Feasibility of the Power Sector Recovery Plan – II

By Akachukwu Okafor 10/02/2018

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A few weeks before this year’s annual Nigerian Economic Summit, I was in conversation with an energy reporter from one of Nigeria’s leading dailies. In that dialogue, I mentioned that I did not see a situation in which further reforms in the power sector especially the Power Sector Recovery Plan (PSRP), would yield any results without the government reviewing the privatization of the electricity sector especially the distribution companies (DISCOs). I argued that part of the reason the DISCOs are not making required investments into network and systems upgrade is because they are not sure of how long they will be permitted by the regulators to be indisciplined before they are called to order. I told him that what most of the DISCOs are doing is cashing out, pending when there is certainty about which direction the sector is going. He argued that the government will not attempt any review of the privatization exercise as this will further place Nigeria’s electricity market on the negative for investment. We concluded the conversation after acknowledging that it may put Nigeria on the negative, but that government doesn’t have an alternative. Although I emphasized that while I foresee a review soon, what I do not know is how it will be handled by government, the nature that it will take, and what the outcome will be.

Soon afterwards, during the Nigerian Economic Summit, Nigeria’s Minister of State for Budget and National Planning, Zainab Ahmed, told the summit that government was considering a review of the power sector privatization, starting with the DISCOs. This, according to her, was necessary to attract the required investment into the sector, particularly the World Bank Group’s $2.5billion which can only be offered upon Nigeria’s fulfilment of 18 agreed conditions stated in the PSRP. In early April, I provided a preliminary analysis on the PSRP based on the Minister of Power’s briefing to newsmen during the launch of the plan, and promised more analysis when the entire PSRP document is available to me, which you will read in this article

Of the 18 conditions stipulated in the PSRP, there are conditions that will be difficult to meet due to the difficult and challenging environment where these problems are situated – the numerous stakeholder groups to engage with, the lack of a clear strategy for solving these problems, the political will to pursue any strategies and most importantly the lack of effective and strong institutions to implement plans/strategies that will meet these conditions. They include: review and implementing a cost-reflective tariff (per MYTO review schedule), development of a plan for the prevention of gas pipeline vandalism and its implementation, and also, identification of sources of funding for the PSRP. The last attempt by the industry regulator to review the tariff upwards to reflect cost of electricity production to distribution to consumers, was resisted by consumer groups through legal action.

Unfortunately, there seems to be no way that further investment that will make significant difference in the electricity sector can be made without a tariff increase. I remember one of the former heads of the regulatory commission telling me during a private chat that for Nigeria’s electricity sector to recover, electricity tariff needs to be set at a minimum of N62KW/h and that it will take at least 10 years should all stakeholders in the sector start doing the right thing once tariff was set at N62KW/h. He further pointed out that it is only at this tariff that the industry can achieve a levelized cost that will increase electricity generation especially from renewable energy sources and attract needed investment in the industry. This assertion is reflected in the PSRP which shows that there has being a steady decline of both naira and dollar denominated investment in the electricity sector since 2013 to 2017, with uncertainties for year 2019. The level of confidence in the Nigeria Electricity Supply Industry (NESI) has left the industry with only two dependable investors – the Central Bank of Nigeria (CBN) for Naira investment and the World Bank Group for dollar investments.

For gas pipeline vandalism, government is light years behind developing and implementing a sound plan that will effectively solve the problem due to the long historical background of violent agitation that has been part of exploiting resources in the region, it’s underdevelopment, continued pollution and political economy of resources there.  Unfortunately, 85% of Nigeria’s current total generation output is powered by gas. This is part of the reason government is vigorously pursuing the development of more hydropower. So, it is difficult to imagine where the funds for implementing the PSRP will come from.

Other strategies laid out in the plan leave more questions than answers. They include: where and how the funds that will be used to fund future (2017 – 2021) sector deficit will come from, who is guarantying and insuring the funds? Will there be political will to match the need to ensure that DISCOs’ performance and implementation of credible business continuity plans are realized? This is a serious concern because of the political interferences on the work of the regulator which has long been a hindrance in compelling DISCOs to adhere to industry best governance practices. There must be a sustainable way to run Nigeria’s electricity market. Currently, it is run on very unsustainable shortfalls, the market shortfall for 2015 and 2016 is estimated at N473 billion, while the tariff shortfall is N458 billion. At this level of shortfalls, the subsidy that needs to be injected into the market to keep it running and simultaneously making investments for service improvements is simply not there, especially in a market that tariff increases will not be immediately supported by consumer groups. For subsidies in Nigeria most times, it is difficult to measure their effectiveness, and justify the subsidy mechanism. While subsidies can be a mechanism to correct market failures, however over the years we have come to experience it as an additional effective mechanism of providing more cash to a market that is usually not accountable and transparent for the sole benefit of market players that have access to the seat of power. This presents a trilemma for implementation of the PSRP.

Government has long realized this reality as it has quickly invoked the provisions of (Section 27) of the Electric Power Sector Reform Act 2005 to increase the ease at which four categories of electricity consumers can have access to electricity. With this development, these consumers (that consume more than 2MWhr/h) can buy electricity directly from electricity generating companies (GENCOs), hereby bypassing the usually inefficient and ineffective DISCOs from the line of business. This makes it possible for previously stranded generated capacities that cannot be wheeled out to reach consumers and for the market to be more demand driven in allocation of electricity to DISCOs. For instance, we achieve a situation where about 36MW which a certain DISCO failed to pick up for distribution to consumers from a power sub-station would not be sent to it in the first place. Other commendable measures have been the launch of the Mini-grids Regulation, the inaugurating of the board of several electricity entities including the board and management of the Rural Electrification Fund (REA) which will soon be launching its platform for accessing electrification fund for accelerated rural electrification. While all these measures are commendable, however, holistic policy, institutional and operational mechanism interventions need to take place more alongside implementation of these measures if Nigeria can dream to reduce the annual loss of over USD$29.3 billion to the national economy and approximately USD$470 billion loss in GDP in 17 years according to a World Bank’s Africa Infrastructure Country Diagnostic (ACID) and a 2015 McKinsey report.

In all, the PSRP is not adequate for the recovery of Nigeria’s power sector, this brings me to the governance culture in Nigeria’s public, quasi-public institutions and compliance to standing rules and adherence to industry best practices devoid of political interference. Without reforms in the public and civil service to improve efficiency of service delivery and effectiveness, reduce corruption and mismanagement, it is expected that the PSRP will lead to no recovery of the power sector.

 

Okafor Akachukwu is a 2017 Mandela Washington Fellow (Public Management, University of Maine) and a Science Policy Research Unit (SPRU), University of Sussex trained Energy Policy, Innovation and Sustainability Expert. Email: akachukwu_okafor@yahoo.com

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Fixing the broken pieces of Nigeria’s electricity market – 1

By Okafor Akachukwu 13/03/17

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Nigeria’s power sector is broken, collapsed and needs fixing as many power sector headlines in the past few weeks have suggested. In this year alone, a Punch January 22 caption reads “[Nigeria’s] Power System Collapses Four Times in Five Days”. A THISDAY caption on the same January 22 says “The Perennial Power System Collapse” Two days before January 22, ESI Africa reported that “Nigeria’s Electricity Generation keeps Plunging”. On January 12, Guardian reported, “Power generation drops by 207.1 MW on gas shortage”. The trend of the reportage indicated no improvements which must have necessitated Abuja Electricity Distribution Company (AEDC) to make appeals to their customers over the disrupted power supply. The Ibadan Electricity Distribution Company (IBEDC) had to issue a statement to blame the Transmission Company of Nigeria (TCN) for the power cuts. On January 27, ESI Africa reported that electricity consumers in Onitsha choose to issue the Enugu Distribution Company with a 21-day ultimatum to improve power supply and also install prepaid meters. Then on January 27, ESI Africa reports that the sector regulator – Nigerian Electricity Regulatory Commission (NERC) is seeking government subsidy to rescue the power sector. Very recently on February 7, during a National Assembly workshop on power the President of Senate, Dr Bukola Saraki was quoted to have said that Nigeria power sector was on the “verge of total systemic breakdown” which he attributed to the sale of power Distribution Companies (DISCOs) to individuals and parties who had “no idea about running a proper power distribution business”. The power sector is not on the verge of a total systemic breakdown, it has actually broken down and failing further.

The failing of the power system/electricity market depends on who you ask, when and where. The DISCOs would blame the Transmission Company of Nigeria (TCN) for not allocating them adequate power to serve the customers as well as some of the customers for electricity theft and billions of unpaid electricity bills by both government and private. Government and GENCOS (Generating Companies) blame inadequate gas supplies to thermal plants for low power generation. TCN blame GENCOS for low power generation to transmit to DISCOS and Nigerian Electricity Supply Industry (NESI) for billions it owes it. National Electricity Regulatory Commission on its own thinks that a review of the electricity tariff is due to ensure that tariffs are cost reflective and that the sector is in need of subsidy from government. Some politicians and technocrats think that the privatization of the sector needs to be ‘reviewed’ – whatever that means has to do with the political economy of the sector. Consumers on their part blames President Buhari, the Minister of Power, and DISCOS – who have preferred to be ineffectual in areas they could be very effective. DISCOs have turned themselves into the power sector’s un-cautioned bullies, and NERC has equally failed to prevail them and other actors in the sector to conduct business appropriately. Several deadlines issued by NERC to DISCOS to install prepaid meters for customers (many of whom have paid for these meters) have not been met with February 28, being the latest deadline. Consumers now group themselves in different ways that seem right to them to find solutions.  How else do you know a market that is broken and failing if not by these swarming challenges?

As depressing as the tale of the power sector is especially with continued drop in gas supplies to power plants, the Minister of Power, Mr Fashola has confidence that a policy that leads to more gas plants would be what will fix the system in terms of generation challenges. Asides, challenges with vandalization and liquidity that have adversely affected supply of gas to power plants, there is a looming threat to further development of Nigeria’s gas resources that will guarantee adequate supply of gas to our power plants. Recently, Christopher Akor of Business Day called the nation’s attention to a surreptitious attempt by the National Assembly to amend the Nigeria Liquefied Natural Gas (NLNG) Act that will mandate the company to remit 3% of its annual budget to Niger Delta Development Commission (NDDC). This move is not in the interest of Nigeria’s national energy security. Government has many ways to increase NDDC’s funding base than to further tax NLNG.

It is not surprising to hear about these moves especially when Nigeria’s Energy Commission independently develops Nigeria’s Energy Master Plan, Ministry of Petroleum Resources (MoPR) and Ministry of Power (MoE) are independent ministries and have their different ideas of how the sectors should be ran and for what purpose.

To MoPR, Nigeria’s gas is for export to earn foreign exchange, to MoE, ‘gas would help solve the power problem, maybe we should talk with MoPR to see what can be done’. Then policy makers turn around to say more tax and contributions need to be extracted from the gas sector to fund activities that can be adequately met by other means. What government should be doing at this time is to make development of the gas sector as attractive as possible. For Nigeria’s vast gas reserves to contribute in any significant way that will help solve Nigeria’s power needs especially in the long term, the Department of Gas at MoPR must rise beyond “overseeing” NLNG, West African Gas Pipeline (WAGP) Project, Trans-Sahara Gas Pipeline Projects and other projects it may have entered into and work to ensure that Nigeria’s gas is harnessed for the country’s power needs. The Directorate of Gas and Power at the Nigeria National Petroleum Corporation (NNPC) must also do more than “monitor and support” all LNG and Independent Power Producers (IPP) Projects in Nigeria. Government has to find ways for ministries, departments, directorates, agencies, commissions that work in the energy and power space to work as close knit as possible.

While Nigerians wait for Nigeria’s gas to be turned to power, there has to be new and quick to deploy solutions and alternatives such as renewables – solar, wind, biomass, biofuel, waste, hydro which are solutions and alternatives for today and the future. Government has to recognize and believe that these are feasible and practical solutions and alternatives. The Minister of Power’s view that renewables are not a solution but an alternative is problematic and does not help government in planning and policy development. Renewables on their own are however not “the” solution even when combined with power from gas. Solving other problems around energy efficiency, social, financial, technological, political, organizational, institutional and market services issues are part of the solution for our very complex and complicated electricity market. It is true that the current high forex rate in Nigeria and other factors including high duties, taxes and fuel subsidies adversely affect an accelerated uptake of renewable energy solutions particularly solar. What I see as the most important and key factor that will help fix Nigeria’s electricity market is a successful business model for renewable energy consumer financing. This will disrupt the market in ways that were never thought possible and will force the Nigerian government and other actors in electricity market to get their act together. Renewable energy entrepreneurs must continue to work hard to get this done.

 

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