One Size Doesn’t Fit All

The push for sustainable and efficient energy systems has led states to consider establishing State Electricity Markets (SEMs). Unlike the National Electricity Market, which centralizes electricity generation and distribution through a national grid, SEMs operate within individual states, enabling localized generation, transmission, and distribution under the 1999 Nigerian Constitution (as amended). 

SEMs foster competition among electricity suppliers, allowing consumers in advanced markets to choose providers based on price and service. Historically, electricity markets began as monopolies but shifted to competitive models by the late 20th century, with states like California and Texas leading deregulation in the 1990s. These efforts promoted private investment and modernized electricity infrastructure. 

In Nigeria, the electricity sector has long faced challenges like inadequate supply, frequent outages, and outdated infrastructure. Efforts to reform the sector began with the Electric Power Sector Reform Act 2005, which privatized the state-owned Power Holding Company of Nigeria (PHCN). Persistent issues, however, led to the Electricity Act 2023, granting states greater control over electricity markets. This Act decentralizes power generation and supply, reshaping Nigeria's electricity landscape and addressing longstanding inefficiencies. 

Market design is a fundamental component of establishing a successful electricity market. It serves as the framework that dictates how electricity is generated, distributed, and consumed within the state/region. A well-structured market design will ensure competition, reliability, and effective integration of renewable energy sources. 

Market design encompasses the systematic arrangement of rules, institutions, and mechanisms that govern the operations of an electricity market. It involves various elements, including: 

• Market Structure: The overall market architecture, including wholesale, retail, and ancillary service markets. 

• Market Rules: Regulations that define how each participant can operate, including bidding processes, price-setting mechanisms, and compliance requirements. 

• Incentive Structures: Mechanisms that encourage desirable behaviours among market participants, such as payment mechanisms, investments in infrastructure and renewable energy. 

This article offers Nextier’s framework for developing a market structure. 

Every market has unique peculiarities 

When designing an electricity market, states must carefully consider models that address the needs of both urban and rural populations, especially underserved or unserved areas. These decisions should be embedded in the policy-making process from the outset, as market design directly impacts service delivery and energy access. 

Each state’s unique demographics, socio-economic conditions, and geographic factors necessitate tailored approaches. Successful energy markets thrive on a robust regulatory framework that enforces rules, defines market structures, and ensures fair competition. This includes oversight of market segments, industry infrastructure, and settlement mechanisms to promote transparency and efficiency. 

Effective regulation not only defines the market but also attracts investment. Namibia, for instance, implemented a modified single-buyer model, enabling independent power producers (IPPs) to sell directly to regional distributors and large customers, bypassing the national utility. This innovative approach expanded opportunities for private sector participation and diversified the energy supply. 

A sound market design also hinges on independent regulators with strong mandates to enforce non-discriminatory grid access and transparent tariff-setting principles. Such systems inspire investor confidence and lay the foundation for sustainable energy development. 

Developing an Effective Market Design 

To create a successful market design, several key steps should be undertaken: Assess Local Context and Needs 

1. Assess Local Context and Needs 

• Analyse Existing Infrastructure: Evaluate the current state of transmission and distribution networks to identify strengths and weaknesses. 

• Understand Consumer Demand: Gather consumer needs and preferences data to tailor the market design accordingly. 

• Consider Geographic Peculiarities: Account for unique geographical and socio-economic factors that may influence market dynamics. 

2. Define Market Structure 

• Choose the Right Model: Decide between wholesale, retail, or hybrid models based on local conditions and objectives. 

• Incorporate Ancillary Services: Include mechanisms for ancillary services such as frequency regulation, voltage control, and reserve capacity to maintain system reliability. 

3. Establish Clear Rules and Regulations 

• Create Bidding Processes: Develop transparent bidding mechanisms that allow generators to submit offers and ensure fair competition. 

• Set Pricing Mechanisms: Define how prices will be determined, including spot markets, capacity payments, and long-term contracts. 

• Outline Compliance Standards: Establish clear compliance requirements for market participants to ensure accountability and reliability. 

4. Incentivize Desired Outcomes 

• Develop Financial Incentives: Create mechanisms encouraging investments in renewable energy, energy efficiency, and infrastructure improvements. 

• Implement Demand Response Programs: Design programs that allow consumers to adjust their usage based on price signals, enhancing grid stability. 

5. Engage Stakeholders 

• Involve Key Players: Facilitate discussions with utilities, regulators, consumers, and industry experts to gather input and build consensus. 

• Create Advisory Committees: Establish committees or working groups to provide ongoing guidance and feedback during the design process. 

6. Pilot and Iterate 

• Conduct Pilot Programs: Implement pilot projects to test market mechanisms on a smaller scale before full deployment. 

• Gather Feedback: Continuously monitor market performance and gather feedback from stakeholders to identify areas for improvement. 

• Adapt and Refine: Adjust based on lessons learned from pilots and ongoing market operations. 

A well-designed market is the cornerstone of a thriving electricity sector. By crafting a market framework that aligns with local needs, fosters competition, and integrates renewable energy, states can unlock transformative benefits for consumers, businesses, and the broader economy. Thoughtful planning, robust regulation, and consistent stakeholder engagement are essential to overcoming legacy challenges and driving innovation. With a clear vision and adaptability, states can create electricity markets that not only meet current demands but also future-proof the energy sector, ensuring sustainable growth and energy security for generations to come. 

Written By: Chiamaka Asoegwu 

For more information and feedback, send an email to nokwedy@thenextier.com