Crucial Issues in the Power Sector in the Last 12 Months (May 2015 to May 2016)

Proem

It is about a year that the current administration was sworn in, and although the current minister of power, works and housing has been in office for a much lesser period, we shall be reviewing issues that have come to the front-burner in that period. From the several multi-year tariff reviews, to the expiry of the tenure of the last set of commissioners without a replacement yet, recommendation that current owners of the newly privatized company utilities divest some of their interest in the companies, to creative steps being taken by the bulk electricity trader to ensure that contracts in the power sector become activated, to issues around transmission and gas to steps taken by the current administration, sentimental commitment by government officials. We shall be undertaking this review in three parts and this piece commences that review.

The Emotional Outcry and Suggestion that New Owners Divest of Their Interests

Several persons have suggested that the new owners of the formerly government owned generation and distribution companies divest to people who can better run those companies. The writer is of the opinion that this is simply not the right approach and is simply emotional talk. The first point is that the contracts which binds the participants to the change of ownership specifies that the owners of these new companies cannot divest (more than 8%) until five (5) years after the sale of government shares in those companies to them and considering that these contracts became into effect in the year 2013, no divestment should be done until 2018, except these contracts are modified and that would require the consents of the new owners as the government cannot unilaterally have a divestment undertaken except in breach of the performance agreement and sale share agreements between the government and these new owners.

A more pertinent point is that there were several fundamental matters that were not resolved before the divestment of government interests with more unfavourable issues such as vandalism in the Niger Delta (an area where much of the gas fields and gas production occurs) rearing their ugly heads. The grid requires 203 billion naira to really achieve the goals of the government in the next 12 months. The 2016 budget, however, allocates only 50 billion to the grid.

With issues such as lower power production, insufficiency of electricity tariffs, gas challenges, vandalism and the insufficiency of grid capability, even the Bill Gates or Richard Branson would not manage any of the successor companies with the fundamental challenges in the sector which are outside their powers. Hence, in my reasoned view, requesting or mandating the new owners to divest of their shares in these companies would not lead to the improvement of the running of these companies of the power sector in general. The government just needs to find solutions to these fundamental challenges in the sector so that things can improve substantially.   

The issue of divestment is also not well thought-through because even if they divest,

The Expiration of the Tenure of Last NERC Commissioners

The tenure of the last set of commissioners of the Nigeria Electricity Regulatory Commission (NERC or Commission) led by Dr. Amadi ended in December 2015 and since then no new commissioners have been appointed. There have been rumours as to who the next set of commissioners are likely to be. However, those are yet to be nominated but the commission has continued to take steps in terms of regulating the sector.

Although, there has been controversy as to the validity and appropriateness of the actions of a Commission without commissioners in place, interestingly, the principal legislation which governs the sector, the Electric Power Sector Reform Act (EPSRA) specifies that no decision or act of the Commission or act done under the direction of the Commission shall be invalid on the ground that there are no commissioners. Hence, despite the fact that there are currently no commissioners, NERC may continue to perform its role as a regulator. The foregoing notwithstanding, it is important that persons who are tested and trusted are appointed as commissioners of NERC so that the successes achieved by the previous commissioners are not undermined.

It is germane that this is not politicized because electricity regulation in Nigeria is crucial because of the sensitive nature of same in Nigeria and its significance to any economy and the Nigerian economy in particular, especially at this time when oil prices have plummeted. Friends and politically associates should not be rewarded with control of the Commission as same is very delicate and serious business. It takes special knowledge, awareness, forthrightness and much more to properly run such a delicate institution and same should not be left to politicians, but the right persons who also have integrity.

Just before the tenure of the last set of commissioners ended, there was in-fighting and the business of the Commission slowed down considerable such that steps which should take 6 months at the maximum to accomplish at the Commission, then took over a year of silence from the Commission. There were derogations from the previous gains made by the Commission. It is, therefore, important that the right persons are appointed as Commissioners to correct the ills of the last set of Commissioners and then take the Commission to the next level.

Even when they divest, such funds go to the owners who are selling their shares and not the electric power sector. Further, it is a rule of thumb that it is easier to get debt than equity because debt would involve fewer risks than equity would. Thus, if it is so difficult to get debt, it would be much more difficult to get equity. It simply is the case.

Transmission issues

The transmission together with natural gas supply challenges (now further exercabate by several cases of vandalism in the Niger Delta area of Nigeria have become the weakest link in the sector and regardless of the number of new power plants, the sector would degenerate rather than improve. Research has shown that over 203 billion is required to improve the grid to achieve modest improvements, in the next 12 months. However, I understand that only 50 billion has been apportioned for grid improvements There are also issues around the soon to expire Manitoba Hydro management contract with the federal government of Nigeria.

As long as power and in sufficient volumes cannot be wheeled along the transmission grid if the power sector would achieve substantial improvement, electricity would be quite expensive as many of the plants would have to be embedded plant which would be close to load centres and the country would not benefit from reasonable electricity prices obtained from the economies of scale. I know a lot is being considered in connection with the sector and in particular whether Manitoba’s contract should be extended and for how long.

Issues as to whether system operations and transmission services provision should be separated are being seriously considered transmission services provisions privatized. Government, however, needs to consider this adequately as same does not appear to be a profitable business and businesses looking to get involved in the provision of transmission services are unlikely to break even up to 40 years. Thoughts need to be given to this before government begins to take steps to further privatize the sector. The gas conundrum may also need to be resolved before such privatization. This is so because if the companies looking to provide transmission services do not receive enough electricity, then they are likely to fail too.

Securitization in the Electric Power Sector

It is obviously the case, that many Nigerian banks have heavy exposure to participants in the Nigerian electricity market and are quite unwilling to provide further debts, funds or security (except same are cash-backed of course). Hence, many of the participants in the value chain are unsure of the commitments of the counter-parties to their contracts and this has caused some discomfort in the market.

However, very recently, certain market participants, working with the Central Bank of Nigeria, created a structure (which is not without its limitations and challenges) which gives comfort to, especially, electricity generation companies that they would get paid for the electricity they generate and sell to the bulk trader.

This does ensure that the contracts are live and effective and are not merely, fictionally, effective because of PPA Activation agreements that were signed by these entities. There is, thus, now some comfort in the market regarding payments.   

For more information on the power sector financing, read the text, “The Nigerian Electric Power Sector: Policy. Law. Negotiation Strategy. Business” by the writer.

Ayodele Oni