The Power Sector Conundrum
I opened this Medium account some time ago but I just loved reading what people wrote and never bothered to write anything.
That changed when it became apparent that Nigerians required information on the near total blackout we have been facing. No one wants to address it and when they eventually attempt to, they barely scratch the surface of the actual issues. If you follow it closely, you can probably piece bits and pieces together but you will still be miles away from what the reality is.
Even though I have been in the sector for a while, I am not sure I know everything about this mess but I will attempt to share with you what I do know.
I hope it helps someone, somewhere.
Overview of The Nigerian Power Sector.
Today, Nigeria generates at best 5,200MW of power. In all honesty, that was during a peak in September 2016, and that number has dropped. The average power generated now is around 3,000MW. The entire country is plagued with blackouts and shortages; no economic analysis or breakdown is needed to know that the supply of power is nowhere close to the demand for it.
The power sector of any country must go through certain stages to become fully independent and driven by market forces.
A look at Figure 1 below gives you the stages of development the Power/Energy Sector of a country will pass through to become highly efficient.
We can all remember Stage 1 with NEPA and the constant madness and blackouts, strikes, crazy bills etc.
The move to PHCN was ‘Stage 2’ in name but was characterized by Stage 1 features and mentality.
To be fair, we are now in ‘Stage 3’ but are trying to shed a lot of the Stage 2 weight as the government is still struggling with the separation of its role as both regulator and player.
What does Stage 3 mean for us?
The issues and failures in the sector forced the Federal Government to enact the Electric Power Sector Reform Act of 2005, which called for unbundling the national power utility company into a series of 18 successor companies: six generation companies, 12 distribution companies covering all 36 Nigerian states, and a national power transmission company.
The act stipulated that ownership of these companies be granted to the Bureau of Public Enterprises (the privatization arm of the federal government) and the Ministry of Finance Incorporated. This unbundling paved the way for an ambitious privatization program to be carried out by the Bureau of Public Enterprises in Nigeria.
In 2007, the Bureau of Public Enterprises hired CPCS Transcom Limited, an international consulting firm based in Ottawa, Ontario, Canada, to provide advice about the best ways to move forward with the privatization of the country’s 11 distribution companies and the 6 generation companies. In 2010, CPCS was consulted again to provide advice on the Nigerian government’s privatization program.
On 30 September 2013, following the privatization process initiated by the Goodluck Jonathan regime, PHCN ceased to exist. In its stead, the Nigerian Electricity Regulatory Commission (NERC) which had been in existence since 2007, took its place as the sole regulator of the Power Sector. The independent regulatory agency, as provided in the Electric Power Sector Reform Act of 2005, was tasked with monitoring and regulating the Nigerian electricity industry, issuing licences to market participants, and ensuring compliance with market rules and operating guidelines.
On 1 November 2013, the new owners took possession of the power producing assets. Problems emerged when investors realised that poorly kept expense logs contained records of extensive debts and the state of the crumbling infrastructure was much worse than expected. Feedstock supply was insufficient, tariffs were too low and power theft and money collection problems were rampant. The fact that the national power transmission company remained in state control and faced its own very considerable infrastructural problems, further limited any short-term progress.
To handle the financial crisis in the sector and the debt liquidity issues, NERC set up a body called the Nigerian Bulk Electricity Trader (NBET), to handle payment to feedstock suppliers (gas producers) — Gencos and collect funds from the Discos’. Sounds easy, right? LOL
Take note of these three (3) Agencies here; Nigerian Electricity Regulatory Commission (NERC), Nigerian Bulk Electricity Trading Plc (NBET) & Transmission Company of Nigeria(TCN). They will play a major role in The Mess later.
Let’s go back to the BPE privatization process. There were 330 letters of interest, 220 bids received and 15 companies were selected as preferred bidders for at least 51% in these bodies; note that the TCN was note sold as the government wanted to retain control of ‘something’ and decided that Transmission was their best bet.
Most of these bids that won were suspicious as it felt like the government simply gave it to whoever had the highest amount and could give them the most upfront (let’s not also forget the fact that they were fronted by friends of the FG, when I say Nepo, you say ‘tism). I say this because I am privy to many bids that were competitive and at lower prices but IRR’s were already stretched thin. These companies had some of the best financial & legal advisors in the global sector advising them so I know the bids were good but they lost to people who bid close to $100m more than they did and we just knew that they were not serious. I digress but I work for a company that lost in the final rounds of two of the bids and decided to do a greenfield project; right now, we are doing better than a lot of the companies that bought the run-down plants.
It’s been 5 years since that process and many of the companies have not been able to revive any of the plants, do maintenance or upgrades. These companies have instead, continued to blame the government but trust me, they have no case here. The government has its failures and I will list them later but on this one, they are not to blame. They put up a business for sale, you bid at ridiculous prices not knowing what it entailed to manage those businesses and now you have hit the rocks and say the seller sold you bad goods. Haba!
Moving on, the process led to the sale of all the Discos and Gencos and left the Government in control of NERC, NBET and TCN. What do they do?
NERC
Nigerian Electricity Regulatory Commission (NERC) is an independent regulatory body with authority for the regulation of the electric power industry in Nigeria. NERC was formed in 2005 under the Obasanjo administration’s economic reform agenda through the Electric Power Sector Reform Act, 2005. It was created for formation and review of electricity tariffs, transparent policies regarding subsidies, promotion of policies that are efficient and environmentally friendly, and i forming and enforcing of standards in the creation and use of electricity in Nigeria. NERC was instituted primarily to regulate the tariff of Power Generating companies owned or controlled by the government, and any other generating company which has a license for power generation and transmission of energy, and distribution of electricity.
The Commission’s powers and duties are provided for in the EPSR Act 2005, and effectively ushered in the privatization of electric power services in Nigeria, unbundling of the defunct National Electricity Power Authority (NEPA)/Power Holding Company of Nigeria (PHCN). NERC’s primary duty is protecting the interests of consumers, issuing licenses to operators/investors, setting and reviewing electricity tariffs and where possible, promoting competition. The Commission’s main objective is to protect existing and future consumers’ interests in relation to electricity generated and conveyed by distribution or transmission systems. Consumers’ interests are their interests taken as a whole, including their interests in affordable tariffs and safe, reliable and available electricity supply, and the reduction of greenhouse gases to them.
As part of its wider responsibilities, NERC:
- Regulates the generation, transmission, distribution and marketing of electricity in Nigeria and with Nigeria;
- Licenses and inspects private and corporate electric power projects 10MW and above; where 1–10MW are issued Captive Licenses;
- Ensures the reliability of generation plants, high voltage transmission systems and the zonal distribution systems;
- Ensures occupational health and safety of persons involved with electricity in the whole sector.
- Monitors and investigates energy markets;
- Uses civil penalties and other means against energy organizations and individuals who violate NERC rules in the energy markets;
- Administers accounting and financial reporting regulations and conduct of regulated companies.
My Verdict: To be fair, they have done their job well, issued 128 licences to people and only 9 were used (keep in mind that they had to stop issuing licences briefly in 2015, to review those already issued and had to recall some as they were inactive). They recently issued a new regulation to encourage voluntary formation of Independent Electric Transmission Networks (IETNs) and Independent Electric Distribution Networks (IEDNs) to eliminate the potential for undue discrimination in access to the electric grid. However, since the generation capacity is low and the transmission not robust, NERC has developed regulations to push for the primary provision of supply, electric reliability and implementation of new regulations keeping in sight when the sector fully develops.
Right now, there is no CEO and commissioners — I do not know why the outgoing team has not been replaced. Their activities have also stalled, let’s hope that is rectified asap.
TCN
“Transmission Company of Nigeria (TCN) was incorporated in November 2005. TCN emerged from the defunct National Electric Power Authority (NEPA) as a product of the merger of the Transmission and Operations sectors on 1 April 2004.
Being one of the 18 unbundled Business Units under the Power Holding Company of Nigeria (PHCN), the company was issued a transmission License on 1 July 2006. TCN licensed activities include: electricity transmission, system operation and electricity trading which is ring fenced.”
Their job is rather straightforward — to transmit electricity i.e. the grid should be functional and rigid to wheel out power. As of today, the Grid can transmit a max of 7,200MW and that’s optimal; the figure is actually about 5,000MW still because of frequency issues and a dilapidated structure. TCN received $4bn to upgrade in May 2014, and I was excited but that money seems to have disappeared and no questions seem to have been asked.
This led the present admin to not renew the contract of Manitoba Hydro, a company which had been awarded the contract to manage TCN. A new CEO was appointed on the 7th of February 2017, and is an Exec from African Finance Development Bank (AFDB). This has been challenged by Unions in the sector because they feel the FG is rewarding the AFDB for the loan they received. We are all waiting to see how that plays out.
My Verdict: Shambolic. Don’t know what role they are playing and the place is run like a regular civil service joint. Needs revamping and reorientation ASAP.
NBET
Always save the best (or worst) for last.
The Nigerian Bulk Electricity Trading Plc (NBET) is a Federal Government of Nigeria (FGN) [1] owned public liability company. The Bureau of Public Enterprises and Ministry of Finance Incorporated (20%) are its two shareholders of record with 80% and 20% stakes respectively.
In line with the “Roadmap to Power Sector Reform” of August 2010, and in fulfilment of the requirements of EPSRA, the Nigerian Bulk Electricity Trading PLC (NBET) aka the Bulk Trader, was incorporated on 29 July 2010, as the SPV for carrying out (under license from NERC) the bulk purchase and resale function contemplated by the EPSRA. As such, NBET has been set up to “engage in the purchase and resale of electric power and ancillary services from independent power producers and from the successor generation companies.” In simple terms, NBET buys power from the Gencos and sells to the Discos, which supply you and me. They then receive payment from the Discos and pay the Gencos and Gas Suppliers.
NBET purchases electricity from the generating companies through Power Purchase Agreements (PPAs) and sells to the distribution companies through Vesting Contracts. The Generating companies include the recently privatized PHCN successor companies, the Niger Delta Power Holding Companies (NIPPs), the already existing Independent Power Producers (IPPs) and the new IPPs.
The objectives of the organisation include;
· To put in place an effective transaction environment which minimizes risk and allocates it fairly to the parties best able to manage it
· To implement a procurement process that is transparent and will result in the economic procurement of needed power
· To have all existing and new power capacity under contract by 2016, although the commercial operation date when this capacity comes on line may be later
· To ensure efficient settlement in the short term until this function is subsumed under the Market Operator
· To become sustaining as soon as practical thereby minimizing the cost to the FGN
· To be ready to novate contracts and wind up as soon as the suppliers are ready to take on their own procurement
· To enter contracts that are well structured and managed in a manner that precludes recourse to any credit guarantee instrument
It has a mandate to do the following;
· To put in place an effective transaction environment which minimizes risk and allocates it fairly to the parties best able to manage it.
· To implement a procurement process that is transparent and will result in the economic procurement of needed power.
· To novate contracts and wind up as soon as the DISCOs are ready to take on their own procurement.
My Verdict: NBET has done just okay. Developed a PPA for Gas and Solar and quite crucially closed the first Independent Power Project (Azura Edo IPP) in 2015. A few solar projects will close in the coming months as well so fair play to them.
They have recently changed their management and there is a bit of an issue with the tariff structure, especially for Gas Powered plants but I believe this will be sorted soon. They have a licence for 10 years and were supposed to have reached a certain point so that they could be phased out but the whole sector has not developed quickly enough.As such, I am certain that their licence will be renewed for another 5 years in 2021. After that, your guess is as good as mine. One to look out for anyways.
Now that we are clear on the players, we can go into the actual issues.
The NIPP Plants
There was a clamour in the mid noughties that Nigeria was not generating enough. Obasanjo decided to fix it and commissioned the NDPHC to build 10 Power plants to bridge the gap.
This was a good plan on paper but the team that was assembled was — sorry to say — full of Dildos and they were given some insane funds to build these plants. They, however, did not have a holistic mindset and went ahead to build just Power Plants, giving no thought to Gas Infrastructure, Evacuation points and the capital investments needed to run the plants for a few years.
It is hilarious that 2 of the 10 plants do not even have gas pipelines to feed the turbines. One of them had a big commissioning ceremony aired live on National TV and they used regular generators to power all the devices and microphones that the then minister and dignitaries used to address the stakeholders. OBJ, wehdone sir.
Some of them are situated so far from TCN infrastructure that they can’t even evacuate the power they will generate if they had gas.
To put this mildly, there is 10,000MW of Power sitting in some ridiculous locations in the country, some completed, others nearing completion & others stalled. All with either infrastructure or commercial related issues. NDPHC has recently been reconstituted to attempt to fix it because to be honest, they were good projects and the issues holding them back are quite minor. These are new plants with a good project life ahead of them.
Why do Nigerians Not Have Light?
This question can have many answers but the simplest way to put this is that we don’t generate enough. The reason for this is what we can all argue on for eternity but the long and short of it is that we don’t generate enough. The average generated today is 2,200MW.
Rule of thumb is that you require 1,000MW to meet the needs of 1million people and with our population anywhere between 180–200m, we need 180,000 to 200,00MW.
Going by the above, we are only meeting at best 1% of our needs. That’s laughable. Factories in China require roughly the same amount to work optimally yet we, as an entire country, must share this.
The reasons for this are many but let me list as many as I know to be fact;
i. Political Will: To be honest, this is the biggest issue we face. For a long time, it’s been well known that some elements of our government profit from the situation of the dilapidated power infrastructure. We have even been told that they are the major sponsors of the companies that won the bids and are happy to shout about the system but not do much about it if they keep getting paid. Whatever the reason, the FG for the last 18 years has paid lip service to this key industry and are the major reason why we are here.
ii. Gas Shortage: We rely so much on gas to power majority of our plants and the gas pipeline infrastructure is so limited that any leakage or damage along the chain means power plants must shut down. The biggest factor contributing to this is the agitation of the youth in the Niger Delta region who resort to blowing up pipelines at will. I can confirm that the black outs that became rampant between November 2016 & January 2017 were because of Gencos not getting any gas when Escravos and other adjoin pipelines were vandalised. It’s easy to blame the Gencos and Discos but there is little they can do when they cannot operate turbines and the FG chooses to treat the issue with levity.
iii. Grid Infrastructure: The Nigerian grid, as I said earlier, can wheel about 7,200MW on a good day. It has vibrating and frequency issues and when any of this varies from the Gencos, the grid collapses. In fact, the Grid is very comfortable at about 3,500MW or less and gets unstable as that increases. This is not unexpected as most of the lines and busbars have been untouched since the 70s and 80s. Madness!
iv. Tariff: Nigerians do not want to hear this but you can’t get good power supply without paying for it. The tariff right now is not enough and is discouraging investors to be honest. I wish that everyone gets the prepaid meters and pays for only what they are delivered; this will improve collection (Fig 2) and get the value chain moving along but the Discos like the estimated billing and ‘settlements’ they get so they have intentionally stalled this. NERC did its job and did so but the Unions fought and g0t the courts to halt a process that was legitimate. I was so disappointed by it but let’s see what the ruling will be.
v. Credit Liquidity: Many of the major players borrowed money in dollars, years ago, for some at N160/N197 to $1. Now the value of the Naira to the Dollar has more than doubled, yet the tariff has not been adjusted for this. Most of them are having to repay these loans while they still earn their revenue in Naira. Do the math, it’s difficult to stay afloat much less run at these sorts of economic values.
vi. Debt & Investment: There is a debt of about $6bn in the sector being owed Gencos and Discos. NBET, as of today, only pays about 23% of the amount it is invoiced by Gencos & Gas suppliers so they have amassed a further $3bn debt. We have not yet discussed about $20bn that is required for investments in terms of Infrastructure for Gas & Transmission as well as relief for Gencos and Discos. The entire value chain is running at a loss today.
The Private Investors & IPP Stage
Right now, only one Independent Power Plant developer has successfully seen the project attain financial close and that is alarming. The reasons for this are many but the biggest issues are funding & Government related. This is further exasperated by the gestation period. Right Now, Nigeria has one of the longest gestation periods for developing a power project (this is the 5th year of mine and we still have not closed). For a country that is in such dire need for Power Supply, that’s disastrous.
The tariff has meant that lenders don’t even want to entertain many Power Developers because there is simply no gain for them and simply put, NO FUNDING = NO PLANTS; NO PLANTS = NO POWER. How much longer can this continue? How the system has not collapsed is a miracle but I won’t want it to, neither should any stakeholder so the issues that hinder private & equity investors have to be sorted out urgently.
Way Forward
The World Bank, in the last few weeks, has stepped in specially to solve the liquidity issues and in the next few weeks the results of their engagement with the FG will be made public. I cannot share for now but it is quite exciting to be honest and in a few years, we could very well be at stage 4.
All we should do is look at Turkey which was at Stage 1 in 2003, and today is almost at Stage 4. The reform and transformation of their power sector has been remarkable and they are on track to be a firm Stage 5 by 2023.
The tariff needs to go up with preconditions for Discos which include metering of ALL households and industries/factories as well as the utilization of bilateral regulations(NERC Issued) to source for power from individual producers.
The grid must be split into regions and a concession given to reputable firms to manage; the TCN is as useless as any Governmental agency that exists. Make the Discos pay their fair share in developing the grid under their area of distribution as a pass-through amount in the tariff and in 7–10 years each region will have standard grids.
Gas is an issue I stayed away from in this piece because it’s so cumbersome and expansive to deal with. First, there are too many bodies in charge of gas resources; NGMC, NGPTC, NDPC, NNPC, GACN, DPR, IOC’s, Independents etc. It took me almost 3 months of daily meetings to figure out who to go to, to get what I needed for my plants and still, the place is a mess. In my office, we talk about the FG getting a Gas Czar who will get all the agencies in line including scrapping or merging where possible.
It will be unfair to say that Fashola hasn’t done well. To we industry people, he has and he has also made a pathway to liberation clear. He is solely why the World Bank feels comfortable coming back to the table to discuss plans that have been on the back burner for years because they felt previous Ministers were not truly intent on making the system and market find its level. The President has also had a hands-off approach and given the World Bank the necessary backing an approval to go ahead with the fix.
For this, a 12-man team was set up which includes the World Bank, FG, NERC, NBET and other stake holders. I have broken my rule of not sharing, right? But yeah, they have been burning the midnight candle for a few weeks now and our fingers remain crossed that we will reach an agreement.
Before I blab, I have to end this now. I can answer questions directly and will continue to write about this as long as I can find the power to. LOL, ‘the power to’, I’m funny.
Ciao.
