The feasibility of the power sector recovery plan

By Akachukwu Okafor 06/04/2017

Trasmission

From a preliminary analysis of the recently developed power sector recovery plan approved by the Federal Government, it is not a feasible recovery plan in the medium and long term. The measures are designed as interventions to stabilize the collapsing power sector rather than help it recover. The plan will not effectively solve the liquidity problems in the sector and the cost reflective tariff only a measure that might further throw the sector into challenges if other measures are not planned for and implemented synchronously.

The power sector recovery plan comprises a wide range of pet policy actions, operational and financial interventions which intends to help improve transparency, service delivery, performance of DISCOS, transmission companies and the entire value chain. In specific terms the plan provides for simplifying and reducing the cash deficits in the sector; how to make the DISCOS viable, accountable, responsive to customers and to ensure stability of the grid and expansion of the grid and transparency and communication within the sector, in addition to how to improve sector governance and the quality of personnel on the board of the DISCOS. Other provisions of the plan include addressing access to renewable energy using mini-grids and stand-alone solutions and implementing solutions that have been developed for 37 federal universities and seven tertiary hospitals as well as stopping the vandalization of gas pipelines which will help stimulate appetite for investment in Nigeria’s power sector. These measures sound brilliant in theory, how they will be effectively operationalized remains to be seen or made public.

Direct financial interventions to solve institutional and organizational incompetence – gap in skill, knowledge, capacity and capabilities and problematic perspective of the system is not an effective way of solving market failure challenges. For instance, the liquidity problem being experienced in the sector is mainly due to DISCOS unwillingness to make the necessary investments to reduce their aggregate technical, commercial and collection (ATC&C) and entire system losses. I was recently informed by a power sub-station duty engineer that he has over 50MW of power sitting on his substation, but the DISCO in the area only accepted to collect 14MW. The result is that the remaining 36MW will waste and because it was generated, and must be paid for somehow. He further said that DISCOS preferred to accept a small fraction of what is allocated to them and leave the rest with Transmission Company of Nigeria (TCN), while they charge the customer the ‘fixed charge’ of being connected on the grid with or without electricity. This practice is said to be more profitable to DISCOS as they don’t need to share their earning with anyone. Liquidity challenges in the sector cannot be solved when key system players are involved in rent seeking practices. It is difficult to see how government plans to simplify and reduce the cash deficits in the sector by approving a Power Assurance Guarantee of N701 billion Naira for Nigeria Bulk Electricity Trading (NBET) to pay GenCos for gas supplies from this year to December 2018 when there is no plan that equally guarantees that the funds will be collected within the market by DISCOS. How subsequent power guarantees to GenCos beyond 2018 will be secured not yet known.

Making DISCOS viable, accountable, responsive to customers is more of what government wishes that DISCOS do but not what they can be in the near term. It is public knowledge in the sector that DISCOS are grossly incompetent in managing their asset, delivering quality service and have consistently refused to do so. Part of their poor attitude has been traced to how the privatization was handled. The Minister of Power in May 2016 during the presentation of a roadmap for solving the power crisis argued that cancellation of contracts and reversing privatization initiatives sends wrong signals to investors and past reversals failed in solving the problems that caused their cancellations and reversal. However, the Minister has failed to point out that these reversals failed because the process of initial engagement, reversals and renegotiations to correct previous problems are flawed by illegitimacies, lack of transparency and ridden with outcomes that satisfied the selfish interests of powerful and influential actors in the sector. I believe that investors would be happy to see reversals and reprivatisations that are transparent and are in accordance with provisions of the law and international best practices.

There are indications that there are other financial interventions asides the N701 billion Naira planned (or budgeted) for the sector which might be in the form of subsidies and introducing a cost reflective tariff that will help reduce the cash deficits. These were positions advocated by the then acting chairman of Nigeria Electricity Regulatory Commission (NERC), Mr Anthony Akah in January this year, and hinted on by the Minister of Power while briefing newsmen after the approval of the power recovery plan. The Senate Committee Chairman on Power, Senator Enyinnaya Abaribe, while answering at a public dialogue before the approval of the recovery plan, advised government to carefully determine if it is power or petrol that it must subsidize and warned that government should not give money to DISCOS. Subsidies have never worked in Nigeria; it has always been a scam. It doesn’t exist. Even when it exists it doesn’t benefit most of the population. It benefits only the rich and vested interests. Subsidies for the power sector will only elongate and complicate Nigeria’s power sector difficulties. Government should rather embark on a sector wide campaign to enlighten electricity consumers on the positive effects of not subsiding power or petroleum products on the economy and provide a plan to help stabilize and manage the short term economic difficulties that will arise. Subsidising power is not part of the solution, rather DISCOS should invest in upgrading its distribution network to reduce ATC&C losses and improve its collection measures to capture more consumers who currently do not pay for electricity consumed. There are suggestions that the business model that the DISCOS currently operate is a model that collects revenues from willing-to-pay-consumers, while unwilling-to-pay-consumers are not targeted to pay for power consumed. The proposed cost reflective tariff which is really an increase in tariff should be put on hold while government and DISCOS develop and implement a plan that ensures that all consumers that use electricity pay fairly for what they consumed. The inefficiencies in the systems especially on the part of DISCOS should not be passed on to consumers who are not protected by the system. This I believe will help solve the cash deficit problems in the sector. Government should not subsidize electricity and should also not increase tariff, unless an increase in tariff is a deliberate measure by government to push people off the grid for renewable energy alternatives – which is a brilliant measure. Unfortunately, this is not what the government plans to achieve. Perhaps a more careful study and understanding of how the market i.e. consumers will respond to the introduction of a cost reflective tariff is what government should be interested in at this moment, so that it doesn’t create more problems for the grid sector. That said, it must be made clear that an increase in tariff may increase energy efficiency (EE) measures, especially by commercial consumers that are more likely to access finance to implement energy efficiency mechanisms. Also, pursuing an energy efficiency plan is a more conscious consumer and policy driven plan which only informed consumers will be willing to take, even though there may be difficulty in change of lifestyle and business process.

Energy efficiency is an energy demand reduction mechanism that is missing in the power recovery plan, at least from the briefing that the Minister of Power gave. This has the capacity to increase the number of consumers that are served by the same quantity of energy that previously didn’t serve a lesser number. An Energy efficiency plan being included as part of the power sector recovery plan is an opportunity to link the recovery plan to Nigeria’s energy efficiency contribution in her Intended Nationally Determined Contribution to the Paris Agreement which is a 30% energy efficiency improvement by 2030, which is a measure that will help attract investments. The structure of the current mini-grids regulation is part of measures that will not effectively assure a quick power sector recovery. These and more I would be analysing in the future.

 

Okafor Akachukwu is the Energy and Environment Editor, The Initiative for Policy Research and Analysis (InPRA) and a Science Policy Research Unit (SPRU), University of Sussex trained Energy Policy, Innovation and Sustainability Expert. Email: akachukwu_okafor@yahoo.com

Scientific, technological and innovation capabilities required for an efficient energy system

By Okafor Akachukwu 14/12/2016

In my November 15 article, titled “Derisking Nigeria’s electricity market for increased energy access”, I alluded to the Nigeria Bulk Electricity Trading (NBET) Company boss’s position that Nigeria cannot run nuclear and wind technologies for electricity purposes. I stated asides the huge financial cost of deploying these technologies, decommissioning and waste management, our inability to run wind and nuclear can only be understood “from a science, technology, and innovation capabilities and management perspective” which the scope of the article did not allow me go into. Today, I will provide more insight on this statement. This is not to say that wind and nuclear technologies have become high tech ventures in themselves as sending man to space. Actually it is much easier to send a man to space and back than to deploy wind and nuclear technologies and keep it running optimally for more than 40 years. The reason is that these technologies are hosted, embedded and operate within a very complex and complicated environment and sociotechnical – energy system that requires much more than the technological knowhow to be successful. And if an element or component of the system is missing, system failure is inevitable. Unlike decades ago, the increasing waves of socioeconomic, financial, environmental, political, technological and security challenges, particularly security vulnerabilities and instabilities, including cyber attacks – have made managing a nuclear facility more complex and complicated. The myriad of challenges seem to dwarf the challenges of scientific, technological and innovative capabilities, and are the first and principle factor for scientific and technological development and advancement.

Science, technology and innovation policy for socio-economic, scientific, and technological development and advancement is dynamic and changing from what we used to know. The linear model of innovation – Research and Development (R&D) and Regulation – was the dominant model in the 1960s-1980s. This model necessitated the United Nations Advisory Committee on the Application of Science and Technology to Development (ACAST) to develop a World Plan for the Application of Science and Technology for Development in 1970 for the Second United Nations Development Decade (1970-1979) – which produced the document that is widely known as the “Sussex Manifesto”. The essence was to produce a strategy that would help developing countries (Global South) build its own scientific and technological capabilities and move from acquiring technologies from developed North, to adapting technologies to local conditions and mastering them. This is widely referred to as “technology transfer” – and is still a huge controversial topic of debate in the climate change negotiations. An important part of the plan was that scientific and technological/technical services sector should receive several times more funds than what is invested in research. Today’s dominant model is the National Systems of Innovation (NSI) from the 1990s, which has come to stay, while the other- “Transformative Change” is an emerging model that researchers at the Science Policy Research Unit (SPRU), University of Sussex suggest. Many countries especially the Asian Tigers have exploited the provisions of these models to be where they are today. I which to use what happened in China particularly in its energy sector to highlight some practical lessons of how building strong scientific, technological and innovative capabilities can be instrumental to development.

In the 1990s when faced with growing energy demand especially for its manufacturing sector, Chinese government quickly set the right policies, incentives and R&D programmes called the 863 and 973 programmes. The objective, to gain mastery and localize supercritical (SC) and ultra-supercritical (USC) coal-fired power plants technologies, was clearly stated in the policies. With full government support – funding and right environment, Chinese firms acquired its first supercritical units in 1992 from leading international firms such as ABB and General Electric for boilers and steam turbines respectively. There were also research collaborations with Chinese regional design and research institutions headed by Chinese Thermal Power Research Institute (TPRI) in Xian and international firms such as Siemens, Hitachi and Alstom for the design of new coal plants. The outcome of these was that in 2004 China’s first domestically manufactured a supercritical unit with a total capacity of 600MW, which started service in Henan Province and between 2004 and 2007 China had installed 123.6GW of super-critical units. Ultra-supercritical technology (USC) also received significant attention. In 2000, China collaborated with Mitsubishi Heavy Industries, the Harbin Boiler Company and Siemens to acquire, adapt and improve USC technology. In 2006 China installed its first domestically manufactured USC unit in Yuhuan. In 2010, more than 100 USC units were on order from Chinese power companies. This was also replicated for integrated gasification combined cycle (IGCC) technologies. Starting with acquiring licenses from leading international firms such as Shell, TPRI learned the gasification technology and advanced it. Recently, due to higher efficiency of Chinese IGCC it beat competing Shell and General Electric IGCC technologies to win the bid for Good Spring IGCC in the US owned by EmberClear. Similar successes have been recorded for Solar PV, wind and nuclear technologies.

These successes wouldn’t have happened without strong scientific, technological and innovation capabilities built upon strategic research and development and regulation policies and mechanism and National Systems of Innovation that has specific national development targets to achieve. NSI requires having the right R&D policy, intellectual property rights (IPR) law that protects and encourages innovation, education policy that aligns with development plan, foresight, right system regulation, technological spaces/platforms for interaction on various levels, use of demand stimuli – procurement to push for supply improvements and innovation, increasing capacity to absorb and use knowledge, building regional and sectoral systems of innovation, stimulating entrepreneurship and incubators. Along with these, China made significant investments of over USD $50 Billion, and the same applies to technological advanced countries such as Germany, Demark, US, United Kingdom, Japan, Netherlands who have made significant gains in the development of new low carbon energy technologies. These elements are needed for a scientific, technological and innovation side of a complete delivery chain in our interest and to successfully acquire and operate wind and nuclear technologies. Lessons abound for Nigeria and other developing countries. Envisioning a technologically advanced green (low carbon) economy without robust R&D and without an NSI base built on an educational policy that improves and advances science, technology, engineering and mathematics (STEM) outputs, and without improving institutional and organizational capabilities to govern the system will only be an illusion. Nigeria can start today to build these capabilities to enable it effectively and efficiently harness its huge gas, biomass, solar, hydro and possibly wind and nuclear potentials for its national energy security.

Okafor Akachukwu is a Science Policy Research Unit (SPRU), University of Sussex trained Energy Policy, Innovation and Sustainability Expert. Twitter: @akachukwu Email: akachukwu_okafor@yahoo.com

Derisking Nigeria’s Electricity Market for increased Energy Access

By Okafor Akachukwu| 04/11/2016

 

electricity-market-2

It may not currently be the best time to invest in Nigeria but the risk of investing in Nigeria may be worsening – possibly worse than as reported in the World Bank Doing Business 2017 report. Nigeria was ranked 169 out of 190 countries, reviewed from her 170th position in the 2016 report. Of the ten (10) indices used, only getting credit and getting electricity recorded upward improvements by 16 and 2 points from 44 and 182 positions in 2016 respectively. However, while getting electricity for business improved by 2 points is creditable, recent developments in Nigeria’s electricity sector may be threatening this improvement significantly.

Just this Monday, during an oversight visit by Nigeria’s House of Representatives Committee on Power to Nigerian Bulk Electricity Trading (NBET), it announced that the Power Purchase Agreements (PPA) which NBET had secured with 14 power generation firms “may have breached due process”, because the process of securing the agreements appeared to have “no proper guideline” and therefore was “null and void”. The Committee further threatened to subject the agreements to legislative investigation. This presents more questions than answers for the sector – how soon will this investigation commence, how long and what process will be taken, what penalties will be prescribed to defaulting parties, what impact will this investigation have on the electricity sector – achieving current project timelines, sector generation plans, and how would prospective investors in the electricity market respond to this? These questions present a challenge and it is currently unclear what the total volume of affected transactions is in megawatts (MW).

The first effects of this announcement will be that these 14 firms would suspend their project implementation until the investigation is concluded. This means that new utility scale electricity additions to the grid would have to wait – which threatens the actualisation of Nigeria’s generation targets and electricity sector reforms. On the short term, investment in the sector will stagnate and prospective investors will be forced to reconsider their investment interests. Depending on the process and recommendations of the investigation, the confidence of investors may be strengthened if there is an indication that the outcome will introduce a new process and guideline of securing PPAs that complies with due process, and transparent procedures. If not handled properly, this incident may be the start of an end to Nigeria’s electricity sector improvements and reform. Already, in the last 10 months, Nigeria’s general investment environment has witnessed increased currency and exchange rate risk, interest rate risk, inflationary risk, liquidity risk, credit risk and market risk. In the electricity sector, the market risk is that the revenue generation of Discos have dropped since the start of the year. Also there is currently a legal challenge of the current electricity tariff at the courts, including the political/social/legislative risk that the sector is now faced with. Nigeria’s electricity market is a failed market and the government should be seen to be doing all it can to intervene and correct the failures and not increase the level of risk and uncertainty that investors have to face in making investments.

In response to the committee’s announcement, the Managing Director and Chief Executive Officer of NBET, Marilyn Amobi stated that the management under her new leadership will work to correct identified anomalies. In other statements, she said, “From my perspective, we have no business talking about 20,000MW for 2020. It is clear we can’t achieve that by 2020….We can’t make that happen. Nigeria is not financially buoyant to embark on [nuclear energy]. We cannot run nuclear in Nigeria, and the question of wind energy, forget it. It’s just a story. We cannot run all that in Nigeria. It’s just a wish list.” These are big and weighty statements, which need some clarifications.

Amobi may have drawn her conclusions from the fact that the generation contribution of the 14 firms would not be realized based on original timeline if an investigation is conducted. She also does not see new PPAs being secured speedily by any means that would mobilize to site and deliver 20,000 MW by 2020. Incidentally, independent power producer (IPPs) application and licensing processes and PPA negotiations for large scale, centralized utility grid projects and transactions takes upwards of 3-6 years to secure and the construction of the power generating plant takes 1-10 years, depending on planned capacity and technology being used. This is the big challenge. On the other hand, decentralized renewable energy (DRE) off grid technologies and other solutions can generate 20,000MW by 2020 if the right policy, regulatory framework, and financial mechanisms for the sector development and growth are put in place. Renewable energy technologies do not require very lengthy, bureaucratic and expensive licensing and PPA processes required for large scale utility plants. Government needs to acknowledge this fact and act on it. While government has already indicated that Nigeria will generate 50% of its energy needs in 2020 from renewable energy, the sector is yet to see or set a clear roadmap of how that will be achieved.

On another hand, Amobi’s position that Nigeria can’t go into nuclear and wind can be understood from a science, technology, and innovation capabilities and management perspective which the scope of this paper will not permit me to go into. The financial cost of nuclear technology is huge, with its waste management challenges. Nigeria cannot afford to have a Three Mile Island, Chernobyl, or Fukushima nuclear disaster on her door step. It will be the worst human catastrophe; we should first concentrate on effectively running our gas and hydro-plants at full capacity. Depending on the way you choose to look at it, wind technology is still new and will require significant investments along its delivery chain in Nigeria – if it will ever work as it is currently does in countries such US, UK, Germany, China, Denmark, Japan and South Africa. I see this as a challenge to wind power IPPs. In all, the Nigerian government has a huge responsibility in correcting the electricity market failure, derisking the sector for investment inflow, building our science, technology and innovation capabilities and systems, building and strengthening institutions that would be able to effectively deliver on its mandate based on due process, transparency, fairness and global set standards.

 

Okafor Akachukwu is a Science Policy Research Unit (SPRU), University of Sussex trained Energy Policy and Sustainability Expert. Contact: Twitter- @akachukwu, Email: akachukwu_okafor@yahoo.com