Before Power Sector Recovery Plan Runs into Snag

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There are strong indications that the federal government’s Power Sector Recovery Plan may run into a self-imposed trouble, writes Chineme Okafor

The coming on stream of the 450 megawatts (MW) Azura-Edo independent power plant (IPP) to the national electricity grid has remained a mixed event for Nigeria’s power sector.
First, its completion and synchronisation to the grid especially ahead of its projected completion timeline, showed that Greenfield power projects with good economics can be done in Nigeria after all.

However, it also exposed the inherent threats in the country’s power market with full activation of its existing contracts with the Nigerian Bulk Electricity Trading Plc (NBET).

This further highlighted the fundamental structural challenges of the sector which is currently reeling from huge financial deficits.
By design, Azura which is a privately-owned power firm, has a ‘buyer payment security,’ established under a Partial Risk Guarantee (PRG) negotiated and guaranteed by the federal government. Under the PRG, Azura is protected from payment defaults on its contracted capacity whether delivered or undelivered as long as its capacity to produce power are not impeded by its making.

For clarity, what this then means is that if for no fault of Azura, energies it generates are not taken by the national grid for distribution to homes and offices in the country, it would not be denied payment in full for the volumes it has generated.

On the back of this, records obtained from the power market indicated that the monthly invoice of Azura which is usually sent to the NBET is about N6 billion and making up for about 15 per cent of NBET’s total monthly invoice for power generation. From further calculation, the invoice also amounted to approximately 50 per cent of the monthly remittance of the electricity distribution companies (Discos) to the NBET, under the current average market remittance performance of 30 per cent the Discos did.
Also, THISDAY learnt that the NBET, which is directly in contract with Azura on behalf of the government, had to resort to creative ways of managing its contractual obligations to Azura to mitigate associated risks of any default that might lead to a draw down on the PRG Azura has.

As a practice, the PRG is intended to reinforce the credit worthiness of a government buyer like the NBET which should have the capacity to discharge its obligation under normal business conditions so that projects can meet credit risk thresholds of international lenders, however, the NBET, to minimise the impact of unutilised capacity given that the Azura plant would be costlier to keep idle, ensures that Azura’s generated energy enjoys priority dispatch.
This a reflection of the structural challenges Nigeria’s power sector is beset with, and for which the Power Sector Recovery Plan (PSRP) was developed with support from the World Bank.

But THISDAY learnt that the implementation of the PSRP may not absolutely tackle these challenges, especially the systemic bottleneck and structural issues that still exist in the sector because key stakeholders have been locked out of the process of appraising the programme.

The PSRP
The Federal Executive Council (FEC) had in March 2017, approved the use of the PSRP document which provides details on how the power sector would be reset over a five-year period to promote sustainable financial viability and growth in the sector.

Intended to formulate appropriate policies whilst implementing financial interventions to accelerate sustainable long-term growth and development in the power sector, the PSRP offered Nigeria a fresh attempt to reposition her power sector after the government launched an ambitious set of power sector reforms in 2001 that led to the unbundling and subsequent privatisation of electricity generation and distribution companies in 2013.

Although, the design of the power sector reforms envisaged four stages of evolution that would culminate in a competitive, efficient, private sector-led power sector regulated by Nigerian Electricity Regulatory Commission (NERC), with the power ministry only providing general policy oversight, that has not happened. And the four market evolution stages – interim period, transitional electricity market, medium-term electricity market, and final market – have not progressed as expected, perhaps making the PRSP a necessity.

While the transitional electricity market was effectively declared in February 2015, by an order of the NERC, it was reportedly done without all the pre-requisites for it to be in place considering that the market’s commercial operations are still not fully implemented.
Indeed, years after the power privatisation, the sector faces infrastructure, liquidity, and governance challenges that require specific, strategic intervention by the government and its regulatory agencies to reset the market, and this is perhaps what the PSRP represents, however experts from their views would want its implementation to be good and without unwholesome interference especially from the political class.

According to these experts, even though the purpose of the power privatisation was to reduce government participation and increase private operations, the government had since 2013, continued to interfere in the operations of the sector in manners that have not helped it to segue into a contract-based market. This is even with several critical financial interventions it had made in the sector to address its illiquidity troubles.

Before the PSRP runs into hitches
Even though the PSRP was planned to reset the sector by restoring its financial viability; improving power supply reliability; strengthening market governance; as well as placing a premium on transparency and contract-based market, industry sources told THISDAY its implementation may become a bit challenged for some reasons.

As part of its plan, the government expects to within the PSRP which should last from 2017 to 2021, dimension and commit to fund projected future sector deficits until tariffs are adequate enough to support the market’s liquidity; eliminate historical revenue deficits of the sector; allow the sector to operate a cost reflective tariff; keep a baseline daily power supply of 4500 megawatts (MW) across Nigeria; as well as ensure the Discos perform their tasks.

However, some government officials in the sector disclosed that the government could implement the plan and yet fail to reactivate the power sector.
These officials pointed out that two key agencies in the sector – the NBET and Transmission Company of Nigeria (TCN) were left out of the preparation of the project appraisal document for the PSRP. They noted that such alleged anomaly could derail the implementation of the plan.

Additionally, they explained that with such development, the PSRP may be implemented with some of the inconsistencies and structural weaknesses that have continued to stall the progress of the power sector still in place.

“NBET is regarded as the obligor or borrower of the loan (in the PSRP), what this means is that the borrower will have the ultimate responsibility for the successful implementation of the World Bank performance-based loan to the sector under the PSRP.
“It becomes pertinent that he who is responsible and accountable for the loan should have a critical stake in designing measurable parameters it may use to ensure performance and successful utilisation of the funds.

“The project appraisal document of the PSRP was put together by a team external to the core market participants of the sector from the government side which is the NBET and TCN,” said one of the sources who spoke on condition of anonymity.

According to the source: “Without the careful review and input from these two critical stakeholders, the PSRP may continue with some of the inconsistencies and structural weakness that continues in the sector.

“The crux of the PSRP is to ensure financial viability of the sector, it is important to leverage on the success of the N701.9 billion payment assurance facility which is a precursor of NBET’s capability to manage the World Bank performance-based loan especially if the company is its borrower.

“The NBET should be empowered both financially and structurally to drive financial viability in the sector, whilst the regulator (NERC) focuses on ensuring stable environment for all participants to transact. NBET continues to advocate for a careful review of the project appraisal document of the PSRP to ensure that we do not continue with the mistakes of the past.”

Considering the potential implication of this on the PSRP, THISDAY sought the reactions of the NBET and TCN, but their officials declined to comment, stating that they were not authorised to talk about the programme, which they noted was being managed by the office of the vice president, Prof. Yemi Osinbajo.

Commenting on the implementation status of the PSRP, the Minister of Power, Works and Housing, Mr. Babatunde Fashola, had cited the inauguration of the board of commissioners of the NERC and management board of the Rural Electrification Agency (REA) as some of the governance markers the programme enunciated.

Notwithstanding, the government sources who spoke on THISDAY, argued that those were superficial contents of the programme. They explained the real issues in the programme had not gained traction, adding that the reported exclusion of the TCN and NBET in the appraisal process was a potential threat to the full implementation of the programme.