Feasibility of the Power Sector Recovery Plan – II

By Akachukwu Okafor 10/02/2018

electricity-market-1

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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Promoting a sustainable energy policy environment in Nigeria

By Akachukwu Okafor 28/04/17

energy-access

Sometimes I wish that Nigeria’s power sector challenges are solved so that I will have less to write on, but this seems not to be happening as issues keep arising in this large and troubled electricity market with its various actors and stakeholders.

After my last publication on the feasibility of the power sector recovery plan, I received several messages from key sector players including from a diplomatic mission commending the article’s insightfulness and asking that I share a copy of the recovery plan if I had it. At the time the last article was published, I did not have the plan and my preliminary analysis was based on the media briefing by the Minister of Power after the approval of the plan. However, I have obtained the plan now and I hope to further analyse the plan based on the specific programmes it hopes to embark on. The feedback I found most interesting was from a former Chairman on the Technical Committee of National Integrated Power Project (NIPP) who was not happy that I did not emphasise how DISCOS, in truth, collect a lot of revenue, but turn around to claim to other market players that they collect little and are operating at a loss. He described DISCOS as the problem of Nigeria’s electricity sector for not remitting revenue and refusing to invest in upgrading their infrastructure.

I promised to be more critical of all players in the sector especially DISCOS as I have always been (and as allowed by word count – it will take not less than a 5,000 word article to analyze how DISCOS are a big problem for Nigeria’s electricity sector). I still do not understand how the government strongly believes that DISCOS operate two accounting books and yet, have not taken appropriate and necessary actions to ensure that they are more transparent and accountable. This lack of transparency and accountability helps in the low revenue base of the power sector which starves it of the finance it critically needs for reforms and recovery programmes. Interestingly, these and other issues including enforcing corporate governance from power sector operators, enforcing market discipline, developing a coherent strategy to resolve militancy and making a definite policy statement on tariff are among sector issues that the World Bank listed as conditions for the release of $1 billion needed to help fund power sector programmes.

Speaking of definite policy statements, according to a World Bank global scorecard for policy makers which compares the national policies and regulatory frameworks for sustainable energy amongst different countries, Regulatory Indicators for Sustainable Energy (RISE), February 2017, Nigeria ranked amongst the worst countries with regard to enabling policy environment for energy access, energy efficiency and renewable energy. Of 111 developing and developed countries studied which represents 96 percent of the world’s population and energy consumption, Nigeria scored very low for the three categories. For energy access, Nigeria ranked 10th worst country ahead of Liberia, Yemen, Mauritania, South Sudan, Sierra Leone, Chad, Haiti, Central African Republic and Somalia in that order. Countries that performed better than Nigeria include – Afghanistan, Congo Republic, Madagascar, Ethiopia, Eritrea, Niger, Togo, Sudan, Honduras, Mozambique. For energy efficiency, Nigeria was ranked 8th worst ahead of Somalia, Mozambique, Chad, Loa People Democratic Republic, Mali, Mauritania, Congo Republic while Niger, Central African Republic, Liberia, Vanuatu, Solomon Islands, Yemen, Burundi, Myanmar, Maldives, Haiti, Zimbabwe, South Sudan were among 12 countries that performed better than Nigeria. On the renewable energy category, Nigeria was ranked 21st ahead of Somalia, Haiti, Sierra Leone, Eritrea, South Sudan, Niger, Mauritania, Bahrain, Liberia, Congo Rep while Uzbekistan, Mozambique, Benin, Burkina Faso, Saudi Arabia, Kuwait, Cambodia, Congo Democratic Republic, Qatar were listed countries that performed better than Nigeria.

Although Nigeria’s renewable energy score improved by over ten places when compared to energy access and energy efficiency it was still 4 points below the indicator score mark for low performing countries. Nigeria’s performance on this scorecard will not come as a surprise to people with a good understanding of the energy sector in Nigeria. Space will not allow me analyse the report in detail. For instance, on the energy access category, Nigeria’s overall score for energy access was 22 and 0, 0, 17, 35, 22, 100, 0, and 0 for existence of plan, scope of plan, grid electrification, minigrids, stand-alone systems, affordability, utility transparency and monitoring, and utility credit worthiness indicators respectively. The most interesting aspect of these indicators is that consumer affordability of electricity scored 100 which is an indication that electricity consumers can afford to pay the cost of electricity.

This situation seems to be well understood by government and key electricity market players which may be what the Nigerian government is exploiting in its continued push for a cost reflective tariff for the market. However, consumer affordability of electricity is clearly different from willingness to pay for electricity which is one of the challenges that the grid sector is facing. The problem of willingness to pay borders on social issues of distrust with public utilities and citizens’ perception of government’s role in providing utilities which is mostly informed by politicians’ election campaign promises. The scores of the other indicators means that government has a lot to do in making the right policies and setting the right regulatory frameworks for an enabling environment that accelerates sustainable energy access.

On energy efficiency, Nigeria’s overall score was 11 out of 100, and this equally doesn’t come as a surprise especially when policy makers are not knowledgeable about their responsibilities to the sector. For instance, the Senate Committee Chairman on Power, Senator Enyinnaya Abaribe while responding to a question on how energy efficiency in Nigeria can be increased said that it is the job of energy efficiency appliance vendors to educate Nigerians on energy efficiency as it is not the job of government to lead energy efficiency programs, or in extension make enabling policies.

Unfortunately, the Nigerian Electricity Regulatory Commission (NERC) which should be helping policy makers better understand the sector which they are to make policies for and also supervise are not doing enough. A check on the capacity building programmes designed for legislators will reveal that most of the capacity building programmes are not specifically designed for policy makers in Nigeria’s difficult regulatory environment. Most capability building programmes are via sponsorship to international conferences that will add little or no knowledge for making the right country-specific power sector policies. The legislative committees, relevant government ministries and departments and agencies on power also lack experts who should help in crafting the right policies asides other capacity, institutional and bureaucratic challenges that trouble the sector.

Renewable energy is performing better than other categories; however, there are a few practices by some project implementing stakeholders especially government energy agencies and projects that are not only unhealthy for the immediate growth of the sector, but which will in the medium term, help destroy the progress being made by other stakeholders. These practices include poor design of projects, wrong costing of projects and lack of transparency in procurement and contract processes which lead the implementation of projects that fail within a short time. This gives a bad name to renewable energy technologies and products. To help promote sustainable energy in Nigeria, government must do what is necessary, not just in formulating enabling policies and regulations for growth but to ensure that these policies are implemented and enforced appropriately in line with best practices. While government and other stakeholders are working towards creating a more enabling sustainable energy policy environment, consumers must realize that they hold the power to wheel the ship of policy in the direction they desire, which can only happen when consumers effectively engage with the policy and regulatory making processes.

 

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

 

Derisking Nigeria’s Electricity Market for increased Energy Access

By Okafor Akachukwu| 04/11/2016

 

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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

 

 

Paris Agreement -Nigeria has to depart from coal

By Okafor Akachukwu | 07/10/2016

coal-fired-power-plant

It is becoming increasingly obvious that those saddled with the responsibility of governing Nigeria’s energy/power system or articulating and implementing a strategic national energy plan starting from the federal ministries of power, petroleum resources, solid minerals development, environment, water resources, finance, budget and national planning, agriculture need to be properly schooled in the work that they should be doing. It is easy to decipher that they are not listening to briefs from experts, not talking to themselves across ministries, departments and agencies or not in touch with developments beyond the shores of Nigeria.

It’s shocking to read the statements allegedly made by Nigeria’s Finance Minister, Kemi Adeosun this Wednesday in Washington at some World Bank and IMF meetings where she accused western nations of blocking Nigeria’s efforts in building new coal fired power plants. While, I wouldn’t want to go into academics of climate science that led to the new Paris Climate Change Agreement which just a few weeks ago, (at the annual September United Nations General Assembly meetings) Nigeria’s President signed. Our dear Adeosun should have clarified the contents of the agreement before her statements. What she should have said was that Nigeria is blocking Nigeria’s efforts to build new coal fired plants. Our government officials and policy advisers should have informed her or Mr President that signing the Paris Agreement will mean no ‘cheap’ coal power plants for Nigeria – meaning that he may find it difficult to fulfil his electoral promises on delivering constant power to Nigerians by the end of his tenure.

We may have signed the agreement because it’s fashionable – other countries are signing. However, we failed to remember that we do not have the finances and technologies to solve our power challenges the way we prefer if we have no intentions of complying with the Paris Agreement. Else we forget, our ambitious Intended National Determined Contributions (INDCs) to the Paris Agreement of cutting 476 million tonnes per year of greenhouse gases (GHGs) emissions reductions in 2030 was drafted and submitted to the United Nations Framework Convention on Climate Change (UNFCCC) by the current President Buhari’s administration – we should have known better. Probably there was no communication and coordination across government at all levels to know what our national energy plans were, what should go into the INDC and what shouldn’t.

Did our government not know of the of US, UK, other European countries and the World Bank’s clear position to stop funding coal power plants in developing countries since 2013? In fact, the US stopped investing in new coal technology projects since 2011. The last World Bank funding approval for a coal fired plant was in 2010 for a plant in South Africa, which was strongly opposed by the US. The World Bank however is currently discussing a draft new energy strategy that may allow it to finance new coal plants only “in rare circumstances” where there are no alternatives. The Nigerian government should have known better, instead of the blame gaming it should be more focused, coordinated, proactive and innovative and go for other available energy options – if it is interested in solving Nigeria’s power challenges.

The world has moved on, the game has changed and if we don’t want to move with it, or join the game, or beat the game – we get stuck, stuck in darkness and underdevelopment. In the past month alone, there has been increased discussion on how to develop and grow the mini-grids sector (decentralized electricity generation and supply) especially using solar and accelerate investments in these sectors to boost Nigeria’s power supply and solve the energy access problem. For instance the Nigerian Electricity Regulatory Commission (NERC) has been conducting series of consultations around Nigeria on its 2016 Draft Minigrids Regulation, there was an International Finance Corporation (IFC – World Bank) and UK Department for International Development (DFID) workshop in Lagos and Abuja on developing and financing the solar mini-grids market in Nigeria, Power for All also held a workshop for government ministries, departments and agencies on accelerating the growth of Decentralized Renewable Energy (DRE) sector.

The Power for All workshop ended with a five point action plan which were: “1.) The need to Streamline government policies and regulations for the sector, 2.) Eliminate VAT and import duties, 3.) Streamline importation, 4.) Enforce quality and standard, 5.) Build markets – through equitable financing.” Aside these plans and more unmentioned, government should also make it easy for renewable energy funds trapped in various national financial institutions to be accessible to entrepreneurs that have the capabilities to utilize them. The usual argument is that renewable energy is expensive – but compared to what? The fact is that the initial cost of deploying renewable energy technologies and solutions may be expensive but it is far cheaper and affordable for consumers to pay for, cheaper for operators to operate and maintain and delivers enormous economic, social and environmental benefits compared to coal technologies which impacts can be generationally devastating.

A question we should rather be asking ourselves is why did we fail to develop our coal reserves in the past 50 years? Nigeria agreed that coal technology should be phased out when it signed the Paris Agreement and constructing new coal would be contrary to that agreement; hence it should quicken its efforts to harness other energy resources that Nigeria is abundantly endowed with. One thing I know is that no one would block Nigeria from building new gas, hydro, solar, wind, biomass, geothermal and tidal plants.

 

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