Onyia: Contract Indiscipline Major Cause of Nigeria’s Power Woes



Prof. Chidi Onyia currently leads the power sector team at the Nigeria Infrastructure Advisory Facility, a UK-DFID programme. He spoke with Chineme Okafor on the challenges of Nigeria’s power market, NIAF’s assistance and what the incoming NERC commissioners should do to restore the independence of the power sector regulator. Excerpts:

What are the tangible success stories of NIAF in Nigeria so far?

The Nigerian Infrastructure Advisory Facility (NIAF) is a UK government funded support vehicle to the Nigerian government focused on tackling bottlenecks in infrastructure development. The whole idea is that the government usually needs technical support and thinking around key policy directions, so what NIAF has done in the infrastructure space – power, capital projects, roads, effective cities and climate change – is to work in these key areas across ministries, departments and agencies to be able to provide the right technical support to the Nigerian government.

The Nigerian government is our client while NIAF does not work for private sector entities. It is a public sector demand-driven advisory vehicle (at no cost) to the Nigerian government.

Specifically, how has NIAF intervened in Nigeria’s power sector recently?

This is the second phase of NIAF; there was a NIAF-1 which was a five-year programme while NIAF-2 ends in December of this year. What NIAF has done within the power sector is help with the contractual framework and thinking around how the reform can be implemented, help to strengthen institutions within the power sector but more importantly, create a credible path towards the realisation of the power sector reform roadmap.

This has not been easy because it is a new project and nobody has gone through this sort of reform process in Africa, so there is a learning curve. What we have being able to do is to be agile in our ability to support our client. Our responsiveness towards this whole process has been quite commendable especially thinking about what has been during the transitional electricity market phase.

We have also worked with the Regulator on the MYTO model and to strengthen the capacity of the Regulator so that they can conduct minor and major tariff reviews. NIAF has also supported the Transmission Company of Nigeria towards optimisation and to identify critical projects by bringing a team of experts to work hand-in-hand with TCN, which remains the only entity that is still in government hands, to be able to deliver on projects that will add significant wheeling capacity to Nigeria’s grid. This was not always the case.  In the past, projects were identified and developed without looking at the integrative nature of what they are supposed to achieve.

We also worked with the National Integrated Power Projects (NIPP), assisting through the transaction aspects and process bottlenecks to ensure that transaction closure occurs under more creative ways.

Another key area NIAF has worked in is in the gas-to-power space.  The projections made on electricity growth were based on government’s thinking or assumptions that were not founded on real projects on the ground.  You will notice that most of the developments in the petroleum space are around associated gas and that means that the IOCs will have to be able to invest more in oil so that associated gas can go to power.  However, with the plan to increase generation significantly, there has to be a creative way to address the growth in the gas sector, specifically gas-to-power outside associated gas.

What we have done here is to suggest to the government alternative gas intervention strategies and that will include exploring inland basins and non-associated gas fields, as well as bringing the Central Bank to be able to cede some money towards focused gas investments for power. These are some areas we have worked on to ensure that the policy makers begin to think differently from the way they have done in the past.

To what extent has these suggestions been accepted by the government; have you made these proposals already?

It is actually a proposal we have made and being looked into seriously at the highest levels of government and leading to the establishing of committees to address how this current licensing regime of the Federal Ministry of Petroleum can be flexible enough to accommodate gas investments.

We have also reviewed how to ensure the IOCs meet their domestic gas obligations, which have not been the case over the years and to determine government’s obligation in the joint venture arrangements where government may not have kept its own part of the obligation and prevented these investments from taking place.

Now, serious discussion is taking place at the highest level and across the power and petroleum sectors, this was not the case before. The two agencies had different thinking around how to resolve the gas issue and there was no clear collaboration but collaborations based on our recommendations are taking place now from the Office of the Vice President.

The issue of gas pricing has remained quite a challenge, have you discussed this?

Yes, the issue of pricing has always been keen in the domestic gas space, and that led to the domestic gas supply obligation agreement with the IOCs, this has not been kept by the IOCs and as a result, we do not have that volume of gas coming into the domestic space and by extension the power sector.

That is changing now because there is serious mitigation around that, which by the way had expired in December 2015, and so they are now working on ways to tighten the loose ends where parties failed in their obligations.

Another thing is that government has worked diligently across the sector to come up with a new gas price that gives gas pricing a slight competitive outlook than what it was before. Now, it is all about business and profit within a reasonable margin and the new gas investors are able to find IPPs that they can sign supply agreements with them and that means that the Regulator will have to sign tariffs for IPPs like Azura which is coming on stream.

As much as the domestic gas pricing is not as high as you will find in the $4 export price, the difference is not significant or so much, and if the obligations are kept by the partners, I am sure we will be able to find enough gas to meet our needs.

How do we balance charging for gas in dollars and a fluctuating forex regime?

This is one of the radical changes in pricing from macro-economic models that were not factored into the MYTO model. There is supposed to be a room for flexibility during the review of the MYTO but the sudden changes in the forex policy puts a lot of pressure on the gas suppliers and by extension the Gencos who have to pay for gas in dollars.  This also means the Bulk Trader will be under pressure to pay its obligations to the gas companies.

This is currently a big issue the government has to resolve and NIAF has made some recommendations to government around the model itself and the methodology on how to make it more flexible and responsive to very rapid changes in prices that were not initially factored in.

Bear in mind that the MYTO model factors in a six months period for minor reviews.  The challenge, here, is that if there are problems that occur at the beginning of the last minor review, it affects the pricing and leads to further shortfalls. Starting every review with such drastic changes in the variables, means an increase in tariff and this is what the average citizens do not want to hear but these are the realities that the economic situation presents to the sector.

In 2014, NIAF warned about chronic illiquidity in the power market, we are seeing this happen now, what is the thinking around this at the moment?

We strongly believe that the market should move to a contract-based market and that it has to be more disciplined with players adopting contract transparency and credibility within the market. As long as there is no discipline within the market, where each of the market players are not involved in any obligation to pay their bills, we are going to continue to have liquidity issues in the market.

For instance, the transitional electricity market was supposed to be a phase where the market becomes a take-and-pay process, where people have to be liable to the agreements they signed.  However, the agreements are not in place and now the gas suppliers are on best endeavour basis, meaning if they have, they will give and if you can pay, you will pay.

Because most of the gas coming into the sector are associated, the IOCs need their money but the main money come from crude oil but there are certain loopholes within the market that allows for such un-business-like behaviour and we think that the current issue can only be resolved when the market becomes disciplined. This entails BPE and other entities serving on the board of the electricity companies holding their fellow board members responsible for what they need to do, where the Regulator acts by holding the players accountable and where government is involved in the sector’s risks.

We are saying that if there is risk involved in taking gas to produce power, but because of vandalism that is not happening, the consumer should not be exposed to that risk.  If there are problems based on the Discos not reducing their ATC&C losses and then causing a market shortfall, the Discos should be held liable for that, same as gas suppliers for the agreements they signed.

The Regulator holds all these together and we are very confident that the new sets of NERC commissioners will review all of them and adopt a new approach to regulatory practice that is evidence-based rather than what it had been in the past.  We are hoping that the government will go back and look at market processes in the sector.

The sector seems to have a lot of blame shifting, from the regulator to operators, what do these mean for the market?

For me personally, I think the market and the regulatory practice has to be evidence-based. It cannot be based on second-guessing and secondary and third level data from the Discos to the Regulator. The Regulator has to have a robust data management process that actually gives it real information. The CBN is a regulator and does not depend on data from banks to run their checks, their data set crosschecks what is submitted to them by the banks so that they can flag anomalies.

I think the Regulator has to invest in creating a data management framework that will help them achieve clear customer enumerations so that we know who the real customers are and what they actually should be paying so that we can align the metering plan. As long as we don’t have clear data processes, we are going to have people passing the blame from end-to-end.

As long as the liquidity issue is not resolved, the market will continue to struggle and that could create investor apathy and this is not what we envisaged for the sector. We expected that the market would create opportunities for capacity investments.

The sector expects new sets of commissioners for the NERC shortly, what would NIAF expect from them?

One of the key things that the Regulator should do is to work based on evidence, be more proactive rather than reactive and take out time to work with stakeholders within the market. They are coming newly and the market operatives are more experienced because they have been here longer while the new appointees may not have so much regulatory experience in Nigeria and so, there will be a learning curve.

What we have done is to provide some technical capacity to the incoming commissioners and to share some of our experiences working with the last set of commissioners.  We will determine how we can help them to divert from issues that will be a risk to the Regulator’s reputation, while they have to work hard to restore market confidence.  We think this can be done quickly by following appropriate regulatory practice in the market.

Have you proposed to the government, a workable solution to the TCN?

We advise but the government decides on what to do. Our thinking is that TCN needs to have increased investment so that it can handle its responsibility. We are spending a lot of time trying to increase generation capacity but the current grid network will not be able to handle evacuation of this capacity if it increases.

The first thing NIAF has advised the government to do is to increase the capital investment in TCN.  By doing so, TCN will be able to increase its efficiency making it an investor-friendly entity because investors (whether through concession or privatisation) will see the value of what they are investing in.

We also asked that the government to strengthen the internal processes because there had been complaints that projects were not planned on an integrative basis. We are advising that the thinking should change and projects planned in line with priorities so that it will be an integrative model.

What about the 10 NIPP plants? Has NIAF also made suggestions to the government on how to close transactions on them?

We have actually advised government to handle each NIPP transaction as an entity and there is no need to rush into closing 10 bulk NIPP transactions when the problems each of them is facing varies. We have suggested that government look at it on a plant-by-plant basis and identify their constraints and bottlenecks and solve them.

We will have multiple problems if we try to conclude all of the 10 at once. The value of the projects is not what they used to be when the process started and so government knows this. We are advising that the transmission projects of the NIPPs be completed so that whoever buys them can start making money immediately and not waiting for long to evacuate power.

There is a new thinking on renewables, have you made proposals on this to the government?

Yes, we have a team on that and we have said that government has to diversify our energy mix. For now, the thermal approach is good because we have the fuel source readily available.  However, we must also take a growth model which is what the government is saying it will adopt. The cost of renewable energy components are dropping and NBET just signed 14 PPAs but we know that as the technology improves and security variables are addressed, the cost of renewables would continue to decrease.  It is now left for the Regulator to determine if the tariff is acceptable.  We strongly believe that renewables is a good way to go.  If we had up to 25 per cent of our energy from renewables, we would not be plagued with system collapses due to the vandalism and resultant fuel constraints in the Niger Delta.

Our team is also working with TCN to adapt to a system that allows for the transmission of solar energy into the grid.  There has to be strategic thinking down the line and we are working with government to amend the grid code and other relevant documents.