Unrealised Expectations in Power Sector and Outlook for 2015

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    With Nigeria’s power sector facing lack of financial capacity on the part of the new  investors, inadequacy of  supply, non-metering of customers, outrageous estimated billing, non-declaration of Transitional Electricity Market (TEM) as well as generation, transmission, and distribution constraints, Ejiofor Alike writes that consumers did not realise the gains of privatisation in 2014
    In 1960’s, Nigeria was said to be generating the same quantity of electricity with South Africa, and Iran.
    But over the years, these countries continued to embark on sustained investment to add new generation  capacities to their grids on yearly basis, while Nigeria’s electricity supply remained stagnant due to lack of investment.
    Today, South Africa, for instance, generates over 40,000 megawatts of electricity, while Nigeria generates less than 5,000 megawatts.
    With increasing demand for electricity supply, without corresponding increase in power generation, the power infrastructure collapsed shortly after the commencement of the current democratic rule in 1999.
    So, after over 20 years  of non-investment in electricity supply that resulted in darkness and in some areas, epileptic supply of electricity, the Federal Government woke up in 1999 to blame the collapse of the power infrastructure on the government ownership of the utility and lack of funding on the part of the government.
    This fueled the power reform initiated by the former President Olusegun Obasanjo in 1999, with the inauguration of the Electric Power Implementation Committee, which developed the National Electric Power Policy in 2001.
    The power policy culminated in the enactment of the Electric Power Sector Reform (EPSR) Act of 2005 and establishment of Power Holding Company of Nigeria (PHCN), after the repeal of the Act that established the National Electric Power Authority (NEPA).
    After NEPA was renamed PHCN,  the government also unbundled 18 successor companies from the PHCN – six generation companies; one transmission company and 11 distribution companies.
    The EPSR Act of 2005 also created the Nigerian Electricity Regulatory Commission (NERC) to regulate the entry and operations of the private sector in terms of the tariff and service delivery.
    The implementation of the EPSR Act was briefly suspended by the late President Umaru Musa Yar’Adua, before President Jonathan, restarted the privatisation of the assets of the PHCN in December 2010, four months after he inaugurated the Power Roadmap in Lagos on August 27, 2010.
    On November 1, 2013, the Federal Government, through the BPE handed over the assets of the assets of PHCN to the private investors, after the conclusion of the privatisation process.
    With the successful handover of the assets to the private sector, there were high hopes that electricity supply would show unprecedented improvement, but exactly 14 months after the handover of the assets down, it is still the same old story.
    During the privatisation process, Nigerians were optimistic that the transfer of the power assets to the private sector would immediately translate to improvement in supply.
    But 14 months down the line, these expectations have remained a forlon hope due to the unresolved fundamental problems in the sector.
    Inadequate Financial Capacity of New Investors
    One of the major reasons by the federal government to embark on the privatisation was government’s inability to fund the power sector.
    The drivers of the power sector reform were of the conviction that the private sector is in a better position to attract limitless funding to finance power projects and manage the sector more efficiently than the government.
    In line with global best practices, the private investors were supposed to have raised the money used in buying the assets by themselves (equity), that is, without borrowing and then use borrowed funds (debt) to fund the upgrade of the assets for greater efficiency.
    But instead of using equity to buy the assets, most of the new investors were alleged to have used 100 per cent debt to acquire the assets.
    Unfortunately, after paying for the assets around July 2013, it took a long time before they were handed over the assets because the privatisation process almost became protracted, due to the unresolved labour issues, which delayed the handover.
    So, by the time they took over on November 1, 2013 the repayment of the loan used to buy the assets was already due because the Nigerian financial system is short-term.
    The implication was that the demand by the banks for the investors to repay the loans used to buy the assets put pressure on the new investors.
    The development gave them no opportunity to borrow additional funds to upgrade the assets they inherited, as they concentrated on raising money to repay the loan.
    Therefore, instead of embarking on massive upgrading of the infrastructure and procurement of meters to increase generation and ensure adequate and transparent metering, the new investors were concerned on raising funds to pay their financiers.
    So, from the beginning of 2014, the investors came under pressure by their bankers, who denied them further access to credit to fund new projects or upgrade the existing assets.
    Estimated billing/inadequate metering

    Estimated billing or what is known among consumers as “crazy bills”, which is as old as the old NEPA had also persisted in 2014, after take-over by the private investors.
    Despite a recent warning by NERC that meters must be read and electricity customers charged according to their energy consumption, the electricity distribution companies have continued to slam over-estimated bills on consumers.
    Following public outcry on the fixed charges on electricity bills, which had prompted protests by consumers in some parts of the country, NERC had directed the electricity distribution companies to desist from over-estimated bills.
    The regulatory agency also warned “that someone does not have a meter does not mean that he must be given over-estimated bills”.
    But despite NERC’s clarifications and the public posturing of the new investors against crazy bills, the distribution companies have continued to give inflated and outrageous bills to consumers, apparently to meet their revenue targets.
    To discourage estimated bills, NERC’s guidelines stipulate that the distribution companies shall endeavour to obtain an actual reading of all meters recording electricity usage at all supply addresses within their areas of operations every month, or at such intervals as approved by the commission.
    According to the guidelines “every DISCO shall endeavour to read the meter, at least, once in three months and the estimated bills issued shall not amount to a figure in excess of the cumulative average of the customer’s consumption.”
    But the distribution companies have apparently ignored NERC’s directives and have continued to milk customers through estimated billing, which is higher than actual energy consumption of the customers.
    It is a common knowledge that the distribution companies sabotage efforts by the government to ensure effective metering because they generate more money by estimated billing than by charging customers according to their actual energy consumption.
    Generation, transmission constraints

    Globally, the electricity market is supply-driven, meaning that if there is no generation, there will be no transmission and the distribution companies will have nothing to distribute to customers.
    As at March 30, 2014, when NERC began to review the mark up date for 2014, power supply was about 3,600 megawatts, against the projected 9,062 megawatts by NERC.
    With a shortfall of over 5,000 megawatts in generation, the revenue expected by the distribution companies was far less than the projection because of poor performance of the generation companies.
    The poor generation broke the value chain as the distribution companies could not generate enough revenue to replace bad transformers, implement their metering plans and also upgrade infrastructure.
    So, with very low supply of electricity, which was caused by inadequate gas supply to the power plants, all the projections were down.
    Though generation was poor in 2014, transmission was still the weakest link in Nigeria’s power sector during the period under review.
    There was a frequent collapse of the transmission network that the Minister of Power, Prof. Chinedu Nebo had to set up an investigative panel to unravel the causes of the frequent system collapse of the transmission network.
    Nebo had inaugurated a 13-member committee to investigate the causes of frequent system collapse.
    But the stakeholders in the sector said Nebo’s action amounted to chasing the shadows because the government itself could not claim ignorance of the causes of the collapse.
    According to them, the current transmission network was designed to carry 3,000 – 3,500 megawatts and each time this load is exceeded, the system collapses.
    As the government was accused of not being realistic in tackling the problem in the transmission, so was also Manitoba Hydro International, the management contractor of the TCN of accused of lacking understanding of the system.
    Low water levels in 2014
    As Nigerians were expecting improvement in electricity supply at the beginning of 2014, following the handover of the assets to the new investors by the end of 2013, the cyclic drop in the levels of water at the hydro power stations during the period of February, March, April and part of May every year re-occured in 2014 and supply dropped to all-time low.
    Three months after the handover of the assets, hydro power stations at Kainji, Shiroro and Jebba witnessed a drop in water levels, which is referred to as “low deep”, which is a cyclic natural phenomenon that occur during the first quarter of every year as a result of drought.
    Despite government’s promises of effective water management to curb this menance, the situation had worsened in recent years by poor water management and lack of maintenance of the hydro stations.
    On many occasions, the situation had resulted in excessive leakage of water in the dams during the early part each year.
    With the handover of the assets to private investors, it was expected that the new investors with their limitless access to funding would better manage the situation.
    However, the situation persisted in 2014, despite the takeover of the assets, and at the early part of the year, Shiroro was shut down, resulting to a drop in power generation by over 300megawatts, thereby worsening the power supply situation.
    Also as predicted by the Nigerian Meteorological Agency (NiMet), the drop in seasonal rainfall, especially in the north, forced the Transmission Company of Nigeria (TCN) to embark on power rationing and load-shedding.
    TCN had blamed the rationing on the constraints in power generation, which saw electricity contributions from the country’s hydro power plants dip with the shutdown of the Shiroro power plant.
    Shortage of gas/vandalism

    The Chairman of the Nigerian Electricity Regulatory Commission (NERC), Dr. Sam Amadi, had said the solution to the cyclical problems at the hydro stations was to increase gas supply to the gas-fired power stations to compensate for the expected fall in generation from the hydro stations.
    “The answer to the cyclical hydro problem is to increase gas supply so that we can compensate the expected fall in hydro power generation to the national grid by enhanced supply from gas turbines,” he said.
    Amadi said if there was enough gas to support the thermal stations, the generation from the thermal plants would compensate for the expected drop from the hydro stations.
    With sufficient gas to support additional capacity at the thermal plants, there is no doubt that there will always be “spinning reserve” to take over when the water levels drop.
    But instead of gas supply to increase and boost generation at the gas-fired power stations so as to compensate for the drop in generation at the hydro stations, the supply of gas to the generating stations in 2014 was grossly inadequate due to vandalism of pipelines.
    Pipeline vandalism disrupted power supply in 2014 with the Nigerian National Petroleum Corporation (NNPC) claiming that close to N1 billion was spent on the repair of the pipelines during the year under review.
    Over 30 percent or 480million standard cubic feet per day ( MMsf/d) of the installed gas supply capacity was out during the greater part of 2014 due mainly to vandalism.
    The lost gas was equivalent to the gas requirement to generate about 1,600 megawatts of electricity.
    The pipelines involved were the Escravos-Warri stretch of the Escravos Lagos Pipeline (ELPS) which accounted for (190 mmcf/d) and the Trans-Forcados crude pipeline (230 mmcf/d).
    Non-Declaration of TEM

    A major setback in Nigeria’s electricity market in 2014 was the non-declaration of the Transitional Electricity Market (TEM), which was initially slated for March 1, 2014.
    The non-decalaration of TEM largely followed the persistent inadequate gas supply to the various power generating plants nationwide.
    When declared, TEM will make it mandatory for the NGC, a subsidiary of the NNPC, to be sanctioned in the event of failure to deliver on its gas supply commitments to the power producers, in line with the Gas Supply Agreement (GSA) signed in 2013.
    With TEM also, any power generating station that fails to deliver on its electricity supply commitment to the national grid in accordance with the Power Purchase Agreements (PPAs) signed with the Nigerian Bulk Electricity Trading (NBET) Plc, otherwise called the Bulk Trader, will also be sanctioned.
    Actionable agreements, which have since been signed but awaiting implementation, pending the declaration of TEM, include Transmission Use of Service Agreements (TUOS); Grid Connection Agreements; Ancillary Services Agreement; Power Purchase Agreements (PPAs); Gas Supply Aggregation Agreements (GSAAs) and Gas Transportation Agreement (GTAs).
    The GSA obligates the gas supplier to provide the agreed minimum amount and quality of gas to the power producers.
    The agreement also obligates the power producers to pay for gas supplied and provides for penalties for non-delivery of the required gas and non-payment for the gas delivered.
    It was gathered that of all the agreements that are awaiting implementation, the GSA posed the greatest threat to the declaration of TEM because of the persistent interruption in gas supply to the power producers.
    Up till now, all the gas-fired power stations are operating below half of their available capacity because of the inadequacy in gas supply.
    As pointed out earlier, the gas shortage was blamed on the sabotage of the Escravos-Warri-Lagos Gas Pipeline network by vandals, saboteurs and vandals operating around Ogidigben, Ajadiabo, Escravos, Gbaramatu and Ugborodo communities in Warri South West Local Government Area of Delta State.
    The situation was so bad at a point in 2014 that it almost became impossible for Chevron Nigeria Limited to pipe 350 million standard cubic feet of gas per day additional commitment because of the vandalism of the Escravos pipeline network.
    If TEM were to be declared in the face of chronic gas shortages to the power sector, NGC would pay huge penalties for failure to meet its gas supply obligations to the power producers.
    Under TEM , the PPAs signed by NBET and the power producers obligate the producers to deliver agreed electricity capacity and energy to the national grid.
    The agreements also obligate NBET to pay for the capacity and the energy delivered while penalties exist for non-delivery by the power producers and non-payment by NBET.
    Poor performance of Discos

    A recent assessment of the operational performance of the 11 electricity distribution companies by NERC clearly indicated poor performance by the new investors.
    At the end of the assessment, the regulatory agency punctured the claims of post-privatisation incremental improvements made by some of the electricity distribution companies.
    NERC in 2014 assessed the distribution companies on their level of compliance to statutory revenue remittance to the market, response to consumer issues, investments in expansion of network facilities and provision of metering facilities to consumer to reduce extant loss levels and ensure transparency in market transactions.
    The outcome of the exercise showed that contrary to the expectations of both the government and the consumers, some of the distribution companies that had performed creditably well before they were privatised by the government late in 2013, were found to have done badly under the new electricity market.
    Speaking on the assessment, the Chairman of NERC, Dr. Sam Amadi said in an interview recently in Abuja that the assessment indicated a contrary development with what some of the  distribution companies have constantly brandished as their achievements in market since the sector was privatised.
    Outlook for 2015

    However, notwithstanding the challenges experienced in power generation in 2014, NERC had remained optimistic that generation would hit 7,000mw before the end of the year but this expectation was not realised.
    NERC expected the increment from the coming on stream of power projects executed under the National Integrated Power Projects (NIPPs).
    But NERC’s 7,000mw projection by the end of this year has remained a pipe dream because there was no boost in gas supply to fire the NIPP plants and raise generation beyond the current average of 4,000mw.
    Shortage of gas supply to the NIPP plants also stalled the privatisation of the completed plants.
    As the country enters 2015, the various stakeholders, including the Ministry of Petroleum Resources and the Ministry of Power should quickly address the challenge of gas supply.
    To address the funding shortfall experienced by the investors, the federal government also in 2014 earmarked N213 billion life-line for the new investors but the investors are yet to access the facility.
    The government should therefore conclude all the processes hindering the access to this life-line by the investors.
    NERC should also demonstrate that it has the capacity to regulate the private investors by sanctioning the operators that flout its directives on estimated billings and provision of meters.

    Source…