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Power Supply: Prediction Comes True

04 Jan 2013

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POLICY & EXECUTION By Sam Amadi


The year 2012 has ended with generation reaching the 4,500 megawatts mark. Even though power supply is still epileptic in many places, this is still something to celebrate considering that two years ago we were generating barely 2,000 megawatts.
I had informed Nigerians in July that we will not generate the much touted 9,000 megawatts but will end the year at 4,500 megawatts because of many constraints in the network which are being gradually but surely removed. Four thousand and five hundred megawatts is adequate to service the market as benchmarked by the Multi Year Tariff Order (MYTO).

In June 1, 2012, the electricity sector regulator- NERC- released the Multi Year Tariff Order (MYTO-2). The MYTO had some set of inbuilt assumptions about the macroeconomic fundamentals that will affect generation, transmission and distribution of electricity. Some of them are inflation rate, exchange rate and cost of gas. It also has sets of technical assumptions like the generation availability, the power factor and the percentage of power sent out to the grid. MYTO subjects itself to biannual minor reviews to track changes in these variables.

Last week, NERC completed the minor review and the good news is that there were no significant deviations from the predictions of Nigerian Electricity Regulatory Commission (NERC) to warrant a change in the wholesale price of electricity. Getting it right is important to driving the reform in the power sector. Unfounded optimism may lead to misappraisal of the gains of the sector and induce a loss of morale in steering forward the reform. The key insight is that predictive power depends on ability to comprehensively assemble data and to analyse them intelligently. My prediction of 4,500 megawatts derived from the financial and technical assumptions which NERC used to build the MYTO-2 model. 

The MYTO has restored confidence in the Nigerian electricity supply industry.  This confidence is more important than the increase in generation because it is confidence in Nigerian electricity market that will spur investment in sustenance and sustainability of electricity supply. President Goodluck Jonathan can take pride as the president who created a real market of electricity in Nigeria. It is true that a robust electricity market is yet to emerge. But the building blocks are mostly in place. The president’s singular determination to re-establish the regulator and allow its independence was a game-changer. Let us not forget that the nascent power sector was truncated and no foreign investment came for power projects when late President Umaru Musa Yar’Adua was ill-advised to disrupt the work of the regulatory commission. President Jonathan’s commitment to uphold the integrity of the regulated markets makes the difference between the old and the new.

Now, the success of the privatisation of underperforming state assets is clearly in sight. The credit should go to both Prof. Barth Nnaji and Ms Bola Onagoruwa who tenaciously pushed the wagon to the finishing line. But you get nowhere if President Jonathan and his deputy who chairs the National Council on Privatisation (NCP) do not guarantee a stable political and policy environment for privatisation. President Jonathan’s unusual transparency and disinterest in who become the preferred bidders shifted the mode from cynicism to enthusiasm.

The history of such reforms in the past in this part of the world is a story of audacious takeover by the big man upstairs. Here in Nigeria, the world was pleasantly surprised at the rigorous process set up to guarantee that preferred bidders are competitive on technical and financial proposals. They could not believe that Nigeria could present such quality of information and processes that encourage credible bidders to enter the game.

Privatisation fails when it ends up as sweetheart bazaar sale. It also fails when reformers recklessly believe that without doing more, a private electricity market will cure all the pathologies of the public electricity market. These sanguine reformers discount the obvious fact that the principal-agency problem that undermines public enterprises is also rife in private enterprises.  Both reasons for failure derive from incomplete diagnosis of the nature of the pathologies and insufficient institutionalisation of effective market governance. The transparent bidding process set up by the Bureau of Public Enterprises (BPE) took care of first cause of failure. The regulatory framework established by NERC hopefully takes care of the second cause of failure.

The evidence is clear that MYTO has worked to put electricity operators on the path of financial viability. The price of electricity recovers the costs of electricity supply in Nigeria. The would-be investors can do the back-of-envelop calculation and be assured that he can recover his costs and earn decent profit from the business. This removes a major risk in the electricity market. What is left now is to drastically improve collection and strengthen the integrity of the settlement system such that cost of energy billed to customers is recovered and the monies are prudently used to finance investments that improve the capability of the networks to deliver safe, reliable and adequate electricity. This is the next focus of NERC for 2013.

The MYTO does not only assure investors of strong prospect of cost recovery, it also provides a definitive regulatory framework for ensuring continuous investment in the network by the new entrants such that efficiency can be improved dramatically. The MYTO signals viability for both Greenfield and Brownfield investments. Since the launch of MYTO-2, a lot of transactions are going on in the finance market such that there is greater hope that both the preferred bidders and the licensed independent power producers will be financially bankable.

Financial bankability is partly a function of predictability. And predictability depends on regulatory certainty. If financiers know what to expect in the event of a breach, or know what risks their clients carry at the end of transaction they are more willing to assume risks, all things being equal. This certainty comes because the regulatory framework is transparent, durable and sensible. The greatest achievement of President Jonathan in the power sector reform is that he has created, through the work of the regulator, a more predictable, stable and transparent electricity market that is safe and profitable for investment. He has not fallen to any temptation to scramble or distort the regulatory framework. And in Africa, that temptation could be overwhelming.  

To further solidify the predictability and reliability of the electricity market, NERC has put out a ‘fit and proper’ test criterion that ensures that whoever runs the networks has the technical and financial capabilities to be efficient and effective.  NERC is releasing other regulations ahead of the entry of the preferred bidders, so that the electricity market in Nigeria is designed against the lessons of failures and shortcomings observed in other sectors. For one, there will be no Nigerian model of family business in the electricity industry that NERC is constructing. The technical and financial nature of the market militates against that.  But additionally, the corporate governance post privatisation second-guesses the assumptions of perfect rationality and the self-correcting market. We will use pricing and regulations to deepen commitments to prudent investment and quality service.

As the year closed, it is clear that the reform agenda on the power sector is running smoothly. There has been some turbulence, recently, the uncertainty about the management contract for Transmission Company of Nigeria (TCN). Thankfully, that is over. Mr. President has restated the contract and got the controversial edges worked out. He has gone further to constitute a credible board for the company. This puts it beyond peradventure the commitment of President Jonathan to speed through the roadmap for power reform.  Just a few issues will be worked in the New Year to de-risk transmission. 

As we celebrate the highest generation of electricity in Nigerian history, it is important not to lose sight of the silent revolution going on in Nigeria. Policy consistency, independence regulation and de-bureaucratisation of electricity supply guarantee that in the next three years and beyond we will no longer celebrate the addition of 1,000 megawatts to the grid. The silent revolution is capable of ensuring that we continuously add substantial new capacities every year to the national grid such that sooner than later we attain adequacy with sustainability.

The predictions of the National Electric Power Policy (NEPP) 2001 and the Electric Power Sector Reform Act (EPSR), 2005 are coming true. The president should take glory in this achievement because he has maintained continuity. To finish the deal, he has to remain fully engaged with the construction of the new electricity market. He should not outsource that responsibility to any official or any other person. He had to continually interface one-on-one with all the people he has appointed to construct this market. He achieved his best results because he did just that, sitting weekly in action-oriented meetings on power. That model should not be abandoned as we get to the finishing line of the roadmap on power, before a competitive electricity market is fully established. 

• Dr. Amadi is Chairman and Chief Executive Officer of the Nigerian Electricity Regulatory Commission (NERC)

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