A 200-day agenda for President Buhari in power sector
According to President Barack Obama, “the first hundred days is going to be important, but it’s probably going to be the first thousand days that makes the difference.”
While a lot of critics are fixated on seeing visible and sudden impact in the power sector within the first 100 days of the new administration of President Buhari, for those knowledgeable on the state of affairs of the Nigerian power sector, it is foolhardy to expect the new government to make any appreciable impact in its first 100 days in the power sector. We should be looking at the first 200 days of the new administration to properly assess the new government’s policy, impact and direction in the power sector.
The first 200 days, is to lay the foundation that would allow for significant improvements in power generation, transmission and supply within the first 1000 days and hopefully attain 24 hour electricity supply within a reasonable and realistic timeframe in future, hopefully within the first four years of this administration.
First appointments in power sector
The first indicator of the direction of the new administration on the power sector will be the quality and pedigree of the appointees in the power sector; who is appointed as the Minister for Power, heads of parastatals under the Ministry of Power. Whoever is appointed as Minister for Power can greatly influence the direction, survival and impact of the power sector reforms in the next 1000 days. Besides the Minister for Power, the quality of appointees to head the following parastatals and commissions would be a major assessment of the ability of the new government to deliver on its plans and campaign promises for the power sector – Nigeria Electricity Regulatory Commission (NERC), Nigeria Bulk Electricity Trader (NBET), Transmission Company of Nigeria (in the event the Management Agreement with Manitoba Hydro is terminated), the Market Operator, and the Bureau of Public Enterprises (BPE).
The present tenure of the board of the NERC, chaired by Dr. Sam Amadi should expire by December 2015 and thus would need to either be renewed or replaced with very capable individuals experienced in electricity regulations in a nascent electricity market such as the Nigerian Electricity Market. The new government should not restrict its search for the next chairman of NERC to only Nigerians. Competent and qualified foreigners/expatriates with the requisite regulatory expertise and experience in electricity markets similar to ours should also be considered as well for the position of the NERC Chairman.
While the BPE is neither a parastatal under the power ministry nor a regulator in the power sector, the BPE, unknown to many Nigerians, is the largest shareholder in both the distribution and generation companies, holding 40 percent ownership of the shares of all 11 Discos and at least 40 percent shares in 6 Successor PHCN Gencos on behalf of the Federal and State Governments as well as Labour. Besides being the largest shareholder in the power sector, in addition, the BPE has the primary legal responsibility of ensuring that the new core investors in the privatized power companies deliver on their performance obligations documented in Performance Agreements with the BPE. Thus BPE’s importance in the power sector, hence its leadership, cannot be over-emphasized as being critical to the successful delivery of the power sector reforms.
Regulatory strengthening in power sector
Perhaps no other factor will contribute to the success or failure of the power sector than the capacity and experience of the Regulator. Under the present set of commissioners led by Sam Amadi, NERC has achieved a lot in terms of regulations that would drive the power sector. They have also made mistakes as well and in the eyes of the electricity customer, appear only to bark and unable to bite. Without doubt, more needs to be done in terms of effective regulatory oversight of the power sector. The ability of the Regulator to regulate the industry without creating regulatory uncertainties and caving in to the demands of private investors is vital. At this nascent phase of the power sector reforms, too much regulations and competing regulatory authorities can complicate issues and impede growth of the power sector. The recent passage of the bill on technical regulations and inspection, otherwise called the Nigerian Electricity Management Services Authority (NEMSA Bill), while logical, is not the way to go and is absolutely unnecessary.
Besides eliminating competing regulatory authorities, there is need for regulatory certainty and stability in the power sector. Investors must be assured of regulatory certainty as they prepare to make investments in the power sector without having to significantly worry about sudden regulatory changes now or in future that could impact their investments.
Development of a 3 – 5 year framework
Having made the right appointments, the first task of the new leadership in the power sector will be to develop and implement a 3 – 5 year framework that clearly articulates strategies to be implemented that would lead to the stability, improvement and sustainability of the power sector. Such framework document, which must build upon previous documents such as the EPSRA and Gas Master-Plan (as opposed to a “re-inventing the wheel” approach), should focus more on identifying implementable and sustainable solutions and strategies to address the gaps and challenges across the power sector value chain. In addition, the new framework must proffer solutions and strategies that would address the revenue shortfalls in the power sector, stimulate investments in the power sector and must extract firm, measurable commitments from all market participants, including gas suppliers on achieving improvements across the value chain. One such incentive could be granting revised wholesale gas prices to gas-to-power projects that come on-stream during the framework period and possibly guaranteeing a minimum return on investment to investors in gas-to-power projects successfully delivered within the framework period. Also, new power generation projects that achieve commercial operations during the framework period could be entitled to certain investment incentives and/or protection – e.g. tax exemptions and waivers, credit support by the federal government in the form of partial risk guarantees (PRGs), Put/Call Option Agreements, or similar type credit support instruments that secure payment obligations under Power Purchase Agreements (PPA) and Gas Sale Agreements (GSA) and ensure the projects reach financial close. The framework must also address financing requirements and government support that would be required during the framework period.
Complete privatization of NIPPs
Within the first 200 days, the new government must ensure that the privatization of NIPP gas fired power generation plants, 10 in number is concluded. The privatization of the NIPPs, which commenced with the expression of interest and eventual submission of bids by interested investors in November 2013 has far advanced with the announcement of Preferred Bidders in a transparent and competitive bid process. Unfortunately, the negotiation process between the government and the Preferred Bidders has been stalled by a number of challenges outside of the control of the Preferred Bidders such as gas supply issues, transmission related issues, negotiation of bankable power purchase agreements (PPA) and credit worthiness of the Bulk Electricity Trader. These issues are well within the control of the federal government, thus necessitating Preferred Bidders to ask for some form of government support and/or protection from these issues to enable them raise the debt financing required. However, the privatization approach of the NIPPs must be changed from a share sale process to an asset sale process to enable investors project finance the acquisition and consequently reduce the level of government support required to mitigate the issues of gas availability and supply to the NIPPs, inadequate transmission infrastructure and credit worthiness of the bulk trader.
It is critical that the privatization of the NIPPs is concluded within the next 200 days. Indeed, privatizing the ten NIPP power assets is what is now required to unlock over 5,000 MW of additional generation capacity and rapidly ramp up generation capacities far in excess of the 10,000 MW projected by the new government in the short term.
Given the importance of the NIPP privatization, the new government has a responsibility of ensuring that both local and foreign Investors who have shown interest to acquire these assets are provided with bankable contracts: power purchase agreements, gas supply agreements, gas transportation agreements, put and call option agreement (PCOA), etc, to enable them raise debt and equity for the acquisition and ensure investors are guaranteed their return on investments under the various power purchase agreements to be entered into with NBET.
Government is supposedly financially broke. Proceeds from the sale of the NIPPs, estimated to realise up to $5billion can provide new funding to reduce budget deficits. Completing the sale of the NIPPs will save the federal, state and local governments the financial obligations of funding the NDPHC owned by the 3 tiers of government. NDPHC was never designed to operate the assets and incur operational costs. Lastly, there are plans to develop hydro power plants under a planned NIPP phase II, using the proceeds of the sales of the gas thermal plants. A successful conclusion of the NIPP sale would see the plan for the new hydros coming into fruition.
Develop credible, sustainable and cost reflective tariffs
Credible, sustainable and cost reflective tariffs are critical to the survival of the Nigerian electricity market. The EPSRA enshrines the requirement for investors to recover costs through electricity tariffs as well as an agreed rate of return on their investment. While ensuring that electricity tariffs charged can cover costs across the power sector value chain, NERC has both a moral and legal responsibility to make certain that electricity tariffs paid by consumers are both credible and sustainable and that only prudent and efficient costs are recovered by investors. A situation where Discos are unwilling to meter their customers and thus reduce their collection and commercial losses, yet seek to pass such losses to their customers is absolutely unacceptable. In addition, the tariff model must cover a longer period of time. The current MYTO model assumes a 5-year tariff path. Given that investment (debt and /or equity) in the power sector is typically long tenored, a longer tariff path (at least up to 10 years is important to give debt and equity Investors a basis to forecast project revenues over the next ten years with a lot more certainty.
The process of developing credible, sustainable and cost reflective tariffs is currently on-going and is being championed by NERC and the Central Bank of Nigeria. It will be to the credit of the new administration if the eventual tariffs can stimulate growth and improvement in the power sector.
The new government must avoid knee jerk reactions and/or populist actions aimed at “lowering” electricity tariffs in an unjustified and unsustainable manner that could reverse gains already made and freeze investments in the power sector. This is where regulatory independence is crucial.
Resolve Geometric IPP, ensure Azura IPP reach financial close
The new government should resolve the Geometric/Aba IPP conundrum and also ensure that the Azura IPP project reach a financial close. Azura, the 450MW gas fired Independent Power Project (IPP) situated in Ihovbor in Edo State is a landmark transaction that has unfortunately stalled in the federal government bureaucracy and the usual “silo” approach that typifies the workings of federal ministries. The Azura IPP project cannot be wished away and unfortunately has become the benchmark for project financing independent power plants in Nigeria. As a matter of urgency, the Buhari Administration must ensure that within its first 200 days in office, Azura IPP project is provided with the necessary credit support to enable the project reach the long awaited financial close as quickly as possible, while at the same time ensuring that Geometric/Aba IPP issues are resolved.
WESLEY OMONFOMAN
Wesley Omonfoman is an Energy Consultant and the CEO of New Hampshire Capital Limited, an energy consulting firm based in Lagos.