ENTREPRENEURSHIP
Opportunities, challenges and prospects in Nigerian electricity market
Nigeria has made a major transition from a vertically integrated publiclyowned electricity network to a largely privately-owned unbundled electricity network. This is a significant transition. It means that unlike 10 years ago when we had only the Nigeria Electric Power Authority (NEPA) responsible for generating, transmitting and distributing electricity and also responsible for regulating itself, we now have different companies generating, transmitting and distributing electricity in Nigeria and an independent commission responsible for regulating the sector.
Another component of the transformation in the sector is that before November 2013, the 10 successor companies that send power to the grid and the 11 companies that sell power to consumers were all owned by the government. Today, these companies are privately-owned and the transmission company is now under the management of the private sector.
The liberalization and privatization of electricity sector in Nigeria marks the end of a phase in the reform of the power sector, but it also marks the beginning of another phase. It ends the phase of structural transformation of the sector and marks the beginning of the phase of cultural and technical transformation. I want to say that this stage is the more important and challenging one.
This transition started in earnest in 2001 when the National Council on Privatization ( NCP) issued the Nigeria Electric Power Policy (NEPP). The policy argued that the collapse of the electricity sector in Nigeria would only be cured with the liberalization of the sector so as to create a competitive and efficient electricity market that is characterized by the existence of an independent regulator and utilities that are committed to cost-efficiency and cost-recovery.
The NEPP was encoded in legislation through the Electric Power Sector Reform Act 2005. With the EPSR Act, Nigerian power sector reform achieved institutionalization. The standard text in policy reform is that until the reform is codified in an Act of Parliament, the gains of the reform remain reversible.
During the tenure of President Umaru Yar’adua when privatization was briefly stalled, the government could not completely reverse the power sector reform because it was fully established in an Act. For this reason, although the former commissioners of the Nigerian Electricity Regulatory Commission (NERC) were arbitrarily suspended, the Commission continued to exist until revitalized by President Goodluck Jonathan in December 2010.
Since 2005, we have achieved so much in the power sector. NERC has licensed more than 20,000 megawatts of power that could potentially come to the grid in a few years. These licensees have failed to make real progress in executing their projects because up until 2012 the fundamental pieces of the reform were not in place. Independent power producers in the new Nigerian electricity market could not secure financing because of the lack of creditworthiness of the Nigerian electricity market.
The creation of the Nigerian Bulk Electricity Trading Company (NBET) solved a major problem with bankability of electricity projects. Until the creation of NBET, project developers failed to convince investors and financial advisors to lend them money for project development.
The simple reason for the refusal was that the Nigerian electricity industry was bankrupt with huge debts arising from unpaid services and very poor tariff collection. Therefore, it was very risky to lend to a Nigerian independent producer. Besides, until NERC unlocked the tariff policy from bureaucratic control, no substantial investment could come to the Nigerian power sector.
The obvious truth is that the reform in the power sector has produced many results and opportunities. First, it has opened the sector to more investment outside the country. One of the crises that the reform seeks to cure is the lack of sustainable investment in the sector which resulted in the collapse of the sector in the late 1980s.
The crisis became most manifest with unavailability of electricity for most businesses. This led to massive de-industrialization. For more than two decades there was little or no investment in increasing and reinforcing electricity networks in Nigeria. The result of this neglect is that today, Nigeria has one of the lowest per capita electricity consumption in Africa or even in the world.
With a population of 165 million people and an average generation of about 3800 megawatts, Nigeria has a lower per capita consumption of electricity than Ghana. Apart from meagre generation capability, the distribution and transmission networks in Nigeria are weak so it is difficult to evacuate more than 5000mw today.
Before the reform, tariffs in the Nigerian electricity industry were depressed by government order. The old NEPA was barred by decree from increasing tariff even when the cost of supply of electricity had increased. The result was underproduction of electricity and the absence of investment in the network. Ultimately, it led to inevitable collapse of the system. Cost reflective tariff is critical to any sustainable success we may have with the power sector reform. But the idea of cost reflective is controversial and politically explosive.
If the EPSR Act 2005 did not wisely isolate the regulatory commission from the direct control of the government bureaucracy we would not have a cost reflective tariff and the traffic in foreign and local investment in the electricity market would not have happened. Because the Regulatory Commission is an independent commission and fixes the tariff after due process and consultation with all stakeholders, and because the tariff is a product of scientific and technical analysis and modelling, it is insulated from the vagaries and anxieties of politics. The stability and credibility of the methodology for determining the Multi-Year Tariff Order (MYTO) gives assurance to investors to continue to come to the Nigerian electricity market.
The committee on metering set up by the NERC concluded that the metering gap in the market is very huge, with about 50% of consumers, that is, about 2
million consumers without meters. This metering gap has been building over the years. The financial and commercial incentives in the old electricity market of publiclyowned companies could not help to close the metering gap. Even when government provided public funds in the name of subsidies, the chief
With a population of 165 million people and an average generation of about 3800 megawatts, Nigeria has a lower per capita consumption of electricity than Ghana. Apart from meagre generation capability, the distribution and transmission networks in Nigeria are weak so it is
difficult to evacuate more than 5000mw today
executives of the distribution companies could not meter customers, not even those who paid for meters.
Now with the coming of the private electricity market, the possibility of quickly bridging this huge gap is more realistic. Success will not come in a day. It will take time and huge financial investment to drastically reduce the number of unmetered consumers. But because metering is a crucial strategy for reducing financial losses the new private distribution companies will have the incentive to make appropriate investment to meter consumers. In a way, the financial interest of the private electricity company can tie with the public good of consumers. This is also reinforced by the regulatory intervention of the NERC who could penalize the distribution companies for failure to reach their metering commitment.
So, the reform of the electricity market creates opportunities for investment in all the value chains of electricity as recovery of cost becomes more guaranteed. The regulator is helping to boost services in the Nigerian electricity market through the recent local content regulation.
This regulation mandates increasing localization of technology, employment and professional services in the sector.
The sector will soon enter into the Transitional Electricity Market (TEM). This stage is the stage of full bilateral trading in electricity. Market participants will transact on the basis of their contract. Trading by contract will mark the formal beginning of a competitive electricity market.
The end of structural reform is the beginning of cultural reform. The problems that crippled the electricity industry are not just technical. They are also adaptive. They are partly problems of values and governance.
If the old NEPA was well managed the network may not have collapsed and government may not have needed to resort to the bazaar sale as we witnessed. Before 2012, when the regulator commissioned an audit of the accounts of the unbundled PHCN companies, the accounts of the entire electricity industry in Nigeria had not been audited.
After privatization the challenges of electricity regulation have not vanished overnight. It is true that the reform has changed the structure of the Nigerian electricity supply industry. But we still need to meet the challenges of cultural and technical restructuring so that we can achieve the goal of adequate and reliable supply of electricity to Nigerian homes and businesses.
Dr. Sam Amadi, Chairman/ Chief Executive of the Nigerian Electricity Regulatory Commission (NERC) delivered this paper at the annual public lecture of the Institute of Chartered Secretaries and Administrators of Nigeria (ICSAN) in Lagos recently.