Decentralization of Electricity Regulation in Nigeria: An Elixir or A Sugar Pill?
President Muhammad Buhari recently assented to 19 bills, 16 of which amended certain provisions of the 1999 Constitution. Of particular interest is the Fifth Alteration Bill №33, Devolution of Powers (National Grid System) which relates to the legislative powers of States to make laws in connection with the generation, transmission, and distribution of electricity within the relevant State (the “Constitutional Amendment”).
Understandably, a lot of excitement has trailed the Constitutional Amendment. However, it is important to reflect on what exactly Nigerians can expect from this change. Is it truly the “silver bullet” solution that it is been portrayed as? And is the Constitutional Amendment capable of providing a shot in the arm which the Nigerian Electricity Supply Industry (“NESI”) desperately requires? As senior legal and banking professionals with multiple decades of experience and leadership in infrastructure development, with a particular focus on electricity in Nigeria, we have a unique perspective that we hope will be useful in providing clarity to some of the critical questions that are beginning to emerge.
In this article, we will try to provide answers to some of these key questions and outline the path forward for the sector in light of the Constitutional Amendment.
The best place to begin is with a brief legislative history of electricity regulation in Nigeria. Under Nigeria’s independence constitution of 1960, Section 73(1) and (2) permitted the Regions to regulate the production, distribution, or supply of electricity within their domain. Similarly, the 1979 Constitution (in Paragraph 14(b) of Part II of the Second Schedule) provided the States with the power to make laws on the generation, transmission, and distribution of electricity within their respective States.
Despite this permissive regime under the 1979 Constitution, no State Government in Nigeria leveraged the liberal regulatory environment to facilitate the development of any electricity project of significance, despite the lofty aspirations for power supply outlined in the manifestos of most of the major political parties during that time.
Subsequently, and for reasons best known to its framers, the (never-passed) draft 1989 Constitution altered this previously flexible regime for States by adding the unhelpful phrase “not covered by a national grid system within that State” to the law-making powers of the State assembly in relation to electricity. The impact of this seemingly minor addition was significant, creating serious legal questions about the powers of State governments to get involved with providing solutions to electricity supply challenges within their borders.
The 1999 Constitution carried forward the constricting approach introduced by the draft 1989 Constitution, and in the process causing much uncertainty about the sharing of electricity law-making and regulatory powers between the Federal Government and State Governments.
Fast forward to 2005, the Federal Government of Nigeria (“FGN”), ostensibly working based on the regime established under the 1999 Constitution, passed the landmark Electric Power Reform Act (“EPSRA”), which appropriated all the regulatory powers related to the NESI to the Nigerian Electricity Regulatory Commission (“NERC”), an agency of the FGN. This was done without consideration for any concurrent powers that the States might have possessed in this regard.
Coming now into the present times, the Constitutional Amendment of 2023 has intervened to smoothen the major wrinkle introduced by the 1999 Constitution, as originally drafted. In the main, by removing the ambiguous phrase “not covered by a national grid system within that State”, the Constitutional Amendment has expanded, or clarified, as the case may be, the powers of States to regulate the generation, transmission, distribution of electricity within their borders.
A few issues arise from the new legislative environment. The first point to note is that the Constitutional Amendment simply takes us back to the position that existed under the 1979 Constitution. As we have said, the legislative autonomy enjoyed by States Governments under the 1979 Constitution was essentially unutilized, as no project of significance was developed by any State pursuant to the permissive regime then in place.
As will be explained below, this underscores a critical point: State Governments possessing the powers to make laws on electricity generation, distribution and transmission will not by itself result in successful projects and abundant electricity within a State. Even prior to the Constitutional Amendment, there was nothing stopping State Governments from sponsoring power projects. Indeed, many State Governments since 1999 like Lagos, Akwa Ibom, Kano, and Rivers have sponsored utility scale generation projects successfully. To that extent, it would be misleading to suggest that the previous constitutional phrasing was principally responsible for the lack of stable and sufficient electricity supply in Nigeria.
The challenges with electricity supply in Nigeria are not all or even mostly regulatory. Indeed, a number of different constricting factors are simultaneously at work, including feedstock supply deficits, grid design and capacity, foreign exchange availability, access to financing, operational weaknesses, poor project preparation, inflation, inadequate tariffs, as well as technical, commercial and collection loses, just to mention a few. Several of these issues are macroeconomic in nature and cannot simply be solved by decentralizing regulatory responsibility for electricity operations.
Having said that, the Constitutional Amendment does contain within it the potential to stimulate radical, positive changes in electricity supply across Nigeria. But this potential will be realized only if States leverage the regulatory independence occasioned by the amendment, to resolve some of the issues besetting the various functional aspects of the value chain within their domain.
For instance, all of the grid-supplied electricity in Nigeria currently originates from only twelve states, namely Niger, Lagos, Ogun, Rivers, Abia, Imo, Ondo, Cross River, Bayelsa, Edo, Kogi, and Delta, whilst consumption is spread across the entire country. This could change with the more permissive regulatory regime for electricity generation. Also, according to the World Bank, at least 85 million Nigerians are not connected to the national grid. In the same way as with electricity generation, the Constitutional Amendment presents an opportunity for States to facilitate transmission grid capacity expansion within their territory. State Governments could put in place policy and regulatory frameworks that assist the accelerated development of mini-grids within their borders. And in relation to last mile distribution, States Governments now possess more regulatory autonomy to regulate, and facilitate the development of, electricity distribution infrastructure within their borders.
However, in addition to opportunities, the Constitutional Amendment also throws up a number of new risks, particularly in the area of regulatory conflict between the Federal and State Governments.
Firstly, in line with the previous constitutional provisions, the current architecture of Nigeria’s most important electricity law, the EPSRA, is designed for a sole regulator with exclusive and overarching regulatory oversight across the country. Accordingly, the mechanics of the EPSRA are not native to the multiple regulator regime created by the Constitutional Amendment. To avoid regulatory confusion, which would further deter much-needed private capital from flowing into into the beleaguered sector, there will be a need to amend the EPSRA, such that it accommodates the new constitutional reality.
In this regard, the regulatory regime for electricity in India offers an insight into a possible solution for Nigeria. Under the framework provided by India’s Electricity Act 2003, the primary focus of the Central Electricity Regulatory Commission (which is India’s equivalent of NERC) is the promotion of competition, improving the standards of quality, and regulation of the tariff of central government-owned generating companies. On the other hand, the State Electricity Regulatory Commissions (SERCs) grant licenses and regulate tariffs at State level, and regulate the wheeling, as well as wholesale and retail sale of electricity within their States.
Secondly, it is critical for policy and lawmakers at the State level to understand what the Constitutional Amendment empowers them to do, and what it does not. In commercial, financial, and operational terms, the new powers in their possession will not yield much positive developmental impact, if not carefully and thoughtfully wielded by its bearers. In order to appropriately exercise these new powers, it is extremely important for any State seeking to intervene via new legislation or regulations to firstly conduct a thorough current position assessment of affairs within its boundaries, using a Baseline Energy Supply and Demand Study.
When conducted to proper standards, such a study will clearly reveal the nature of the energy deficit within the State, the areas within the supply value chain where the major bottlenecks lie, the current and future demand profile of the State, the most efficient potential energy sources and technologies to meet future demand at the lowest possible long-term cost to the consumers, and a list of priority projects meeting the foregoing criteria. Any strategy for introducing new legislation or regulation must derive its life from such a thorough study, taking into consideration the very local realities of the State, and not any generic regional or international considerations.
Thirdly, it will be important for States to consider how any new legislation or regulations would interact with the existing regulatory landscape. New laws and rules should serve to enhance the capabilities of existing and future electricity supply industry participants, whether operators or consumers. Speaking plainly, new rules must remove bottlenecks rather than introduce new difficulties, if positive developmental impact is to be achieved.
Fourthly, it will be critical for States to develop the institutional capacity to manage and follow-through on implementation of any legislative interventions made pursuant to the Constitutional Amendment. In relation to capacity development, there is thankfully a wealth of resources available from donors, development partners, and international institutions available for States to tap into, particularly in renewable energy supply.
Finally, the State-level policy makers that succeed in the new environment will be the ones that adopt a mindset seeking to create a favorable environment within their borders for the key projects identified under their Baseline Energy Supply and Demand Study. This mindset will entail focus on innovative ideas like creation of regulatory sandboxes, fiscal incentives, template documentation, pre-packaged projects, special tariff windows and islands, and collaboration with existing electricity operators or developers to incentivize new investment.
Most of these innovative ideas have already been tested with success in many markets across Africa and globally. It will be important for Nigerians to understand that the biggest advantage of the Constitutional Amendment is that it provides the opportunity for State Governments to compete with innovation in attracting projects and capital, without being constrained to operate only at the speed of the Federal Government.
In conclusion, it is important to reiterate that the problem of sustainable, affordable, and efficient electricity supply in Nigeria is an organizational and financial challenge. The Constitutional Amendment provides significant opportunities for well-organized States to attract competitive financing and advance their developmental agenda in relation to electricity supply at their own pace, without being shackled by the Federal Government.
Nonetheless, success in this endeavor will demand a strong focus on States being better organized, more innovative, and less bureaucratic than Abuja has been accused of being in the past. The State Governments that succeed in doing this will be the ones that reap the rewards of the Constitutional Amendment.
The work is only beginning, and there is a lot to be done!
Wolemi Esan is Deputy Managing Partner at Olaniwun Ajayi LP.
Folahanmi Fagbule is a Deputy Director at Africa Finance Corporation (AFC).
