Weighing Gencos’ Grievances

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Chineme Okafor highlights the complaints of the electricity generation companies in Nigeria and the need for the government to address their grievances

For months now, the electricity generation companies (Gencos), that produce the power that goes into the distribution lines that extend to homes and offices in the country have steadily grumbled about their growing challenges in the market which could lead to operational shutdown.

In their appraisal, the market has remained unfair to them, and instead of rewarding their claims of best productivity in a troubled sector, it has rather deprived them.

Amongst the complaints, the Gencos have maintained that they sell electricity to the grid at rates that are not commercially rewarding; do not even get paid adequately for volumes they send to the grid; often barred from producing up to their capacity levels because the distribution networks are allegedly weak; and do not get adequate protection from the market regulator – the Nigerian Electricity Regulatory Commission (NERC).

Additionally, the Gencos have through their trade platform – the Association of Power Generating Companies (APGC), questioned the governance processes of the market as well as the independence of NERC which it lately accused of regulatory partiality especially with regards to enforcing market rules and contracts.

They even claimed the Nigerian Bulk Electricity Trading Plc (NBET), a government-owned bulk power purchaser which buys power from them, sells to Discos and remit commensurate proceeds back to them have often short-paid them because the Discos often underpay the market.
These, the Gencos said were signs to show the country’s electricity market is in deep trouble and likely not going to inspire growth but further decline.

A market operating on conjecture
Key amongst the complaints of the Gencos is the execution of the market’s Transitional Electricity Market (TEM) which was declared in 2015, and within which commercial interactions between operators should be backed with contracts such as the Power Purchase Agreements (PPA), Ancillary Agreements, Gas Supply Agreements (GSA), and Vesting Contracts amongst others.
In their estimation, the Gencos claimed the TEM does not exist, adding that at best, the country’s electricity market is been run on conjecture, as against using enforceable commercial terms.

Their association – APGC, explained that even though provisions in the TEM assured they would get full payments for power they supply to the national grid, they were yet to get full payments of their invoices to the market.
In a note, the Executive Secretary of APGC, Dr. Joy Ogaji, had stated that there were no binding contracts in the market at the moment, thus, indicating the market is perhaps on a free-fall.

“Under the Electric Power Sector Reform Act (EPSRA) 2005, the electricity market in Nigeria would be administered by a number of industry contracts and market rules. The investment on generation is at the instance of the off-taker (in this case NBET).

“TEM was declared on 1st February, 2015. The declaration of the Transitional Electricity Market (TEM) would signal the commencement of all contracts but contrary to the TEM promise, the conditions for declaring it are still far away. “Without effective contracts – Power Purchase Agreements (PPA), Ancillary Agreements, Gas Supply Agreements (GSA), Vesting Contracts between Discos and NBET and other industry contracts, TEM cannot be said to have taken off,” the Gencos claimed.

The non-operation of the TEM, they further explained had placed on them huge financial burdens and barred them from expanding their operations.

According to them: “The TEM promise of 100 per cent Genco invoice settlement by NBET failed, placing a big financial burden on the Gencos. The promise provoked some additional investments by Gencos with its attendant high cost of capital, increased regulatory risk, increased debt profile.

“The Gencos were made to bear the brunt of this lack-lustre performance on the part of NBET and other market participants. The power sector is yet to attain a contractual market status. One of the notable functions of a contract is to facilitate forward planning and to make provision for future contingencies.”

In their estimation, the current market situation, “gives room for conjectures, no contract is binding, and all are on best endeavour.”
For instance, they stated that the absence of effective contracts to backstop gas supply agreements in terms of bankability, currently puts them in a tight corner, adding: “Instances abound where Gencos have had to resort to other means other than the electricity market to support the gas and other services just to put power on the grid.”
On the imperative of the guarantee for the Gencos, they noted that the role of guarantees in the power value chain was important for their operations, and would want this to be rectified.

“With the existence of an enhanced payment security, Gencos will be able to fund working capital and raise capital expenditure to upgrade their operations in order to meet the electricity demands of Nigeria. Gencos requires adequate payment security from NBET as per the PPA to back stop payments due under the PPA,” they stated.

Subjective market practices
Further, the Gencos complained the market has continued to tolerate alleged arbitrary practices of Discos, to the detriment of their operations.
They claimed the Discos now arbitrarily determine how much electricity Nigerians can enjoy every day, as against how much they (Gencos) can generate and put on the grid for distribution, adding the practice was against the rules guiding the market’s operations.

The Discos, they alleged, indulge in the arbitrary practice with the knowledge of the regulator – NERC, which by the way had refuted the claims.
The Gencos however said the NERC had in connivance with the Discos included in the TEM Supplementary Order of 2015, terms that limited the volume of electricity they can put on the grid and be paid for.

Ogaji, again explained to THISDAY that the reduction in the Gencos’ billable generation capacity was instigated by the Discos and approved by the NERC without considering their thoughts and impacts of same.
According to the Gencos, the practice meant that Discos determined what the power system could take and not what Gencos are willing and available to sell, adding that NERC, went on to direct that metered energy be converted into capacity for billing.

“This regulatory directive, on a monthly basis, brings down the actual billable mobilised Gencos capacity, leading to the Discos billed less. It is believed that this reduction of capacity during billing was instigated by the Discos and the regulator approved of it.
“The current state of the market, where a generation company is short-changed for the benefit of other market participant negates the tenets of the Multi-Year Tariff Order (MYTO),” said the Gencos.

They noted: “The result of the foregoing is that, Gencos have not been receiving full payment for the electricity supplied by them, while the gas suppliers have also not been receiving full payments for gas supplied to the Gencos.
“This has accounted for the sub-optimal growth, inefficient operation and the current dire situation of the Gencos, which has huge negative impact on the entire power sector. The current NESI, completely negates the tenets of the MYTO as a model to incentivise prudent operators.”

According to them: “In summary, the current tariff is calculated for the Discos based on the actual generation, meaning what each Disco actually receive on monthly bases as dictated by themselves in line with their load rejection and allowed by the regulator (this can be verified from NERC).

“This clearly implies that the power on the grid is determined purely by what the Discos decide to take and not what is declared as available to be supplied by the Gencos or documented by the System Operator.”
“If this is the case, we do not see how the Discos whose abysmal performance is responsible for the state of the market cries wolf and foul. It is akin to the story of the millipede and the person who stepped on the millipede. The NESI should move past this attention seeking behaviour to a reality and solution seeking mode,” the Gencos added.

Regulatory risks, undefined commercial terms
Again, the Gencos in their many complaints, also said they do not have absolute confidence on the ability of the NERC to optimally regulate the power market. They as well questioned the terms of Nigeria’s sale of electricity generated by them to some West African countries.
With regards to the NERC’s governance of the sector, the Gencos alleged the NERC had been fragile in the past, and currently has no control of developments in the market.

They claimed the Nigerian government takes power from them and sell to countries in West Africa under the West African Power Pool (WAPP) not on commercial but diplomatic terms, adding that this has remained opaque because they often do not know the monetary value that is due to them from such sales.

According to them, the NERC currently do not have a means of independently validating the Aggregate Technical, Commercial and Collection (ATC&C) loss reduction figures of the 11 Discos, and that the sector is currently faced with lots of regulatory risks occasioned by regulatory uncertainties; government’s continued influence in the affairs of the regulator; and NERC’s ineffective regulations.

“Arguably, since the completion of the privatisation process, NERC has, in our view, been ineffectual in discharging its regulatory functions. The power sector is still faced with regulatory risks arising from regulatory uncertainties, government’s continued influence in the affairs of the regulator and ineffective regulation of the sector by NERC.

“The technical and operational capabilities of NERC need to be further strengthened to address obvious gaps in the Commission’s regulation of the power sector so far, which can be described as being reactive rather than proactive. For instance, NERC has no means of independently validating ATC&C loss reductions achieved by Disco (if at all),” said the Gencos.

They added: “Regulatory independence is key to private sector confidence in the power sector and has a significant effect on the ability of government to attract and sustain investments in the power sector. NERC pursuant to the provisions of the EPSR 2005) sections 32 and 96, has the mandate to provide leadership and coordination.

“Currently, there is lack of coordination and consistency across industry stakeholders leading to overlap of responsibilities and unclear boundaries among organisations; regulatory uncertainty related to NERC decision and tariff setting; capacity and skills constraints across the industry; scarcity of capital; lack of accountability due to absence of corporate governance.”

On Nigeria’s daily export of about 300 megawatts (MW) electricity to African countries, the Gencos explained that the agreement does not coincide with the Multi Year Tariff Order (MYTO) upon which they also produce power.