Why GENCOs deserve more than a passing attention in the power supply equation
The power sector operates on the tripod of electricity generation, transmission and distribution. The trio makes up the value chain that brings electricity to consumers.
The generation companies (GENCOs) are the producers of the vital commodity transmitted to the distribution companies (DISCOs) for distribution to the final consumers.
Each work independently. But, no part of the chain can function mutually exclusively of the others. Without electricity being generated, nothing would be available to either transmit or distribute to the consumers.
That is why generation not only holds the key in the power equation; it is the goose with the golden egg.
However, for long the roles of the different legs in delicate tripod have been largely misconstrued, beclouded by misconceptions and misunderstanding. Trying to change the mindset of an average Nigerian electricity consumer has been such a herculean task.
Once the consumer switches on electricity and the bulbs refuses to bring light, the immediate conclusion would be the GENCOs who have failed to generate electricity. Wrong!
More often than not, the GENCOs have sufficient generated power available, without the capacity to transmit and distribute to the final consumers, all the effort is wasted. That is the scenario; that is the basic dilemma the industry faces.
Available Capacity
Generated Capacity
Stranded Capacity
Egbin
880MW
201MW
679MW
Transcorp
529MW
280MW
249MW
Shiroro
450MW
412Mw
0MW
Geregu
276MW
0MW
276MW
Kainji/Jebba
836MW
656MW
170MW
Sapele
120MW
65MW
55MW
Others
4775MW
1190MW
3562MW
TOTAL
7856.52MW
2804MW
4991MW
Stranded capacities of various power plants as at 20th July 2016.
Considering the importance of power as the fundamental ingredient for the growth of any economy, getting all the parts to work in sync is crucial. But, getting the generation to function effectively is more important. It is the aces required to complete the puzzle.
Generation involves producing electric power from sources of primary energy at a power station by electromechanical generators, primarily driven by heat engines fueled by chemical combustion or nuclear fission.
It also involves other means, such as kinetic energy, through flowing water (Hydro), and solar photovoltaics and geothermal power.
The make-up of the electricity sector consists various players, from the fuel suppliers (water, gas, oil, and other renewable sources of fuel); generators (who generate the power), transmitters (transporters of the generated power to the distributors) and distributors (who retail the power to household consumers and other smaller businesses.
The privatisation programme was to allow government to transfer public assets in the power sector to private hands, for efficiency and cost-effectiveness.
Through privatisation of these assets, the expectation was that fresh capital would be injected by private investors, to bring new value into the assets, to increase the country’s privately-held capital base of the power sector. Privatisation was not meant to portend waving a magic wand though.
At inception, the GENCOs were contractually obligated to ramp up electricity generation capacity by about 5,000 megawatts (MW) over a five year period.
Today, the Bureau for Public Enterprises (BPE) confirms most of the GENCOs have exceeded their contractual obligations.
For instance, Ughelli Transcorp had 160 MW generation capacity at takeover. By September 2016, the company was generating 450 MW.
Similarly, Egbin at takeover in November 2013, averaged 300 MW generations due to the dismal state of its six units. At one point, only two of the units were partially functional. At the moment, Egbin generates an average of 1,100 MW, on availability of gas.
When the overhaul of the remaining units is completed next year, Egbin will be operating at a minimum of 92 per cent of its capacity.
On the other hand, hydro plants, like Shiroro, at takeover had 450 MW, with some units not operating optimally. The units were overhauled and Shiroro now generates 600 MW, its original installed capacity.
The pointer here is: The GENCOs need just little push, by way of incentive, to deliver. But, poor regulatory environment has continued to incapacitate their effectiveness in playing their roles.
A good regulatory framework to guarantee fair competition was of extreme importance, to determine the gains of the transition from government to private ownership.
All stakeholders had obligations to fulfil their roles, to make the system work for the people.
The GENCOs have expressed their frustration with the Nigerian Electricity Bulk Trader (NBET)’s failure to commit to the terms of the power purchase agreement (PPA) with them.
During the run-up to the Nigerian electricity sector privatisation, government promised to set-up NBET to shield the GENCOs from the vagaries of the market.
The NBET was supposed to incentivize investors who were worried about liquidity issues in the market and the high cost of producing electricity.
Sadly, years after coming into the market, NBET that was supposed to help, now perhaps appears helpless, more in need of help than those it was set up to help.
NBET is incapable of shielding the GENCOs resolve the chronic poor market liquidity challenge as envisaged. The impact of the high cost of operations falls directly on the GENCOs.
If the GENCOs are to play their role in the power supply value chain, they must be saved the agony of the debt squeeze, which is threatening most of them to buckle under the weight.
Venturing to invest in the power generation assets was predicated on the promise by the bulk trader to shield the GENCOs from these problems, irrespective of what happens in the downstream sector of the industry.
The worsening market liquidity squeeze has culminated in a situation where the GENCOs lack the necessary funding for their operations, acquiring spare parts and equipment for the power generation equipment. Some GENCOs have not been able to pay their workers for several months.
Most of the GENCOs are frustrated by NBET’s poor settlement of their invoices (less than 20 per cent).
The inability of NBET to handle payments to the GENCOs in accordance with the PPAs they have with the agency is strangling their operations.
Besides, what solution is there for the challenge of stranded power, occasioned by rejection by the DISCOs of power generated at huge cost by the GENCOs, either as a result of inadequate capacity to evacuate, or congestions in the national grid network to transmit?
If the GENCOs are unable to sell the power they generate, because what they produce cannot be distributed to the consumers, how do they recover the cost that would allow them stay in business?
To worsen the matter, the policy of domiciliation in dollars of the cost of gas, the primary fuel for power generation, coupled with the associated take or pay obligations, strenuous letter of credit conditions by gas suppliers, are tough hurdles in the path of the GENCOs.
Despite their willingness and readiness to deliver their mandate in line with the terms of their PPAs, the GENCOs are unable to deliver power, because they are bogged down with huge unpaid debts by various stakeholders.
The GENCOs are barely managing to keep their heads above the waters, from the weight of massive operational losses they suffer.
These challenges are potent threats to continued existence of the GENCOs. The combined effects of these problems exert enormous pressures on the GENCOs and their investors, negatively impacting their capacity to deliver power to consumers.
The situation is gradually gravitating menacingly towards an acute crisis point. If urgent steps are not taken by all stakeholders, total cessation of operations by GENCOs is imminent.
This is not just an empty threat to neither government nor the policy makers; this is the cold reality, requiring concerted action to halt the clear and present threat to the drive towards a functional economy.
Government’s desire at this time is to ensure adequate provision of the basic infrastructure to drive economic growth. The wheels of the economy would not turn, if the GENCOs are unable to generate electricity required to power the productive engines.
The GENCOs are availed very limited options manoeuver. Either the stakeholders, particularly government, roll up their sleeves and face up to the challenge of resolving the issues militating against GENCOs’ mandate, or fold their hands and watch the system go down.
The issues are pretty clear. The GENCOs are dedicated to deliver on their commitments to deliver power to the people. But, drastic steps must be taken to resolve lingering issues to avoid an elongated system collapse.
A dire situation requires a dire approach to the solution. The GENCOs are aware of this reality, and are ready to take their destiny in their hands.
They are ready to explore all dispute resolution mechanisms open to them, including litigation, to test the PPA they have with NBET. The truth is that they must survive, if the system must grow.
If all else fails, the regulatory authorities must allow the GENCOs to take advantage of the provisions of the EPSR Act 2005, which empowers eligible customers to bypass the wholesale electricity market and enter bilateral contracts with any willing eligible customer.
The GENCOs remain optimistic all debts would be paid promptly, to enable them fulfil their contractual obligations to gas suppliers, pay their workers, and maintain their operational facilities towards fulfilling their primary obligation to generate electric.
Joy Ogaji
Joy Ogaji, the Executive Secretary of the Association of Power Generation Companies (APGC), wrote in from Abuja.