EXCLUSIVE: Lagos moves its power market from best effort to contract

Biodun Ogunleye, Lagos State Commissioner for Energy and Mineral Resources, tells ENN how the state plans to turn its newly devolved electricity market from best effort into contractual obligation, and what investors should watch over the next two to three years as Lagos builds towards 6GW and beyond.

The Nigerian Electricity Regulatory Commission (NERC) has transferred regulatory oversight of the Lagos electricity market to the Lagos State Electricity Regulatory Commission (LASERC), and the state has set up LAISO as its independent system and market operator. Formal supply in Lagos remains below 1,000MW by the state’s own figures, and its plan for the new market provides for fourteen operators and a six-fold increase in wheeling capacity.

Ahead of Nigeria NOW! in Abuja on 19 and 20 November, Biodun Ogunleye answered ENN’s questions on what that authority now makes possible, and on what will persuade investors that the market is bankable.

Lagos has taken control of its electricity market. What can the state now do that simply was not possible under the previous model?

The biggest difference is that Lagos can now plan electricity around the realities of the Lagos economy rather than simply wait for an allocation from a central market.

Following the transfer of regulatory oversight to LASERC, we can regulate the intra-state market, license operators, establish service standards, create enforceable market rules and develop solutions around generation, distribution, retail, metering and customer service. NERC formally transferred regulatory oversight of the Lagos electricity market to LASERC under the Electricity Act framework.

We have also established LAISO as an independent system and market operator, so the direction is towards a market where generation, networks, supply, settlement and customer service are clearly separated and properly coordinated.

Most importantly, Lagos can now aggregate its own demand and take steps to ensure it is met sustainably. We can structure PPAs, attract embedded generation, encourage new investment into networks and design regulation around the needs of industries, communities and customers in Lagos.

What has not changed is the need for cooperation with the Federal Government. Transmission remains interconnected and gas supply crosses jurisdictions. So this is not Lagos separating itself from the national market; it is Lagos taking greater responsibility for its part of the market.

The plan provides for fourteen operators. What will convince investors that Lagos is not just creating a new regulatory structure, but a genuinely investable power market?

For investors, the issue is not whether Lagos has fourteen operators or four. The real question is: can those operators operate within a bankable market?

An investable market must answer some very basic questions: What market model are we operating? Who is buying the power? Who collects the revenue? What happens when an operator fails to perform? Are tariffs sustainable? Is the data credible? Are contracts enforceable?

That is why our focus is moving the Lagos market from “best effort” to “contractual obligation”.

The operators must have measurable obligations around hours of supply, metering, losses, reliability, customer service, investment and network performance. At the same time, investors require bankable PPAs, predictable market cashflow, transparent settlement and credible payment security.

The structure is therefore intended to create smaller, accountable and performance-driven operators, rather than simply reproduce large monopolies at a smaller scale.

The test of this reform will not be the number of licences we issue. The test will be whether capital can enter the market, earn a reasonable return and deliver a measurable improvement in electricity service.

Lagos wants to increase electricity wheeling capacity six-fold. Where will the capital and infrastructure come from to turn that ambition into reliable power for businesses and industry?

We recognise that generation without transmission is a stranded investment. There is no benefit in bringing another 2,000MW into Lagos if we cannot move that electricity to the factories, data centres, homes and commercial districts that need it.

Our strategy therefore has several layers.

First is deeper collaboration with TCN, NISO and the Federal Government to reinforce the existing transmission backbone, upgrade overloaded substations and develop the proposed 132kV ring around Lagos.

Second is to open the network to private capital. The scale of investment required cannot be funded solely from government balance sheets. We need infrastructure funds, development finance institutions, institutional investors and private-sector partners investing in substations, feeders, embedded networks and related infrastructure.

Third is the commercial reform itself. Investors will only finance infrastructure when there is a credible market cashflow behind the assets. That is why the work on PPAs, settlement, metering and revenue assurance is inseparable from the physical infrastructure programme. Lagos’s implementation framework couples transmission reinforcement with additional generation, distribution rehabilitation, metering and market settlement.

Capital follows bankable cashflows. Our job is to create both the infrastructure plan and the commercial architecture that makes that plan financeable, hence an investor-friendly market has been our cornerstone.

Nigeria NOW! is asking how power can support the country’s industrial growth. Could state electricity markets be the missing link between new generation and Nigeria’s major industrial hubs?

I believe state markets can become a very important part of that link.

Electricity is ultimately consumed locally. Factories are located somewhere. Industrial parks are located somewhere. Ports, data centres, refineries, hospitals and commercial districts are located within states.

A state electricity market allows us to identify concentrated demand, aggregate that demand and then build generation and network investment around it.

Lagos is a very good example. We have enormous electricity demand, yet formal supply remains below 1,000MW while a significant amount of economic activity is powered through private self-generation. The demand already exists; the expenditure already exists. The challenge is bringing that demand into a formal, investable electricity economy.

If an industrial cluster can enter into a credible long-term supply arrangement, that demand can underpin a new power plant, gas infrastructure, transmission reinforcement or an embedded network.

So state markets should not replace the national electricity market. They can make the national market stronger by connecting generation more directly to productive demand.

When reliable electricity reaches industry, production costs come down, competitiveness improves, capacity utilisation rises and jobs become easier to create.

If Lagos gets this right, what does it change for the wider Nigerian power market, and what should investors be watching over the next two to three years?

If Lagos succeeds, the most important outcome will be that Nigeria has a working proof of concept for a decentralised, multi-market electricity structure.

It will demonstrate that the Federal and State markets can coexist, with the Federal Government continuing to play its indispensable role in transmission, interstate trade and the wider national framework, while states take greater responsibility for local regulation, distribution, supply and investment.

For investors, I would watch five things over the next two to three years: the movement to a contract-based Lagos market; the mobilisation of approximately 2,000MW of additional supply; transmission and distribution reinforcement; progress towards universal communicating and 100% metering; and the development of the gas-to-power and digital market infrastructure. Lagos’s current implementation framework places all of these within one coordinated programme rather than treating them as isolated projects.

Our broader direction is towards an electricity market capable of supporting 6GW and beyond, with gas, renewables, storage, embedded generation and distributed energy all playing a role.

So what investors should watch is not simply another power project. They should watch whether Lagos succeeds in creating a market where demand, infrastructure, regulation, contracts and capital finally meet.

If we achieve that, the significance goes far beyond Lagos. It provides a model that other major economic centres in Nigeria can adapt to their own circumstances.