After the Inauguration…
Introduction
With the inauguration of Nigeria’s new federal administration happening in the midst of poor electricity supply (and indeed, an energy crisis), the new administration already has its work well defined; at least, as far as the power sector is concerned. The situation is such that, despite the best efforts of the last administration to improve the power sector, the new administration is tasked with the responsibility of ensuring that the effect of an improved power sector is felt by the populace.
The task ahead is by no means an easy one; however, there are plausible solutions and steps which need to be taken to achieve the desired results. Therefore, after the fanfare on Friday, the new administration should get down to work. The writer believes that there are principles which should guide whatever the new administration does to improve the electric power sector and these should include the need to re-work (and not necessarily jettison what had been done, previously) the fundamentals of the power sector, understanding that without grid power or other viable (but reasonably priced alternative{s}) the real sector, which should be the fulcrum upon which the economy should be built, would not come-off. For clarity, the real sector comprises agriculture, industry, building and construction, and services particularly the small and medium scale ones.
Interestingly, some of the problems in the electric power sector are not particular to the power sector. Issues such as poor statistics and poor data gathering or collection together with poor town planning and abysmal compliance with planning laws and regulations are also material challenges.
Focal Points
National Power Audit
As had been highlighted below, there is poor data collection and storage and hence, Nigeria as a country cannot accurately state the volume of power required by various segments of the Nigerian society. A national power audit is, therefore, requisite for the proper determination of the actual volume of electricity required by various segments of the country; the type and the periods when such power is required by various geographical regions of the country. Prior to this time Lagos State had, amongst other states, blazed the trail in the planned improvement of the power sector by undertaking power audits to determine the exact power needs of Lagosians. Where a power audit is conducted, the power audit is likely to show, for example, that certain areas require very little power (have little load) at certain times of the day or month. It then means that the system operator can ensure that there is a proper balancing and scheduling so that (for example), largely commercial areas engaged in certain types of business can have more power wheeled to them at certain days or periods of the day.
Personnel
In Nigerian politics, the winner takes all. Hence, a change in government equals a change in personnel, regardless of the competence or track records of such person(s). This is due largely to the fact that newly elected candidates prefer to surround themselves with ‘loyalists’. To achieve positive change, it is germane for the new government to do away with this approach especially where such may lead to loss of experienced and tested hands.
The necessity of skill and expertise in a sector so delicate should not be sacrificed on the altar of ‘nepotism’ or political ‘patronage’. The new administration should therefore consider the retention of productive personnel and minds in whom confidence of the populace and the electricity market players have been reposed in; for a turnaround in the electricity situation in Nigeria. In the same vein, the new administration should not be in a hurry to set aside the policies of the current administration but engage in the retention and fine tuning of the policies, to the extent that same are effective.
Gas Deficit
The writer had alluded to the need to deal with the fundamentals and natural gas, is one of such fundamentals without which not much success can be achieved. Many have described Nigeria as the ‘island of oil sitting on an ocean of gas’, access to gas locally, continues to pose a major challenge to the nation. Despite the proven gas reserves estimated at about 186tcf, various factors such as lack of adequate infrastructure and neglect of gas production for domestic use by the industry contribute to the poor result in gas production. Generally, gas producers in Nigeria who have the technical and financial capacity to develop gas infrastructure and produce gas, have historically concentrated on gas export projects to the detriment of the local gas market. The historical unavailability of a commercially viable pricing system has played a huge role in this concentration on export projects.
In addressing this issue, a proper electricity pricing regime which accounts for the cost of gas as the multi-year tariff order seeks to achieve; needs to be established along with the construction and rehabilitation of gas pipelines. Though, there appears to be an improvement in the gas sector, as evident in the recent increase of gas production by 50% per mcf; it is required of the government to provide adequate support with infrastructure, generally, if a more sustainable production of gas for domestic use is to be ensured.
It has also been reported that over $50 billion gap is in need of bridging and such can be done by finding solutions to the lingering disputes between the international oil companies and the Federal Government of Nigeria so as to ensure the release of over 300bcf of stranded gas assets held by the international oil corporations. Substantial improvements in the domestic gas market may be achieved by encouraging local oil and gas players (who have been acquiring the upstream assets of the export-focused international oil corporations) to take part in the exploration process. In light of the foregoing, the author suggests that indigenous companies with capacity and expertise in developing gas fields be granted operatorship in the upstream assets rather than the Nigerian National Petroleum Corporation or Nigerian Petroleum Development Company Limited retaining same.
In the writer’s opinion, there should be a strong linkage between gas and electricity regulation to promote proper coordination of gas supply for power generation and a consideration of a regime which merges gas transportation and electricity regulation. Where these cannot be merged, there should be an arrangement such that gas supply and electricity are aligned and a small group of 2 or 3 persons can be put together to achieve this. In addition, pending the time when adequate capital is invested in developing new gas network infrastructure, the Federal Government should continue to ensure the proper location of gas powered plants in regions where gas is easily accessible.
Support New Owners of Generation & Distribution Companies
Government support in this sense is not necessarily financial support but the creation of an environment to allow potential maximization by companies in power generation and distribution. For example, in respect of distribution companies, where the owners are required to expend funds to reduce technical, commercial and collection losses over a five year period, in accordance with pre-agreed thresholds, such funds would run into hundreds of millions or even billions of naira. There has however been no consideration that such capital expenditure may not be justifiable if the relevant distribution companies do not receive enough power for sale to consumers on their network. Imagine a scenario where so much is spent without a line of sight as to how and when recovery of such sunk costs would occur. No lender would consider same bankable. Hence, the government needs to provide support by playing its own role in ensuring the distribution of power to such companies to justify expenditure. This can be met by the creation of an environment that enables generation companies increase capacity and by the Federal Government of Nigeria, overhauling the transmission grid to facilitate the improved delivery of electricity to the distribution companies.
Another option that may be considered is an increase in the electricity tariff. The author agrees that this option might be a bit too political for a new government to effect; however, only the brave succeed. It may be argued that many of distribution companies can go the way of embedded generation, however, that would be nonsensical if it would be in very large numbers and the reason is explained below. The grid is the cheapest and the most efficient means of wheeling power from where same is generated, to the consumer. Furthermore, except many of the embedded plants are run on renewable fuels such as solar, wind etc. it goes back to the same situation of the plants not running because there is no gas. Hence, embedded power plants running on natural gas may still not deliver the required result.
Transmission Privatization/ Upgrades
The fact that the grid is very weak and fragile is notorious as even the 2001 National Electric Power Policy recognized this fact. Therefore, an upgrade of the transmission infrastructure currently in place is needed, as the entire electric power sector is to thrive on the all-round effectiveness of each of the components that make the sector function rather than the immense strength of one component. Hence, the saying that ‘a chain is only as strong as its weakest link’ is true with regard to the power sector. Thus, there should be as much focus on transmission (and other components of the power sector) as there is on power generation.. The Resolution of the transmission challenge is major issue as the transmission in place would be incapable of wheeling the power generated if the power plants in Nigeria were to operate at full capacity.
Therefore, the upgrade, expansion and proper maintenance of the extant transmission network is required in order to effectively wheel power generated and reduce transmission losses substantially. Currently, the transmission company with its functional units of transmission services provision, generation/transmission scheduling and marketing administration/settlement; is meant to serve the entirety of the country, however, the transmission company has performed poorly. Although, the Ministry of Power is currently undergoing grid improvement and expansion activities, the Federal Government has consistently failed to provide proper maintenance as the private sector would; hence the need to privatize same.
In privatizing the transmission system, it is pertinent that a corruption/controversy free model is used. The writer would in another piece provide insight into plausible means of privatizing the transmission system. Suffice to state that there are several models including the asset ownership and assets management split. Under this model, it may be useful to sever the system administration and market administration functional units from the transmission company and have the Ministry of Power take up that role with the management of the grid, privatized to ensure that while transmission is improved through privatization, the government continues to play some oversight function.
Dr. Fayemi of the All Progressives Congress at the recent Lagos Business School Breakfast meeting mentioned that, transmission would be deregulated, regionalized and privatized. It is, however, pertinent to note that transmission at a country-wide level requires central control of power loads to be unqualified/ absolute, thereby making it risky to fragment that control, even whilst privatizing that aspect of the value chain.
Emergency Power Policy & Embedded Power-
Focus on the delivery of temporary solutions to power shortage in the country should be given by the new administration whilst addressing long-term solutions. Already, creative businessmen have begun to use haulage, by trucks, of compressed natural gas from gas fields/ processing plants to where they are required as fuel for power generation; which is seen as a useful alternative to the currently poor gas pipelines infrastructure.
I believe that in the short-term, this would be quite popular; however, the new administration needs to think through an excellent emergency power policy as that was one of the failings of the erstwhile administration. Embedded generation has been encouraged by the erstwhile administration but the new administration must do much more to incentivize would-be embedded generators. Further, it is noteworthy that embedded power generation thrives on a good energy mix, especially alternative fuel sources rather than regular fossils fuels; otherwise same fails. In the Nigerian situation, for example, where gas is not available, power supply would not improve by merely building several embedded plants. Rather, there would just be several non-functional power plants scattered all over the country.
It is also germane for the new administration to make the point that emergency power would be more expensive but would only be a stop-gap until challenges with the transmission grid are fairly resolved. Further, creativity and thorough analysis should go into the administration’s emergency power policy for several reasons. One of such is that, for power projects to be bankable, they should have long term off-take agreements such as power purchase agreements and where the emergency power plants are for short tenures, same may not be attractive to investors. Therefore, it is important to forge a delicate balance between having emergency power plants and the terms of such contracts; particularly because of the belief that grid power could improve shortly.
Hence, some questions worth considering revolve around tenure, pricing, government intervention and gas related issues as far as emergency power delivery is concerned. Though, this is a period where any proposal to grant incentives will be frowned at, the author proposes that special incentives should be granted to companies seeking to provide emergency power, as that may lead to an immediate increase in investors’ interest.
More Robust Energy Mix-
In order to arrive at a more sustainable power supply scheme in both rural and urban areas, a good energy mix is required rather than the employment of only hydro and gas as sources of fuel. Therefore, focus should be placed on other forms of energy and power generation such as solar, wind (to a very limited extent) and coal gasification technologies etc. Nigeria is especially blessed to have areas where solar generation would thrive and to also have reasonably large coal deposits. Coal Gasification is regarded as the clean energy of the future. It is the case that Nigeria lies within a high sunshine belt and thus, has enormous solar energy and other solar related potentials. The Northern part of the country, in particular, provides a more viable potential for photovoltaic use, with insolation of up to 7 kWh/ m2/day. Average sunshine hours in Nigeria, are estimated at 6hrs per day. Hence, the country does have rich potentials for renewable energy (solar power production in particular). Given Nigeria’s solar potentials, there should be an encouragement of solar thermal applications and it is strange that hitherto, large parts of the North are not already reaping the benefits of their solar endowment in terms of solar power use.
The previous administration (working with the Commission) did quite a bit to encourage renewable power generation. Some of these steps have included the development of Feed-In-Tariffs (ReFits) for renewable energy (wind, biomass, solar and small hydro) which were included in the Multi Year Tariff Order (MYTO) II issued in June 2012. Recently, a memorandum of understanding was signed by the Minister of Power with a US company looking to use clean coal technology to generate electricity. The new administration should therefore continue to support initiatives of the erstwhile administration in the renewable energy space and also provide additional support.
The Commission very recently issued a draft template power purchase agreement for renewable power and this is quite laudable. The Ministry of power should take steps to complement the efforts of the Commission through good policy formulation.
Ayodele Oni
Ayodele Oni {ayodeleoni@outlook.com}, a solicitor, specializes in international energy (oil, gas and electricity) investment law and policy. He holds a mini-MBA in power & electricity. Follow me @ayodelegoni.