A Review of the Nigerian Energy Industry

Next steps for power sector reform

Electric-power-plant17 February 2014, Lagos – Finally the structure of electricity supply in Nigeria has changed. In one day, the country moved from public ownership of most electricity utilities to almost complete private sector ownership of the utilities.

By the time the Nigerian Integrated Power Plants (NIPPs) are sold to preferred private sector bidders late this year, it would be a complete restructuring of the electricity industry from a vertically integrated monopoly industry to a privatised competitive electricity market. At that stage, the only asset that would be fully owned by government would be the Transmission Company of Nigeria (TCN). Even that would be privately managed.

The just concluded privatisation is historic not just because it is the largest single sale of utilities in recent time. It is historic also because it effectively marks the beginning of an electricity market in Nigeria. Any person who left Nigeria in 2000 and suddenly re-emerged on November 2, 2013 would not recognise the structure of the electricity industry. Things have changed significantly. We have moved from a mere industry to an electricity market, even if the fundamentals of that market are still rudimentary.

On the morning after 1st of November, the chronic shortage of power did not disappear. Many customers continued to be estimated because they don’t have prepaid meters and many communities continued to suffer blackout because of system collapse. So what has changed? First, on 1st of November we made a decisive turn towards the realisation of the objective of the National Electric Power Policy (NEPP) which is to “establish a long term electricity market structure in Nigeria in which multiple operators provide services on a competitive basis to the broadest range of customers. Under such a regime, competitive market forces would be the best determinant of the appropriate and sustainable levels of prices charged by various carriers for their services”. What has changed is that we are on course to establishing a competitive electricity market that can sustain adequacy and reliability.

The journey has its problems and pitfalls. We are today hit by an unscripted shortage of supply arising from disruption and shortage in the supply of gas to power plant. This situation arises from both our inability to effectively protect gas pipelines and failure to provide effective policy and commercial frameworks for gas-to-power. Before 2010 we did not have an effective gas to power policy. This reflected in the disarticulation of the two sectors. Gas power plants were established without the certainty of gas supply. Now this is changing. We are aligning power projects to gas supply and the Nigerian Electricity Regulatory Commission (NERC) is building electricity tariff model on the commerciality of gas-to-power. New gas pipelines are being constructed to convey gas to power plants and gas supply and transportation agreements are being made bankable and enforceable.

But the bad news is: in power market these are structural problems that are unyielding unless dealt at the foundations. The good news is: because they are structural once solved you get automatic results. So, in spite of the teething problems of gas supply, we can be confident that the future of electricity supply in Nigeria is bright because the crisis of gas-to-power is being structurally resolved. This is not a sorcerer’s sport. It is a process-based activity.

So, the morning after, when the lights are not on for 24 hours across Nigeria, we can still score the power sector reform a pass mark. Yes, many communities have written to the regulator to complain of drop in quality of power supply. We make no excuses. But we know that this state of decline is just momentary. As long as we sustain the financial sustainability of the sector and continue to sustain an effective and clear regulatory landscape we can boast that the current interventions will lead to adequacy and reliability in a short time. The challenge for this sector post-privatisation is to provide enough power for a financially resourced distribution company to sell to customers. Today the DISCOs are not finding enough power to sell. The result is that they are not able to meet their revenue requirements and therefore unable to finance reinforcement of the network in a manner that enhances reliability. When Nigerians complain that they don’t have power at their homes or offices, it is either that the DISCO has not received enough power from the grid or that the DISCO has failed to strengthen its network such that it cannot reliably distribute to customers the insufficient power it gets from the grid.

NERC is working on this twin problem. The scarcity of power can only be addressed in the long term by the liberalisation of generation that is ongoing. We have faith that the Nigerian Bulk Electricity Trading Company (NBET) will contract sufficient new powers from independent power producers in the coming years. Of course, the time lag between financial closure and completion of construction of power projects means that we have to wait a little longer for the bulk trader power to get to the grid. Think about it. Why is capacity still constrained? Today, NERC has licensed over 20,000mws of new power from IPPs. Until when the NBET was established as part of this reform in 2011, none of these well-meaning IPPs could close the deal because the Nigerian electricity industry lacked a credible off-taker and the tariff was a no-no for financiers. Today, the bulk trader is signing power purchase agreements with some of these licensees and the prospects of continuous delivery of new power are now bankable.

The Multi Year Tariff Order (MYTO) that governs the financials of the Nigerian electricity market benchmarked the tariff on the assumption that the grid will generate at least 7,000mws by December 2014. Today, the grid only produces on the average about 3,500mws daily. We had hoped on extra power coming from the NIPPs. But many of these plants do not have enough gas to produce to capacity. If we had good system planning in the past as we are having now, there would have been guaranteed gas to these plants and the incessant slippages in timelines would have been avoided.

All these dysfunctions are now changing fast. On February 4, 2014, the regulatory commission approved a new regulation- the Bulk Procurement Regulation – that revolutionises the procurement of power. It cures the disarticulation that is responsible for this acute shortage and the poor power supply in the country. Henceforth, the commission will not entertain unsolicited application for licences except for extreme national interest. The regulation provides a planned and cost efficient approach for power procurement. It requires competitive bidding for new capacities based on the alignment of load-demand, feedstock and transmission availability and off-taker commitment for procurement of power. By this regulation when NERC declares that there will be 5,000 more megawatts at any time, you can go to bank with that because all necessary conditions – availability of gas, evacuation facilities, mitigation of financing and construction risks – have been addressed by the successful winner of the bid who would be licensed by the commission. We will not have the situation where midway in project development the project developer discovers there are no gas pipelines or evacuation facilities for the plant. We are inaugurating an era of planned and systematic procurement of power in Nigeria to ensure sustained capacity growth to match population and load-demand growth in the future.

We are focused on long term sustainability of the reform. But in the short to medium term, we have to find power to sell to the consumer to ensure that the system does not collapse. Thankfully, before the sale of the assets, NERC had enacted a regulation to allow for distributed generation. The embedded generation regulation is the silver lining in the momentary gloomy sky. It allows DISCOs to seek out modular power plants or captive power plants that can sell power directly to them and by-pass the challenges of transmission. The beauty of this regulation is that it can also overcome the challenges of gas supply through the use of renewable energy from small dams, solar panel and wind-farms. Already, there are some entrepreneurs who are boldly taking advantage of the regulation.

NERC is already cracking the hard nut of shortage of gas to power. We have held meetings with gas regulators and have settled on strategies to simultaneously improve the commerciality of gas to power as well as increase the amount of gas delivered to the power plants. We are also improving on the quality of gas contracts such that gas suppliers feel obligated to supply to power plants. We will continue to pressure NNPC and the Ministry of Petroleum Resources to improve its effectiveness in management of domestic gas supply obligations (DGSOs) and pipeline construction. So, we are hopeful that there will be more hydrocarbons for power plants and more pipelines to carry them.

But we are getting more innovative. As part of unleashing more energy through private sector investment in embedded generation, we are looking towards Liquefied Natural Gas as an alternative to natural gas; instead of waiting endlessly for pipelines to sprout, we will liquefy gas and truck it to power plants. Again, we can incentive the gas-flare to power such that we convert the estimated two billion scf of gas flared daily to generate a cumulative 8,000mws of embedded power. We are set to mobilise medium entrepreneurs in the gas and financial market to see how to boost distributed generation so as to significantly improve power supply in the short term while we wait for bulk trader power in the years to come.

Don’t forget that power supply has gone down also because of failure of distribution network in some places. The DISCOs obviously have not started making those investments required to rehabilitate, sustain, enhance and expand the network. NERC has worked hard to steady their nerves in the eve of their coming and steer the sector away from financial collapse. Because most of the new owners acquired their assets with more debt than equity than is prudential, they began with a panic. Their books were not balancing partly because they have less power to sell. Now, the bigger gale has swept away and the market is in stable financial health.

We have helped them to negotiate the bad turn. Now we will let them step up to finance quick improvement in their networks. We will benchmark the DISCOs to compulsory investments in network improvement (including metering) while we work hard to ensure increased revenue through the selling of more power. The financially weak DISCOs have just one option: to look for the money. If it cannot borrow to finance improvement, it will be required to divest some shares to new financiers who will help fund the expected improvement. By the way, the main reason for transferring ownership from public to private is that the private sector will finance improvement as quickly as possible. We will not let the new owners off that obligation. This is the shape of things to come.

– Dr. Sam Amadi is the Chairman/CEO of the Nigerian Electricity Regulatory Commission (NERC)

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