How Buhari Can Fix Electricity

Buhari-2015-BN-3

Chineme Okafor writes that to meet the yearnings of Nigerians for sustainable power supply, the incoming government of Muhammadu Buhari, must build on existing reforms in Nigeria’s electricity industry to ensure its quick revitalisation

In adopting electricity privatisation, the federal government perhaps viewed it as the best way to solve Nigeria’s long running electricity problem and ensure sustainable power supply.

In taking up the option, managers of Nigeria’s economy considered privatisation as a willing tool that could be used to upgrade the country’s capacity to generate more electricity, distribute adequate power to homes and and businesses and further push the frontiers of inclusive socio-economic development in the country.

Nigeria in this regard cannot be said to be an early bird in power systems privatisation, especially when it is considered that privatisation as an economic concept has in past years gained grounds and swept across other economies of the world, but it can lay claim to have concluded one of the most comprehensive electricity privatisation exercise so far in the history of electricity privatisation, having done so in 2013.

In completing the process, the country has primed the power sector, which had over the years remained chronically undercapitalised and unproductive from government’s control, to become an open choice market for immediate and future investments in capacity growth.

From government’s uneconomical management of the country’s power systems, it has become rather difficult to get the best of value from the sector, and these have consequently ensured that constant supply shortages, deteriorating equipment, and high system losses were always recorded to make electricity service the worst offered service by any government managed utility service provider in the country.

 

Unfulfilled Promises

As inadvertently preached by the government prior to conclusion of the power privatisation process, that the gains of privatising the sector would become palpable almost immediately, ordinary Nigerians who had grown weary of poor electricity services had hoped that the waiting for improved electricity services was almost over especially with the government’s promises.

Indeed, the government had unwisely compared power privatisation with that of telecommunication, which it had initiated and concluded in 1999.

Experts had warned that the comparison of power privatisation with that of telecommunication was unjustifiable and could be likened to comparing apples with oranges.  The government had hoped that starting with its immediate harvest of the low-hanging fruits, which include quick recovery of unutilised installed generation capacities and deployment of generation, distribution and transmission assets of the National Integrated Power Projects (NIPPs) to augment existing assets of PHCN, that the exercise will immediately bring the desired deliverables.

It was however not long that such excitements, which were drawn by the dawn of the electricity privatisation in 2013 soon began to dissipate with hitherto unforeseen challenges that threatened to derail operations of the new owners of the power systems.

 

Overwhelming challenges

Within a very short period of its operation, the privatised electricity sector began to show signs of unexpected regression rather than progression as expected.

Crucial issues that were thought to have been taken care of in the early stages as conditions precedent to the conclusion of the exercise were found to have resurfaced and eventually hurt the progress of the exercise as it were.

As discovered, reports obtained in the early stages indicated that stability in gas supply to generation plants and chronic market illiquidity became the major issues that continued to impact on the new electricity market.

While not trending with diverse debates that seemed to suggest that the market maintained a healthy outlook, THISDAY in July 2014 obtained an expert report on the status of the market from the Nigeria Infrastructure Advisory Facility (NIAF).

The NIAF report, which proved to be true afterwards, showed that the market was indeed contending with some financial risks and which the Nigerian Electricity Regulatory Commission (NERC) agreed to with its acceptance of a N213 billion hybrid financial package for the market from the Central Bank of Nigeria (CBN).

The report succinctly stated that there were real risks of payment defaults and precipitous loss of confidence, all which could lead to an unexpected collapse of the electricity market.

It explained that the financial risks were real and proximate, and recommended possible support options that could help buoy the market into the Transitional Electricity Market (TEM)-a contract-based trading regime.

While reflecting the views that had been expressed by other experts in the industry, the NIAF report clearly noted that certain situations such as low generation profile in the upstream aspect of the sector molded up to become attendant serious risks to banks that had financed purchase of power assets in the liberalisation programme, and as such chronic illiquidity now appears to be the central challenge of the sector.

From its analysis, only about half of power generated in the sector is paid for, thus leading to chronic monthly shortfalls between generators’ bills for wholesale energy to distribution companies and actual payments.

Monthly receipts, it added, were only about half of monthly total billings for bulk power supply which is approximately N24 billion. The report advocated that improving payment performance was crucially important to the viability and commercial sustainability of the privatised market.

Going further on the finances of the market, the report added that at present rates of inadequate revenue collection, it could take up to five years to eradicate the recurring monthly shortfall and that cumulative payment arrears would amount to approximately $4 billion.

“It is far from clear that all companies in the sector can continue to self-fund a significant proportion of their operations over such an extended period. Significant losses are being registered by the many banks funding the power sector. Without action, this trend seems likely to worsen,” the report said.

In its consideration of the broader effects of the development to the market, the report indicated that delay in start of a contract-based market beyond 2014 could lead to the market’s loss of gained momentum and that the 2015 general elections with the subsequent re-establishment of government could also impact heavily on the progress of the market.

“This alone, risks serious ebbing of investor confidence. The accruing losses are starting to throttle the ability of generation companies to meet their own funding requirements and pay for fuel.

This will reduce further the amount of bulk supply available to sell to distribution companies; creating the beginnings of a vicious, downward spiral,” posited the NIAF report.

In addition, instances of significant and sustained drop in gas supply to generation companies, thus reducing available generated power for distribution, and inadequate metering of consumers by the electricity distribution companies, all added to suggest that the privatisation of Nigeria’s power systems was hastily planned with minimal consideration to some germane factors.

 

Moving ahead with best remedies

While it is not cast in stone that Nigeria must go the privatisation option in its desire to upgrade its power systems, it is however relevant to consider the outcomes of the options that had been used in the past.

Before the unbundling and sale of the generation and distribution assets that were heaved off the defunct PHCN, approximately 47,000 audited workers of the utility produced and distributed just about 2800 megawatts (MW) of electricity to about 40 per cent of Nigeria’s over 100 million population including industries.

Generation companies such as Kainji, Ughelli, and Afam amongst others had seldom lived up to their billings and often had issues with capacity upgrade. As a matter of fact, public funds that were budgeted for repairs and upgrade were never seen to match up to requirement and sometimes never applied to the purpose they were approved for.

But today, capacity upgrades have been undertaken in most of the generation companies such as Egbin and Transcorp Ughelli. Likewise, distribution companies are seen making efforts to improve on their distribution systems and services to consumers.

Besides, the huge financial outlay required to upgrade Nigeria’s power systems cannot easily come from the government purse, especially with other contending issues like standard health care delivery, education and other key infrastructure projects. The private sector with its ingenious mode of operation still has a lot of role to play in the country’s power sector.

While some of the challenges that the NIAF report highlighted have been taken care to avert the risks of prolonged market stagnation and or collapse, through the initiation of a hybrid financial package, parts of which include contingent arrangements for liquidity support to distressed companies, a fast-track pathway to re-finance distressed companies, phased tariff adjustments and scrutiny of distribution companies’ finances, other aspects of the challenges have yet to gain considerable attention and must be addressed by the incoming government.

In as much as there are extant criticisms of the CBN’s financial package for the sector, it is however necessary that as advised by NIAF, the incoming government should be firm in ensuring that the countries fiscal and or monetary authorities stick to established guidelines in administering the facility to avoid risks of moral hazards.

The incoming government must resist the possible temptation of running afoul the real intent of the CBN facility, which should remain a loan, not grant or subsidy.

Against the risk of political favour, companies’ eligibility in the CBN facility should remain subject to agreement on their financial condition and be pegged to an agreed trajectory of improving retail collections, hence improving ability to pay for bulk power.

Experts’ views

Speaking more on what the incoming government should do to grow the value that privatisation could bring to bear in Nigeria’s power sector, Chairman of the Society of Exploration Geophysicists (SEG) Nigeria, Prof. Charles Ofoegbu told THISDAY that the mistake of building power plants without making adequate provisions for fuel supply, which was committed by the outgoing government must be addressed by the incoming government.

Ofoegbu in his assessment of the power privatisation explained that human and institutional mistakes were committed in the process, adding that the new government must identify and correct these mistakes for the deliverables to come forth.

“We keep commissioning generating power plants. I had warned that the power supply will diminish and that we will find out that we are not going to make progress, that we will rather be e dropping.

We are getting shorter and shorter hours of power supply, meanwhile, we are commissioning many more power plants.

The reason is that we are placing the cart before the horse. We did not implement an adequate gas master plan,” Ofoegbu said.

He also explained: “The gas master plan we have has not being fully implemented and you are beginning to put in place generating plants on a master plan that is not implemented.”

“Gas supply is not there. We don’t have adequate gas supply. There are some power stations that we have in this country that don’t have pipes taking gas to. Why should that be the case? Why should we not plan? Why should we not do the first thing first?”

Ofoegbu further tasked the incoming government to review the country’s gas production and supply arrangements to first ensure that domestic requirements are first met before export is undertaken.

While advocating for greater inter-agency partnership between relevant agencies of government in the power sector, he added that: “Gas from Nigeria made people to say power does not fail in Ghana. It was only until recently that they started having shortfall in gas as a result of our supply constraint.

As a country, we also need to ask ourselves questions about our Father Christmas approach to our neighbours.  We need to ask ourselves moral questions. We have short falls in domestic gas supply, what business do we have pumping gas to Ghana?”

On the other hand, the Chairman of NERC, Dr. Sam Amadi noted that the incoming government can advance the progress in the power sector if it considers it fit to review the policy document bearing the reform process, to amongst other objectives, make amends where necessary and taking note of lessons and mistakes made in the process.

Amadi explained that such issues like electricity theft, new technologies in power systems, off-grid and smart alternative generation sources which were not captured in the policy document, could be introduced to foster greater value in the sector.

On his part, global energy consultant, Dan Kunle who asked the incoming government to leverage on the electricity reform programme of the outgoing government to put Nigeria at the helm of the Economic Community of West African States (ECOWAS) regional market, stated that inroads made by the outgoing government to bring on board newer sources of generation like coal into the generation mix should be sustained by the incoming government.

Kunle explained that the new government can further Nigeria’s control of the ECOWAS market with improved commitment to the power sector and leverage further to become a regional economic hub for west Africa and other parts of the African continent.

He said while specifically calling for increased government commitment to hydro and coal power generation that: “There is really no need for the incoming government to discard what has gone into the power sector reform through the efforts of the outgoing government.

What I expect from the incoming government is to reinforce existing commitment to the investing communities, that way, investors will be assured that the reform exercise will continue and that government is backing same.”

“The coal sector should be opened up, Mambilla hydro project must be pursued with vigor going forward. Government should flag off the Mambilla project and invite the Chinese who have all the money to invest in this project,” Kunle added, saying that Nigeria should not tarry any more in developing her coal sector with which it can further develop her steel industry.

Also, in his admonition to and expectation from the incoming government, the Vice Chairman of Shiroro Power, Olubunmi Peters stated at the April edition of the meeting of operators in the sector with NERC, that Nigeria has evolved so much that the government should be encouraged to add value and not otherwise to the ongoing privatisation process.

“Nigeria today has evolved and I think whether it is from the government or us, we are hoping that when the government comes on board, they will be encouraged to add value to what is on ground and we all have a role to play in this,” Olubunmi said.

Managing Director of Ikeja Electricity Distribution Company (IKEDC), Abiodun Ajifowobaje also noted his expectation when he said: “One of the problems we have in this country is continuity and in the case of power, it is not what you think you can get right even within the term of a president.

He said: “My advice to the incoming government is look at where we are, where we want to be and where we have challenges and come up with ideas that can move the power sector forward.”

Consumers who bear the brunt of power shortages even in the face of constant extortion for services that are seldom delivered, also expects that the government will tackle instances of vandalism of critical assets like gas pipelines that transmit gas to power stations to ensure improvement in power generation as well as impress it on the distribution companies to improve on their digital metering of consumption as against estimated billing which has been found to be unfair.

ENERGY INTERVIEW

CAPTION: Amadi
Amadi: New Tariff Process Affords Consumers’ Rights Good Headway

Chairman of the Nigerian Electricity Regulatory Commission, Dr. Sam Amadi told Chineme Okafor that the joint tariff review process involving electricity consumers and distribution companies will foster good faith in interactions on business and service delivery between both parties. Excerpts:

Could you explain the perspective that drove NERC’s recent approval of joint tariff review process between Discos and electricity consumers?
Let us understand one thing, the new initiative or approach to tariff design in this sector is not totally new. In most jurisdiction in the world, it is the Discos that prepare their bill and even in the NERC here but then they don’t always do a robust wok on the process but based on that we try to help design a tariff that is fair and affordable to all parties involved.

What is happening here is that we are saying to the Discos, take charge of your network, look at your system and then come to us and tell us what they think is the cost at which they need to provide efficient electricity service to their consumers.
Does that squarely and unfairly put them in charge of tariff setting?
No, they will not manufacture figures from the air because the Multi Year Tariff Order (MYTO) has already benchmarked certain indices such as the cost of capital, cost of gas, inflation rate, foreign exchange rate, and return on investment based on comparative analysis and there are technical and financial benchmarks which the MYTO has. Now we ask them to use this benchmark and go and prepare their tariffs.

We also know what should be the standard operational and maintenance costs for distributing certain quantity of power and so if an allocation for power is 200MW for example, there is a usual CAPEX ratio for that and so they have to go and prepare their revenue requirement for distributing such allocation putting into consideration some underlying conditions such as quality of service.

So, the good thing is that they know more about their costs and locations of savings and will want to make their costs as low as possible.

We now said that instead of reporting to us, they should first go to the consumers and explain to them about the tariff because when they do their cost profile, they also have to prepare how they will recover it as there are different classes of consumers; they now design their tariff and show us how they will recover according to these classes of the consumers.
How vital is their consultation with consumers in this process?
They now have to consult with the consumers on this but the consultation process is not a consensus process and does not mean that at the end of the day, both parties will agree but it is that it gives the consumers an opportunity to deny, reject or contradict what they are proposing.

It benefits us because we are pushing the Discos to understand that actually these tariffs that they are designing is not for NERC but consumers who will pay for it and they should be establishing greater relationship with them, they have to show good faith and legitimacy so that consumers will know that they are always there for them.

It will also help drive consumer power as I have always emphasised that a comprehensive regulatory framework must have strong consumer power just like in advanced countries where there is always strong consumer advocacy groups which strengthen consumer engagements and advocacy.

In today’s economy, market power goes with political power and operators who have access to market power can buy voice because they have access to consultant who can prepare special reports to justify their requests, we also think that consumers should be able to develop that capacity and share information.
Is the initial consultation an end in itself and that NERC approves whatever it gets from there?
No, when they have gone through that process, those reports are sent to NERC to study further and approve their tariff if it is certified to have met the conditions laid out and what that means is that if they consider the need for a review of the tariff as allowed in the framework, then they can come up to go through that process first, otherwise, they can go on with what they have.

That however does not mean that we are bound to approve any tariff at all but that they have an opportunity to present any evidence for review and in consultation with consumers.
Recent remarks by the incoming government suggest that the privatisation exercise could be reviewed, what message does that send to the market?
Everything is possible to be undone. Life itself can be undone but the point is that there are two basic things. The government that comes into power has the responsibility for making policy; they can change or improve existing policies and they can also more vigorously pursue existing policy.

To undo privatisation means two things: it could mean using the existing framework to rewind it, for example, the Discos who sign agreements to buy the assets, there are clauses in their agreement upon which they can pull out if they are no longer satisfied with the prevailing circumstance and from a legal point of view, there are due processes of undoing such process.

The other one is extra-legal, some kind of nationalisation which is still theoretically possible in today’s world when government nationalise privately owned assets and should that be a right policy is a different thing but if you are talking about can they undo, there is no impossibility with government through due process or extra-legal actions in reversing any policy or decision but then consequences usually flow and some of them can be financial, legal and very fundamental in terms of interest to economic growth and social welfare of the country.

So, what do you make of such remarks?
I think from my understanding of the two political parties, their policies are all in line with the fundamental framework of the National Electric Power Policy and that policy was issued in 2000 although by a PDP government but that policy is clearly premised on privatisation, on securing financial viability of the sector as a way of improving power supply by sustaining investment and improving reliability.

I don’t see what magic anybody can do without following through the main focus of the National Electric Power Policy. It is a sound policy that needs to be reviewed and I totally think that it needs to be reviewed.

What will you suggest should be reviewed in the policy document?
The review will mean that there are certain things that we didn’t factor in, for instance, articulation of smart grid into the policy and from 2000 till today is about a decade and so there are new insights that we have gained about how privatisation works, we have also learnt some things about the market failures and government failures which we didn’t know before now and can be useful going forward, we have seen how institutions work or fail to work.

What this means therefore is that there is nothing wrong in government reviewing the privatisation process and the reform process in terms of going back to the founding document and doing some forensics to ask ourselves about what processes that are yet to be completed and what we have learnt from those that have been completed, how do we make those processes better. I think it is all about leaning backwards and looking forward.

So, privatisation of the power systems is not really the problem?
For me, it is not about privatisation because it is not the problem, we are in a new modern economic world where we think about the straight-jacket and one of the new straight-jackets is privatisation or public private partnership depending on how you choose to call and which explains that government may not be the sole producers of public goods and services and in many cases, should not produce goods and services directly.

But there are still residues of socialist and welfarist economic thinking where some people think that no matter how, government should still be in charge of producing public goods and services but every government is at liberty to go through the literature and make up its mind on what should be its dominant economic philosophy and once that philosophy is accepted it has a ripple effect on other policy areas especially in something as significant as power.

But have there been attempts to review this policy by the outgoing government?
I think that we have been half-hearted at times not to review in the past and with or without, any attempt on such should proceed from the policy framework as a whole and not just in bits and pieces which is what the government did not want.

For example, discussions on something as significant as losses, some of them are commercial involving theft and vandalism have come up and parts of the argument put up would be do we need a new law on electricity theft and not just on that but on vandalism of public utilities, do you need to create a special tribunal or streamline with existing laws and or speed up the process of prosecution.

In tackling this for example, you have to prioritise and commit to ending electricity theft either through meter bypass or acts of vandalism against electricity installations and take them out from the normal rubrics of the criminal code or prosecution and create a new set of laws. There are laws in our criminal code to deal with this but we might need to escalate it to a special kind of law and that is one thing this incoming government can do.

What other issues can the incoming government can pursue to add value to the power reforms?
Another issue that can be pursued is for example how to deal with state investments in power firms. Knowing that this reform is based on regional monopoly of distribution assets, some people are saying that we should break the distribution companies further and separate the distribution and retail market but our view is that it is conditioned on adequate supply and you cannot separate such in a market where you are selling averagely less than 4000MW and so there is not enough supply to create choice.

Some of these are some the outstanding issues in the sector that you can begin to think about as well as how much role and financial commitment should be moving towards renewable energy sources.

There are many high-end policy choices that the new government can sit down to draw a road map on and that can require retooling the policy document. If you ask me, there is nothing that stops the incoming government from putting its head together and carrying out a review that will give it a real sense of what is working and needs to be retooled in the sector.
What conversation should the government initiate on gas to power?
I had championed in this sector from the first day I came that there is disconnect between gas and power. The new government with better social capital and political will can look at that issue again to consider an electricity market where the basic feedstock is gas and its regulation is not within the control of the electricity sector.

Even if they still want to keep two regulatory frameworks different instead of bringing it together like in the UK and US, can it create sufficient institutional and legal framework for convergence. My view has always been that we should be converging gas and electricity within the same regulatory track for efficiency and coordination and that is what the incoming government can think about.

What about transmission, are there better alternatives that can be explored?
The government can think about the transmission in that should it concession, privatise or even have regional grids with different transmission service providers and with attendant risks and benefits. These are issues that the new government can review, take a position and probably change a lot in the sector.

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