The Energy Regulation and Markets Review: Nigeria

Overview

The Nigerian energy sector largely comprises the petroleum sector where fuels are produced for energy production and the electricity industry. Other energy supply sources to the national grid include hydropower and other renewable sources. Several off-grid projects have been developed in recent times and these tend to rely on either natural gas or solar power.

The electricity industry is highly dependent on natural gas, which accounts for over 80 per cent of the electricity supplied to the national grid. It is expected that natural gas will continue to be relevant in Nigeria's energy mix for many years to come, given the country's proven gas reserves of over 203tcf and the commitment of the federal government of Nigeria, as articulated in the National Gas Policy, to leverage Nigeria's huge gas portfolio to drive industrial development.

Nigeria's installed generating capacity at approximately 12,000MW is far below its energy demand requirements. As such, a significant proportion of consumers rely on petroleum products such as premium motor spirits and diesel for alternative electricity supply. This chapter will focus mainly on the natural gas and electricity industries.

Market players in the electricity industry comprise 18 successor companies that were unbundled from the state-owned vertically integrated utility pursuant to the Electric Power Sector Reform Act 2005 (EPSRA). These include six generating companies (gencos), 11 distribution companies (discos) – all of which have now been privatised – and one transmission company (which remains a state-owned entity), on-grid and off-grid independent power producers, distributors and mini grid operators.

Market players in the gas industry are the gas producers comprising the international oil companies and Nigerian independents that operate under various contractual arrangements (e.g., joint ventures and production sharing contracts (PSC)) with the Nigerian National Petroleum Corporation (NNPC), which is a national oil company or on a sole risk basis; gas marketers and transporters. Prominent among the latter is the Nigeria Gas Company (NGC), a subsidiary of the NNPC that owns and operates the main gas transmission pipelines in the country and its marketing affiliate, the Nigerian Gas Marketing Company (NGMC); gas distribution companies, most of which operate under a franchise arrangement with the NGC; and various downstream gas utilisation companies, which include power generation companies and independent power producers (IPPs).

The gas and electricity markets are regulated at the national level by separate regulators.

Regulation

i The regulators

The electricity industry is regulated by the Nigerian Electricity Regulatory Commission (NERC). The NERC is an independent regulatory body established under EPSRA, which is the principal source of law and regulation for the electricity industry. NERC issues regulations and orders giving effect to EPSRA and is empowered to grant licences for the generation, transmission, system operation, distribution and trading of electricity, and to promote competition and private-sector participation while ensuring standards of quality in the electricity industry. The Nigerian Electricity Management Services Agency established under the Nigerian Electricity Management Services Agency Act 2015 conducts technical inspections, testing and certification of electrical installations, electrical meters and instruments to ensure compliance with technical standards and regulations.

The Energy Commission of Nigeria (ECN) established by the Energy Commission of Nigeria Act 1979 (as amended) is responsible for policy formulation and implementation and the strategic planning and coordination of national policies on energy. The Minister of Power is empowered under EPSRA to trigger the different phases outlined in EPSRA for the development of a competitive electricity market and to issue policy directives to the NERC on matters concerning electricity. The EPSRA also establishes the Rural Electrification Agency to promote rural electrification programmes through public and private-sector participation.

The Minister of Petroleum Resources is charged with formulating and implementing policies for the petroleum sector and supervising the government agencies directly involved in managing the petroleum sector. The Minister is empowered by the Petroleum Act 1969 to grant licences and leases for upstream and downstream petroleum operations, to supervise petroleum operations and to issue regulations to govern operations in the industry, among other powers. The Department of Petroleum Resources (DPR), which is the technical department of the Ministry of Petroleum Resources, supports the Minister in the exercise of his or her regulatory powers. The DPR supervises and monitors the oil and gas industry operations and ensures compliance with relevant laws, regulations and guidelines. Its responsibilities include processing applications for leases, licences and permits, collection of royalties, rents and other statutory fees and maintaining records on petroleum industry operations and the National Data Repository. The DPR also issues regulatory guidelines for licences, permits and operations across the oil and gas value chain. The Department of Gas Resources within the DPR has specific responsibilities for the regulation of the gas sector.

The principal sources of law and regulation for the gas industry include the following:

  1. The Petroleum Act 1969, which is the overarching legislation that governs petroleum operations together with several implementing regulations that include:
    • the Mineral Oils (Safety) Regulations 1962, which prescribes safety measures for exploration and production operations;
    • the Petroleum Regulations 1967, which regulate the transportation and storage of petroleum, including importation, shipping, unshipping, landing and discharge of petroleum;
    • the Petroleum (Drilling and Production) Regulations 1969, which regulate applications for leases and licences, exploration and drilling, field development, and payment of fees, rent and royalties;
    • the Petroleum Refining Regulations 1974, which regulate the construction, operation and maintenance of refineries (which includes gas-processing facilities); and
    • the National Domestic Gas Supply and Pricing Regulations 2008, which imposes a domestic gas supply obligation on gas producers in order to meet the demand requirements of the domestic gas market and establishes a pricing framework for gas supply to the domestic market.
  2. The Deep Offshore and Inland Basin Production Sharing Contract Act 1993 (as amended), which provides for fiscal terms and incentives for companies operating under production-sharing contracts with the NNPC in deep offshore (i.e., at water depths exceeding 200m2) and inland basin blocks.
  3. The Associated Gas Re-Injection Act 1979 (AGRA), which regulates gas flaring. Pursuant to AGRA and the Petroleum Act, the Flare Gas (Prevention of Waste and Pollution) Regulations were issued in 2018 to provide a framework for third parties to access flare gas on a competitive basis as a flare reduction strategy. These regulations also impose more stringent duties on operators as regards gas flaring and venting, and increase the fees payable for routine flaring and the penalties for violations.
  4. The Oil Pipelines Act 1956 and the Oil and Gas Pipeline Regulations 1995, which regulate the construction, operation and maintenance of oil and gas pipelines.

The key regulators for the gas industry are:

  1. the Petroleum Products Pricing Regulatory Authority established pursuant to the Petroleum Products Pricing Regulatory Authority Act 2003, which regulates the pricing, supply and distribution of petroleum products;
  2. the Nigerian Content Development and Monitoring Board established pursuant to the Nigerian Oil and Gas Industry Content Development Act 2010 whose primary function is to ensure the continuous growth of local content in all arrangements, projects, operations, activities and transactions in the oil and gas industry; and
  3. the National Oil Spill Detection and Response Agency established pursuant to the National Oil Spill Detection and Response Agency Act 2006 with responsibility for oil spill detection and response activities.

Environmental regulators relevant to both the gas and electricity industry are the Federal Ministry of Environment, which implements the framework for the conduct of environmental impact assessments of gas and electricity projects further to the Environmental Impact Assessment Act 1992; and the National Environmental Standards and Regulations Enforcement Agency, established pursuant to National Environmental Standards and Regulations Enforcement Agency (Establishment) Act 2007, which is empowered to enforce environmental laws, policies, standards and guidelines, as well as international treaties to which Nigeria is a signatory. The DPR also enforces environmental regulation and standards in connection with oil and gas operations.

ii Regulated activities

Upstream operations

The exploration and production of crude oil and natural gas may only be conducted under an appropriate licence or lease issued by the Minister of Petroleum Resources pursuant to the Petroleum Act. These include an oil exploration licence (OEL)), which confers a non-exclusive right to prospect for petroleum; an oil prospecting licence (OPL), which grants the holder an exclusive right to explore and prospect for petroleum; and an oil mining lease (OML), which grants the holder an exclusive right to search for, win, work, carry away and dispose of petroleum. The Petroleum Act empowers the President of the Federal Republic of Nigeria to designate an area within an OML as a marginal field and to approve or (if the marginal field has been left unattended for an unreasonable period of time, not less than 10 years) allow the farm-out of such marginal field to a third party to engage in exploration and production activities (marginal field licence).

Licences or leases (or any interest therein) are typically granted pursuant to competitive bidding rounds conducted by the DPR. Awardees are required to pay signature bonuses and commit to a defined work programme and minimum work obligations. The DPR also issues permits for various aspects of upstream operations such as drilling of wells, well completion tests, well workovers and re-entry and abandonment, as well as the construction and operation of upstream production facilities.

Midstream and downstream petroleum operations

The construction and operation of refineries, gas-processing plants, pipelines, storage facilities and terminals are also activities that require licences or regulatory approvals. A refinery licence issued by the Minister pursuant to the Petroleum Act is required to construct and operate a petroleum refinery (including a gas-processing plant) and an oil pipeline licence issued by the Minister pursuant to the Oil Pipelines Act is required to construct and operate oil and gas pipelines. Licences are also required to transport petroleum in bulk, to import liquified petroleum gas, to offtake liquified petroleum gas in bulk and for premises where petroleum is stored in bulk.

The permitting process for the construction and operation of midstream and downstream facilities typically has three stages:

  1. issuance of a licence to establish following the DPR's satisfactory review of the conceptual design for the project;
  2. issuance of an approval to construct following the DPR's satisfactory review of the detailed design for the facility; and
  3. issuance of a licence to operate, following the mechanical completion of the facility and satisfactory pre-commissioning inspection by the DPR.

Service provision in the petroleum industry

An oil and gas industry service permit issued by the DPR is required to render services in the oil and gas industry such as works and maintenance services, equipment supply, fabrication works, drilling, dredging, pipeline laying, consulting services and logistics.

Electricity

An appropriate licence issued by the NERC is required to construct, own and operate an undertaking or engage in the business of electricity generation (excluding captive generation), electricity transmission, system operation, electricity distribution or trading in electricity. Undertakings for generating electricity not exceeding 1MW in aggregate at a site or for distributing electricity with capacity not exceeding 100kW in aggregate are exempt from the licensing requirement. NERC permits are, however, required for captive generation exceeding 1MW and for the operation of mini grids that have a generation capacity of below 1MW and a distribution capacity of over 100kW.

Customers wishing to purchase electricity directly from a generation licensee or trading licensee (without contracting with a distribution licensee) must apply to the NERC for eligibility status. The NERC also issues permits to providers of metering services to discos. Such services include meter financing, procurement, supply, installation, maintenance and replacement.

iii Ownership and market access restrictions

Licences and leases for activities in the petroleum and electricity industry may only be granted to companies incorporated in Nigeria. Other than with respect to marginal fields, where participation by foreign investors is limited to 49 per cent, such companies may be 100 per cent foreign-owned. The Petroleum Act, however, provides that the Minister may revoke an OPL or OML if the holder becomes controlled directly or indirectly by a citizen, or subject of, or a company incorporated in, a country whose laws do not permit Nigerian citizens or Nigerian companies to hold and operate petroleum concessions on conditions that are reasonably comparable to conditions upon which such concessions are granted to subjects of such countries.

With respect to service provision, local content laws and regulations require regulated entities to give first consideration to qualified Nigerian companies in the award of contracts for the supply of goods, works and the provision of services. The Nigerian Oil and Gas Industry Content Development Act 2010, which applies to the petroleum sector, goes further and defines a Nigerian company as one in which 51 per cent of the shares are held by Nigerians.

The EPSRA imposes restrictions on aggregate holdings by licensees in the electricity industry. An applicant for a licence who owns more than 10 per cent or such other percentage as the NERC may specify (the approval threshold) of shares in another applicant or licensee must disclose such interest to the NERC. The NERC may then require such applicant to divest itself of such holdings within a specified period. Similar disclosure obligations apply to licensees who acquire shares above the approval threshold in a licence applicant or licensee. Licensees are also prohibited from acquiring or affiliating with the licence or undertaking of another licensee or person who is in the business of electricity generation, transmission, distribution, system operation and trading without securing the consent of the NERC.

iv Transfers of control and assignments

The consent of the Minister must be obtained prior to the transfer of an OPL or OML or any right, power or interest therein. An application for consent is made to the Minister, through DPR, together with payment of a prescribed fee, which may include a premium. The Minister must be satisfied that the proposed assignee is of good reputation and possesses sufficient technical knowledge, experience and financial resources and is otherwise acceptable to the government. Mergers and acquisitions that result in an indirect transfer of upstream petroleum interests in Nigeria will also trigger a ministerial consent requirement. In addition, for assets held under a joint venture arrangement or production-sharing contract with the NNPC, the NNPC's consent must also be obtained for any assignment of interest.

Likewise, for the electricity industry, the NERC's prior consent is required for a licensee to assign or cede a licence or transfer an undertaking or any part of it by way of sale, mortgage, lease, exchange or otherwise to another; or acquire or affiliate with the licence or undertaking of another licensee.

Notification to, and approval of, the Federal Competition and Consumer Protection Commission is required prior to the implementation any merger that involves entities with a combined turnover that exceeds 1 billion nairas or a target entity whose turnover exceeds 500 million nairas.

Transmission/transportation and distribution services

i Vertical integration and unbundling

Following the unbundling of the vertically integrated state power utility pursuant to the EPSRA, players involved in transmission and distribution services are disaggregated. The Transmission Company of Nigeria (TCN) owns and manages the national grid and is the only entity licensed to provide transmission services. Distribution services are provided by the discos and entities that hold independent electricity distribution licences.

In relation to the natural gas industry, the NGC owns and operates the major gas transmission pipelines and has maintained a practice of granting distribution franchises to private parties under arrangements that require such parties to develop or maintain a distribution network on the NGC's behalf and sell gas sourced from the NGC to end users within the distribution zone.

ii Transmission, transportation and distribution access

Open access and retail access

An open access regime applies to the NGC's gas transportation network. The Nigerian Gas Transportation Network Code issued by the DPR in August 2020 serves as the primary governance and contractual framework for access to this pipeline network Only licensed shippers may book capacity at entry and exit points of the pipeline network and there is no restriction on retail access. With respect to other pipeline networks, the Oil Pipelines Act permits third parties to apply to the Minister for third-party access and the Minister may grant the application if he or she is satisfied (following consultations with the applicant and the pipeline owner) that the pipeline can convey the substance and quantity the applicant wishes to convey without negatively impacting the safe and efficient operation of the pipeline or the owner's own use. The terms and conditions of access will be negotiated by the parties or imposed by the Minister if the parties fail to agree.

With respect to electricity transmission and distribution networks, distribution licensees are mandated to provide non-discriminatory open access to embedded generation licensees (i.e., operators of generating units that are directly connected to and evacuated through a distribution system) or any other licensee provided it has available capacity and in accordance with agreed terms. Also, the Eligible Customer Regulation 2017 (ECR) provides for mandatory access for 'eligible customers' or their suppliers to the transmission and distribution network for the purpose of delivery of electricity pursuant to a contract for use of the network entered into with the licensee of the network. Eligible customers are a special class of customers licensed to purchase electricity directly from generation and trading companies. These customers tend to be industrial and residential estates that buy such power for their own use. The ECR has introduced some level of retail competition into Nigeria's electricity industry.

Exclusivity

The NERC may allow a licensed activity to be exclusive for all or part of the period of the licence for a specific purpose, for a geographical area or a combination of both. The NERC has clarified that discos do not have exclusivity over the distribution area conferred with their licence and to this end, and in a bid to expand access to electricity, introduced the Independent Electricity Distribution Network (IEDN) Regulations 2012. The IEDN Regulations provide a framework for the development of independent distribution networks in areas that are unserved or underserved by a disco. It allows the NERC to grant a licensee the exclusive right to construct, own, operate and maintain a distribution system in a designated geographical area within the area of operation of a disco.

The regulatory framework for the gas industry does not provide for the granting of exclusivity rights with respect to the provision of gas transportation and distribution services. However, historically, the NGC has assumed such rights and has granted exclusive franchises to private-sector participants to develop and operate distribution networks on its behalf under build-operate-transfer arrangements.

iii Rates

The EPSRA requires the NERC to establish tariff methodologies for distribution and transmission services, which allows a licensee operating efficiently to recover its full costs and a reasonable return, incentivises improvements in service provision, avoids undue discrimination between consumers and phases out or substantially reduces cross-subsidies. Pursuant to this, the NERC has established the Multi-Year Tariff Order (MYTO), which provides a 15-year tariff path for generation, transmission and distribution of electricity in Nigeria. Minor reviews of MYTO are to be undertaken yearly to take into account changes in limited parameters such as inflation and foreign exchange rates and gas prices; while major reviews are to be undertaken every five years.

With respect to natural gas, the transportation charge is often negotiated. The Minister of Petroleum Resources may intervene pursuant to the Oil Pipelines Act if the parties are unable to reach an agreement.

iv Security and technology restrictions

Technology transfer is regulated by the National Office for Technology Acquisition and Promotion (NOTAP) established under the NOTAP Act 1979 (as amended). The Act mandates NOTAP to register contracts or agreements for the transfer of technology into Nigeria in connection with various purposes such as use of trademarks, patented inventions, plans and diagrams, supply of detailed engineering, the supply of machinery and plant, technical assistance, etc. Registration with the NOTAP is a condition to accessing foreign exchange from the foreign exchange marker regulated by the Central Bank of Nigeria to make payments on such contracts.

Energy markets

i Development of energy markets

The electricity industry is a regulated electricity market, which in the last decade has been unbundled and privatised from a previously state-owned and operated monopoly. The EPSRA established the Nigerian Bulk Electricity Trading Plc (the Bulk Trader), an electricity-trading company, to purchase power from gencos and on-sell to discos. It is essentially a monopsony aggregator of power produced within the industry, albeit for an interim period until the electricity industry is fully competitive. Electricity purchased by the Bulk Trader is dispatched in accordance with an economic merit order system that is implemented by the TCN in its capacity as system operator.

Wholesale gas supply is undertaken either directly by gas producers or by gas marketing companies. Natural gas is also traded by a growing segment of virtual gas pipeline companies that are trading gas through compressed natural gas and mini-LNG systems to underserved markets in Nigeria.

A domestic gas supply obligation (DGSO) is imposed on gas producers pursuant to the National Gas Supply and Pricing Regulations 2008 (NGSPR). The Gas Aggregation Company Nigeria Limited (GACN) acts as an intermediary between upstream producers and wholesale gas offtakers, and ensures that upstream gas producers comply with annual DGSOs issued by the DPR to ensure adequate domestic supply of gas to strategic sectors, such as the power, strategic industrial and other commercial sectors. A penalty of US$3.50/MMBtu is payable by a gas producer that fails to meet its DGSO allocation. Also, any gas export project proposed by a gas producer will not be permitted until it meets its DGSO. Gas volumes outside a producer's DGSO can be sold at market-based 'willing seller/willing buyer' price.

ii Energy market rules and regulation

The EPSRA provides for the establishment of market rules by the system operator that are designed to establish and govern an efficient, competitive, transparent and reliable market for the sale and purchase of wholesale electricity and ancillary services in Nigeria and for the licensing of market operators. The market rules for the operation of the electricity market that are currently in force govern the operations of the electricity market in the transitional and medium stages of the development of competitive markets. These rules provide the framework for an efficient and competitive market. They set out the responsibilities of each participant, the operation and pricing system of the balancing market and ensure a transparent and efficient settlement system, among other objectives.

iii Contracts for sale of energy

Market participants involved in the sale and purchase of on-grid power must conduct their transactions though the Bulk Trader, which purchases power from the generation companies using standardised power purchase agreements. The Bulk Purchaser on-sells power to discos through vesting contracts where it allocates a portion of the aggregated electricity supply to a particular disco. The rates for energy sale in these contracts must comply with the MYTO methodology. New entrant independent power plants that require a tariff beyond the MYTO benchmark must apply to the NERC for approval and an individual site-specific pricing model will be used, in which case the NERC will apply prudence and relevance tests to determine whether such site-specific costs should be allowed in the rates.

Market participants involved in the sale and purchase of off-grid power may enter into bilateral contracts. With the exception of contracts between embedded generation companies and discos, which must also comply with the MYTO methodology, there are no regulatory requirements that govern the rates and contract terms for the sale and purchase of off-grid power.

For natural gas sales, an offtaker that has applied to and obtained a gas purchase order from the GACN is entitled to negotiate a gas supply and aggregation agreement (GSAA) with a gas producer that has been issued a DGSO by the DPR. There is a template GSAA for DGSO transactions. The GSAA provides for the gas producer to be paid an aggregate price, which is a weighted average of all payments under similar GSAAs for sale of DGSO volumes received by the GACN into an escrow account established for that purpose. A gas producer that has satisfied its DGSO can contract freely on terms with any offtaker for the sale of natural gas on a 'willing seller/willing buyer' price basis.

iv Market developments

The Petroleum Industry Bill 2020, for the reform of the petroleum industry is currently under consideration by the Nigerian parliament. It proposes several far-reaching changes to the legal, institutional and regulatory framework for the petroleum industry, including the establishment of a new industry regulator. With respect to natural gas, it seeks to a create distinct regulatory framework for midstream and downstream gas operations by introducing a new licensing regime and a framework for the technical and commercial regulation of the gas sector.

Renewable energy and conservation

i Development of renewable energy

The government approved a national energy policy in 2003 that outlines the government's commitment to integrate renewable energy sources into the nation's energy mix. Consistent with this policy vision, the NNPC has established a Renewable Energy Division to exploit renewable energy sources and participate in global carbon emissions reductions initiatives. The government has also approved the National Renewable Energy and Energy Efficiency Policy 2015 (NREEEP). This document serves as a blueprint for the sustainable development, supply and utilisation of renewable energy resources for both on-grid and off-grid energy solutions. It focuses on hydropower, biomass, solar, geothermal, wave and tidal energy power plants and cogeneration plants for energy production as well as the improvement of energy efficiency as an additional source of energy. The NERC has also developed a feed-in tariff regime for renewable energy sourced from solar, wind, biomass and small hydro in order to stimulate investment and achieve a target of 2000MW of electricity developed from renewable energy by 2020. By 2030, the government expects that renewable energy will contribute a 30 per cent share in the electricity mix.

ii Energy efficiency and conservation

The NREEEP recognises energy efficiency and conservation as a key component of a sustainable energy policy. The key policies to drive the promotion of energy efficiency centres on improving consumer awareness and provision of incentives to encourage investment in and use of energy efficient technologies.

Pursuant to NREEEP, the government has developed the National Energy Efficiency Action Plan (NEEAP) as a supporting strategy document to guide the implementation of NREEEP. The NEEAP sets out targets for energy efficiency in buildings, industries, electricity distribution and energy efficiency labels and standards from 2015 to 2030, as well as specific policy measures to achieve the targets such as public awareness campaigns, mandatory labelling and certification, installation of efficient lighting in social housing projects and fiscal incentives to reduce prices of efficient lighting. It also proposes the adoption of fiscal instruments to reduce prices on efficient lighting products, an incentives scheme to support local manufacture of on-grid and off-grid equipment and financing schemes to cover the upfront costs of lighting products.

Actions plans from the NEEAP that have been implemented to date include the adoption of a National Building Energy Efficiency Code in August 2017, which sets out the minimum requirements for energy-efficient buildings and provides for their proper implementation control and enforcement. The Code applies initially to public buildings of the Ministry responsible for implementing the Code and it is expected that it will subsequently be adopted by states and local governments. The Standards Organisation of Nigeria has also launched the Energy Guide Label to guide Nigerians on the amount of energy consumed by air conditioners, refrigerators and lamps.

iii Technological developments

There are no significant technological developments in the area of renewable energy and energy conservation.

The year in review

i Key decisions, legislation, cases or policy changes

Milieudefensie (Friends of the Earth Netherlands) and 2 Ors v. Shell Petroleum NV. & 1 other (the Milieudefensie case)

On 29 January 2021, the Court of Appeal in the Hague in a landmark judgment found Shell guilty of a breach of its duty of care by not doing enough to prevent oil spills from its pipeline in two villages in the Niger Delta, Nigeria. It is the first time that a foreign court has held Shell accountable for its duty of care abroad and this could open up a flood of litigation against parent companies of European oil companies operating in Nigeria that have caused significant harm to the environment from oil spills and gas flares.

Changes and policy flip-flops in the deregulation of downstream petroleum prices

For several decades, Nigeria has been attempting to withdraw fuel subsidies and deregulate the price of petrol in a bid to attract investments into the petroleum-refining sector in Nigeria. Labour unions have over the years resisted the withdrawal of these subsidies in view of the adverse impact they are likely to have on transportation costs and commodity prices, which most affect underprivileged citizens.

In the latest episode of this long-drawn-out saga, in 2020 the government via the Petroleum Products Pricing and Regulatory Agency issued directives signalling the deregulation of petroleum prices. However, due to significant pushback from the labour unions the government reversed its decision to remove the subsidies and assured citizens that it will continue to cap prices and that no upward review is imminent.

NERC Distribution Franchising Guidelines

In June 2020, NERC issued the Guidelines on Distribution Franchising in the Nigerian Electricity Supply Industry 2020 (Franchising Guidelines) to enable discos take advantage of evolving business structures and technology for the purpose of providing adequate, safe and reliable services to end users. In this regard, a disco is permitted to enter into a franchising arrangement with a third party (franchisee) to authorise the franchisee to perform some of the specific functions of the disco within the disco's licensed area. This will facilitate an improvement in the quality of service delivery to end users and address some of the operational and liquidity challenges in the electricity industry.

MYTO review of electricity tariffs for service reflexivity

On 1 September 2020, NERC issued a new tariff order – MYTO 2020 – to allow utility companies to charge higher electricity tariffs that will better cover the true cost of their operations, if the utilities in turn provide better services to the relevant customers. Five tariff bands have been introduced that apply to five service thresholds, graduated by the minimum number of hours electricity is provided per day (i.e., 20, 16, 12, 8 and 4). This development is significant as it should address the long-standing liquidity challenges in the electricity industry.

ii Key mergers, takeovers, activity in the market, tenders or auctions

Marginal field bid rounds 2020

The marginal field bid rounds 2020 began in July 2020, and the government is offering indigenous companies the opportunity to acquire an interest in marginal fields within various acreages held by licence holders that have delayed developing these fields. There is an increased level of M&A activity in the energy sector, with several of these indigenous bidding companies setting up alliances and joint ventures to acquire and exploit the marginal fields on offer.

IOC divestments continue

Shell and Chevron are divesting more of their long-held oil mining leases in the Niger Delta; the latest divestments are interests in OML 17, OML 86, OML 88 and OML 132. As Nigeria forges ahead as a mature province, the trend in the last decade has been for all the international oil companies operating in Nigeria to sell off some of their petroleum assets to independents and indigenous oil companies.

iii Trends in the sector

The decade of gas initiative

The government is promoting investments in gas projects to increase gas production and utilisation over the next decade. The 'decade of gas' initiative is being championed by the government to increase utilisation of gas in the domestic market, with the objective of displacing the current over-reliance on other petroleum products as the primary source of energy for transportation, household, commercial and industrial uses.

Conclusions and outlook

Several issues have impacted the development of Nigeria's energy market over the years, especially as it relates to the gas-to-power segment. Market illiquidity occasioned by lack of payment discipline, ineffective contracts and lack of cost recovery across the value chain has caused market participants to consistently report losses and has restricted the flow of investment to fund the much-needed infrastructure developments and upgrades.

It is expected that the recent interventions by the government, especially with the transition towards truly cost-reflective tariffs, will reduce the current market distortions and consequently attract more investment into the sector. It is also expected that the reforms proposed by the Petroleum Industry Bill 2020 will enable the gas sector to better serve the electricity markets.

Footnotes

1 'Gbite Adeniji and Jumoke Fajemirokun are partners at ENR Advisory.

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