Power sector under the Buhari administration: A 200-day review

Prior to May 29th, the power sector grappled with a number of challenges such as low generation, huge market debts arising from poor revenues and lack of cost reflective electricity tariffs. In February, the Transitional Electricity Market (TEM) was declared, signaling the commencement of a contract based electricity market. Due to crippling market debts that threatened to destabilize the power sector, in February, the CBN commenced the disbursement of the Nigerian Electricity Market Stabilization Facility, a 10-year, special intervention loan facility, to address the power sector debts prior to the declaration of the TEM.

About N64 billion, out of the total facility amount of N213billion, has been disbursed to date. As a result of the amendment of the MYTO2.1 tariff by NERC in April, the power sector almost grounded to a halt as core investors in Discos issued force majeure notices.

The tariff amendment by NERC also heightened regulatory uncertainties in the power sector. In May, total generation was at an all-time low of less than 1,400MW. Post May 29th, within the first 200 days of the Buhari administration; power generation improved to an all-time peak of 4,800MW constrained by transmission and gas challenges as well as the absorptive capacity of the eleven Discos to take power.

Despite the gas constraints, the improvement in generation can be attributed to improved gas supply as a result of significant reduction in the vandalism and sabotage of gas pipelines.

Revisiting the six point agenda
According to President Barrack Obama, “the first hundred days is going to be important, but it is probably going to be the first thousand days that makes the difference.”

In June, 2015, we outlined the following six (6) point agenda for the power sector within the first 200 days of the Buhari administration: first appointments in the power sector, regulatory strengthening in the power sector, development of a power sector framework to stabilize and improve the power sector, Complete the privatization of the NIPP Gencos, implement cost reflective electricity tariffs and ensure the Azura IPP reach financial close

Given the challenges in the sector, we opined that the first 200 days (rather than the traditional 100 days) of the new administrationis sufficient time to properly assess the new government’s policy, impact and direction in the power sector. As we advised, the focus of the Buhari administrationwithin its first 200 days should be to lay a foundation that would allow for significant, measurable improvements in electricity generation, transmission and distribution within the first 1,000 days of the administration. December 14th, 2015 marked 200 days of the Buhari administration. How has the administration performed in the power sector since May 29th and also in the implementation of the six point agenda we outlined in June?

First appointments in the power sector
We posited in our June article that the first indicator of the direction of the new administration on the power sector will be the quality and pedigree of its appointees in the power sector i.e. who is appointed as the Minister for Power, heads of parastatals under the Ministry of Power and who becomes the new chairman of the electricity regulator. The appointment of BabatundeRajiFashola as the Minister for Power, Works and Housing, is a good indicator of the level of commitment the Buhari administration attaches to the power sector.
In addition, the appointment of Louis Edozien from the private sector as the new permanent secretary of the Ministry of Power is a bonus. No doubt, the President has assembled an A-team with proven track record of performance to manage the power sector, post privatization.

The present tenure of the board of the Nigerian Electricity Regulatory Commission (NERC), chaired by Sam Amadi expired by December 21st, 2015. In our view, besides the Minister for Power, the most important appointments that will be made in the power sector by the Buhari administration is the appointment of a new Chairman and Commissioners for the NERC. The new chairman and Commissioners must be very capable individuals experienced in electricity regulations. We again advise that the Buhari administrationshould 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. Together, these appointees must work in tandem and as a team, to ensure that the Buhari administration delivers on the power sector reforms as promised during the election campaigns.

Regulatory strengthening in the power sector
In 2015, the independence of NERC as the electricity regulator was put to the test with the general elections. Certain regulatory orders that aimed to reduce electricity tariffs were issued prior to the general elections. These regulatory orders could arguably have been politically influenced.

During the first 200 days of the Buhari administration, some form of government interference with the regulator has somewhat continued with the intervention of the office of the Vice President and the Minister of Power in resolving the lingering tariff issues, as well as numerous National Assembly hearings and legislative pronouncements on NERC and the power sector. Without doubt, more needs to be done in terms of effective regulatory oversight of the power sector.

While there is a need for the regulator to interface with government in its function and duties, it should be made clear that the regulator at all times, must be seen to have independently arrived at regulatory actions and orders. As we approach a critical phase of stabilizing the power sector, the ability of the regulator to regulate the industry without creating regulatory uncertainties and also caving in to the demands of market operatorsas well as following “orders from above”is vital for the sustainability of the power sector reforms.

The expiration of the tenure of the Sam Amadi led NERC Board gives the Buhari administration an opportunity for further regulatory strengthening. Regulatory strengthening also includes devising appropriate market driven mechanisms and/or framework for the resolution of market issues between the regulator and market operators. A situation whereby market operators do not agree with regulatory actions and/or orders issued by the regulator and approach the Presidency or the Minister of Power to seek redress, must be totally discouraged going forward.

Development of a 3 – 5 Year Framework
One notable campaign promise of the APC is the improvement of power supply and addition of 20,000MW in the next four years. To the best of our knowledge, the Buhari administration is yet to develop a framework to actualize its campaign promises in the power sector and if developed, yet to be shared with the public. Perhaps the seeming non-existence of such a framework document can be attributed to the delay in appointments in the power sector. Having now settled down to business, we hope the new power team led by the Minister would work on developing a holistic power sector framework as a priority task.

As we advocated in June, the power sector frameworkshould clearly articulate strategies and solutions to be implemented within a 3 – 5 year period that would lead to the stability, improvement, growth and sustainability of the power sector. Such framework document, which ideally should build upon previous documents if any, shouldin-addition, proffer solutions and strategies that would address the revenue shortfalls in the power sector as well as stimulate additional investments in the power sector.

The power sector framework should also extract firm, measurable commitments from all market participants, including gas suppliers, on achieving improvements across the value chain. To be effective in this regard, the framework must adopt a “carrot and stick approach” by building incentives where commitments to improvements are met within the set target periods as well as penalties when not met. The power sector framework should also focus on how to diversify our energy mix from predominantly natural gas fired base load generation, to other forms of base load generation.

Renewable Energy (RE) such as solar and wind, may be attractive but more emphasis should be on attaining sufficient base load megawatts in the short term from coal and hydro sources. Lastly, the framework should also address financing requirements in the power sector and the form of government support (guarantees, letters of support, Options, other forms of credit support, etc) to be provided to key power projects such as IPPs and transmission projects, to enable them reach financial closeor commercial operations during the framework period. In this regard, we propose a Power Sector Asset Trust Program that could provide needed credit support to some of these power projects.

Complete the privatization of the NIPPs
In June, we noted that the new Administration should conclude privatization of the NIPP Gencos within its first 200 days. However, the Buhari administration is yet to re-start and complete NIPP Genco privatization process, which started in 2013. So far, there’s been no formal statement by the government on the status of the privatization of the NIPPs. A clear roadmap needs to be developed and the process re-started. It is important to note that the NIPPs generate more than 35 percent of total available generation and the bulk of planned additional capacity to the grid in the next two years, will largely come from the NIPPs.

We again restate that it is critical that the Buhari administration conclude the privatization of the NIPPs. Privatizing the ten NIPP Gencos is what is required to unlock over 5,000MW of additional generation capacity and rapidly ramp up available generation capacity far in excess of the 10,000 MW projected by the new government in the short term. Also, NIPP Gencos when privatized will become credible off-takers for natural gas suppliers, thus providing the much-needed fillip to the implementation of the Gas Master Plan. In addition, proceeds from the sale of the NIPPs, estimated to realize up to US$5billioncould provide new funding to reduce the 2016 budget deficits for the three tiers of Government.

Implement cost reflective electricity tariffs
With the recent announcement of new electricity tariffs by NERC, the Buhari Administration has been able to resolve the lingering tariff issues that effectively stymied growth in the power sector for much of 2015.

However, its déjà vu! Once again, like it did in December 2014, NERC has come up with revised electricity tariffs that are hopefully sustainable and cost reflective. The key word is “sustainable”. If electricity tariffs are not sustainable, then the requirement for cost reflectiveness cannot be achieved. 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.
The Vice President and the Minister for Power seem to have brought about purposeful leadership in ensuring that NERC and Discos agree on new tariffs. This time around, the tariff setting process is a departure from past tariff setting processes. The Discos themselves were responsible for setting the tariffs, with NERC only providing the tariff guidelines and methodology. Hopefully, Discos would be able to collect the new tariffs from the customers they serve.

However, the easy part is setting new tariffs. The harder part is managing the backlash that would come with implementing the new tariffs. Now that cost reflective electricity tariffs have been put in place and will come into effect in February 2016, the Buhari government must avoid knee jerk reactions and/or populist actions aimed at “reducing” electricity tariffs in an unjustified and unsustainable manner. This is where regulatory independence is crucial more than ever before. It will be to the credit of the Buhari administration if the new electricity tariffs stimulate growth and improvement in the power sector as intended. Previous tariff increases did not achieve this objective.

Ensure the AzuraIPP project reach financial close
One of its first acts by the Buhari administration in the power sector was to resolve the protracted issues with providing the Azura IPP project with the necessary government support it needed to reach financial close. The Azura project is a 450MW gas fired Independent Power Project (IPP) situated in Ihovbor in Benin City, Edo State.

The AzuraIPP has become the benchmark for project financing IPPs in Nigeria. While this is commendable, in the same manner, the BuhariAdministration must ensure that other IPPsthat are already near financial close are provided with same support to also enable them reach financial close as well.

The privatization of the ten NIPP Gencos falls into this category of projects to be provided with government support. Given the impact of the sale of the NIPP Gencos in terms of additional generation capacity and revenue to the three tiers of Government, providing such credit support to the transaction is in the interest and benefit of the Buhari administration.

However, the Buhari administration is yet to resolve the protracted issues between Geometric Aba IPP and Enugu Disco. While the matters are in court, we understand that both NERC and the BPE have put forward a plan to resolve the matter out of court. Hopefully, both Geometric and Enugu Disco would put aside their differences and agree on the settlement plan by NERC.

Positive so far
The first 200 days of the Buhari administration has seen very positive and commendable improvements in the power sector. Very notable are the appointments in the power sector by the Buhari administration. However, it is early days yet. Without being pessimistic or cynical, Nigeria has been down this road before in the past, where there were improvements and key policy pronouncements in the early days of the previous administration that never really materialized into sustainable and lasting improvements in the power sector. Given its commitment to the Change mantra, we believe the Buhari administration would achieve sustainability and lasting improvements in the power sector if it continues to implement all or aspects of the above six point agenda. Nonetheless, February 21, 2018 will mark the first 1000 days of the Buhari administration. By then, it will be clear if the Buhari administration made any difference to the power sector.

OdionOmonfoman is an Energy Consultant and the CEO of New Hampshire Capital Limited, an energy consulting firm based in Lagos. E-mail: orionomon@outlook.com.