Mixed Performance in the Power Sector

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Chineme Okafor writes that Nigeria’s privatised power sector experienced twists and turns in 2016

The year 2016 made it three years since Nigeria formally handed over the running of its public electricity generation and distribution to private investors in a reform exercise that ended the tenure of now defunct Power Holding Company of Nigeria (PHCN).

Specifically, on November 1, 2013 , Nigeria handed over the successor generation and distribution companies of PHCN to private operators after signing the transaction and industry agreements.
This then advanced the privatisation exercise, which many at that time, regarded as a remarkable development in the country’s power sector.

The development also opened a new phase which was expected to lead to improvements in investments, service delivery and regulatory practices.
But after three years, the privatised sector in 2016 came face to face with its first real challenges. These challenges reportedly shook its foundations of the sector such that there were palpable fears of its survival if nothing reasonable was done.

Operational challenges
From very poor gas supplies to power generation plants, generation shortages, inadequate or weak transmission system, to stranded capacities or complete loss of transmission capacities, poor revenue collection and remittance levels, and regulatory uncertainties, the operational narrative of the power sector in 2016 was quite unfortunate.
On power generation, average generation capacity in 2016 was quite abysmal at 3500 megawatts (MW). While the target generation figures on which the 2015 tariff was built was between 6000MW and 7000MW, actual generation never got to that level.

In fact, after a record generation of 5,074MW momentarily achieved in February 2016, daily power generation in the country oscillated between 2800MW and 3500MW. This only grew to 4000MW on December 30, 2016.
Instances of poor gas supply, low water levels, revenue shortages and other unwholesome business conditions ensured that the productivity of the generation companies were encumbered. There were also reports of stranded generation capacities owing to either poor gas supplies or transmission constraints.

Another operational challenge of the sector was its protracted practice of poor revenue remittance by the distribution companies (Disco) which became very proclaimed in 2016.
As at September 2016 when the Managing Director of the Niger Delta Power Holding Company (NDPHC) Limited, Chiedu Ugbo spoke at a function in Abuja, the market shortfall was reportedly at N809 billion. This, amongst many other challenges, threatened the financial foundation of the sector.

Ugbo had that his NDPHC was been owed up to N105.235 billion by the market as unpaid cost of energy supplied. He explained: “The market operator settlement process shows we are owed N105.235 billion as at today. Just to take us back to history, in 2011, we invoiced N8.2 billion; in 2012, we invoiced N21.9 billion; 2013 – N46.9 billion; 2014 – N51.3 billion; 2015 – N62.4 billion and 2016 – N44.6 billion, and that is the total of N235.4 billion.”
“Of these invoices, in 2011 we got 39 per cent, 2012 we got 26 per cent, 2013 we got 62 per cent, 2014 we got 72 per cent of the invoice, 2015 we got 62 and 38 per cents in 2016. It keeps going down in 2016, and for the June invoice, we got about 18.5 per cent and 19 per cent in July.

“When you compare this to our operational expenses, you will see that we are already in trouble. From the collections, our gas bill in January and February N3.8 billion, March was N3.4 billion. There is no month we have a gas bill less than N2.4 billion. The total we owe for gas now is about N42.207 billion,” he added.
Also caught up in the mix was the Transmission Company of Nigeria (TCN), which could not attract the kind of investment need to expand its capacity. The TCN had also in 2016 ended its management contract relationship with Canadian firm, Manitoba Hydro International (MHI).
The TCN was expected to have improved on its service delivery efficiency under MHI, but this could not be said to be the case as at when MHI left. Its corporate governance practices were still ranked very low by operators in 2016.

Like other market participants, the TCN also complained of poor revenue generation and disregard for market rules by operators. It said these were part of the challenges it had to overcome to offer stable services to the sector.
Its acting Managing Director, Dr. Atiku Abubakar, who was represented by the acting Managing Director of the Transmission Service Provider (TSP), Tom Uwah at another meeting in Abuja, said the plans and activities of the TSP were being impacted by the poor financial remittance and compliance levels of the Discos.

He explained that plans to grow the transmission capacity from 5500MW to 6000MW by December 2016, and then 20,000MW by 2022 would be determined by the market’s respect for existing rules.
For the distribution segment, their reported disregard for the market rules and poor revenue remittance levels were said to have contributed greatly to the sector’s challenges.

While the 11 Discos made efforts to absolve themselves of any blame, the rise of the market’s financial shortage to over N809 billion was linked to their reported illicit financial behaviours.
Whereas they were accused of failing to provide meters to consumers to guarantee optimal revenue collection, the Discos in turn pushed the blame back to the Regulator and government, alleging that they have not been allowed to charge cost reflective rates for electricity supplies.
They cited instances of poor regulatory decisions like the tariff freeze in 2015 for certain cadres of consumers, abrogation of collection losses, and huge debts owed by the government for energies consumed by its agencies, as parts of the reasons for their failure.

Other bad patches
Beyond the operational challenges, the electricity sector also operated for one year without a properly constituted regulatory commission. For untold reasons, the government refused to appoint board of commissioners for the Nigerian Electricity Regulatory Commission (NERC). And when the government eventually decided to appoint, the nominees became controversial with the chairman-designate allegedly turning down the offer and refusing to show up for Senate confirmation.

This development meant that the sector operated with a makeshift regulatory agency for one year. The significance of this was that the government, by its actions, had continued to disregard the dictates of the Electric Power Sector Reform Act 2005, which gives legal bearing to the existence of the privatised sector.
Notwithstanding, there have been clear signs of the impact of the absence of a fully constituted board of commissioners for the NERC on the sector. One of such impact is the seeming reluctance of the market and its participants to enter into a Transition Electricity Market (TEM), one which emphasises on contracts and obligation. The refusal of the market to enter into TEM had indirectly contributed to the sector’s very bad financial status.
An assessment

It was based on some of these operational failures of the market that the President of Dangote Group, Aliko Dangote last year declared that the power privatisation was a failure after three years of its operation.
Dangote specifically based his judgement on the inability of the operators to make the needed investments in capacity expansion. He said the privatisation process was flawed and asked the government to reverse it entirely.
But the Bureau of Public Enterprises (BPE), which conducted the process described his call as too early and not reflective of the true status of the sector’s operations and challenges.

In response to Dangote, BPE’s acting Director General, Dr. Vincent Akpotaire said a call for the power privatisation to be reversed was unnecessary. He explained that the agreement signed with the investors upon their acquisition of the power assets allows that they take at least five years to invest in and stabilise their networks.

According to him, based on that, Dangote’s claim of the exercise’s failure was not factual, adding that the next two years would afford the operators the opportunity to build on the lessons they may have learnt in the last three years to improve the efficiency of their assets and services.
Any bright spots?

The bright spots perhaps in the power sector in 2016 was the decision of the government to activate its longstanding pledge to include solar power in Nigeria’s energy mix
It then signed Power Purchase Agreements (PPA) with 14 solar power promoters who would build solar farms to generate 1125MW of the solar electricity in the country. The pioneer solar plants will cost their promoters up to $2.5 billion worth of investment.

Another cheery development in the sector was NERC’s stepping up of its enforcement actions against operators for operational malfeasance and breach of service agreements. The regulator had before now failed to wield the big stick against recalcitrant operators.

As at the close of the year, the NERC had fined almost every operator in the sector millions of naira for respective breaches. The recovered fines would be paid to the Rural Electrification Agency (REA) in line with the dictates of the EPSRA.