In our recent analysis of the Lagos Electricity Law, we highlighted some of the incentives built into the Lagos Electricity Law to attract private capital into the Lagos Electricity Market. Since its publication, one pressing question has emerged: Can the Lagos Electricity Law serve as a model for other Nigerian states? Given Lagos State’s history of pioneering regulatory frameworks that often become blueprints for the rest of the country, we briefly examine whether the Lagos Electricity law offers a replicable roadmap for other Nigerian States seeking to transform their local electricity markets. Our analysis suggests that the market structure contemplated in the Lagos Electricity Law may be of limited utility in other States. We conclude that a tailored approach is essential for designing sustainable electricity markets across the country.
The Lagos Electricity Market Model: A Bold Template for Reform
It would appear that the market structure contemplated under the Lagos Electricity Law is a hybrid electricity market structure combining elements of wholesale competition and regulated retail markets. For instance, the Lagos Electricity Law contemplates competition across the value chain by providing for an electricity market with multiple distribution, generation, transmission licensees as well as a separation of these business segments. Also, the Commission[1]’s role in tariff regulation and consumer protection ensures a level of regulation typically seen in regulated markets. While competition is encouraged under the Lagos Electricity Law, the tariff setting powers as well as extensive regulatory oversight of the Commission indicates that the Lagos Electricity Market is not fully deregulated. Notably, the Lagos Electricity Law also makes room for flexibility in some respects. For instance, license exclusivity may be granted for a geographical area or business segment, for up to 5 years, subject to public interest considerations and periodic reviews. Also, licensees and different classes of electricity consumers may be allowed to negotiate tariffs directly under certain circumstances. It is yet to be seen whether this market structure will serve Lagos State. However, in many respects, the market structure contemplated under the Lagos Electricity Law, appears to reflect Lagos’ densely populated, highly urbanised nature, which makes decentralised systems viable and economically sustainable.
Why Lagos’ Model May Not Work for All States
Nigeria’s States vary significantly in population density, regulatory capacity, economic activity, and infrastructure development and energy demand profiles. In many respects, these differences suggest that electricity markets must be tailored to local realities rather than simply adopting Lagos’ template. Here are some key considerations:
- Energy Demand and Economic Density
States with predominantly rural populations may lack the economic density to support multiple licensees or competitive market structures. For these States, a regional energy market shared with neighbouring states might be more viable. Alternatively, such States may benefit from a vertically integrated monopoly, consolidating generation, transmission, and distribution under a single regulated private entity. A vertically integrated monopoly offers the benefit of simplicity and cost efficiency while prioritising infrastructure development and access to electricity. Under this structure, the relevant State may also include provisions in its electricity law to define the pre-conditions for transitioning into a more competitive market with multiple licensees. The conditions for such transition can include, the attainment of demand thresholds, infrastructure readiness, demonstrated regulatory capacity and private sector interest. Also, a transition to a deregulated market may allow for a phased approach, allowing initially for open generation, for multiple private entities to generate electricity and to sell to a monopoly distributor, or for open distribution, allowing for competition only in the distribution of electricity.
- Tariff Setting
The Lagos State Electricity Law grants the Commission the power to set broadly applicable tariffs, aiming to balance affordability and financial sustainability for investors. This centralised tariff-setting mechanism reflects the State’s large, consistent and relatively homogeneous urban energy demand. However, States with lower purchasing power and a dispersed population may benefit from introducing a legal framework that prioritises differentiated tariffs, whilst also accounting for rural electrification costs. Also, areas with clusters of industrial energy users may require a framework that prioritises negotiated tariffs to ensure competitiveness, while residential users benefit from subsidised rates.
- Infrastructure Gaps and Geographical Advantages
For States with dispersed rural populations, vast rural areas, limited grid connectivity and geographical advantages, it may be prudent for the regulatory framework to prioritise alternatives to decentralised systems, involving off-grid and renewable energy solutions like mini-grids and solar installations to meet localised energy needs.
- Building Regulatory Capacity
Sophisticated electricity regulation does require technical expertise, which many States may currently lack. It may therefore be prudent for States to consider a legal framework that prioritises capacity building for regulatory bodies, leveraging partnerships and technical assistance to strengthen oversight and compliance capabilities. It would also be prudent for States to assess their ability to enforce compliance and manage complex electricity markets as part of a move towards decentralised market structures.
Key Takeaways for State Governments
- Starting with Local Realities: It may be prudent for local energy markets to reflect each state’s unique energy demand, population density, and economic profile.
- Adopting Flexible Models: It may be prudent for States with lower demand or limited infrastructure to consider vertically integrated monopolies or regional energy markets as stepping stones.
- Define Transition Conditions: It may be prudent for States with lower demand to define clear pathways for market evolution, such as achieving demand and infrastructure milestones, are essential for scaling sustainably.
- Prioritise Differentiated Tariffs: Tailored tariff models can balance affordability with financial sustainability for diverse electricity consumer groups.
- Focus on Capacity Building: Regulatory development is critical to managing market complexity and ensuring long-term success.
Conclusion
The Lagos Electricity Law demonstrates what is possible with innovative regulatory reform, but it appears that its design reflects the State’s unique economic and demographic realities. For other Nigerian states, a tailored approach is essential for designing a sustainable electricity market.
This publication is not intended to provide legal advice and is not prepared with a specific client in mind. Kindly seek professional advice specific to your situation. You may also reach out to your usual Balogun Harold contact or contact us via support@balogunharold.com for support
[1] The Lagos Electricity Regulatory Commission (LERC)
