Nigeria’s Electricity Transmission Grid Requires Reform

PHCN-SUBSTATION-AT-MAKERI

The objectives of Nigeria’s electricity sector reform is to promote a private sector led market, ramp up capacity, seek efficiency and ultimately, secure improved delivery of power to consumers. The first objective has been partially met with the handover of PHCN successor companies to private investors on November 1, 2013 but the other objectives appear to be on a reverse drive. Aside from gas shortage, the vulnerability of  the transmission system is a cause for concern. Agreed, asset takeover will not automatically translate to uninterrupted power supply as there are binding constraints straddling across the entire value chain that require time to fix; but to say that the current power situation in the country has dampened the expectations of consumers is a mild assessment of the malaise.

Without discounting the role of upstream and downstream players in the electricity value chain, the immediate gains achieved by some of the privatised power plants after handover and available capacity from some Nigerian Independent Power Plants (NIPPs) projects could have improved power supply marginally, if not significantly, were there improvements in grid efficiency and capacity to evacuate stranded power. Current challenges notwithstanding, it is hardly disputable that the sector will improve with time. However, critical and difficult decisions have to be made to further deepen the ongoing reforms, including the ownership, control and management of the transmission grid. The current structure in the transmission segment is suspect on its ability to effectively fulfil its mandate in the value chain.

Electricity sector reform sequencing, pacing and scope vary across different countries. A country’s approach depends on its peculiar context, concerns and choices with unique challenges. But the experiences of countries that have travelled that route could serve as a navigational tool from which useful lessons are drawn to aid in dodging dangerous potholes and negotiating bends in the journey towards shaping the electricity market of other countries.

What lessons can we learn from countries that reformed their electricity sector and how can we adapt these lessons to suit our unique circumstances and constraints? When the United Kingdom (UK) privatised its electricity sector in 1990, the electricity transmission grid, known as the National Grid, was transferred to the twelve (12) Regional Electricity Companies (RECs) under common ownership. The RECs have since divested and today, the UK National Grid is listed on the London Stock Exchange, expanded to the US and also diversified into gas distribution.

India presents a different evolutionary context from that of the UK. Prior to the recent integration of the entire country into one transmission network, under Power Grid Corporation of India Limited, India operated fragmented electricity transmission, structured along regional and state lines. Power Grid Corporation of India is 57.9% owned by the government while the balance of 42.1% is held by institutional and non-institutional investors. ESKOM of South Africa on the other hand, a vertically integrated electricity company, is 100% owned by the government.

Should Nigeria necessarily replicate the UK model? Not exactly but can be tweaked to suit our peculiar experience. Or is partial privatisation the way forward like India or should we continue with the status quo where government retains ownership while grid management is concessioned to the private sector? If we choose to continue with the existing arrangement, it is important the current short term concession contract is restructured into a long term agreement (to be reviewed periodically against performance benchmarks), embedded with full funding responsibility on the concessionaire, assumption of transmission grid loss by the concessionaire and design appropriate pricing mechanism to incentivise investment, if current tariff structure is not attractive enough. This way, critical stakeholders loop would have been enlarged to capture one additional player.

To determine who the critical stakeholders are in the context of this discussion, simply map the electricity value chain, as is, and ask a pertinent question – “what do the players in the value chain (gas producers and suppliers, gencos, government as owners of the grid, grid concessionaire and discos) stand to loose should the transmission grid fail?” Clearly, government and the transmission grid concessionaire have smaller stakes in the pie at the moment, comparatively.

The preferred alternative to the proposed concession is an ownership structure totally devoid of the political process – a complete transfer of ownership from the government to the private sector. Without going into details, the government may consider ceding the transmission grid to an entity under joint ownership of existing discos and gencos (something similar to Nigerian Interbank Settlement Scheme – NIBSS). If we agree that above all, the gencos and discos are the two most critical stakeholders in the value chain and that there is a compelling commercial incentive for these two players to ensure reliability of the grid, then it is not difficult to see why the model is likely to work.

The joint ownership model may be challenged on a number of points – grid transparency, open access, the role of future electricity generation companies in the transmission entity, ability of the proposed transmission entity to finance expansion in view of the huge acquisition debt burden of the new investors in privatised power assets and considerable financing requirement for refurbishment and expansion of acquired assets.  Legislation and purposeful regulatory agility will be required to address some of these concerns. In addition to the obvious advantage of more optimal investment decisions by the private entity, access to funds would be less a difficult task, if sourced on the back of a guarantee from and/or cashflow of all the shareholders in the transmission entity in addition to the cashflow accruable to the transmission entity from use of system charge.

But what is wrong with government ownership of transmission infrastructure in Nigeria? After all, ESKOM of South Africa, a vertically integrated electricity company is wholly owned by the government. It is true that public service motivation sometimes requires that some basic infrastructure and services are owned or provided by the government to avoid “tragedy of the commons” and predatory capitalism. In fact, cases also abound of places where government owned businesses, run purely on commercial basis, have thrived just like their private sector counterparts or even better. A good example of this in the electricity sector is Electricite de France (EDF Group) of France, 84.49% owned by the French Government as at December 31, 2013), an integrated company that dots global electricity (and gas) landscape with investments across six continents.

Conceptually therefore, there is nothing wrong with state ownership of the grid. But contextually, no, not here– existential facts point to one depressing conclusion – in Nigeria, government ownership of enterprises is the tortuous road to Golgotha. Public service and national security argument in Nigeria is littered with ash-coated and weather-beaten images of businesses that will ordinarily thrive elsewhere – NITEL, Nigerian Airways, Ajaokuta Steel Rolling Mill, crude oil refineries, Nigerian Sugar Company, NEPA to mention but a few.

In any country where the most attractive form of “business” is not business, then business ownership is better left in the hands of the private sector. Curtailing the excesses of the private sector is achievable with responsive regulation. On a final note, in the event that no investor is interested in a long term concession with responsibilities for funding of the transmission grid, this write-up should be construed as an offer to the government, seriously.

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