The Electricity Act 2023 And The Constitutional Amendment Act 2023: Implications For The Power Sector

1. Introduction

In a bid to foster competition, transparency, and efficiency within the Nigerian Electricity Supply Industry (“NESI”), the Electricity Power Sector Reform Act 2005 (“EPSRA”) was passed into law. The EPSRA sought to reform the power sector by unbundling the then Power Holding Company of Nigeria (“PHCN”) into 18 successor companies comprising of 6 generation Companies (“GENCOs”), the transmission company of Nigeria, and 11 distribution companies (“DISCOs”). Furthermore, the EPSRA established the Nigerian Electricity Regulatory Commission (“NERC”), which is vested with the regulatory powers over generation, transmission, and distribution of electricity across Nigeria¹.

Despite these aforementioned reforms, immense challenges troubling the electricity sector remain, such as generation deficit, poor or defective transmission lines, illegal connections and sabotage, poor distribution networks, among others. According to NERC² , only 53% of available (electricity) capacity is utilized due to challenges with gas supply, transmission and distribution constraints and commercial challenges. This in turn has resulted in poor power supply to homes and businesses across Nigeria. By the foregoing, an argument on the full decentralisation of the NESI was kickstarted. It was argued that rather than relying solely on the Federal Government to address electricity gaps, States should also be empowered to do so. However, this argument was further plagued with a major issue on whether the constitutional and legal framework empowered States to set up independent electricity markets. This was because the Constitution of the Federal Republic of Nigeria, 1999 (as amended) (“the Constitution”), specifically Section 4, provides for the legislative powers of the Federal and State governments vested in the National Assembly and the House of Assembly of each State, respectively. While the National Assembly is empowered to make laws on any matter included in the exclusive legislative list ³ and any matter in the concurrent legislative list⁴ , the House of Assembly of each state is empowered to enact laws on matters not included in the exclusive list and on any matter in the concurrent list⁵ .

In relation to the electricity market, Paragraph 13(a) and (b) of the Concurrent List empowers the National Assembly to make laws for the Federation or any part with respect to electricity and the establishment of electric power stations, and the generation and transmission of electricity in or to any part of the Federation and from one State to another State. Furthermore, Paragraph 14(a) and (b) of the Concurrent List empowers the House of Assembly to make laws for the State with respect to electricity and the establishment in that State of electric power stations and on the generation, transmission, and distribution of electricity to areas not covered by a national grid system within that State.

This ambiguity induced debates on the implication of restricting powers of the House of Assembly of a State to only “areas not covered by the national grid system” within a State.

Also, the Constitution did not define the phrase “national grid system” thereby adding more fuel to the fire.

To address this Constitutional debate, on March 17 2023, former President Muhammadu Buhari assented to the Constitution Amendment Bill passed by the National Assembly in respect of the amendment to Paragraph 14(b), Part II of the Second Schedule to the 1999 Constitution. This provided a much-welcomed clarity on the powers of States to establish an independent electricity market.

2. Amendment to Paragraph 14(b), Part II of the Second Schedule to the 1999 Constitution.

This amendment brought about the deletion of the phrase “not covered by the National grid system” from the provisions of Paragraph 14(b) of the Concurrent List. The Paragraph now reads that the House of Assembly may make laws for the State to generate, transmit, and distribute electricity to areas within that State.

This amendment is projected to foster increased efficiency, better service delivery, and overall improved power supply to consumers. It would also encourage private sector investments that would in turn drive the growth of the State focused electricity markets by shaping competitive, transparent and efficient State electricity markets. This will also better protect and support some of the States in Nigeria such as Lagos, Edo and Kaduna States - who had previously taken steps to lay the foundations for their respective electricity market within their States.

Furthermore, the amendment is viewed as an important development in confronting Nigeria's abysmal power supply issues. It has also addressed and answered the constitutional question on the right and power of State governments to set up electricity markets.

However, while the amendment may have addressed the debate on the right of States on the generation, transmission, and distribution of electricity within the States, it is in conflict with the Electric Power Sector Reform Act (EPSRA) 2005 which was the principal law governing the sector before the passage of the Electricity Act 2023. It is important to note that the EPSRA only makes room for a single national electricity market. In other words, it does not recognize the State electricity market and comprises of provisions that interfere with the powers and rights of the States to establish their respective electricity markets. Furthermore, there is a possibility that State electricity laws (when enacted) may be incompatible with some provisions of the EPSRA or lead to conflict between NERC and State established electricity regulators. This inconsistency in the laws presented an important requirement for the review of the EPSRA to guarantee uniformity in the laws.

3. The Electricity Act 2023.

On June 9 2023, President Bola Ahmed Tinubu assented to the Electricity Bill thereby making it an Act, empowering States, companies, and individuals to generate, transmit, and distribute electricity. This in turn repealed the EPSRA 2005 and creates a comprehensive legal and institutional framework to guide the NESI. This enactment provides the necessary boost for the continued decentralisation and liberation of the NESI and stands to promote competitiveness and efficiency in the market.

This piece would explore the legal, commercial, and practical implications of the enactment of the Electricity Act for investors and other stakeholders in the NESI by dissecting the key highlights and implications.

3.1.Key Highlights and Implications of the Electricity Act 2023.

The enactment of the Act creates a vacuum that may affect existing investors in the NESI, incentivise new investments in the electricity sector, create more hurdles for industry players, or trigger a boost of efficiency in the sector. This development of the Act would nonetheless transform Nigeria's electricity sector into an efficient and competitive industry by attracting significant private sector investments, promote the deployment of renewable energy, create more access to electricity, and foster fair and transparent regulations that protect the interests of consumers.

However, before diving into the analysis of the Act, it is important to note that the relevant State must first enact its own electricity market laws. Hence, once a State passes its electricity market regulation laws, the State, companies, and individuals within the State are permitted to generate, transmit, and distribute electricity within that State.

The Act establishes an array of key features that are intended to spin Nigeria's power sector in the right direction. These highlights include:

3.2.De-centralisation and De-monopolisation of the Power Sector

The Act guarantees the de-centralisation and de-monopolisation of Nigeria's electricity generation, transmission, and distribution at the National level and authorizes states, companies, and individuals to generate, transmit and distribute electricity⁶ . Under the Act⁷ , States are empowered to issue licenses to private investors who in turn would be permitted to set-up and operate mini-grids and power plants within the State⁸ . The licenses obtainable include: electricity generation license (excluding captive generation); electricity transmission license; electricity distribution license; electricity supply license; electricity trading license; and system operation license⁹ . These licenses enable private entities to participate in different aspects of the electricity value chain, thereby promoting competition, and encouraging innovation to solve the growing energy needs of Nigeria.

Furthermore, the Act stipulates that without a license, a person may operate or construct an undertaking for the purpose of generating electricity not surpassing 1 megawatt (MW) in total at a site, or an undertaking for the distribution of electricity with a capacity not surpassing 100 Kilowatts (KW) in total at a site or such other capacity as the Commission may determine¹⁰. In other words, it is possible for a person to construct, own, or operate an undertaking for the purpose of generating electricity or an undertaking for distributing electricity without obtaining a license, provided that such construction, ownership, or operation undertaking shall not exceed 1MW or distribution undertaking shall not exceed 100KW. However, the Act prohibits interstate and transnational electricity distribution¹¹ .

3.3. Powers of the Nigerian Electricity Regulatory Commission (NERC)

The Nigerian Electricity Regulatory Commission (NERC) is established under the Act as the apex regulator of the NESI¹². The NERC among other functions listed in the Act in furtherance of its functions, is saddled with the power to license and regulate persons engaged in the generation, transmission, system operation, distribution, supply and trading of electricity¹³ .

Furthermore, the NERC also possesses the power to monitor the operation of the electricity markets and sanction licensees in deserving circumstances¹⁴; and to seal and enter the premises of persons operating without a license or suspected to have committed an offence under the Act15 . The NERC also has the authority to enforce compliance, regulate tariffs¹⁶, and effectively resolve disputes within the sector¹⁷ but also provides for the delegation of regulatory authority to state regulators once they have been constituted.

3.4. Application for a License under the Act:

The procedure for the application for a license is set out in Section 71(1) - (8) of the Act. This section stipulates that an application shall be made to the NERC in the form and manner prescribed, and be accompanied by the prescribed fee and such information or documents as may be prescribed or as the NERC may require¹⁸ . The holder of a license may also put in an application for the renewal of the said license before it expires¹⁹ .

3.5. Focus on Renewable Energy and Sustainability:

The Act promotes the generation of electricity from renewable energy sources²⁰. It encourages embedded generation, hybridised generation, co-generation and the generation of electricity from solar energy, wind, small hydro, and biomass²¹ . The Act also supports the development and utilisation of renewable energy by incentivising a simplified licensing and fees regime for issuance of licenses to renewable energy service companies for the provision of electricity to consumers and from renewable energy sources specified under the Act²². Other mechanisms to incentivise investment in renewable electricity under the Act are contained in Section 164 (a) - (u). Furthermore, the Act also introduces tax incentives to promote and facilitate the generation and consumption of energy from renewable sources and in accordance with the provisions of the Industrial Development (Income Tax Relief) Act or such other fiscal policy framework that fosters such tax reliefs that would incentivise implementation of renewable energy projects in Nigeria²³ . Also, the Act introduces the feed-in-tariffs²⁴ policy which guarantees a fixed price for renewable electricity fed into the grid.

In addition, the Act provides for opportunities for Embedded Generation, which requires power generating licensees to generate a certain approved percentage of their total power generation from hybridised generation or from renewable energy sources, such as solar energy, wind energy, small hydro energy, biomass, or such other renewable energy sources as defined under the Act or as may be developed in the future.²⁵

3.6. Establishment of the National Hydroelectric Power Producing Areas Development Commission (N-HYPPADEC):

The Act establishes the N-HYPPADEC, a body corporate charged with the function of formulating policies and guidelines for the development of hydroelectric power producing areas without prejudice to the powers of the Minister to issue policy directives and the NERC's power to regulate the electricity industry under the Act²⁶ .

 The N-HYPPADEC is a novel provision of the Act, and its full functions are set out in section 89(a) - (h) of the Act, including but not limited to identifying factors inhibiting the development of the hydroelectric power producing areas and assist states in the formulation and implementation of policies to ensure sound and efficient management of the resources of the hydroelectric power producing areas; ²⁷ and tackle ecological problems that arise from overloading of dams in the hydroelectric power producing areas and advise the Federal Government or the government of a state on the prevention and control of floods and environmental hazards.²⁸

3.7. Consumer Protection Standards:

The NERC is mandated under the Act to develop, in consultation with the licensees, mechanisms to ensure fair pricing, accurate billing, quality service delivery and supply, customer complaint handling standards and procedures, procedures for assisting/dealing with customers who have difficulty paying bills, procedures for applying for electricity service, procedures for disconnecting non-paying customers or for those in breach of other terms and conditions of an applicable tariff or contract, manner of dissemination of information to consumers, and the internal procedures for responding to emergency situations²⁹ .

3.8. Tariff Regulation and Subsidies:

It is prescribed in the Act that, certain activities such as the generation and trading, transmission, distribution, supply and system operation, electricity distribution franchising - in the NESI are subject to tariff regulation30 . It warrants tariff methodologies publications ³¹ , with the purpose of allowing consumers and stakeholders to understand the basis for tariff calculations³². Tariff regulations aim to balance the financial viability of power providers with the affordability of electricity for consumers. Furthermore, the Act establishes the Power Consumer Assistance Fund (PCAF) for the purpose of subsidising underprivileged power consumers as specified by the Minister in consultation with the NERC³³ .

3.9.Establishment of the Rural Electrification Agency (“The Agency”):

The Act establishes the Agency who are responsible for the implementation of rural electrification initiatives and linking the gap in electricity provision in remote and marginalized communities³⁴. The Act recognises the need of access to electricity to rural, underserved and unserved areas in Nigeria.

3.10. Establishment of the Nigerian Electricity Management Services Agency (“NEMSA”):

The Act establishes NEMSA which shall take over the Electricity Management Services Plc incorporated in 2007³⁵. The objectives of the NEMSA amongst others stipulated under the Act is to carry out electrical inspectorate services for the NESI³⁶, enforce all statutory technical electrical standards and regulations as published by the NERC and all other regulatory bodies³⁷ , etc³⁸ .

3.11. Offences and Penalties:

For the offence of theft of electricity, the Act stipulates that a person is liable on conviction to a fine as provided under the Section or to be imprisoned for a term of at least 3 years or both³⁹ . The proviso to this section is contained in Section 208 (d) (i) and (ii) of the Act.

For electric lines and materials theft, a person on conviction is liable to a fine of at least N500,000.00, only, or at least 3 years imprisonment term and a maximum of up to 5 years imprisonment or both⁴⁰. A reoccurring offender is liable on conviction for the second or subsequent offence to a fine of at least N1,000,000.00 only, or imprisonment for a term of 5 years⁴¹ . A person in receipt of any stolen electric line material with the knowledge or having reasons to believe such material to be stolen property, commits and offence and is liable on conviction to a fine not more than 3 times the value of the stolen property received, or imprisonment for a term of 14 years⁴² .

Furthermore, a person convicted for the interference with meters or works of licensees is liable to a fine of not more than N500,000.00 only, or imprisonment for a term not more than 3 years or both, and a fine of N10,000.00 only for every day the offence continues⁴³ .

Other offences stipulated under the Act include negligently breaking or damaging electricity materials⁴⁴ , intentionally disrupting power supply⁴⁵, offence relating to damage of public streetlights⁴⁶, contravention of regulations or orders⁴⁷, false declaration⁴⁸, offences by companies⁴⁹, abetment⁵⁰, unlawful use of information by inspector^51, obstruction and impersonation⁵² .

4. Opportunities Available Post the Enactment of the Electricity Act 2023.

With the primary objective of providing a comprehensive and institutional framework to govern the operation of a privatised, contract and rule based competitive electricity market in Nigeria and to attract private sector investments in the entire power value chain of the NESI, the Act has taken active steps to bring about major opportunities in renewable energy projects such as solar, wind, hydroelectric, and biomass projects with incentives like feed-in-tariffs and tax benefits into the Nigerian energy market. It encourages power generation by private sector participants in conventional and renewable power generation by issuing licenses to Renewable Energy generation Companies, as well as retaining and emphasising the embedded electricity generation obligation which requires power generators from conventional sources to acquire or generate a certain percentage of their total energy generation from renewable energy sources.

The Act also creates a transmission and distribution network by providing opportunities for investments in transmission lines, substations, distribution networks, and smart systems. The establishment of mini-grids and off-grid solutions to remote areas which are unserved and underserved is expected to improve electricity supply to remote unserved and underserved areas of the country. These are also expected to improve the opportunities for investment in the manufacturing and supply of electrical equipment, thereby promoting local content and economic development. With the aim of protecting the interests of investors in the power sector, the Act ensures asset protection, the right to sell or transfer a licensee's undertaking in the event of revocation of licenses, or compensation in the event of any forceful takeover in the interest of national security.

Finally, the unbundling of the exclusive powers of the Federal Government through the National Assembly to legislate on and regulate the generation, transmission, distribution and sales of electric power, by admitting interested states to legislate and regulate investment in the legislation, generation, transmission, distribution and sales of electricity should be lauded. This will bring about unprecedented private investments in the sector, which will drive available and affordable electricity to the consumers.

5. Conclusion

The Amendment is a significant step towards addressing the country's long-standing power supply deficit among other challenges. It settled the constitutional question on the right and power of State governments to set up State electricity markets. The Electricity Act then arrived to cement the already established powers of States to set up their respective electricity markets.

Even though the (Electricity) Act is not perfect, it is an important starting point for decentralization. The objective of the Electricity Act with this decentralization is not for a power tussle but for open collaboration on an equal footing between the States and NERC to achieve improvement in electricity supply. The power system doesn't discriminate that this came through State or Federal regulation. For this to work well there needs to be cooperation at the regulatory level so that power can be delivered to the right standards because it would be absurd to have thirty-six regulators so as to avoid multiple regulation. The concern now should be focus on how to get power, the engine to growth and development to the relevant consumers. The current Sector Regulator, NERC should work with States within existing legal frameworks to make sure that everything is done in an orderly manner to avoid distortion to the system. States within a given geo political zones could agree to set up a regional system. After reviewing the cost implication, States will decide how they want to work together. It will not be a one size fits all approach, but based on what they can sustain. Currently, the only institution that has knowledge in regulating electricity in Nigeria is NERC. There is need for collaboration and NERC needs to lead this collaboration because States need capacity building. They also need to establish regulatory entities and NERC has the requisite experience to assist them. We can solve the challenge of capacity in electricity markets in States through collaboration of the State and Federal Government and by consultation.

It is beyond a shadow of doubt that the Act marks a major milestone in Nigeria's power sector reform journey, there is also the renewed hope that a state's controlled electricity market has the potential to increase efficiency, improved service delivery, and ultimately provide an overall improvement in power supply to consumers. However, it is important to note that the success of the Act rests largely on the devotion and preparedness of State governments to set-up their respective independent electricity markets and establish a strong and independent regulatory agency to propel the market because nothing in the Electricity Act invalidates the State law with regards to regulation and generation of electricity. When it comes to nurturing the sector, States face important choices that come with implications. The adoption of a collaborative mindset, prioritizing customer satisfaction and quality improvements, focusing on load growth, and working towards liquidity improvement are all important to adopt and are key to supporting the sector's growth and success.

Ultimately, it is important for stakeholders, investors, and industry players to capitalize on the opportunities presented by the Act and the Electricity Act, 2023. This amendment Act is a welcome development because it affords states and private business entities the opportunity entities to freely amend the distribution license to distribute power to the served and underserved within a given catchment area and market.

The new Act is geared towards improving service to the consumers and increasing investment. There is a cost to electricity and the commensurate investment in the sector to give adequate supply has not been made. When it comes to State regulation, consumers are in need of regulators who prioritize their needs. This includes ensuring that service quality is preserved, and fair pricing is enacted for the services provided.

When implementing the Electricity Act, it is important to prioritize cohesion and collaboration. Asset transfers will be a critical issue to address, with precedents being set in the process. Stakeholders need to be ready for this, and States are advised to proceed with caution in respect to taking any major steps. Financial capabilities are also important, because it brings about direct accountability to constituents.

Overall, the success of the effective implementation of the Electricity Act would hinge on cogent collaboration and rational planning. It is worth mentioning that there is presently no direction or clarity on how DISCOs will cover their books along state lines. There is also no clarity on liabilities being banked along state lines, these are critical questions that ought to be considered in the implementation of the Electricity Act. From a regulatory and licensing point of view, the Electricity Act is clear on functions, the concern is that there is no clear framework on the policy aspect.

Lastly, implementation of the new Act is not going to be a walk in the park, it is not going to be an easy transition, the public and private sectors are encouraged to collaborate to ensure the successful implementation of the Act and in turn, realizing its vision for a more efficient, reliable, and sustainable power sector in order to provide electricity to Nigeria. The new Electricity Act has the potential of transforming the entire electricity supply industry if the implementation process and the identified challenges are properly considered.

Footnotes

1. 1 https://nerc.gov.ng/index.php/about/history 

2. Musiliu O. Oseni, NERC Vice Chairman/Commissioner Market, Competition & Rates at a NERC Stakeholder Workshop on the Constitutional Amendment and Electricity Act 2023 on July 12-13, 2023.

3. Section 4 (2) of the Constitution of the Federal Republic of Nigeria, 1999 (as amended).

4. Section 4 (4) (a) of the Constitution of the Federal Republic of Nigeria, 1999 (as amended).

5.  Section 4 (7) of the Constitution of the Federal Republic of Nigeria, 1999 (as amended).

6. Section 1 of the Electricity Act 2023.

7.  Section 63 (1) of the Electricity Act 2023.

8.  Ibid 7.

9. Ibid 7. 

10. Section 63 (2) of the Electricity Act 2023.

11.  Section 63 (2)(b) of the Electricity Act 2023.

12. Section 33 (3) of the Electricity Act 2023.

13. Section 33 (2) (d) of the Electricity Act 2023.

14.  Section 33 (2) (f) of the Electricity Act 2023.

15. Section 33 (2) (h) of the Electricity Act 2023.

16. Section 116 of the Electricity Act 2023.

17. Section 46 of the Electricity Act 2023.

18.  Section 71 (1) of the Electricity Act 2023.

19. Section 73 (1) of the Electricity Act 2023.

20. Section 80 (1) of the Electricity Act 2023.

21. Section 80 (2) of the Electricity Act 2023.

22. Section 164 (a) of the Electricity Act 2023.

23. Section 166 (1) of the Electricity Act 2023.

24.  Section 168 (1) of the Electricity Act 2023.

25. Section 80(1) - (2) of the Electricity Act 2023

26. Section 89 (a) of the Electricity Act 2023.

27.  Sec 89(1)(f)

28. Sec 89(1)(h)

29.  Section 119 (1) (a) - (h) of the Electricity Act 2023.

30. Section 116 (1)(a) - (c) of the Electricity Act 2023.

31. Section 116 (2) of the Electricity Act 2023.

32.  Section 116 (2)(a) of the Electricity Act 2023.

33. Section 122 (4) of the Electricity Act 2023.

34. Section 127 of the Electricity Act 2023.

35. Section 172 (4) of the Electricity Act 2023.

36. Section 176 (a) of the Electricity Act 2023.

37. Section 176 (b) of the Electricity Act 2023.

38. Section 176 (a) - (x) of the Electricity Act 2023.

39. Section 208 (1) (a) - (d) of the Electricity Act 2023.

40. Section 209 (1) (a) - (c) of the Electricity Act 2023.

41. Section 209 (2) of the Electricity Act 2023.

42. Section 210 of the Electricity Act 2023.

43. Section 211 (a) - (d) of the Electricity Act 2023.

44. Section 212 of the Act.

45. Section 213 of the Act.

46.  Section 214 of the Act.

47. Section 215 (a) - (b) of the Act.

48.  Section 216 of the Act.

49. Section 217 (1) - (3) of the Act.

50. Section 218 (1) - (2) of the Act.

51. Section 219 (1) - (2) of the Act.

52. Section 220 (1) - (2) of the Act.

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.

Gabriel Onojason

Alliance Law Firm

71 Ademola Street

SW Ikoyi

Lagos

NIGERIA

E-mail: albert.adu@alliancelf.com

URL: www.alliancelf.com