Okeke: Major Roadblock Stands Against New Investments in Nigeria’s Power Sector

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The Managing Director, Azura-Edo IPP, Mr. Edu Okeke, in this interview speaks about the company’s operations in the past one year, the opportunities and challenges in Nigeria’s electricity market. Chineme Okafor provides the excerpts:

It is now about a year that the 461MW capacity Azura-Edo IPP began to supply power to the national grid, would you tell me how it has been for you since then?

It has been a fantastic journey for us, not because of the way in which our plant has been dispatched by the TCN (Transmission Company of Nigeria). If you take a typical power plant in Europe, changes in dispatch are typically quite predictable and units are stopped or de-rated with a good deal of advance notice. By contrast, the vagaries of the Nigerian grid mean that our control room operators have to be on their toes every second of the day. In fact, they receive more dispatch instructions in one month than some of their European counterparts would receive in a whole year.

This also reflects the fact that TCN knows that they can always rely upon us to deliver available capacity whenever they call upon us. We are the only gas-fired power plant in Nigeria that has never suffered a single gas supply constraint and the performance of our turbines has been rock-solid all year. As a consequence, our availability rate this past year has averaged over 98.5 per cent – a superb record for any power plant in its first year. Moreover, precisely because of this reliability, we have played a huge role in helping TCN to stabilise grid frequency. And, our peak daily capacity typically accounts for between eight per cent and 10 per cent of all the power put onto the grid.

The process of developing the Azura IPP was quite tough and resourceful. Your promoters were really patient and waited out the bureaucratic schemes in Nigeria, do you see another Azura-like IPP coming through soon and does the country require more electricity generation capacity?

It is to the credit of our promoters that the seemingly impossible happened. In our book, ‘The Making of Azura-Edo IPP’, we showed that the development of the project took about 250 person years of work. So, it wasn’t an easy task but a hard and grinding journey that exemplified the determination and resilience of thousands of men and women. When the project reached financial close and we began construction, we hoped that it would be a template for future projects in the country. Unfortunately, as a country, we seemed to have derailed from the original process of creating a commercially viable electricity market in which electricity prices support willing-buyer willing-seller transactions.

For example, in hard currency terms, the regulated distribution tariffs are now, on average, lower than the wholesale generation tariffs. This is clearly a major roadblock to any future investment in the sector, because nobody wants to invest in a business where wholesale prices are higher than retail prices. But we are hopeful that, sooner or later, we will get back on track. On whether we need more generating capacities, the answer is yes as what we have today is not adequate for the population. We need a multiple of what we have today to be able to power our industries and homes.

In the last one year, we’ve also seen some changes – good and bad, in Nigeria’s electricity market, which of the changes have impacted you the most?
From our perspective, the biggest change in the market actually happened several years ago when the naira suffered a sharp devaluation at the same time as the government maintained the old price caps on electricity tariffs. As a result, the hard currency value of the Discos’ receipts fell precipitously and the sector as a whole became insolvent, pending future price deregulation and, or market restructuring. This market stagnation did not directly affect our existing plant – the 461MW Azura-Edo IPP, but it did have a serious impact on our capital allocation decisions vis-à-vis new investments.

For example, our original plan was to keep the construction crew on site after the completion of the Azura-Edo IPP and commence work on the second phase of the plant, which would have added another 270MW to the grid. But, at the beginning of last year, as we began commissioning the Azura-Edo IPP, we decided that it would be more prudent to hold back on new investments in Nigerian power capacity until we could see a clear regulatory and political pathway back to sector-wide commercial viability. Our parent company, therefore, accelerated its investments in base load power generation capacity outside of Nigeria. But our first love was, and remains, Nigeria and in the medium to long term we believe the growth in Nigeria’s electricity sector will outstrip that of any country in the world, with the possible exception of China.

So, is the environment right for electricity business to thrive?
The reality is that the current tariff for the sector is far too low to cover the costs of the whole value chain. This has necessitated the government stepping in through the CBN (Central Bank of Nigeria) to provide debt facilities to enable NBET (Nigerian Bulk Electricity Trading) to settle the invoices of the generating companies. But, this is not sustainable in the long run. Government should, as matter of urgency, work through the regulator, NERC, to bring the tariff to a level where the market is self-sustaining. That’s the only way we can have a functional market.

I’ll like to know what sort of relationship you maintain with key stakeholders – the regulator (NERC), transmission company (TCN), and bulk purchaser (NBET)?
Our relationships with these stakeholders are excellent. To start with, we are meeting all the regulatory expectations of us as set by NERC and our reports to the regulator have helped to set new standards for transparency and comprehensiveness. As I mentioned earlier, we are a very reliable partner to TCN which relies on our constant availability to help them manage and stabilise the grid. NBET meanwhile has been a reliable off taker for us and both parties have worked diligently to meet their contractual obligations under the power purchase agreement.

In your host community, what sort of CSR do you run?
Our guiding principle with our host communities is that we are here to stay. Subsequently, we have developed a working relationship with them where we understand their needs and see how to help while they themselves appreciate our efforts and challenges and understand that there are limits to what we can and cannot do. By way of illustration, during the past year, we have constructed and tarred a two kilometres road for one of our host communities, Ihovbor. We have also completed a road for the Orior community and built a six-classroom extension for a school in the Idunmwina community. We are also currently constructing boreholes and transformer extension facilities for them. However, on CSR, we don’t just look at our local community but see the whole country as our constituency. This is because our power is wheeled to all parts of Nigeria.

Hence, as part of our ‘Believe in Better’ CSR program working alongside some well-established NGOs, we have recently assisted a learning facility for IDPs in Maiduguri by providing them with solar power, (we) are providing support to Nigerians who require eye treatment or surgery, (we) are supporting a forest preservation project in Taraba and Adamawa states, and have donated an ambulance and hospital equipment to the Stella Obasanjo hospital in Benin City. We have some other exciting projects in the pipeline, for example plans to work with underprivileged kids using sports as a vehicle and projects involving women empowerment. We are passionate about these programs and see them as our fundamental responsibility to give back to the communities we work with and help the less fortunate amongst us.

You’d agree with me that conversations on climate change and GHG emission are topical today, especially as they affect people and livelihoods. How much GHG do you emit from your plant and how safe are people living around your plant?

When we’re running at full capacity, we burn up to 100 million cubic feet of natural gas every day. That’s equivalent to about 5,400 tonnes of CO2 emissions every single day. That sounds like a lot. And, in absolute terms, it is a lot. But you have to look at the matter from a net rather than a gross perspective. The GHG (greenhouse gas) intensity of natural gas is far less than the GHG content of heavy fuel oil, diesel, kerosene, and petrol. And because all our turbines run on natural gas, the electricity we produce helps to replace electricity generated by much dirtier fuels. This means that the net effect of our production is positive, in terms of shifting Nigeria away from its dependence on heavy, dirty fuels towards lighter, cleaner fuels. The use of natural gas also means that the air quality at our site is very good. In fact, whenever I’m in Benin I prefer to stay on site rather than in a hotel, not least because the air quality on site is far better than in the city centre.

There are some kind of controversial thoughts around the Eligibility Regulation of the NERC, and I wanted to get your views about this regulation, and does your contract allow you to participate in this scheme?

Azura has its entire capacity already contracted out, so it does not have extra capacity for other customers as identified by the regulator.

There’s also this very touchy issue about your power purchase agreement (PPA) and priority payments to Azura by the NBET, tell me what this is all about, and I learnt that some Gencos are miffed with your contract?
I do not know where you got the information that there is priority payment to Azura. As I don’t know how the payment process works for other Gencos, I cannot comment on that. However, we know that some Gencos went to court alleging that while 100 per cent of Azura’s invoice is being settled by NBET, theirs are not. As the case is still in court, I will not be making comments on it except to state that Azura fully supports that all Gencos should have their invoices fully paid, on time, all the time. Adherence to contract and payment certainty are absolutely critical in any sector. Their presence drives growth and investment. Their absence guarantees stagnation and paralysis.

A good number of industry experts I spoke to in the last couple of months have reservations about the power market. What are your thoughts on the direction of the market?

My previous answers already encapsulate some of my thoughts on what needs to be done to shift the industry towards commercial viability. The only additional point that I would stress is that policy makers and regulators should take a long and open-eyed look at the factors which are causing capital investment to preferentially flow into the electricity markets of other African countries.

What are they doing which we are not doing? What do their retail tariffs look like compared to ours? Are they offering greater regulatory and contractual certainty than we are? We might still be the ‘Giant of Africa’ in terms of population and natural resources. But unless we start making some honest regional comparisons, we may discover in a few years’ time that we have become the sleeping giant.