The Electricity Act: A Key Milestone or Mere Paper Talk?

The passage of the Electricity Act in 2023 empowered states and the federal government to develop and enforce electricity regulation within their respective boundaries. Under the law, state governments have full control of electricity generation, transmission, and distribution as regulators and/or operators. The move to decentralize the energy market was promoted to ensure access to affordable, reliable, and market-priced electricity across Nigeria. In addition to state-sponsored projects, the state governments could create regulatory frameworks to encourage participation by private sector actors, including independent power producers and corporations looking to generate captive energy.

In reaction to the law, many states have begun creating regulatory frameworks for their local electricity markets. While a few states have fully passed electricity laws and set up regulatory agencies, others are further behind. However, the bureaucratic process is the most significant impediment to realising a functional state energy market. There are concerns that many factors that hampered the previous federal government-led electricity market would prevent a flourishing states-led electricity market. A key hurdle is the scarcity of financing driven by investors’ perception of high political risks and non-market-based pricing. For states, a well-developed municipal bond program could help address these concerns and serve as a catalyst for attracting other financing sources.

Municipal Bonds and State-based Electricity Markets  

Municipal bonds are hardly new. These debt instruments have played key roles in the development of critical infrastructure in different parts of the world. Municipal bonds, like other bonds, are debt obligations that entitle the holders to periodic interest payments (annually or semi-annually) and the principal at the end of the bond’s stated life. However, unlike other bonds, municipal bonds are often offered by subnational governments such as states and local governments (municipalities).

These bonds could be general obligation bonds (backed by the state’s entire assets and tax receipts) or revenue bonds (backed by revenue receipts from a specific asset). The latter is especially used to finance key infrastructure projects such as roads, energy plants, waterworks etc. Furthermore, unlike general bonds, municipal bonds are often tax-free at the state and/or national level, thereby providing added incentives for the investors. The bonds are often marketed to institutional investors as well as retail investors. The latter are often beneficiaries of the projects financed by the bonds, thereby making them both customers and creditors or investors. The US Municipal bond market is the largest and is currently valued at $4.1 trillion.

In Nigeria, municipal bonds have not acquired the status of investment assets given to other instruments such as stocks and real estate. However, state bonds listed on the stock exchange and FMDQ are essentially municipal bonds albeit the general obligation types. Specific asset-backed municipal bonds remain unpopular in the country. However, they could play a key role in kick-starting the electricity market in various Nigerian states.

State electricity markets, like the federal-based markets before now, could face significant scepticism from potential investors as concerns grow over the viability of investments in the absence of market-based pricing. While the Electricity Act seeks to create a market-based pricing regime for electricity, there is no gainsaying the price stickiness of the sector with repeated opposition to periodic price adjustments from key stakeholders, including labour unions, opposition political parties, and citizens. This opposition either forces the government to intervene or creates incentives for political opportunists to make “pro-people’’ decisions that further stifle the sector's growth. Without these adjustments, distribution companies often fail to meet the revenue targets required to pay generating companies, plunging the entire value chain into a financial crisis. This sequence of events could be repeated under the states-led regime.

This could be averted by designing and deploying state municipal bond programs to kickstart the electricity market in various states. Municipal bonds as a class, especially with the added tax-free status, could help attract investments from various investor groups and provide potentially higher returns than bank savings, interest rates and other low-return asset classes. This would, in turn, help provide revenues for key generation, transmission, and distribution assets. The bonds could be raised directly by a state-sponsored utility company or a special-purpose vehicle with significant backing from the state.

Beyond attracting institutional investors, a vital part of the program would include attracting retail investors, especially in the same state where the assets are likely to be deployed. Retail bond units or subunits could be priced at figures that could be afforded by a sizable portion of the population, including individuals and small businesses. With an electricity market backed by investors who also double as consumers of the electricity generated by these assets, the issue of periodic adjustments is less likely to be controversial since high prices naturally translate to higher revenues for the electricity company, safer investments for creditors and/or higher returns for equity investors, which include thousands of retail investors in the state.

The benefits of a well-developed municipal bond program are multifold. Foremost, it could lay the groundwork for raising financing from investors, including key energy investors who are less likely to be worried about opposition to market-based pricing, considering that a large swathe of the consumer group doubles as creditors and investors. Secondly, a successful municipal bond program in the energy sector could create a template for raising financing for other critical sectors in states, including water supply, local roads, agricultural infrastructure and other infrastructure which remain dangerously underfunded, with negative consequences for the local economy. Also, well-developed municipal bond programs in different states offer institutional and retail investors the opportunity to pick the best offers among states as well as create a healthy competitive environment as each state seeks to outdo the other in attracting further investments, growing the energy market, and attracting businesses and families into the state.

The Electricity Act could play a key role in creating a different electricity market in Nigeria. However, to realise these ambitions, tackling the key impediments that stifled the market under previous regimes is necessary. One of these is significant opposition to market-based pricing. The other, which flows directly from the former, is the reluctance of private sector actors to enter the market due to opposition to market-based pricing, which in turn prevents healthy financial returns. A municipal bond program that converts consumers to creditors and investors could help address these challenges.

References

Federal Republic of Nigeria. (2023). Electricity Act 2023. https://placng.org/i/wp-content/uploads/2023/06/Electricity-Act-2023.pdf

Channels Television. (2024, August 28). NERC transfers regulatory functions to additional five states. https://www.channelstv.com/2024/08/28/nerc-transfers-regulatory-functions-to-additional-five-states/

U.S. Securities and Exchange Commission. (n.d.). What are municipal bonds? https://www.sec.gov/munied