Evolution of the Power Sector in Nigeria and
inherent business opportunities.
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Historical Facts/ Reform Background
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Reform Elements/Updates
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Reform Institutions and Roles
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Market Developments so far.
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Achievements and Inherent Business Opportunities
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Questions and Conclusion.
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Various regimes in distant past paid little attention to this sector.
Billions of Naira has been pumped into the sector to reverse the neglect and
mismanagement, with no tangible result.
Nigeria being the most populous nation in Africa, with population currently at
170million, and expected to grow to 230million by 2030.
Rule of thumb for any developed industrial nation is that at least 1 gigawatt (i.e 1000
megawatts) of electricity generation and consumption is required for every 1 million
head of the population.
This guiding rule provides a useful indicator as to the scale of the investments that
will need to be made in the Nigeria Electricity supply Industry over the coming
decades.
Nigeria per capita electricity consumption is among the lowest in the world and far
lower than many other African Countries.
Nigeria per capita electricity consumption is just 7% of Brazil and just 3% of South
Africa.
Brazil has 100,000 MW of grid based generating capacity for a population of 201
million people.
South Africa has 40,000MW of grid based generating Capacity for 50 million people.
As at 2010, the peak generation supplied by Nigeria PHCN has just 3,804MW for a
population of 150million people.
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Self generation of electricity (from diesel and petrol generators) is
conservatively estimated at a minimum of 6,000mw i.e more than average
output from the grid during 2009.
That the population (and the vast bulk of the country is poor) have no
connection to the grid.
Consequence of yawning gap between demand and supply is that although the
current regulated (average and levelized) tariff is just N8.51/kwh.
The poor currently pay more than N80/kwh burning candles and kerosene.
Manufacturers pay in excess of N60/kwh on diesel or LPFO generation.
Everyone else pays annual around N50 – N70/kwh on self generation (diesel or
petrol) High cost of diesel and petrol generation has crippled the growth of the
country productive and commercial industries.
Despite capital injections averaging N2B per annum, the available capacity of
Nigeria state owned electricity utility has been estimated at about 3,000mw for
the past two decades.
The cost by 2020 in terms of cost GDP would be in the order of N20 trillion
(USD$130billion) every year.
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Even if 40,000mw were to be met, Nigeria capacity per head
of population in 2020 would still be less than a quarter of what
South Africa currently enjoys.
Nevertheless to reach 40,000mw will require imperative
estimate of US$10billion on the whole value chain in the next
ten years.
In 2005, the government launched an ambitious capital
investment programme under the title of the National
Integrated Power Project (NIPP).
The NIPP projects compose both gas fired power plant, 2
hand mission lines. Anticipated 5,000mw was expected to be
added to the country generation capacity within next 3 years.
Drop in ocean compared to required 40,000mw in 2020.
The Yar’ Adua government completely applied the brokers to
reversing back to government monopoly solution.
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Solid foundation laid down in 2001/2002 – 2005 promulgation of the Electric
Power Sector Reform (EPSR) Act.
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Fundamental changes to the ownership control and regulation of the sector
envisaged by the legislation are achieved and the downstream benefits are
realized.
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Birth of a modern, efficient, customer focused, private sector driven electricity
supply industry.
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Sector wide reform to be driven by improved service delivery to every class of
customers as the electricity sector full implementation of EPSR Act.
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Ownership, Control and regulation of the sector as attained in the National
Electric Power Policy 2001 and enshrined in the EPSR act 2005.
In order to introduce competition, functional segmentation of PHCN was crucial. This
required:
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The separation of transmission and dispatch from generation.
The establishment of a transmission company.
The establishment of a number of competing, privately owned
companies from existing PHCN generating facilities.
The opening up of generation to new market entrants.
The establishment of a number of distribution and sales (marketing)
which will also be privatized
Later, competition in wholesale and retail sales (marketing) will be
including the opening of trade in the sales (marketing) of electricity to
and to other new market entrants.
generation
companies
developed,
generators
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Experts suggest the following five major steps in implementing the
reform of the power sector, in different orders of preference:
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Getting the investment framework right.
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Deciding on the goals of restructuring and the ideal industry structure.
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Preparing the players to participate in a competitive market.
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Privatizing existing and new assets.
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Ensuring that the competitive market is implemented properly.
Most of the tasks outlined above (Item Nos. 1 – 3) have been
completed while Item Nos.4 & 5 are in various stages.
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Imperatives of EPSR Act
Remove obstacles to private sector investment.
Divestiture of the PHCN successor companies.
Reform of fuel to power sector.
FG strategy on the divestiture of the PHCN successor committee
Hydro Power Generating Plants
Thermal Generating Plants
Transmission Committee of Nigeria
The distribution Companies.
Gas to power implementation.
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Ultimate objectives of EPSR Act
Divestiture of successor companies through privatization in
some cases and through concessions in others.
The inflow of the large volume of private sector investment
through the creation of new power generation and power
distribution companies and
The subsequent developments of a competitive electricity
market
Roadmap for Power Sector Reform
Customer driven sector wide plan to achieve stable Power
supply
Sector wide reform to be driven by improved service
delivery to every class of customers as the electricity sector
full implementation of EPSR Act.
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Key early milestones like creation and unbundling of the PHCN
achieved.
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Followed by corporatization, commercialization and evaluable
successor companies in tandem.
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Inflow of large volume of private sector investment through the
creation of new power separation and distribution entities and
subsequent development of a competitive electricity market.
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Objectives impacted by 8 obstacles
The maintenance of an inappropriate pricing refine.
Failure to establish bulk purchaser in line with the provisions of the EPSR act.
Failure to address investors concerns about credit muteness of discounted companies/bulk
purchaser doing their evenfall transition to financial viability.
The financial and operational risks to potential acquirers of successor companies posed by the
failure to reach an agreement with the labor unions on the settlement of outstanding arrears (of
salaries, pensions and other benefits) and on severance pay.
The uncertainties generated by the delay in operationalizing the Nigerian Electricity Liability
Management Company (NELMCO).
Delay in contracting out the management of TCN.
Concerns about the licensing regime for power generation and power distribution companies. And
the lack of continuity and consistency in pursuing the enactment and commencement of the
Electric Power sector reform act and subsequently after the act was eventually parked in following
the timeliness established thereon.
For sector to be financially viable throughout value chain the end user tariff must at least be at a
cost – reflective level.
PHCN unable to meet recurrent expenditure, and also short term and long term capital
expenditure.
MUTO to address across 3 customer categories of residential, commercial and establishment of a
bulk industrial purchaser.
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REMOVING OBSTACLES
Establishment of an appropriate pricing regime.
Establishment of a bulk purchaser.
The provision of EGN credit enhancement.
Creating an efficient and motivated work force.
Operationalizing NELMCO.
Contracting out the management of the Transmission
Committee of Nigeria.
Clarifying and strengthening the licensing regime.
Ending the trend of inconsistent policy implementation.
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Transition cannot happen overnight thus for an interim period, the FGN through its
parastatals will continue to retain direct accountability for service delivery across
large parts of the electricity value chain.
To protect against “rate shock” and to ensure low income consumers are provided
with a “lifeline” tariff with greater differentiation and introduction of an indigene block
tariff whereby the rate paid for electricity varies with given level of consumption.
Carry the general public along every step of the way by ensuring that progress
against objectives will be made clear and transparent.
System operator and various DISCOs to undertake more strategic and more
predictable load – shedding practices.
Privatized, based on a core investor sale of a minimum of 51% of sort equity in
companies.
Methodology to emphasize reduction of technical or commercial losses and increase
efficiency of collecting.
Strategy for meeting efficiency target specialized in RFRs.
Completion of all the overdue NIPP projects for generation, transmission and
distribution.
Completion of the outstanding and already indebted NCTC investment in the gas
supply and transportation industry.
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During transition stage, a special trading entity that will carry out bulk
purchasing of electricity and ancillary services and resell these to
licensed distribution companies.
Understanding that all contracts entered into by this bulk buyer would
be capable of being motivated to the successor DISCOs when the latter
attains commercial viability.
Incorporated 29th July, 2010
PPAs with existing IPPs to take up their current stranded generation
capacities already negotiated.
Transition entity that will only last as long as it takes decision to be
made (establish individual credit worthiness in a private sector driven
market).
Bulk trader backed with a credit payment supplied package with MYTO
allows full passage of allowable cash thereby removes the single
biggest risk element – lack of credit worthiness and distribution level
that has unlimited against the growth of the market.
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Federal Ministry of Power-Overall broad policy formulation.
BPE/NCP-Technical Committee, etc-drives the reform and
liberalization/ privatization of the power sector.
NERC- carries out regulation and market surveillance; plays critical
role in issuing operating licenses and regulating the sector operators
confidence that a level playing field will subsist and that rulers will
be followed and enforced.
Presidential Task Force on Power.
NELMCO-To manage legacy liabilities and stranded assets.
EMS-Carry out consulting services and provide shared services,
such as logistics and meter testing.
Nigeria Electricity Bulk Trading Co Ltd
Market operations -Account To oversee the market and commercial
arrangements.
National Power Training Institute of Nigeria-Provide world class
training to support the utilities manpower
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National Electricity Power Policy (NEPP) & Electric Power Sector
Reform Act 2005 (EPSR) provides for development of Nigeria
Electricity Market.
Wholesale competition was recommended for Nigeria to assist in
monopoly, control & cost insensitivity
Implementation of the Nigeria Electricity Market is through a gradual
process of increasing competition designed as three market stages
Transitional Market Stage: Characterized mainly as competition for
the market.
Medium-Term Market Stage: Characterized by full wholesale
competition for the market & in the market.
Final Market Stage: Open to full wholesale competition and retail
competition
DURING
TRANSITION
Vesting contracts
-Intermediate steps to move from
integrated utility to fully competitive
market
- Designed to ensure a smooth and
orderly transition
AS MARKET
MATURES
Bilateral Contracts.
-Only contractual tools used in buying
and selling electricity.
Market Reform Model
• Types of market
-Competitive wholesale market and retail competition in the long term.
-Multi-buyer model - (hybrid during a transition period)
-Private sector driven
-Cost reflective market structure
-Encourage full competition in the long term.
-Market Operator to be a ring-fenced semi-autonomous entity during
the transition.
• NEPP & EPSR Act: Provisions for development of market
-Competitive market guaranteed by Act, Policy and Market Rules.
-Creation of an independent electricity regulator- NERC
GENCOS-7
 Privatized and handed over except Sapele
DISCOS-11
 Privatized and handed over, based on a core investor sale
of a minimum of 51% of sort equity in companies.
 Methodology to emphasize reduction of technical of
commercial losses and increase efficiency of collecting.
 Strategy for meeting efficiency target specialized in RFRs.
Transmission Company of Nigeria
 Handed over to Manitoba under a 5 year management
contract.
 Requisite skills required to manage the huge and complex
programme of construction and rehabilitation that will be
required over the coming decade.
HYDRO POWER GENERATING PLANTS
 BPE strategy to grant concession for the operation of Kainji, Jebba and
Shiroro predicated on magnitude of capital requirements and water
rights issues associated with plant.
 Also link between sustainable management of hydro power and the
development of country’s agricultural resources.
THERMAL GENERATING PLANTS
 To be privatized via the sale of a minimum of 51% equity to core
investors.
 Care to be taken to ensure a monopoly or oligopoly of market power in
the generation is not created through this.
 The NIPP plants to be managed under operation and maintenance
(O&M) contracts now being prepared by Niger Delta Power Holding
Company (NDPHC) the parent company of the plant
 Bid bonds already submitted by potential acquirers for NIPPs.
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For the sector to be financially viable throughout the value chain
the end user tariff must or least be at a cost reflective level.
At former price levels, PHCN can not
meet recurrent
expenditure requirements, while continually begging government
for additional moneys for short term and long term capital
expenditure.
National uniform tariff replaced with seemingly lost reflective
ceiling on and user tariffs.
Methodology used is the building blocks approach.
Fair and equitable tariff methodology should cover allowed
revenues and structure of tariffs to recover revenues
Adequate return on capital to be allowed as incentive to invest
Costs associated with recovering the capital over the useful lives
of the assets depreciation.
Cognizance of efficient operating costs and overhead.
MYTO TARIFF PRINCIPLES
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Tariff for 3 electricity sectors based on certain principles and assumptions.
Cost recovery/financial liability – licenses recover efficient costs including a
reasonable return on capital.
Signals for investment – tariffs should encourage an efficient level and
nature of involvement i.e location.
Certainty and stability of the tariff framework enables private sector
investment.
Efficient use of the network – tariffs should reflect the marginal costs that
users impose on the system, influence efficient use and reduce gross –
subsidies.
Risk allocation – tariff framework should allocate risks efficiently to those
best placed to manage them.
Flexibility/Robustness– it should cater for unforeseen changes in the
market.
Social and political objectives – it should provide for the achievement of
social goals such as universal access and demand – side management.
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Nigeria blessed with numerous fuel sources for power, including
hydro, natural gas, cool, wind solar and an abundance of waste
for biomass
Because of this capital costs required to implement, government
focused on generating in three areas name: Hydro, Coal and
natural Gas.
Gas may be the focus by converting flared gas assets and
harnessing non-associated gas for power application.
This requires providing appropriate incentives to international oil
companies (IOCs) and other investors in oil and gas businesses.
Done through the National Gas master plan to encourage private
sector investment in gas infrastructure.
Goal to fast track bankable gas supply agreements as well as
gas transport to both federal government power plants and the
independent power producers plants.
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Contracting out management of the transmission company
of Nigeria This management of TCN contracted out to a
private company which has both the requisite project
management and technical expertise. Handed over to
Manitoba under a 5 year management contract.
Requisite skills required to manage the huge and complex
programme of construction and rehabilitation that will be
required over the coming decade.
Management of TCN key concern for potential investors in
the power generation and power distribution sectors.
Need to ensure commensurate investors in the
downstream sector will also take place.
Contracted to Manitoba a private Canadian company
adjudged to have both project management expertise and
technical expertise.
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Established as a government special purpose vehicle to
assume and manage extent assets, liabilities and other
obligations that was not been easily foreseen from PHCN
to any of the successor companies.
To clear issues of unwelcome degree of uncertainty as to
the size of the legacy PHCN liabilities which they might
eventually find the themselves saddled with.
NELMCO inherits all legacy PHCN liabilities as well as any
liabilities associated with the existing PPA agreements and
the bulk trader assumes ownership of the existing PPAs
and executing new buy and sell agreements with the
successor generation/distribution companies and IPPs.
Management of legacy liabilities of both NELMCO and the
Bulk purchaser to also be made clear.
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Key concern for potential investors in Gencos and Discos
- Investors will be reluctant to make large scale investments in the
upstream and downstream sectors of the industry unless they are
confident that government investments in the downstream sector will
also take place.
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Essential for management of TCN to be contracted to private company
with both requisite project management and technical expertise.
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NCP and BPE process completed and MANITOBA given initial five year
concession.
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Licenses shall not extend ten years duration although NERC
may extend on a rolling basis for additional five years period.
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Electricity asset investments involve high costs with a long
duration and investment expert license to be aligned to
revenue required to recover investment most cases 20 and
25 years and not 10 to 15 years.
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Comfort mechanism worked out by government to issue
regulation setting out criteria/process for speedy license
renewal/extension.
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Given that if an IPP succeeds in signing a PPA on commercial terms
with the bulk purchaser, this PPA is unlikely to be bankable in short
to medium term if bulk purchaser is not credit worthy.
At most conditions required for IPP investors to secure funding
required for investment and government not ready to wait. This will
delay the urgently needed private sector investment in power
generation. Thus mechanizing of:
- FGN backed letter of credit (LC) to provide liquidating of the bulk
purchaser;
- A rolling guarantee of the obligations of the bulk purchaser
issued by multinational banks
- A World Bank partial risk guarantee backed by a FGN indemnity.
- An FGN Treasury Bond issue or
- A combination of two or more of these options.
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Whatever form of credit support will only create a
contingent liability, which in turn will only become
an actual liability for Federal Government if:
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The power plant is finally financed and built by the IPP
developers.
The power plants generating units are actually working and
available.
The power plant has secured itself the requisite feedstock
and,
A distribution company and in turn the bulk purchaser are
unable to honor their payment obligations to the relevant
IPP.
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Comprehensive agreement on all outstanding issues .
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FGN already negotiated with labor as per severance
package and Unionization, etc
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Settlement of outstanding arrears (of salaries, pensions
and other benefits and severance pay sorted out).
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Increased physical surveillance to prevent sabotage.
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Joint Problem Solving Teams continue as partnership
between govt. and Labor
S/N DESCRIPTION
1
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3
4
STATUS
Create an enabling legal and regulatory environment to support DONE
competitive markets in electricity
Unbundle power sector into separate generation, transmission, DONE
distribution and possibly retailing sectors to achieve the maximum
benefits for customers
Privatization should be a transparent process involving the sale of ONpower distribution utilities as well as generation plants, and GOING
covering existing assets as well as new projects.
Open access to transmission and distribution wires, and the ability Done
to trade power between buyers and sellers in an open market, are
critical to achieving a competitive framework.
5 Operate the generation and retailing markets In progress
competitively, with a large number of generators selling
into a wholesale In Progress electricity market at prices
which balance demand and supply throughout the day.
6 Operate the transmission network under a management
contract, resulting from a competitive bidding process.
In progress
7 The independent regulator should oversee prices and Done
other incentives for transmission and distribution
operations.
8 Restructuring should proceed at a pace consistent with Done
the development of a competitive and unbundled
system.
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Explore Value Chain- Provision of Meters, Transformers and
other ancillary services.
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Collaboration activities with other bodies and agencies like BOI
(Bank of Industry), AfDB (African Development Bank), USAID,
USEXIM and about 5 major international consortium ready to
partner with IPP projects which will require Bank Guarantees from
a commercial Bank in Nigeria is in excess of $100billon.
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Most IPP project in the pipeline by the above mentioned agencies
are Gas related. These projects are capital intensive and long
term in nature however but pooling resources together with
appropriate deal structure can help.
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First Mover advantage is key and it is the only way to ensure that
we lock in transactions with long term benefits.