The Nigerian Electric Power Sector in 2016
There have been several happenings in Nigeria’s electricity supply industry (NESI) in the last fifteen years or so, commencing with the issuance of the Nigerian Electric Power Policy (NEPP) to the enactment of the Electric Power Sector Reform Act (EPSRA), the establishment of the Nigerian Electricity Regulatory Commission (NERC) and also the recent privatization of the generation and distribution aspects of the electricity supply value chain. In the main, those have been the positives.
Nevertheless, there have been downsides such as the less than modest improvement in the power sector despite the privatization of the sector, the failure recorded in the proposed privatization of the power plants built under the auspices of the Nigerian integrated power projects, the illiquidity in the NESI and the huge debts running into trillions of Naira owed gas producers especially by the power companies with the Power Holding Company of Nigeria (in liquidation) being the biggest culprit. The failure to pay for gas has meant that despite huge expenditure on new electric power generation capacity, power cannot be produced and electricity cannot flow.
As is customary with this column, we shall, in the next two (2) editions, be taking a peep into what to expect in the power sector in the year 2016. Some of these have been triggered, others are already determined and are being readied to take effect whilst others could be said to fall within the realm of conjecture. There are also recommendations in certain circumstances. Below are some of the views of the writer on the likely occurrences in the electric power sector in Nigeria, and the attendant consequences this year.
Tariff Increases
A tariff change has been initiated and same would take effect from February 1, 2016; whilst the highlight for many consumers of electricity is that distribution companies would no longer charge the fixed charge component of the power tariffs, the downside is that tariffs have increased by about 45%, on the average. The current minister of power appears to be determined to ensure that electricity tariffs are sufficient to incentivize electric power companies, especially Discos, to commit sufficient investments into their networks and it is not unlikely that issues such as the falling oil prices (which may rise momentarily because of the crises in the Middle East), dwindling exchange rates and inflationary trends may lead to further increases (albeit minor) later in the year.
Ideally, a tariff change (particularly an increase) is not necessarily a bad thing. The problem is that it could be quite difficult to convince everyone to share same view as there have been tariff increases without any significant improvement in electric power supply. A good argument for the minister and the electricity companies though, could be that those increases were not sufficient to deliver electricity efficiently and to take care of electricity generation inputs, such as natural gas.
That said, one thing consumers may now consider doing more often than ever before (now that the tariff increase has become reality), is to consider alternative power sources such as solar power systems as complimentary to power received from Discos. The initial outlay may be high but the cost of maintaining same is reasonable, plus having alternative power sources like solar potentially reduces a user’s monthly electricity bill, as there is no electricity bill for solar or wind power generation, generally speaking.
Further, consumers would need to consider more efficient usage of electricity and should consider using compressed fluorescent lamps (CFLs) and light emitting diodes (LEDs) instead of the incandescent lamp. Movement sensing electricity systems which automatically go off when no movement is detected should also be considered. Furthermore, attitudes generally need to change such that the culture of wastage is is discouraged and dispensed with.
The foregoing notwithstanding, the government must ensure that power supply improves rapidly to justify the imminent tariff increases. The distribution companies must cut wastes; avoid a lavish culture. Investments requisite for the improvement of their networks must necessarily be made and it would no longer be sufficient to ration power. I believe that one of the reasons for a tariff increase is to ensure that the tariff can bear gas prices such that the excuse of insufficiency of gas gradually becomes a thing of the past.
Semblance of Improvement Due to Improved Systems and Distribution Planning
Although, the planning and subdivision of cities in Nigeria into commercial, residential and industrial areas/ zones has been poor; the new owners of the electricity distribution companies (Discos), led by the Eko Electricity Distribution Company Plc. are currently doing a lot of electricity distribution planning. This is being done in a bid to ensure that despite the insufficient power supply the populace does feel a semblance of improvement through proper planning. The writer understands for example, that in some instances, areas have been divided into largely commercial and largely residential areas such that the largely commercial areas have more power supply at certain times of the day with the largely residential areas having more power supply when the average Nigerian is expected to be at home which would be all night and until morning except for weekends when largely residential areas would have much more power supply.
Despite the fact that this cannot be said to be a real improvement in power supply, adequate systems and distribution planning together with adequate support from the regional planning department of government could help reduce the adverse impact of inadequate power supply.
Change in the Regulators
Whilst the NEPP recommends the establishment of an independent regulator for the electric power sector, the EPSRA specifically established NERC as technical and economic regulator for the entire NESI. Although NERC was established in March 2005, the first set of Commissioners was appointed on 6th October 2005. This first set of commissioners of NERC consisted of: Dr. Ransome Owan (Chairman), Abdurahman Ado (Vice-Chairman), Dr. Sola Odubiyi, Professor Iloeje, Dr. (Mrs.) Grace Eyoma, Ibrahim Bunu and Alimi Abdulrasaq. Many of these individuals were excellent minds with international exposure and experience.
With the quality of those appointees, the lack of experience that should ordinarily have been the case, because electricity regulation of the type was only read in UK and USA textbooks without any practical expression was pleasantly not the case. There was a thorough recruitment process which brought in and trained high quality staff. The first set of commissioners also developed a comprehensive body of administrative and regulatory rules, regulations, practices and precedents which, for a new regulator with no prior experience, was phenomenal.
All of the foregoing was done in only about three (3) years and that was incredible. Despite the best efforts of these individuals (NERC commissioners) to build an excellent foundation that was free of FGN control or influence, certain persons in government wouldn’t want any of that as Dr. Ransome Owan, and the 6 Commissioners, representing each of the geopolitical zones were sacked by the late President Umaru Musa Yar’Adua on February 4, 2009, without due process and recourse to the National Assembly. The sacked officials of the Commission were subsequently arrested by the Economic and Financial Crimes Commission over allegations of fraud that were largely unfounded.
In his words, Eyo Ekpo confirms that “in all honesty our predecessors laid a pretty good foundation for others to build upon, something which is made more remarkable by the fact of the very difficult circumstances of their short tenure. They are the ones we remember”.
The erstwhile President of Nigeria, Goodluck Ebele Jonathan nominated seven individuals as the 2nd set of Commissioners of NERC. The nominations subsequently received parliamentary approval and the nominees were inaugurated as the new NERC commissioners in December 2010. In that period, NERC Comissioners have, in the view of the writer, moved NERC to the next level. Specifically, NERC had re-set electricity tariffs, supported the privatization of Gencos and Discos which crystalized in November 2013, established an open and transparent framework for the competitive procurement of wholesale electricity, developed Interim Market Rules and successfully transiting the Industry through a turbulent Interim Rules Period from 1st November 2013 to 31st December 2014.
NERC also developed a new, cost-reflective tariff framework for the Industry and its implementation on 1st February 2016, prepared the entire electricity market between March 2011 and January 2015 for its evolution/progression into the Transitional Stage Electricity Market (TEM), assisted with the commencement of TEM on 1st February 2015; developed and implemented the CBN-NESI “Nigerian Electricity Market Stabilisation (Loan) Facility” and established an Independent System Operator for the electricity industry.
Apart from the foregoing, NERC has introduced local content regulations, issued several other regulations for the technical, financial and economic regulation of NESI to encourage investment whilst still protecting consumers. It had indeed always been my view that NERC had performed its duties admirably in the last five (5) years. NERC had, apart from the foregoing, worked very hard at forging a good balance (which is a delicate one) between consumer protection and investment attractiveness of the sector.
In the year 2014, for instance, NERC issued enforcement regulations for the electricity industry, together with administrative sanctions (including fines) available to the commission against any operator (being a licensee in the power sector) found liable for breaching any of the sectorial rules. Just last year, the Commission also approved the Nigerian Electricity Supply and Installations Standards Regulations which specify standards for installations in the electric power industry.
Despite the achievements, it would appear that towards the end of the last administration of the FGN, NERC got too involved in politics and took certain actions/ decisions which simply smelt of political patronage without taking into consideration, the bigger picture. Specifically, on March 17, 2015 NERC issued a notice stating that “henceforth, collection loss, which is defined as the ‘amount billed but not collected’, will not be automatically passed on to consumers of electricity. Consequently, the collection loss for all Discos is set at zero”. NERC then specified that the removal of collection losses from customer tariff had reduced tariff by more than 50 percent in certain cases. The question to the writer’s mind, at that time was whether the setting of losses at zero did not amount to changing the rules mid-way into a game, especially considering that the Discos had only recently been privatized with agreements largely hinged on the provisions of Multi Year Tariff Order.
What made the decision of NERC particularly suspect at that time was that during the privatization of the Discos, the value of the service/efficiency parameters was considered viz-a-viz the investment proposals made by bidders aimed at reducing ATC & C losses over a five (5) year period. The owners of the Discos had specified clearly in their bid documents, the percentage rate at which the entirety of the losses (ATC&C) in the power industry would be reduced over a 5 year period and would legitimately expect that this be honoured as same affects other fundamental matters such as financing, and expected revenue to meet expenditure. Therefore the sudden reduction in the 5 year period was viewed with so much suspicion and adversely affected investor confidence. Very recently, NERC has also been very slow in decision making as regards obtaining licences and permits or, indeed, providing feedbacks to investors and prospective investors. The tenure of the last set of Commissioners of NERC ended on December 21, 2015, the day they issued the MYTO 2015. It is now expected that a new Chairman and other new commissioners would be appointed to manage the affairs of NERC.
Averting a Banking Crisis
During the privatization of the Discos and the now privately owned power generation companies, over N750 billion was expended by banks and other financial institutions in the sector in form of loans and investments.
Prior to lending to the acquirers of the formerly government owned companies, some banks sold Eurobonds whilst others raised additional capital with assurances to their stakeholders that proceeds of same would be used to finance the power sector. The first sign of crisis occurred when in March 2015, NERC thought to remove collection losses from customer tariff such that tariffs reduced by more than 50% in certain cases. Considering that the loss projection which was now removed formed part of the basis for the granting of such loans and other facilities the banks feared that the power companies would be unable to pay back such loans.
At that time, it was argued that the reduction in electricity tariff will pile pressure on the income of the Discos and would potentially affect their capacity to meet obligations to banks, which may have prepared their expected cash flow and lent to the Discos based on the original Multi Year Tariff Order (MYTO) 2.1. Although adjustments have been made, there appears to be no respite for the Discos and the banks as there are serious liquidity challenges in the electric power sector. The low level of revenue recorded by many of the Discos has heightened asset quality concerns about some of the loans to the NESI.
With the falling oil prices and exchange rate challenges (especially where there were no provisions with regards to hedging),the extent of which could not have been predicted at the time the facility agreements were being negotiated with the banks; the amount payable by many of the Discos and electricity generation companies (Gencos) would appear to be much more than was envisaged when the loans were obtained and some of the banks and borrowers are negotiating the conversion of some of the dollar-denominated loans into naira to reduce the foreign exchange risks associated therewith. With the increase in electricity tariffs and an improvement in metering together with the insistence by government that their ministries, departments and agencies pay their electricity bills, the liquidity problems in the power sector would reduce although the other issues previously highlighted are still potential problem areas.
This piece concludes next week.
Ayodele Oni
For more information on the power sector, read the text, the “Nigerian Electric Power Sector: Policy. Law. Negotiation Strategy. Business by Ayodele Oni”.
AYODELE ONI, (ayodeleoni@outlook.com), a solicitor specializes in international energy (oil, gas & power) investment law and has a mini MBA in power & electricity. You can follow me on twitter @ayodelegoni.