What went wrong in power sector? (2)

electricity

Power Plant

Continued from yesterday

Effective Regulation
THE Nigerian Electricity Regulatory Commission (NERC) is a product of the reform process. Among its numerous functions, it is saddled with the responsibility to regulate tariffs for all activities in the value chain. It developed a Multi-Year Tariff Order (MYTO) based on a number of assumed techno-economic parameters.

The projections are subject to revisions depending on changes in the parameters, thus we have seen MYTO 1 and MYTO 2 within its short span of existence.

Its decisions are not inviolable as demonstrated by a recent court judgement restraining it from a recent tariff increase and the reported declaration of Force Majeure by the DISCOs on the most recent MYTO review.

The privatization of the power sector has therefore come a long way having met the key internationally recognised success factors. Why, then, have we not enjoyed the benefits?

Why are we still groaning in darkness despite privatization?
The ownership of power assets changed hands on the premise that the private sector is able to mobilise funds and use them more efficiently than the public sector.

Two different models were employed in the privatisation process. The overriding objective for the DISCOs was system upgrade and improvement.

The prices were pre-determined, bidders were required to showcase their experience, understanding of the assets on sale and business plan for improved service delivery. For the GENCOs, pricing was an added competition criterion

The attempts by the bidders to go beyond the data room to verify the state of the assets were frustrated by the electricity workers unions.

They depended largely on information packaged by evaluators appointed by the seller – BPE. Even if the evaluators’ assessments were of acceptable quality, degradation of the assets as a result of continued use during the protracted interlude between the time of assessment and asset transfer was obviously not captured in the transactions.

It was therefore not surprising to hear complaints from the buyers of the appalling condition of most of the assets.

The implication is that the business plans needed to be revised ab initio. More funds are needed than projected. Payback period is jeopardised.

Additional loans are required, etc. The capacities of local lenders, on the other hand, are known to be stretched. Power is not the only sector sourcing for financing, the oil and gas sector is witnessing massive divestments!

The gas conundrum
To further compound the situation, the GENCOs are paralysed by shortage of gas. This is a national self-inflicted perennial problem which has its roots in lack of appropriate pricing of the commodity. For decades, policy makers failed to appreciate that gas gathering and processing is capital intensive.

Seeing that gas was being flared in the oil fields, they expected it to be delivered to government owned GENCOs at give-away prices.

The creation of a Gas & Power Division in NNPC and the formulation of a national gas policy have now tilted the balance towards more realistic pricing which of course has not motivated the IOCs sufficiently to invest in gas field development projects, the situation is further compounded by their systematic disengagement from onshore activities.

Even when they are reluctantly willing to do so, JV funding is an ever present clog in the wheel.

The solution of this age-old problem demands flexibility on the part of the government with respect to pricing policy and JV funding.

Rather than holding on tenaciously to the present price regime of US$2.50 per 1,000 scft of gas, policy makers will do well to harmonise the price with the going supply price to the Bonny LNG which may just not be substantially higher than US$2.50. The variability of that price vis-à-vis crude oil price is believed to be favoured by the IOCs against a regulated fixed price.

In order to demonstrate government’s willingness to tackle the power supply shortage frontally, funding of gas projects must be singled out for priority attention! In the medium to long term, serious attention must be paid to coal-to-power and exploration of additional fuel sources.

Improved power generation will not only be a political gain to the government, the multiplier effect on the economy is bound to be enormous.

Is power sector reform sustainable?
Public ownership of generation and distribution assets has failed us. The government reluctantly yielded to the option of reform and privatization when it became clear that it could no longer meet the financial requirements needed to maintain existing facilities not to talk of further investments towards meeting the ever growing demand. The per capita power consumption of Nigeria ranks among the world’s lowest.

The capacity of the private sector to raise funds and out-perform the public sector has been demonstrated in the telecom sector and also in the acquisition of the power assets.

The buyers have only recently mounted the saddle. Time was needed to appraise the acquired assets and revise whatever business plans they bidded with. Unlike what happened in the telecom sector, the power companies cannot start on a clean slate and the acquired assets have suffered from many years of neglect.

The government should by no means yield to calls for reversal of the privatization exercise under any guise or pressure to do so.

Firstly, such a major policy somersault will generate ripples beyond our borders and the loss of credibility will be difficult to recover from.

There is nothing wrong in reviewing the performance of GENCOs  and DISCOs especially within the context of the covenants in the sale agreements and where there are defaults,  sanctions  should be applied.

Consumer protection 
Consumer protection is non-existent; such needs to be institutionalized. Many consumers both small and large complain bitterly about crazy/arbitrary bills imposed on them by the distribution companies.

This is a fall-out of the estimated billing approach practised by PHCN; this option was flagrantly abused when the distribution companies were given high revenue targets and the only way they could meet such was imposition of punitive charges on the consumers.

The new DISCOs have an obligation to install pre-paid meters under the terms and conditions of the asset sales agreement but the massive roll-out of pre-paid meters is yet to begin; in the meantime, they continue to take advantage of the inherited estimated billing system to the disadvantage of the electricity-starved consumers.

NERC has to wield the big axe and put a stop to this unwholesome practice. Such a measure will force the DISCOs to (i) ensure installed meters are read and reflected in billings and (ii) fast-track installation of pre-paid meters rather than bloat their recurrent budget on account of engagement of meter readers.

As enunciated in the reform roadmap, the power sector reform is a process which has just begun. The ultimate goal is a situation where the consumer can choose the GENCO and DISCO to supply his electricity. We have to learn to crawl before we walk, before we run.

• Concluded
• Dr. Oye Eribake, a Fellow of the Nigerian Society of Engineers, resides in Lagos.

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3 Comments
  • Paddy8

    Good article. (1) NERC has performed exceedingly well. Its orders are logical and follows international principles. They also actively regulate to protect consumer interests.They are one of the saner segments of and for the power industry in Nigeria (2) The NIPP bids went bad due to several factors (a) allowing conflict of interest parties to bid. I know one case who are EPC contractors for atleast two of the three projects they bid – in both cases, there has been significant delays and overdrawing the EPC bid price. 80% to 100% of EPC bid price had been drawn as against 40-60% completion.They bid very high amounts for these projects. NIPP woke up at this stage and they are in courts as of now. They should have been stopped at at the bid prequalification stage (b) most or all the projects were bid for much higher values that they would normally attract.Acute competition among Nigerian origin bidders is the main reason.Absence of serious international bidders has resulted in high bids.On the other hand, Chinese bidders quietly bid for their projects at good prices and took over the assets-how? NIPP has to reflect. NDPHC did not complete their obligations on time post bids with the result extension of time to take over these projects have taken serious toll of the generation in Nigeria.Let us reflect as to how much of the 5000MW+ assets bid have been handed over/in operations? Also on how to correct the anamolies asap and bring these assets online. (3) Gas , its transmission- both sectors in shambles. Apart from availability of gas, gas pipelines,gas pressure, delivery mechanism, theft are key issues that need critical attention.On prices – how prices are different to different sections of generators while the end beneficiaries are same. US$ 2.50/3.30 to NIPP bidders,US$7.65 to embedded generators, US$ 15+ to CNG based generators ( even if comression cost is added, this price is exceedingly high? Why gas is priced ( or proposed) differently to Discom suported PPAs? There has to be a policy and I am sure NERC is competent to regulate the gas prices subject to appropriate profits to the gas marketeers/companies. Or should we move towards international gas prices subject to appropriate adjustments on the assumptions that Nigeria has well head deliveries and therefore LNG linked prices for power generation cannot be sustained (4) In my view, there has to be a debate on if gas should continue to be the main fuel for Nigerian power sector? With soft coal prices and availability of coal in Nigeria – why not plan number of coal projects with Nigerian coal as well as imports from Mozambique, Tanzania,SA, Indonesia? 10000-15000 MW coal based projects will divert Nigerian gas /LNG to international markets at good prices and will help Nigeria to save foreign currency even after paying for imported coal. A serious review is neded. (5) most important link is the need for massive effort in building transmission lines pan Nigeria to ensure 24×7 delivery to all across Nigeria. These are missed oportunities of the last fifteen years. The new administration can take this up on war footing. War on shortage of electricity in Nigeria is as important as war on Boko Haram. Nigeria can – will they do it?

  • emmanuel kalu

    great article. however the problem is not with privatization, the problem is with the regulators and the govt. all the problem the power sector is facing, is due to funding. that funding is not coming from the banks or from govt, yet the power sector is not working hard enough to earn the funding needed. how do you earn this money, first provide what little product you have and bill accurately for it. this would help to increase funds, which can then be used to provide more services while upgrading the access and services. in terms of gas, the govt needs to stop all this price regulation. the people can handle increase prices if the product they pay is provided. we need to allow the market decide prices and just have an effective regulation that is focus more on consumer than businesses. if the govt create the demand for gas and allow market forces to price the product, gas would be readily supplied. we also need to protect our pipelines and ensure that enough gas for domestic use is supplied before being exported. we need strong leadership in the power sector that would enforces the rule, innovate and be creative.

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