THE FIVE ESSENTIALS

State electricity markets represent one of the most transformative outcomes of Nigeria’s Electricity Act (2023), unlocking a new era of energy autonomy for Nigerian states. ?

The Act grants Nigerian states the authority to create sub-regional electricity markets, empowering them to enact policies, regulations, and issue licenses to companies supplying power within their borders. The states have the authority to establish institutions, engage in planning, coordination, and undertake activities across various segments of the power sector value chain.?

This bold shift can attract significant investments, expand energy access, and elevate Nigeria's current electricity access rate, estimated at about?60.5% in 2022. This development could drive economic growth for the 63% of Nigerians classified as multidimensionally poor.?

However, while the Act clearly outlines the "what," the real challenge lies in the "how."??

Establishing functional and sustainable electricity markets at the state level is crucial. State governments must develop clear, strategic processes to ensure the viability and success of their electricity markets. Currently, the Nigerian Electricity Regulatory Commission (NERC)?has granted six of Nigeria’s 36 states regulatory oversight over their state electricity markets.

Nextier has worked with three states (Enugu, Anambra, and Katsina) to design their electricity market policy bills, and, in one instance (Enugu), establish the State Electricity Regulatory Commission.???

The electricity policy lays a clear plan to tackle the state’s electricity supply issues. With a focus on boosting power availability, supporting economic growth, and aligning with national energy goals, it aims to reshape the state’s energy landscape. Nextier’s approach includes defining SMART* practical short, medium, and long-term goals to ensure all residents have access to reliable, sustainable, affordable, and efficient electricity, creating a stronger foundation for the state’s future.??

Based on our expertise at Nextier, there are five essentials for building sustainable state electricity markets that must be addressed in state policies.??

1. Establishing a baseline?

A baseline study is the foundation for successful electricity market development. A good state electricity policy must mandate an assessment of the state's current energy landscape, identifying both its unique strengths and critical gaps. The results from the study are essential for developing the Integrated Resource Plan which forecasts and plans for the state’s future energy needs.?

By conducting a thorough evaluation, states can quantify their electricity infrastructure deficits and channel resources toward the most impactful projects. This ensures that investments prioritise initiatives with the highest potential for cost-effectiveness and financial returns.?

The study must include an enumeration of the state’s energy assets, highlighting the infrastructure gaps and computing the level of investment required to bridge them. It should also highlight the state’s advantages. For instance, Akwa Ibom State, which owns and operates a 189 MW power plant, has a competitive advantage over other states due to its existing generation infrastructure. On the other hand, states with existing industrial clusters have the advantage of potential electricity off-takers. ?

However, effective investments also require targeting the right opportunities for different investor types. Nextier’s assessment of Katsina State highlighted its vast solar potential, with an annual solar radiation level of 2,100 kWh/m2, significantly higher than the global average of 1,361 W/m2. This translates into a substantial photovoltaic (PV) output of approximately 1,750.3 kWh/kWp annually. ?

This data highlights the potential investment opportunities for investors seeking renewable energy projects, positioning Katsina as a prime location for harnessing solar power.? This information would be particularly interesting for investors conscious of environmental, social, and governance (ESG) considerations.?

Thus, Nigerian states can address their infrastructure deficits and attract investments aligned with their unique strengths, setting the stage for sustainable electricity market growth.?

2. A clear delineation of roles and responsibilities?

One of the key challenges for stakeholders across the electricity value chain is clarifying the boundaries between state and regional regulators, as well as defining the roles of various players. Establishing clear frameworks is critical to creating a well-functioning electricity market at the state level.?

States must outline their market designs and the roles of stakeholders within these frameworks. For Katsina State, Nextier recommended a balanced mix of public and private sector stakeholders, including a State Regulatory Commission, customer groups, and a private sector-owned Credit Enhancement Company (CEC) to ensure financial security and encourage investment.?

A robust legislative and policy framework is also essential to guide these stakeholders and ensure that processes are efficient and transparent. This includes developing key documents such as a State Integrated Resource Plan (IRP) to outline long-term energy needs and strategies, and a Competitive Procurement Process Policy to ensure fair and open bidding for electricity generation projects.?

By clearly defining roles and responsibilities and setting the legal foundation, states can create an organised and transparent environment that promotes investment, ensures accountability, and facilitates the smooth operation of their electricity markets.?

3. A phased approach?

The greatest risk for state electricity markets is replicating the challenges of the national market. However, it’s important to note that the national electricity market was well planned on paper. The major challenge has been?the failure?to deliver step-by-step implementation.??

Like the national market design, Nextier’s approach advocates for a phased market evolution consisting of a pre-transition, transition, and post-transition phase. Each phase focuses on gradually developing the necessary structures to ensure market viability.?

At present, most states are in the pre-transition phase, where the priority is building the foundational infrastructure and regulatory frameworks required for a competitive electricity market. Still, the state policy must account for potential risks specific to state electricity markets even in this phase.?

Risk mitigation is embedded into every aspect of the policy design for states we work with. For instance, we recommended the establishment of Credit Enhancement Companies (CECs) owned by private financial investors, Development Finance Institutions (DFIs), and Nigerian financial institutions. By committing to the economic viability of the state electricity market—through the implementation of cost-reflective tariffs—the CEC will enable market participants to secure capital for investments across the electricity value chain. This approach ensures a steady flow of revenue, significantly reducing financing risks and encouraging investment in critical infrastructure.?

4. Identifying viable funding opportunities?

The elephant in the room is ensuring that state electricity markets are able to attract private sector investments. State electricity market policies must communicate a state’s readiness to attract private sector investment, demonstrating the government’s focus on incentivising private sector leadership in market development, ensuring the market remains dynamic and investor friendly.?

Following the IRP, it is critical to develop a pipeline of bankable projects that present clear, compelling opportunities for investors and financial institutions; projects with ready offtakers. The goal is to avoid projects that offer no financial returns, especially those solely tied to public service obligations or with a purely social mandate.?

While the policy itself may not be a binding commitment from the state, it serves as a strategic opportunity to showcase the state’s framework and approach, sparking investor interest and laying the groundwork for more substantive discussions. This framework could also signal the state’s willingness to embrace innovative approaches, such as carbon pricing mechanisms that generate additional capital for energy sector investments.?

5. Extending electricity access to unserved and underserved communities?

Underserved areas are regions with existing but inefficient distribution systems, resulting in poor electricity quality. Unserved areas, typically off-grid, lack any distribution infrastructure. These regions are often rural, and according to World Bank data, as of 2022, while 89% of urban Nigerians have access to electricity, 27% of rural dwellers remain without.?

Expanding electricity access, especially in rural areas, is vital for unlocking economic growth. States need forward-thinking strategies to address regions with unreliable or nonexistent service, ensuring that all communities benefit from reliable power.?

Given the high costs and logistical challenges of grid extension in unserved areas, off-grid solutions (OGS) like Solar PV hybrid mini-grids, mini-hydropower plants, solar home systems (SHS), and standalone renewable energy systems offer a practical, scalable way to rapidly boost electrification rates. These solutions are flexible, easily deployed in areas with minimal grid infrastructure, and provide a fast track to increased access.?

For example, in Anambra State, we recommended a proactive role for the government in supporting off-grid energy development by simplifying access to land for mini-grids and streamlining permit processes. States can also facilitate off-grid projects by identifying optimal locations for mini-grids and matching them with households and businesses.?

However, financing remains the most significant challenge. State electricity policies must include clear strategies for financing off-grid solar (OGS) projects, with a focus on promoting productive use of electricity, signalling that the state is committed to financial viability. Innovative financing mechanisms can include contributions from community associations, cooperatives, town unions, or partnerships with the Rural Electrification Agency (REA), as seen with the 7.5KW solar minigrid at Joint Hospital in Ozubulu in Anambra State, Nigeria. Additionally, the state can establish a State Electrification Fund to support off-grid initiatives through its State Electrification Agency.?

There’s a bright future ahead?

Policy design is only one side of the equation; implementation brings its own set of challenges. ?

As Nigeria navigates the establishment of state electricity markets, teething problems are to be expected due to their nascency. However, if states adhere to the recommended initiatives, policy actions, and implementation timelines, we could see viable state electricity markets emerge within the next half-decade. By 2027, for states like Enugu and Anambra, we expect commercial operations that are credible, commercially sound, technically and environmentally compliant, well-funded, financially viable and non-subsidised.?

These markets have the potential to evolve into more reliable, equitable, and sustainable systems that address the energy crisis plaguing each state, ultimately contributing to a greener and more resilient future.?

Enugu State is currently leading the way, being the first state to successfully complete key milestones such as developing an electricity policy, setting up a state electricity regulatory commission and holding stakeholder consultations, inviting the public to comment on regulations and even issuing licenses. ?

It's still early days and the race is not necessarily to the swift. Still, we are optimistic that several states including Enugu, Anambra and Katsina are on the right track to achieving success.?

SMART: Specific, Measurable, Achieveable, Realistic, and Time-bound goals.?

Written by Noelle Okwedy & Nkem Ani