes; and
  • there has been a material change in the circumstance of the licensee.

The applicant shall pay a non-refundable fee as applicable and publish a notice of the proposed amendments in the prescribed form. Where the proposed amendment is in respect of a licensee providing a service to an area covering a building or place occupied by the Federal Ministry of Defence, the commission shall obtain the consent of the Ministry of Defence before making an amendment to the licence.

Generally, each successor company will have obtained certain properties as part of the assets of the relevant successor company. However, a person intending to construct a generation facility must source their land privately; the law does not grant a proponent land or eminent domain or surface rights. Under the Land Use Act (LUA), title to all lands in a state is vested in the Governor, who holds the title in trust for the people of that state. The State Governor can grant a right of occupancy (leasehold interest) for a maximum period of 99 years to anybody seeking an interest in land in that state, and title is typically evidenced by a Certificate of Occupancy. The constitution guarantees rights in the case of compulsory acquisition of property, except in cases of overriding public interest as prescribed by law. In those instances, prompt payment of compensation must be made to the title holder. Any person who wants to begin a project can obtain title from the existing holder of a right of occupancy.

Where an applicant for a generation, transmission or distribution licence requires a parcel of land in which a person has a legal interest, the EPSRA empowers NERC to make a declaration that said land is required by a licensee. However, the EPSRA provides that NERC shall not make such declaration without giving the landowner an opportunity to make representations against such a declaration. The President shall then issue a notice in the Gazette to the effect that such land is required by the government of the Federation for a public purpose. The Governor of the state where the land is situated shall thereafter, in accordance with the provisions of Section 28 (4) of the LUA, revoke the existing right of occupancy in respect of the land and vest that right in the licensee to the exclusion of the previous holder(s). The previous holder(s) shall be entitled to claim compensation in accordance with the provisions of the LUA. The provisions of the declaration shall include the provision of funds for meeting any liabilities that may arise from the exercise of the rights granted.

Once this process is concluded, the generation licensee shall be entitled to access rights over lands, buildings or streets to discharge its licence obligations.

The national guidelines for the decommissioning of facilities in Nigeria, issued by the Federal Ministry of Environment, provide that a decommissioning plan shall be developed in accordance with the ministry’s stated guidelines in relation to environmental sustainability. Decommissioning requirements specify the acceptable standards required for eliminating environmental and health hazards during decommissioning and site clean-up.

The requirements provided in the guidelines include the following:

  • the removal of structures on or beneath the ground;
  • the disposal or secure isolation and/or treatment of contaminated equipment in-situ or offsite;
  • the remediation of aesthetics;
  • containment control of contaminant;
  • a general site clean-up of access controls to physical structures remaining on-site that are unsafe or hazardous to humans or animals;
  • remediation of aesthetically unacceptable portions of the site (filling in of pits, removal of stained soil and odorous material, levelling of mounds, disposal of waste rock, etc); and
  • a clean-up of the site to a level that will provide long-term environmental protection and be safe for intended future use.

Construction and operation of the transmission network are vested in the TCN, which is licensed under the EPSRA to carry on grid construction, operation and maintenance of the transmission system within Nigeria and transmission systems that connect Nigeria with a neighbouring jurisdiction. The transmission network in operation today was constructed by the federal government, and all subsequent additions, developments or improvements thereto have been at the initiation and cost of the FGN.

The construction of transmission lines and associated facilities is mainly regulated by the Nigerian Electricity Supply and Installation Standards Regulations 2015 (NESIS regulations), which provide for:

  • the regulation of engineering design, installation, commissioning and maintenance of electric power systems, setting out the standard technical requirements for civil works and buildings for 330/132/33 kV transmission substations in the national grid;
  • civil works including layouts, structures, buildings and foundations, electromechanical works and bus-bar arrangements; and
  • dealing with major transmission equipment, the SCADA system and related health and safety matters.

The construction of transmission lines, overhead transmission conductors and insulators for overhead transmission lines, and the dielectric strength of overhead transmission lines and supporting structures, is also provided for under the NESIS regulations.

The NESIS regulations provide that the transmission licensee shall obtain approvals from NERC for the construction of transmission lines, the installation of overhead conductors or deviations from the set characteristics of a particular project. NERC’s authority to issue these approvals stems from its over-arching role as a regulator for the NESI. In practice, NERC requires notification of all projects concerning the transmission system. The scope of its powers is wide and extends to all facets of the transmission network, as well as other segments of the industry.

In addition to the approvals that must be obtained from NERC, the following requirements apply to the construction of transmission lines and facilities:

  • where required, the equipment or materials to be used must meet the specified ISO standards for various transmission equipment;
  • where required, NIS (Nigerian Industrial Standards) standards for safety machinery and other materials must also be met; and
  • the design of all buildings and structures under the civil works must comply with the Nigerian building code.

The operation and maintenance of the transmission system is governed by the EPSRA and the grid code. The EPSRA provides for the licensing of the system operator, which is a semi-autonomous sector of the TCN responsible for the physical management and operation of the transmission network.

The grid code regulates the operation, procedures and principles for the transmission system, and is geared towards achieving an effective, well-coordinated and economic transmission system for the NESI. The grid code applies to the TCN and all users of the transmission system. Users are defined as persons using the transmission network as permitted by the TSP and NBET.

Notwithstanding the lack of specific laws governing the construction of transmission networks, the operation and maintenance of the network remains the responsibility of the system operator who is responsible for the physical management of the transmission network, and the market operator responsible for commercial transactions. Both are licensees of NERC, so it may be said that NERC has overarching regulatory powers.

For operation and maintenance of transmission infrastructure:

  • System Operator
  • Market Operator

For regulation and grant of approvals:

  • NERC

Applicable laws and codes:

The regulatory approval for the construction of transmission facilities or networks is embedded within the transmission licence granted by NERC. Section 65 of the ESPRA clearly authorises the transmission licensee to carry out grid construction and maintenance. There are no clear stipulations on the approval process for the construction or development of transmission networks. Given the nature of transmission licences issued to the TCN, the economic and technical evaluations will presumably be conducted by the TCN before NERC is approached for the relevant approvals.

In addition, the grid code provides that the development of the transmission network must be planned in advance, with adequate lead time to obtain all necessary approvals, such as EIA, forest clearance, road or railway clearance, clearance from aviation authorities and rights of way. The proposed development plan must also allow for detailed engineering and construction work to be carried out. In addition, the NESIS regulation provides that every licensee engaged in transmission shall ensure that it has an EIA Report and a certificate from the Federal Ministry of Environment, prominently displayed in its principal place of business.

NERC is the final authority for granting these approvals and there is no further reference to the Ministry of Power. There are no statutory prescribed timelines for the granting of approvals.

See 5.1.2 Regulatory Process for Obtaining Approvals to Construct and Operate Transmission Facilities.

See 4.4 Proponent's Eminent Domain, Condemnation or Expropriation Rights.

In Nigeria, transmission is the exclusive preserve of the TCN, whose jurisdiction covers the whole country. Given the nature of the TCN as a government-owned entity with monopoly rights over the transmission sector, the right to construct and operate transmission facilities within the territory of Nigeria is exclusively vested in the TCN. This means that the TCN determines what improvements or developments may be made to the transmission network, and determines the manner in which these are carried out, as well as the timing. Invariably, there is no competition in this segment of the industry, and it is safe to say that anyone carrying out the construction of a transmission facility is working for the TCN pursuant to some contractual arrangement.

The EPSRA is the primary legislation regulating the operation of transmission services in Nigeria. The MYTO 2015 for the TCN governs transmission charges and also sets cost-reflective tariffs, which enable the NESI to be properly funded and functional. Other subsidiary legislation in this sector includes the market rules: http://www.onemnigeria.org/index.php?option=com_docman&task=doc_view&gid=197&tmpl=component&format=raw&Itemid=61. The MYTO regulations can be accessed at http://www.onemnigeria.org/index.php?option=com_docman&task=doc_view&gid=92&tmpl=component&format=raw&Itemid=61.

Transmission charges are determined by NERC in accordance with the provisions of the TCN MYTO. The following is taken into consideration when setting the transmission tariffs:

  • that the licensees recover the full costs of business activities and earn a reasonable return on capital;
  • that incentives are provided for improving performance and costs, improving quality of service and encouraging efficient use of the network;
  • that there is no undue discrimination between consumers and consumer categories;
  • that certainty and stability of the pricing framework is provided, which encourages investment;
  • that incentives are provided to improve technical and economic efficiency; and
  • that incentives are provided to reduce costs, improve the quality of service and encourage the efficient use of the network.

NERC adopts procedures for price determination in the NESI. Any person aggrieved by any decision of NERC in relation to tariffs and prices, or by any of its other decisions, has the right to apply to NERC for a review of that decision. This is provided for under Section 50 of the EPSRA. Furthermore, NERC has the power to call for objections or representations in connection with proposed procedures prior to adoption. Also, any licensee who has concerns regarding the rates proposed by NERC is at liberty to make representations before the adoption of said rates.

Under the grid code, transmission services can be accessed by all Gencos and Discos, as agreed and permitted by the TSP and NBET.

The applicant will be required to submit an application form to the TCN that contains the following, among other things:

  • a description of the plant or apparatus to be connected to the transmission system or a modification relating to the user's plant or apparatus that is already connected to the transmission system;
  • confirmation that the user’s plant and apparatus at the connection point will meet the required technical standards in the grid code, as agreed with the TSP where appropriate;
  • confirmation that the user’s plant, apparatus and procedures will meet the safety provisions as contained in the grid code;
  • the technical data anticipated for the user’s modified or new plant or apparatus, specifying the load characteristics and other data;
  • the desired connection and operational date of the proposed user’s development; and
  • a proposed commissioning schedule, including commissioning tests, for the final approval of the system operator and the TSP.

The required agreements for obtaining transmission services include the following:

  • the Grid Connection Agreement;
  • the Ancillary Services Agreement; and
  • the Transmission Line Agreement or Transmission Project Agreement and the Transmission Use of System (TUOS) Agreement.

The EPSRA is the primary law that governs the construction and operation of distribution facilities. The EPSRA empowers and authorises NERC to grant distribution licences. Therefore, a company that intends to construct a distribution network must first obtain the approval of and a licence from NERC. The ESPRA is supported by the IEDN regulations and the guidelines for the application for distribution licences, both of which were issued by NERC pursuant to its powers under the Act. These regulations contain the requirements and processes for obtaining a distribution licence; see https://www.NERCng.org/index.php/library/documents/Licensing.

The NERC Application for Licences (Generation, Transmission, System Operations, Distribution and Trading) Regulations 2010 detail the manner and form in which applications for distribution licences shall be made, together with the relevant procedure, information and documentation required to support the licence applications.

The terms and conditions imposed in approvals to construct and operate will usually be stated in the licence itself. However, the Application for Licences (Generation, Transmission, System Operations, Distribution and Trading) Regulations 2010 contain comprehensive requirements and conditions required to be satisfied by each applicant for a distribution (or any other activity) licence.

See 4.4 Proponent's Eminent Domain, Condemnation or Expropriation Rights.

See 4.4 Proponent's Eminent Domain, Condemnation or Expropriation Rights.

The EPSRA is the primary law governing the electricity distribution service and contains the day-to-day operating procedures and principles governing the development, operation and maintenance of an effective, well-coordinated and functional distribution network for the country. The terms and conditions of a distribution licence are similar in form and content to that of a generation licence, as set out in 4.3 Terms and Conditions Imposed in Approvals to Construct and Operate Generation Facilities.

NERC is responsible for creating the relevant tariff methodology to provide a viable and robust tariff policy for the NESI, with the aim of ensuring the following:

  • full cost recovery plus a reasonable return on investment;
  • the promotion of technology and market efficiency through incentives;
  • fairness and openness to consumers; and
  • a reduction or elimination of cross-subsidies.

The MYTO provides a 15-year tariff path for the electricity industry, with minor biannual reviews and major reviews every five years. The MYTO is a tariff model used to set wholesale and retail electricity prices that are cost reflective and allow the power sector to be properly functional and properly funded. The MYTO is comprised of payments for the cost of the energy (fixed charge and energy charge), transmission costs, regulatory and administration charges, the Discos' distribution charges and costs associated with metering, billing, marketing and revenue collection. In other words, the end-user tariff reflects the cost of the whole supply chain of the NESI, beginning with generation and transmission, distribution, metering and billing to the final consumer. See https://www.NERCng.org/index.php/home/operators/ltmr/405-nigerian-electricity-market.

The MYTO establishes the building blocks upon which the tariffs and charges for transmission, distribution and retail activities are calculated. The blocks upon which the MYTO is founded include the following:

  • the allowed return on capital, being the return necessary to achieve a fair rate of return on the assets invested in the business;
  • the allowed return of capital associated with recouping that capital over the useful life of the assets (depreciation); and
  • operating costs and overheads.

Various Discos have used the MYTO methodology, which has, in turn, been approved by NERC.

NERC holds consultations with the relevant stakeholders in the industry before it issues the MYTO, and every subsequent amendment thereto. The Discos and the public are invited to present their submissions on the tariff review, and these are considered in the issuance of the MYTO.

Streamsowers & Köhn

16D Akin Olugbade Street
Victoria Island
Lagos

+234 1 271 2276

+234 1 271 2277

info@sskohn.com www.sskohn.com
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Law and Practice

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Streamsowers & Köhn is a mid-sized Nigerian law firm, comprising six partners and about 30 lawyers. The firm’s energy and natural resources practice group covers power, oil and gas, and mining matters, and the firm plays a significant role in developing and interpreting the regulatory framework in these sectors. The energy and natural resources practice group has advised the Central Bank of Nigeria and the Nigeria Electricity Regulatory Commission on the NGN213 billion Naira Electricity Market Stabilisation Facility. The Energy and Natural Resources Practice Group possesses a thorough knowledge of the legal and regulatory framework governing the energy sector and has developed competencies in advising on multi-dimensional energy transactions across the value chain of the oil and gas and energy sectors. The firm provides legal advisory services and business support to clients including multinationals, indigenous oil and gas companies, and new entrants in the power sector.

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