Enhancing transparency in power contracts

Legal and regulatory frameworks for promoting open contracting in Nigeria’s national and subnational electricity market play a key role in the sector. Power contracts are vital components of the energy sector, governing the terms and conditions for selling and purchasing electricity among parties. Power Purchase Agreements (PPAs) are particularly significant contracts in the power sector.

A Power Purchase Agreement (PPA) is a power offtake agreement between two parties, usually between an electricity producer and an off-taker of electricity. The electricity producer can be a renewable energy developer or generation company, and the power purchaser or off-taker can be a bulk trader, utility company, or large energy consumer.

PPAs include contract terms such as the amount of electricity to be supplied, the negotiated price, who bears what risks, the required accounting, penalties if the contract is not honoured, etc. PPAs are generally long-term contracts, lasting between 10 to 15 years. However, the process and terms of negotiated PPAs and other power contracts, such as connection agreements, vesting contracts, etc., are often shrouded in secrecy and lack public visibility despite most of these contracts involving public funds.

On the one hand, it is argued that lack of transparency in negotiated PPAs and other power contracts poses substantial problems, negatively impacting the potential accessibility of public and private sector participants. Investors in the power industry seeking to conduct due diligence in the contracting process often do not get any information on existing PPAs, which hampers their ability to make informed decisions regarding potential investments in the sector. The opacity problem of power contracts has profound consequences, as nondisclosure can lead to overpayment, financial losses, sectoral short-sightedness, systemic imbalances in delivery and demand, and governance risks.

On the other hand, in mature energy markets, the wealth of publicly available data on contracts and pricing helps drive competition and transparency, which is frequently lacking in emerging markets. This inhibits informed decision-making and exacerbates energy poverty in these markets.

Organisations such as Energy for Growth Hub have advocated for transparency in power contracts. Global standards and frameworks, such as the G20 Global Disclosure Standards and the World Bank’s Framework for Disclosure on Public-Private Contracts, offer valuable guidance to promote transparency in power contracts. These frameworks suggest cultivating a culture of transparency and open contracting in Power Purchase Agreements (PPAs) to encourage greater trust and efficiency in the power sector. These frameworks recommend the following strategic actions to ensure open contracting and greater transparency of power contracts:

The first is to establish minimum contract disclosure standards. By mandating the disclosure of fundamental information in all PPAs, stakeholders can gain clarity and insight into the terms and conditions of power agreements. This foundational transparency will demystify contracts and empower investors, developers, and policymakers to make more informed decisions.

The second is to commit to timely publication. Governments should commit to publishing PPAs within one year of financial close, particularly for projects that receive sovereign guarantees (if any) or development financing. This timely release of information will ensure that relevant parties have access to up-to-date details about project agreements.

The third is to enact the legal frameworks. Implementing laws that require the disclosure of PPAs will formalise the commitment to transparency. Legal mandates will create a structured information-sharing approach and ensure compliance with disclosure standards.

The fourth is to encourage global norms. Collaboration with international partners to establish global standards for PPA disclosure can promote unified approaches to transparency. Stakeholders can work towards consistent and effective practices across different regions by promoting international norms, frameworks, or initiatives.

Now, the Nigerian situation as an anticipated limitation. The pursuit of PPA transparency may be significantly impacted by Section 15 of the Freedom of Information Act, which presents anticipated limitations in disclosing crucial information. It is essential to understand how these limitations affect stakeholders and how they can be navigated. The Nigerian Freedom of Information (FOI) Act in Section 15 (1) a -c stipulates that: (1) A public institution may deny a request for information that includes: (a) Trade secrets and commercial or financial information obtained from a person or business where such information is proprietary, privileged, or confidential. Disclosure of this information may harm the interests of the third party unless the third party consents to its release; (b) Information whose disclosure could reasonably be expected to interfere with the contractual or other negotiations of a third party; and (c) Proposals and bids related to contracts, grants, or agreements, including information that could undermine procurement processes or give an unfair advantage to any party.

Section 15 of the Freedom of Information (FOI) appears to limit the disclosure of certain types of information, including PPAs. This section could potentially impact the advocacy for increased transparency in PPAs by restricting the release of contractual information that could be deemed sensitive or proprietary. Section 15 may impose restrictions that could hinder full transparency in PPA disclosures. Nigeria can work towards improving transparency in its contracting processes while navigating the constraints imposed by Section 15 of the FOI Act through these measures:

First, advocates can push for legislative amendments to the FOI Act to create specific exceptions for PPAs. This could include provisions that balance transparency with protecting sensitive commercial information. For instance, amendments could allow for redacted disclosures where proprietary details are safeguarded while providing essential contract terms.

Second, incorporate transparency clauses directly into PPP contracts. These clauses can specify what information will be disclosed and how it will be shared, ensuring that vital elements of the contract are available to the public while protecting sensitive data.

Third, develop best practices and guidelines for PPP transparency. These will be tailored to the Nigerian context and offer a framework for disclosing information that adheres to existing FOI restrictions while enhancing overall openness.

Fourth, invest in capacity building for both public and private sectors to improve understanding of the importance of transparency and the mechanics of effectiveand adequate disclosure. Training programms can help stakeholders navigate the requirements of the FOI Act while implementing robust transparency practices. And fifth, raise awareness about the importance of transparency in PPAs and the need for legislative reform. Public advocacy can drive change by highlighting the benefits of openness and fostering support for amendments to the FOI Act.

Although the FOI Act typically assigns the discretion to disclose information to the public sector, in the context of PPAs, the public sector alone cannot provide all necessary information or maintain the sole right to disclose information. The private sector should support PPA disclosure through proper collaboration and engagement, and contracts should include provisions on how and what information will be disclosed. Additionally, enhancing the capacity of both public and private sectors to understand the importance and mechanisms of disclosure and to collaborate effectively in disseminating information may be necessary.

With the emergence of state electricity markets in Nigeria, states should incorporate Power contract disclosure standards in their subnational market design to promote and encourage private investments. By examining successful models from subnational markets like the United States, stakeholders can identify best practices for implementing open contracting frameworks. Regulatory authorities, such as the Nigeria Electricity Regulatory Commission (NERC) and State Electricity Regulatory Commissions (SERCs), will enforce these standards by overseeing contract negotiations and ensuring compliance to mitigate risks associated with opaque practices.

In conclusion, implementing transparency initiatives for electricity contracts is a cost-effective and impactful solution to encourage private investments in the sector. Advocating for greater disclosure and standardisation in power sector agreements can enhance open and competitive markets, facilitating the energy sector’s growth. With clear disclosure standards, the energy sector can move toward a more transparent, efficient, and equitable future, benefiting everyone.
Ani is a legal consultant and energy sector specialist and wrote via [email protected]