Background

In a bid to promote competition, transparency, and efficiency within the Nigerian electricity supply industry (“NESI”), the Federal government, in 2001, issued the National Electric Power Policy (“NEPP”) to expand the Nigerian power sector (the “Sector”) through the injection of private investments under the National Council on Privatization. The NEPP resulted in the enactment of the Electric Power Sector Reform Act 2005 (“EPSRA”). The EPSRA introduced wide-ranging reforms to the Sector, including the unbundling of the then Power Holding Company of Nigeria into 18 (eighteen) successor companies consisting of 6 (six) generation companies (“GENCOs”), the transmission company of Nigeria, and 11 (eleven) distribution companies (“DISCOs”). Also, the EPRSA established the Nigerian Electricity Regulatory Commission (“NERC”) vested with the regulatory powers over the generation, transmission, and distribution of electricity across the federation.¹

Despite the extensive reforms, there are still significant challenges plaguing the Sector, which has resulted in an abysmal power supply to homes and businesses. In fact, the 2020 World Bank Doing Business report ranks Nigeria 171 out of 190 countries in getting electricity and electricity access is penciled down as one of the major constraints for the private sector² . Rather than rely solely on the Federal government to address the electricity access gap, some States – notably Lagos, Edo and Kaduna States – argued for the full decentralization of the NESI and consequently kicked-started steps to set up and run an independent State electricity market. A major issue in this regard was whether the erstwhile constitutional and legal framework empowered/recognized the right of States to set up their independent electricity markets.

To address the constitutionality debate that would have no doubt arisen and the potential for a long-drawn battle on the constitutionality or otherwise of State electricity markets, on 17 March 2023, President Muhammadu Buhari assented to the constitutional 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 of the Federal Republic of Nigeria (as amended) (“1999 Constitution”), which provides much needed clarity on the powers of States to establish an independent electricity market (the “Amendment”). The Amendment has now provided a strong constitutional basis in favour of State-focused electricity markets. In this article, we discuss the provisions of the Amendment and its implications on NESI.

A look at the 1999 Constitution pre the Amendment

Section 4 of the 1999 Constitution 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 list³ 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 . The implication of the above is that both the National Assembly and the State House of Assembly have powers to make laws in respect of matters listed in the concurrent legislative list set out in Part II of the Second Schedule to the 1999 Constitution (the “Concurrent List”). However, if any law enacted by the House of Assembly of a State is inconsistent with any law validly made by the National Assembly, the law made by the National Assembly shall prevail, and that other law made by the House of Assembly of a State shall, to the extent of the inconsistency, be void.⁶

In connection with the electricity market, Paragraph 13(a) and (b) of the Concurrent List provided, inter alia, that the National Assembly may 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”. Related, Paragraph 14(a) and (b) of the Concurrent List provides that the House of Assembly may 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.” [Emphasis and underlining added].

Prior to the Amendment, the key debate was on the implication of restricting the powers of the House of Assembly of a State to only “areas not covered by a national grid system” within a State. That is, whether or not this restricted the possibility of willing States to set up an independent electricity market with an independent regulatory agency and market participants that report only to the State electricity market regulatory agency. These debates were predominantly premised on the meaning of “areas not covered by a national grid system” and if the phrase should be interpreted in a strict and literal manner that restricts States from setting up their electricity market, and therefore deny Nigerians access to electricity on the basis of technical arguments. The 1999 Constitution did not help matters as the phrase “national grid system” was not defined. As you will see immediately below, this debate is now academic following the Amendment.

The Amendment – a win for State-focused electricity markets

Off the back of these debates and what could have potentially been a long-drawn legal battle on the interpretation of the provisions of paragraphs 13 and 14 of the Concurrent List, the National Assembly passed the Amendment, which has now been signed into law by the President. The Amendment essentially settles the debate regarding the powers of the States to establish their State electricity market.

Specifically, the Amendment deletes the phrase “not covered by a national grid system” from the provisions of paragraph 14(b) of the Concurrent List. Following the Amendment, paragraph 14(b) of the Concurrent List now reads that the House of Assembly may make laws for the State with respect to “the generation, transmission, and distribution of electricity to areas within that State. [Emphasis added]

While some have argued that this Amendment only “clarifies” what the position was prior to the Amendment, some others take the view that the Amendment now “allows” States to set up independent electricity markets. In whichever camp anyone may decide to pitch their respective tents, the fundamental point is that Lagos, Edo and Kaduna States, who before now already commenced steps to set up their separate electricity market within their respective States, can feel justified in their pursuit of this. The Amendment will also encourage private investment in the Sector, as investors may be more willing to invest in an independent market that is not entirely controlled by the Federal government. Private sector investments will be key in not only driving the development of the State focused electricity markets, but in structuring competitive, transparent and efficient State electricity markets.

Lagos State – A brief look at the Electricity Policy 2021

As noted, prior to the Amendment, Lagos State had already taken giant steps to set up an independent electricity market for Lagos State. In October 2021, the Lagos State Ministry of Energy and Mineral Resources issued the Lagos State Electricity Policy (the “Electricity Policy”). The primary objectives noted in the Electricity Policy include:

1. The establishment of a regulatory framework for, and license, all electricity market entities in Lagos State;
2. The establishment of an electricity market with a clear focus on ensuring minimal adverse environmental impact and minimal recourse to Lagos State Government subsidies or guarantees;
3. To significantly reduce off-grid generator emissions and foster a natural gas market in Lagos State through the implementation of a programme to transit from distillate fuels to natural gas and renewable energy sources;
4. The adoption of the cleanest, commercially viable modern technologies to deliver electricity to residents of Lagos State using diverse and secure sources of energy; and
5. The implementation of a sustainable programme for the delivery of a minimum of 50MW and 1000MW/h of new capacity and energy per annum to the unserved and underserved areas of Lagos State.

For Lagos State, to establish a viable electricity market for the State, eight factors must be put in place as follows: (i) an enabling constitutional and legal framework; (ii) collaborative Federal and State government support for market growth and customer satisfaction; (iii) an autonomous credible regulatory body; (iv) an integrated resource plan; (v) competitive and transparent procurement of generation resources; (vi) a bankable commercial framework; (vii) well-funded, well-managed players in the market; and (viii) an independent system operator.

With respect to the first factor – an enabling constitutional and legal framework – the Amendment has conclusively addressed the constitutionality question. In relation to the legal framework, we are aware that in 2022, the Lagos State Ministry of Energy and Mineral Resources sent an Electricity Bill to the Lagos State House of Assembly for passage. We understand that the Lagos State Electricity Bill is currently going through the usual legislative process, and it is expected that the Lagos State Electricity Bill will be passed into law this year.

A key point that was highlighted in the Electricity Policy is the need for collaboration between the Federal and State governments. To have a viable State electricity market, the importance of regulatory synergy between NERC and the regulatory agencies that will be established by the States to oversee State-focused electricity matters cannot be overstated. According to the Electricity Policy, there is a need for an organized and orderly transition of responsibility for electricity operations from NERC to the Lagos State established electricity regulator. It will be difficult to achieve the proposed regulatory transition and synergy without revisiting the current structure of the EPSRA.

The EPSRA hurdle

While the Amendment may have settled the debate on the right of States over the generation, transmission and distribution of electricity with the States, one cannot ignore the current principal law governing the Sector, that is the EPSRA. It is evident from its provisions that the EPSRA was drafted and enacted in contemplation of a single national electricity market. Therefore, it does not presently recognize the State electricity market and contains provisions that encroach on the rights and powers of the States to set up their electricity market. Some have even questioned the constitutionality of the provisions of the ESPRA on the distribution of electricity, an activity that was not included as part of the powers of the National Assembly under paragraph 13 of the Concurrent List.

With the Amendment, it is expected that more States will examine the prospects of State electricity markets and enact laws in this regard. There is however a risk that State electricity laws (when enacted) may potentially conflict with some provisions of the EPSRA or lead to regulatory clashes between NERC and State established electricity regulators. As earlier noted, where there is a conflict between the laws validly made by the National Assembly and the laws made by the House of Assembly of a State, the law enacted by the National Assembly will prevail over that of the House of Assembly of a State to the extent of the inconsistency. Therefore, to put to rest any potential friction (including the question on the validity of the provisions of the EPSRA on the distribution of electricity) that may ensue between the Federal government and a State government seeking to establish a State electricity market, there is a need for the review of the EPSRA to ensure that its provisions do not encroach on States’ powers to establish their electricity markets.

It is therefore a welcomed piece of news that the National Assembly is in the process of re-enacting or amending the EPSRA. On 20th July 2022, the Senate passed the Electricity Bill, 2022 which seeks to repeal the EPSRA and enact an Electricity Act to provide for a comprehensive legal and institutional framework for the Sector.⁷ Similarly, the House of Representatives is also in the process of amending the EPSRA, a process which has generated keen interests from the States as shown by the second public hearing that was held on 5th January 2023 to address the Nigeria Governors Forum’s concerns with the proposed amendments.⁸ The House of Representatives amendment bill was passed by the House of Representatives during its legislative proceedings on 4th April 2023. Both the Senate bill and House of Representatives bill recognise State electricity markets in one form or the other. However, and as noted in the Lagos State Electricity Policy, any re-enactment of or amendment to the EPSRA must include provisions dealing with the transition of responsibility for electricity operations from NERC to State based electricity regulators as a way of not only facilitating regulatory synergy, but to create a strong foundation for a viable State focused electricity market.

Conclusion

In conclusion, the Amendment is a significant step towards addressing the country's long-standing power supply issues. The Amendment has settled the constitutionality question on the right and power of State governments to set up State electricity markets. While these are still early days, there is the potential that a State’s control of its electricity market will potentially result in increased efficiency, better service delivery, and overall improved power supply to consumers. However, the success of this Amendment will largely depend on the commitment and readiness of State governments to establish their independent electricity markets and create a strong and independent regulatory agency to drive the market. Ultimately, Nigeria's power sector has the potential to witness significant transformation on the basis of the Amendment.⁹

1. https://nerc.gov.ng/index.php/about/history
2. https://www.worldbank.org/en/news/press-release/2021/02/05/nigeria-to-improve-electricity-access-and-services-to-citizens#:~:text=According%20to%20the%202020%20World,constraints%20for%20the%20private%20sector
3. Section 4 (2) of the 1999 Constitution.
4. Section 4 (4)(a) of the 1999 Constitution.
5. Section 4(7) of the 1999 Constitution.
6. Section 4(5) of the 1999 Constitution.
7. https://www.blueprint.ng/issues-as-reps-move-to-alter-electric-power-sector-reform-act/
8. https://www.blueprint.ng/issues-as-reps-move-to-alter-electric-power-sector-reform-act/
9. We acknowledge Toluwanimi Adetimehin for his valuable contributions to the preparation of this article.