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“Market Structure in the Restructuring of the Nigerian Electricity Industry,” by W. A. Isola

“Market Structure in the Restructuring of the Nigerian Electricity Industry,” by W. A. Isola

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Until recently, the market for electricity used to be a monolithic structure. The Electricity Pool of England and Wales were the first attempts to introduce competition in the electricity industry. Other countries followed, including developing counties such as Chile, Argentina, and Peru. Nigeria recently has deregulated its electricity industry. A partial equilibrium model in the style of the Cournot game is employed to determine appropriate market structure in the generation of electricity. The result shows that as a monopoly, the price that cleared the market was N11.60 per kilowatt hour versus the N7 per kilowatt hour ceiling price set by the government. It also is found that as the number of players increased, the price that cleared the market declined continuously. This study shows that 14 firms of “equal size”—seven hydro-based and seven gas-based with a total production capacity of 54,000 megawatts—are feasible. (This article was published in The Journal of Energy and Development, volume 34, number 2, copyright 2011).
Until recently, the market for electricity used to be a monolithic structure. The Electricity Pool of England and Wales were the first attempts to introduce competition in the electricity industry. Other countries followed, including developing counties such as Chile, Argentina, and Peru. Nigeria recently has deregulated its electricity industry. A partial equilibrium model in the style of the Cournot game is employed to determine appropriate market structure in the generation of electricity. The result shows that as a monopoly, the price that cleared the market was N11.60 per kilowatt hour versus the N7 per kilowatt hour ceiling price set by the government. It also is found that as the number of players increased, the price that cleared the market declined continuously. This study shows that 14 firms of “equal size”—seven hydro-based and seven gas-based with a total production capacity of 54,000 megawatts—are feasible. (This article was published in The Journal of Energy and Development, volume 34, number 2, copyright 2011).

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05/12/2014

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THE JOURNAL OF ENERGYAND DEVELOPMENT
W. A. Isola,
“ 
Market Structure in the Restructuring of the Nigerian Electricity Industry 
 ,” 
Volume 34, Number 2Copyright 2011
 
MARKET STRUCTURE IN THE RESTRUCTURING OFTHE NIGERIAN ELECTRICITY INDUSTRY
W. A. Isola
*
 Introduction
T
he market for electricity throughout much of the world used to be a monolithicstructure until the end of the 1980s. The Electricity Pool of England and Wales, together with the North Pool of the Scandinavian countries, were the firstattempts to organize a market for electricity and to introduce competition into theelectricity industry. These attempts succeeded largely because of the advancementin technology and changes in economic perceptions. Other nations, includingdeveloping countries such as Chile, Argentina, and Peru, followed the England and Walesexamples;recently, Nigeriaalso joinedthetrend, havingderegulated itselectricity industry through the enactment of the Electric Power Reform Act of 2005. Consequently, Nigeria’s defunct National Electric Power Authority (NEPA)is now known as the Power Holding Company of Nigeria (PHCN). The law paved the way for the unbundling of NEPA into 18 companies: six generating compa-nies, one transmission company, and 11 distribution companies. The incorporationof these enterprises has been concluded. The National Electricity Regulatory
*W. A. Isola, Senior Lecturer at the Department of Economics, University of Lagos, AkokaYaba, Nigeria, holds a Ph.D. degree in economics from the University of Lagos. His areas of specialization are energy and industrial economics. The author has participated in and contributed to a number of international training and workshops such as the Practical General EquilibriumModeling under the auspices of the Global Economic Modeling Network School—Europe(Brussels, Belgium) and the African Economic Research Consortium (AERC) TechnicalWorkshop on Game Theory. Aside from contributions to edited volumes, his publications haveappeared in
ICFAI Journal of Industrial Economics
and 
The Journal of Economics and Business
,as a sampling. The author wishes to acknowledge the support of the University of Lagos and AERC.
The Journal of Energy and Development 
, Vol. 34, Nos. 1 and 2Copyright
Ó
2011 by the International Research Center for Energy and Economic Development(ICEED). All rights reserved.
209
 
Commissions, which is the top regulatory body in the country, has been formallyconstituted.In view of this deregulation and unbundling, certain relevant questions relatingto the relationship among electricity generation, efficient supply, and quantities of output cannot be ignored. In other words, what is the appropriate number of firmsthat need to generate the required supply of electricity and what should be their output capacities? These questions derive from the fact that too many firms could lead to the creation of excess capacity and, if too few, there is a risk of abuse of market power that can develop under such scenarios. However, it has been found that duopoly is prone to the development of a high-degree of market poweconcentration. Recent empirical studies also have provided some evidence thatelectricity suppliers have exercised considerable market power concentration in both California in the United States and the United Kingdom.
1
This has beenattributed partly to poor market structure design. This study is germane because of the need to ensure production efficiency and allocation efficiency in the genera-tion segment of the Nigerian electricity industry. Indeed, many other countries areundergoing similar economic and public-policy decision making as that of  Nigeria. Furthermore, this paper derives from the experiences of energy crises inleading reforming countries such as Italy in 2003, California in 2001, New Zea-land (Auckland) in 1998, and Chile from 1998 to 1999.
2
As P. C. Watts noted inhis conclusions:
Deregulation is a high risk choice. Those jurisdictions that have not yet deregulated electricitygeneration need to think long and hard before they go ahead. Those that have done so need tofigure out how to minimize the downside potential of the journey on which they haveembarked.
3
Again, it must be noted that the U.K. experience with restructuring of elec-tricity generation and mitigating possible market power dominance has demon-strated the complexity and challenges involved in introducing competition into thesector. J. R. Green and M. D. Newbery have demonstrated, for instance, that theinitial structure based on only two unequal competing electricity generators wasinefficient as both firms abused their market power; two equal competing firmscould have been more effective.
4
It is against such a backdrop that this paper seeksto examine the market structure in the restructuring of the Nigerian electricityindustry using partial equilibrium analysis.In the next section of this paper, we shall discuss some theoretical and em- pirical considerations. Thereafter, a review of extant literature is presented fromwhich Nigeria can learn best practices. Following the literature review section isthe methodology, while the result of the model and the broader implications of thestudy are presented next. The final section, which is the conclusion, is a pre-sentation of the way forward.THE JOURNAL OF ENERGY AND DEVELOPMENT210

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