Private investment in electricity transmission in Nigeria
Transmission exists as a core component of the electricity value chain as the network serves as a conduit for transmission of electricity generated to the distribution segment of the value chain. Currently under government control, the transmission network is managed by the Transmission Company of Nigeria (TCN). TCN’s core mandate broadly covers the operation and management of high voltage (330/132kV) transmission system assets, generation dispatch functions (system operations) and provision of open access transmission services on regulated tariff. The TCN, through the Market Operator, is also responsible for managing the electricity market settlement system based on a set of Market Rules. TCN is run by two departments, i.e. the Transmission Service Provider (TSP) and the System Operator (SO).
Until recent initiatives being considered and put forward by the Government to encourage private investment in the transmission segment of the electricity value chain (e.g. the support offered by the African Development Bank (AfDB) via the designation of a new MD/CEO to run the affairs of TCN), transmission has been a largely monopolistic element of the value chain. This structural make up has been flawed with inherent drawbacks and bottlenecks that have hindered any form of investment in Nigeria’s transmission network. These issues can be broadly classified into management issues, system improvement and expansion funding issues and allowed revenue recovery issues.
Barriers to investment in Transmission in Nigeria
Several critical factors have impeded the much needed investment in transmission; however, the Honourable Minister of Power (Mr. Babatunde Fashola) is making great strides towards decoupling the historical and present bottlenecks in the transmission segment of the value chain, in order to encourage private sector participation. Some of the hindering factors to investment include-
Management Structure: TCN currently does not have a board and the management is in charge of the affairs. Manitoba Hydro International (MHI) managed the affairs of TCN from 2012 to 2016 with little or no achievement to their objectives due to the poorly crafted performance targets and KPI’s.
Cost Recovery: TCN’s funding since privatisation was supposed to be derived from the Transmission Use of System (TUoS) tariffs levied on the Distribution Companies (Discos) with tariffs not being truly reflective of costs. Revenue recovery is achieved through income from tariffs impacted by factors such as the Multi Year Tariff Order (MYTO) generation projections, collection performance anticipated in the MYTO based on the level of Aggregate, Technical, Commercial and Commercial Loss (ATC&C), foreign exchange and inflation being properly reflected in tariffs based on market realities, etc. Disco tariffs have been far from cost reflective and as such, Discos have been unable to meet their market obligations in full due to certain anomalies with the tariff structure such as- the sculpted nature of the tariffs which under recovery in the early years and little or no means to finance the shortfall gap, low generation output at variance with MYTO projections, removal of MDA’s from collection losses in the MYTO with no mechanism of recovery of the debts, CBN’s decision to float the Naira against the dollar which is at variance with recovery of costs in the MYTO in terms of expected timelines, etc. As a result, TCN is unable to generate enough revenues to meet its operational requirements.
State of the transmission network: The transmission network is made up of around 6,680Km of 330KV lines 7,780km of 132kV lines, 330/132kV substations with installed transformation capacity of 10,166 MVA and 132/32/11kV substations with installed transformation capacity of 11,660MVA.
TCN is still plagued with high non-technical loss and low infrastructure coverage of the country. Less than 40 percent of the country is covered by the existing transmission infrastructure.
The observed wheeling capacity of the transmission has been around 5,000MW for some time due to aging network, obsolete substation equipment, reactive power issues due to long and weak transmission lines in the North leading to constant under-frequency and voltage collapse, overloading of certain corridors and load flow balance of the network due to poor planning of the network, high technical and non-technical losses, high incidences of vandalism, radial lines with no redundancies, community and right of way issues during project execution, lack of effectiveness in managing system reliability and inability to perform real time operations, etc.
Despite the shortcomings, incidences of system collapses have drastically reduced from 42 system collapses in 2010 to about six system collapses recorded in 2015. In addition, the quality of power delivered has improved. A total of 2,650 km of 330 kV and 7,101 km of 132 kV transmission lines and 2,850 MVA of 330/132 kV and also 2,900 MVA of 132/33 kV transformation capacity will be added to the network in the next two years going by project schedules of TCN. In addition, there are on-going reinforcements of existing 330 kV and 132 kV lines and substations to enable the efficient wheeling of more electricity across Nigeria.
Funding: TCN has funding constraints based on the fact that the 2017 FGN budget allocated to TCN is around N40.2bn which is at variance with the MYTO-2015 financial model Capex provision for TCN in 2017 which is N418.504bn. This funding constraint will hinder planned and on-going transmission projects and TCN’s operations in general. This implies that TCN will either fund around 10% of its capex projects or procure about 90% of its funding from other sources. Otherwise TCN will not meet its network reinforcement targets. According to reports by the Nigeria Electricity Regulatory Commission (NERC), TCN needs to spend an estimate of N1.4 Trillion between 2016 and 2020 in order to improve transmission wheeling capacity from 5500MW to 11000MW
The poor state of the transmission network has and continues to affect availability of supply. Evacuation capacity continues to constrain generation output. Additional generation will be considered useless without investment in transmission.
Other factors hindering investment in transmission include:
The current liquidity situation in the power sector;
Lack of a framework for private sector participation in transmission;
Insufficient governance in TCN to deliver best outcome, etc.
The need for an Enabling environment through Laws and Regulations
For private sector participation to thrive within the transmission segment of the value chain there is a critical need for appropriate laws and regulations to be put in place and the existing framework also needs to be overhauled to ensure that there is an attractive investment climate in the sector.
The starting point for private participation in transmission is securing a license in accordance with the Electric Power Sector Reform Act (EPSRA) (2005). Section 65 of the Act simply states that anyone who wishes to construct, operate or maintain a transmission system in Nigeria will need a transmission license. However, where the investor is simply the owner or lessor of the line and the System Operator (SO) is the operator, then a license may not be needed. Alongside the licensing requirement(s) are also other pertinent requirements including environmental permits process, company law requirements such as company registration, etc.
Other relevant and applicable regulations for private participation in transmission include:
• NERC Investment in Electricity Transmission Networks Draft Regulation (2012)
The draft regulations applies to all independent electricity transmission networks, and the operators and users of independent electricity transmission networks other than the transmission network operated by the transmission licensee that is a successor company to the Power Holding Company of Nigeria Plc. Licenses may be granted by the Commission to persons who satisfy the stipulated requirements for the grant of a transmission license to construct, own, manage and maintain an independent electricity transmission network governed by the NERC Application for Licences Regulations 2010.
• NERC Regulations for the Investment in Electricity Networks (2005): The regulations provide for the procedure for investing in electricity networks in Nigeria with the main objective being to create strong incentives to encourage TCN and the Discos to make appropriate and sustainable investments.
The Regulation applies to all types of investors interested in investing to further the growth of electricity infrastructure in the NESI. Investment in electricity networks may be undertaken by network licensees (transmission or distribution licensee) or non-licensees (made only in networks owned, operated and maintained by licensees). The SO according to the regulation is responsible for transmission network planning.
Despite the availability of the above regulations for guiding investment in transmission, it is imperative that a robust framework is put in place to attract the needed investment in the transmission segment of the value chain.
Way Forward
There is a general understanding that the private sector may be needed to bridge the funding gap for transmission, but it does not appear that an explicit plan has been formulated on the extent of that private sector contribution. The fundamental building blocks for allowing private sector participation are already in place, i.e. Transmission Use of System (TUoS) charges (with regulated transmission tariffs) which creates a clear revenue stream for private sector remuneration, the Grid Code establishing technical standards, operating and safety margins and planning processes; which is a necessary pre-condition for private sector participation, and the development of the legal and regulatory framework to promote an enabling environment which needs to be strengthened, etc.
How then can the private sector participate in transmission?
Private participation in transmission can take several forms including:
Unitary Privatisation whereby TCN is privatised partially or as a whole to a trade investor who would bring the required capital;
Project Financing by private investors whereby such investors finance and build and/or own and maintain parts of the network;
Break up TCN into TSP and ISO with TCN managing operations. An independent SO (ISO) will be helpful in allowing private sector investment as anticipated under EPSRA;
Government can create a separate creditworthy borrowing entitiy for the purpose of selling existing assets and procuring new assets. Being a credible offtaker, such entity would have access to financing using Buyer or Seller Credits or Operating Concessions that will not require FGN guarantees;
Management Contract with well-crafted performance targets and KPI’s;
Concession or Lease Arrangements- long-term concession of new transmission lines or the creation of a BOT arrangement between concessioners and TCN;
Independent Power Transmitters, etc.
However, a cost reflective transmission tariff across the value chain is fundamental to realising the objectives of any model chosen.
Conclusion
Transmission is a critical element of the value chain and the Government needs to promote private sector participation in transmission because investors wishing to invest in the power sector will analyse the functionality of the entire value chain and where there is a perceived risk in one element of the value chain, the entire value chain would be undermined. The challenges faced by TCN continue to hinder the realisation of reliable and stable power supply and thus needs to be addressed as a matter of urgency.
Ivie Ehanmo
IVIE EHANMO is an Energy Lawyer/Power Sector Legal and Regulatory Specialist. She is a Partner at the law firm, George Etomi & Partners where she manages the firm’s Energy and Infrastructure Projects and is also a Senior Legal and Regulatory Consultant for Energy Market and Regulatory Consultants (EMRC) (Formerly Mercados EMI.