A Review of the Nigerian Energy Industry

Power sector’s unending teething challenges

27 October 2015, Lagos – The efforts of private investors since they took over the assets of the defunct Power Holding Company of Nigeria two years ago has seen some improvement in electricity supply with generation rising to 4,783MW. Ejiofor Alike however writes that the power sector is still bedeviled with legacy issues.

Power-Electricity-transfoBefore the private sector took over the assets of the defunct PHCN under the federal government’s power privatisation programme, the sector had suffered long years of neglect arising from under-funding and government’s poor management.
In other words, the power sector under government’s management was characterised by infrastructural decay, lack of sustained investment, poor funding, government’s monopoly, corruption and inadequate competent workforce.

For instance, Nigeria was said to be at par with South Africa in terms of electricity generation capacity in the 1960’s but South Africa has since hit a peak of over 40,000 megawatts due to sustained yearly investment in power infrastructure.

But Nigeria not only failed to add to her generation capacity on a sustained yearly basis, the country also abandoned the existing power infrastructure to rot over the years, thus generation hovered around 2,000 megawatts, when former President Olusegun Obasanjo took over in May 1999.

As the country’s population was increasing with its attendant increase in demand for electricity supply, there was no corresponding increase in power generation due to absence of investment and the neglect of the existing facilities.
For several years in the history of Nigeria’s power sector, only the elites in high-brow areas and seats of power had easy access to electricity.
It was not surprising that the power infrastructure collapsed in 2000 shortly after the commencement of the current democratic rule in 1999.

The system was in so much rot that at a point it collapsed several times over a 24-hour period.
The development fueled a blame game between the then Minister of Power, the late Mr. Bola Ige and the then Managing Director of National Electric Power Authority (NEPA), Mr. Bello Suleiman, on the pages of the newspapers.
The crisis came to a peak when Obasanjo sacked the NEPA boss and the entire board of the ailing utility giant and set up a nine-man technical committee, headed by the former Governor of Cross River State, Senator LiyelImoke, who was later, appointed Minister of Power and Steel.

Former President Obasanjo was so moved by the rot he inherited in the power sector that he initiated landmark reform that has today changed the face of the sector.
With the poor management of the power sector by the government, which had resulted in the collapse of the entire system, Obasanjo’s administration demonstrated a strong political will by initiating the reform to hand over the power assets to the private sector for better funding and effective management.
The setting up of the Imoke-led committee to probe the inefficiencies of NEPA signaled the beginning of the power reform, which actually started in 2001.

In fact, the journey actually started in 1999, when former Obasanjo inaugurated the Imoke-led Electric Power Implementation Committee, which developed the National Electric Power Policy in 2001

During his second term, Obasanjo again dissolved the NEPA board headed by AlhajiUmaruNdanusa and replaced it with a new technical committee, also headed by Imoke, who was then Minister of Power and Steel.
The committee had a mandate to run the affairs of NEPA and see it through the privatisation process.
Members of the technical committee included: the then Director General of Bureau for Public Enterprises (BPE), Dr. Julius JubrilBala, who was Deputy Chairman; the then Senior Special Assistant to the President on Budget Monitoring and Price Intelligence, Mrs. ObyEzekwesili and the then Managing Director of NEPA, Mr. Joseph Makoju.

Others were the Managing Director of Nigerian Gas Company (NGC); Mrs. Irene Chigbue also of BPE and a Director in the Office of the Secretary to the Government of the Federation (SGF), Dr. BY Abubakar.
With the National Electric Power Policy produced from the works of Imoke’s first committee, NEPA was transformed into the Power Holding Company of Nigeria (PHCN), with 18 successor companies.
The Electric Power Sector Reform (EPSR) Act of 2005 was signed into law on March 11, 2005 to provide an enabling legislation to the power reform and the unbundling of PHCN.

The enactment of EPSR Act of 2005; establishment of PHCN; repeal of the Act that established NEPA and the creation of 18 successor companies from the PHCN – six generation companies; one transmission company and 11 distribution companies were part of the initial stages of the reform.

The EPSR Act of 2005, which changed the legal and regulatory environment of the country’s electricity industry, also created the Nigerian Electricity Regulatory Commission (NERC) to regulate the entry and operations of the private sector in terms of the tariff and service delivery.
Obasanjo had started the implementation of the Act before he handed over on May, 2007, when power generation hovered around 3,000 megawatts.

However, due to policy inconsistencies that characterised governance in Nigeria, the administration of the late President Umaru Musa Yar’Adua suspended the reform, as well as all the power projects initiated by Obasanjo, under the National Integrated Power Project (NIPP), targeted to inject over 4,000 mw into the national grid.

But former President Goodluck Jonathan resumed the implementation of the EPSR Act of 2005 and successfully concluded the sale of the PHCN with a formal handover of the assets to the private sector in November 2013.

Jonathan’s administration also resumed the construction of the NIPP power plants and also commenced the privatisation of the completed plants before he handed over to President MuhammaduBuhari in May 2015.

The Permanent Secretary, Federal Ministry of Power, Dr. GodknowsIgali said recently that Nigeria’s international partners were not confident that the privatisation would be a success because it was the largest single privatisation exercise to be handled by any government in the world.

According to him, even the World Bank advised the federal government “to sell one distribution company at a time,” instead of selling all the assets at once.
Though the handover of the assets to the private sector has led to significant improvement in power supply, with a recent record generation of 4,783 megawatts, the sector has continued to suffer protracted challenges due to the decayed infrastructure handed over to the private investors.

Poor transmission network
With weak transmission network, as well as old, compromised cables and limited transmission lines to deliver power across country, Nigeria’s transmission network is widely regarded as the weakest link in the value chain.

The collapse of the transmission network first became a national embarrassment in March 2012 at the peak of the crisis between the former Minister of Power, Prof. Bart Nnaji, who commenced the implementation of the power reform under the administration of former President Jonathan and the electricity workers under the aegis of the National Union of Electricity Employees (NUEE).

The workers’ personal grievances against Nnaji, coupled with their opposition to the privatisation of the power sector, fueled concern that they may have embarked on sabotage of the transmission facilities to frustrate Nnaji and his privatisationprogramme.
This suspicion prompted Nnaji to order an investigation into the three system failures which the country experienced from March 15 to 26, 2012.

Before the March 15, 2012 incident, system collapse, which used to occur regularly in previous years due to the collapse of the infrastructure, had not taken place since December 2011 as a result of the repairs in the transmission network.
For instance, PHCN recorded 18 system collapses in 2011, whereas for the corresponding periods in 2008, 2009 and 2010, the figures were 36, 33 and 27, respectively.

However, on March 15, 2012, there was total system failure due to a technical fault on the 33KV Onitsha—Benin line.
This was followed by an explosion and a fire outbreak at the Benin Transmission Station on March 23, which reoccurred on March 26 on the same facility.

Nnaji subsequently ordered a probe into these three incidents, describing them as “unacceptable”.
He acknowledged that though “it is easy to ascribe the total system failure of March 15 to a technical fault on the 33KV Onitsha—Benin line, it is puzzling that an explosion followed by a fire outbreak could take place at the Benin Transmission Station on Friday, March 23, and then repeated on Sunday, March 26 in the same power facility”.

During the privatisation, the government sold all the generation and distribution companies but retained the ownership of the Transmission Company of Nigeria (TCN) under the management of Manitoba Hydro International of Canada (MHI).
But bureaucratic bottleneck continues to hamper the operation of TCN as government officials allegedly interfere with the management of the company by MHI, effectively hampering its capacity to deliver on its commitment.

Prof. Nnaji told THISDAY in a recent interview that the private sector management of TCN by Manitoba Hydro was never allowed to work.

“That is the problem; that is part of the problem. So, the people, who were brought to manage had to endure interferences from the government-appointed officers. So, that is an issue. What should happen is that, perhaps, a short time extension or a concession but not going back to government management,” he said.

THISDAY gathered that even when gas is available to fire the turbines to generate more power, the power to be generated will be left stranded because the existing transmission infrastructure cannot evacuate additional load and this means loss of huge revenue by the generation companies.

At a point the frequency of system collapses was so alarming that the immediate past Minister of Power, Prof. Chinedu Nebo had to set up an investigative panel to unravel the causes of the frequent system collapse of the transmission network.
Nebo had inaugurated a 13-member committee to investigate the causes of frequent system collapse in the country, a step described by one of the operators as “chasing the shadows because the government itself could not claim ignorance of the cause of the collapse.”

The current transmission network was designed to carry 3,000 – 3,500 megawatts and once this load is exceeded, the chances of the likelihood of system collapse will increase.
Apart from strengthening the transmission capacity to be able to evacuate more loads, another solution is that all the generation should not be fed to the national grid because the system has exceeded its load-carrying capacity.

Inadequate funding
One of the major challenges under the government management of the power sector was lack of funding to sustain investment in the sector.
Government claimed to have lacked fund to run the sector and the distribution and generation companies were not collecting enough revenue to manage their operations.

While the distribution companies under NEPA and PHCN did not provide meters to capture the actual energy consumed and the revenue that accrued to them, most of the consumers, who were billed on estimation, did not pay electricity bills because power supply was largely seen as a social service.
The tariffs charged under the government ownership of the power assets were also so low that it could not guarantee reasonably returns on investment.

So, when the private investors took over, the collection losses suffered by the distribution companies as a result of inadequate metering of consumers and energy theft was very huge.

The private sector inherited this problem, which was compounded by low tariffs that are not cost-reflective.
From available indices, the current tariffs are very low that they cannot guarantee returns on investments.
The Managing Director of Ikeja Electric, Mr. AbiodunAjifowibaje told THISDAY at the weekend that “when we say cost-reflective tariff, we mean a tariff that will keep everybody in the value chain in business.”
He said the tariff must take into account the cost of transmission, gas supply, distribution, generation and inflationary rate.
“Power has improved; we use to get 300 megawatts but we are now getting 400 – 450 megawatts. But why are we still not getting enough power because what we need is 1,250 megawatts? We are not getting enough power because the generation companies are not getting enough gas to generate power. Why are they not getting enough gas? They are not getting enough gas because they are not able to pay adequate price for the gas. Why are they not paying for the gas? They are not paying for the gas because we, the distribution companies are not paying them enough for the power they generate. Why are we not paying them? We are not paying them because the consumers are not paying us cost-reflective tariffs,” he explained.

Ajifowobaje said the low tariff prompted the intervention of the Vice President, Prof. YemiOsibanjo, who has expressed support for the payment of cost-reflective tariff by consumers of electricity.
THISDAY gathered from one of the operators that with the Power Purchase Agreement, NERC should have carried out two minor reviews of the Multi-Year Tariff Order (MYTO) 2.1 “in order to bring the power purchase price applicable to the GENCO’s in line with material changes”.

“Variances in these three basic elements (Gas price, exchange rate, and inflation rate) are supposed to automatically trigger a review of the MYTO, but those elements have spiked as high as 55 per cent (gas prices), yet the last review was in May 2014,” he added.
NERC, which initially set the tariff structure, recently abdicated this responsibility to the distribution companies, saying they should determine their individual tariffs and submit to the regulatory agency for approval before implementation.

The agency however directed the distribution companies to hold consumer consultations in their areas of coverage, to agree on the tariffs that will be paid by different classes of electricity consumers.

But in most of the meetings held nationwide between the customers and the agency, consumers vehemently opposed the planned review of tariffs and advised the distribution companies to provide meters first to capture the actual energy consumption of customers for proper billing.

Both operators and regulators are concerned that the current tariffs are very low but consumers are suspicious of the plan to increase the tariffs because of the inadequate metering of customers.

The electricity customers with prepaid meters are less worried about an upward review of tariff because the cost of the actual energy they consume, which is captured appropriately by the meters is not only low but also very commensurate with the electricity supplied.
However, in bid to make profit, the distribution companies slam majority of the Nigerian consumers with high estimated bills that are far higher than the power they consume, hence the nationwide protest against upward review of tariffs and the attendant litigations.

Reacting to a recent report credited to him that 40 per cent tariff increase would be approved for the distribution companies, NERC’s Chairman, Dr. Sam Amadi, however told THISDAY at the weekend that the final tariff to be approved by the regulatory agency would be such that would not give the distribution companies what they do not deserve.
According to him, the final tariff will also commit the distribution companies to quality service.

Non-performing contractors
In a bid to ensure that generated power are evacuated, the government had awarded a number of contracts on about 105 projects but some of the contractors have demonstrated lack of competence to deliver on schedule and on budgets.
The award of the contracts was fueled by the fact that the existing transmission and distribution infrastructure had become too dilapidated to evacuate power especially from the newly-completed power stations to far long distances to supply homes and industries.

The NIPP transmission projects, which are split into 105 different projects, include 40 transmission lines, 45 transmission sub-stations, 20 sub-station extensions and telecommunication protections infrastructures to cover all NIPP power plants and transmission Lots.
NIPP distribution projects are also ongoing in all the 11 Distribution companies in the country.

These include 1,701 kilometres of 33Kv lines; 2,666km of 11Kv lines and 3,540MVA additional injection capacity.
Also a total of 22,598No 25Kv and 50Kv distribution transformers, including Completely Self-Protected (CSP) transformers were also provided under the NIPP.

However, while some of these projects are nearing completion, others are still at early stages of execution because of lack of competence on the part of the contractors.

Other challenges
The private investors also inherited other legacy challenges, including government’s bureaucracy; underdeveloped human resources due to non-employment of a single engineer by the defunct NEPA and PHCN for 20 years prior to privatisation; and vandalism of electricity infrastructure and gas pipelines.

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