What the ‘Change’ Administration of GMB must do to Improve the Power Sector
TIntroduction he Nigerian general elections have come and gone and there is an imminent change of leadership at the center. The current administration, in the authors’ view set the stage for an improved power sector; the new administration must take this a notch higher. The writers believe that the incoming administration should learn from the mistakes of the outgoing one and then improve on the foundation already put in place.
Focus Areas
Reference to support is not financial support. Let’s do a brief analysis of the scenario; especially with distribution companies. The owners of these companies are required to expend funds to reduce technical, commercial and collection losses over a five year period, in accordance with pre-agreed thresholds. Such funds would run into hundreds of millions or even billions of Naira. No one has, however, considered that such capital expenditure may not be justifiable if the relevant distribution companies do not receive enough power to sell to consumers on their network. Imagine a scenario where so much is spent without a line of sight as to how and when recovery of such sunk costs would occur. No lender would consider same bankable. Hence, the government needs to provide support by playing its own role in ensuring that distribution companies receive enough power to be able to make enough money to justify capital expenditure. The obvious but more difficult option is to create an environment that enables generation companies to increase their capacity and also overhaul the transmission grid to facilitate the delivery of that improved quantity of electricity to the distribution companies. Another option that may be considered is an increase in the electricity tariff. The authors agree that this option is a bit too political for a new government to effect; however, only the brave succeed. It is also arguable that many of the distribution companies can go the way of embedded generation. However, that would not make sense if it would be in very large quantity and we explain why that is the case, below. The grid is the cheapest and on the whole, the most efficient means of wheeling power from where same is generated, to the consumer. Personnel In Nigerian politics, the winner takes all. Hence, it is common practice that with a change in government; personnel also change, irrespective of the individual performances of the said personnel. These changes range from the appointment of advisers, experts and workers in several government ministries. This is mostly done for political reasons as newly elected candidates prefer to surround themselves with ‘their people’ and loyalists. It is germane for the incoming government to refrain from adopting a similar approach especially where it is likely to result in losing experienced and tested hands.
The importance of skill and expertise in a sector so delicate should not be sacrificed on the altar of ‘nepotism’ or political ‘patronage’. This is not
NBA-SBL TARGETS ECONOMY REGULATORS AT 9TH BUSINESS LAW CONFERENCE
there is no better time to contribute our quota to nation building and have themed the conference Regulators as Catalysts for Economic Growth.
‘The aim is to use the conference as a forum for regulators, lawyers and business executives to dialogue on policies and regulations that shape economic growth.’
There would also be adequate balance of leisure activities, including a boat-cruise, tours and dinners in the entire duration of the conference from June 7 – 9 and in the words of Mr. Jemide, ‘it will be a conference of work-hard and play-hard.’
The key sessions of the conference have been designed to raise major talking points that affect our business environment and kick to say that the current crop of persons working in the sector is the best the Nation has to offer; however, a number of them would appear capable of producing outstanding results if given the necessary support. Going by his antecedent in Lagos, shouldn’t Governor Babatunde Fashola SAN be considered for an important role? However, it is important that the Buhari/Osinbajo administration sees fit to retain productive personnel and minds that will drive the sector in the right direction. The personnel that will drive the sector must be those that the populace and the electricity market players will have enormous confidence in their ability to drastically improve the electricity situation in Nigeria. Similar to the situation with personnel, the incoming administration should not be in a hurry to set aside the policies of the current administration but critically analyse same, retain the best parts of such policies whilst fine-tuning same. Gas Deficit Nigeria has been described by many as the ‘island of oil sitting on an ocean of gas’. In spite of the proven gas reserves of about 186tcf, the availability of gas locally has been a major challenge to the country. One of the major reasons for this is the lack of adequate infrastructure. Gas producers in Nigeria who have the technical and financial capacity to develop infrastructure and produce gas have historically focused more on gas export projects in form of liquefied natural gas and gas liquids projects generally. This has been due, largely, to the unavailability of a local commercially viable pricing structure and poor infrastructure.
The major setbacks associated with the use of gas in the power sector and the issues of availability for domestic use can be resolved by implementing a proper electricity pricing regime which accounts for the cost of gas (which is what the multi-year tariff order seeks to achieve); and construction and rehabilitation of gas pipelines. Government may still need to provide some support with the infrastructure- in all fairness, the gas subsector is improving. Government just needs to give it some more push. The recent increase by 50 cents for per thousand standard cubic feet (mcf) of gas; though a step in the right direction, same would not appear sufficient.
There is indeed an over $50 billion gap that needs to be bridged and a means of bridging the gap is finding solutions to the lingering disputes between the international oil companies and the Federal Government of Nigeria to ensure the release of over 300bcf of stranded gas assets held by the international oil corporations. With more encouragement given to local oil and gas exploration companies who have been acquiring the upstream assets of the export-focused international oil corporations we may yet see substantial improvements in the domestic gas market. The authors suggest that indigenous companies that show capacity and expertise in developing gas fields be granted operatorship in the upstream assets rather than the Nigerian National Petroleum Corporation or Nigerian Petroleum Development Company Limited retaining same.
The writers had also advocated having a strong linkage between gas and electricity regulation so that there is proper coordination of gas supply for power generation. In particular, it may be necessary to consider a regime which merges gas transportation and electricity regulation. In addition, pending the time where adequate capital start an enduring mechanism for continuous engagement between the Section on Business Law and the major regulators that shape our business environment.
The conference would also feature a special session tagged ‘Improving Nigeria’s Ease of Doing Business’. This the committee explained is to underscore the importance of improving Nigeria’s current 170th position on the World Bank Ease of Doing Business Index cannot be overemphasised.
Prominent legal and business personalities from around the world are expected to grace the conference as resource persons, including the CEO of the Ghana Investment Promotion Centre, Mawuena Trebarh and John Hawksworth, is invested in developing new gas network infrastructure, the Federal Government should ensure that any gas powered plants that will be built will be located in regions where gas is easily accessible. Transmission Privatisation/ UpgradesThe fact that the grid is very weak and fragile is notorious as even the 2001 national electric power policy recognised that fact. Therefore, there is a need to upgrade the transmission infrastructure currently in place as the entire electric power sector cannot thrive merely on the immense strength of one component, but on the all-round effectiveness of each of the components that make the sector function. Hence, the saying that a chain is only as strong as its weakest link is true with regard to the power sector. Thus, there should be as much focus on transmission (and other components of the power sector) as there is on power generation. Any efforts to proverbially force a V8 engine into a 1970s Volkswagen Beetle will be futile and eventually lead to failure. In fact, the increase in power wheeled through the same old transmission lines will strain the aging infrastructure. Ergo, there is a need for an upgrade of the system.
It would appear that the current model of having a management contractor which is still overseen and guided by the Federal Government is not achieving the desired results. Hence, privatisation may be a more viable option. Clearly, the privatisation of the power generation and distribution companies (which by the way, is laudable) only addresses one part of the problem. Resolving the transmission challenge is another major issue as the transmission would not be able to wheel the power generated if the power plants in Nigeria were to operate at full capacity.
Therefore, the extant transmission network requires upgrade, expansion and proper maintenance in order to effectively wheel power generated and reduce substantially, transmission losses. Currently, the transmission company (consisting of three functional units perform different functions of transmission services provision, generation/transmission scheduling and marketing administration/settlement, respectively) is meant to serve the entirety of the country. However, the transmission company has hitherto, performed poorly. Although, the Ministry of Power is currently undergoing grid improvement and expansion activities, the Federal Government cannot properly maintain these or even do so much, compared to the private sector; the Chief Economist of PWC who will speak on “Long Term Global Economic Trends and Implications for Nigeria’’ and the session, which is based on PWC’s World 2050 Report, which will be chaired by Elisabeth Proust, the CEO of Total E & P Nigeria Ltd.
Discussants expected at this special session include Mr. Segun Agbaje, CEO of Guaranty Trust Bank Plc and Dr Doyin Salami, distinguished economist and senior lecturer at the Lagos Business School.
Another important highlight of the conference is a specific focus on young lawyers for whom excursions have been arranged to visit three top law firms for mentoring sessions and to discuss with their senior colleagues in the profession. hence the need to privatise same.
In privatising the transmission system, it is pertinent that the right model is used and the privatisation is corruption/ controversy free. The writers would in another piece provide insight into plausible means of privatising the transmission system. Suffice to state that there are several models including the asset ownership and assets management split. Under this model, it may be useful to sever the system administration and market administration functional units from the transmission company and have the Ministry of Power take up that role with the management of the grid, privatised. This would ensure that while transmission is improved through privatisation, government continues to play some oversight function.
Dr. Fayemi of the All Progressives Congress mentioned at the recent Lagos Business School breakfast meeting that transmission would be deregulated, regionalised and privatised. It is, however, pertinent to note that transmission at a countrywide level requires central control of power loads to be unqualified/ absolute. Hence, it would be risky to fragment that control, even whilst privatising that aspect of the value chain. Emergency Power Policy & Embedded PowerThe incoming administration is expected to pay more attention towards the delivery of temporary solutions to power shortage in the country whilst long-term solutions which are not far-fetched (namely; gas and grid) are fine-tuned. Already, creative businessmen have begun to use haulage, by trucks, of compressed natural gas from gas fields/ processing plants to where they are required as fuel for power generation. This is seen as a useful alternative to the currently poor gas pipelines infrastructure.
We believe that in the short-term, this would be quite popular but the new administration needs to think through an excellent emergency power policy as that was one of the failings of the current administration. Embedded generation has been encouraged by the outgoing administration. The incoming administration must do much more to incentivise would-be embedded generators. Obtaining licences is getting pretty difficult and time consuming. We believe that the Commission is now over-regulating and slowing down a process which should be swift and efficient.
It is, however, pertinent for the incoming administration to make the point that emergency power would be more expensive but would be a stopgap. Further, creativity and thorough analysis should go into the administration’s emergency power policy for several reasons. One of such is that for power projects to be bankable, they should usually have long term off-take agreements such as power purchase agreements and where the emergency power plants are for short tenures same may not be attractive to investors. Therefore, it is important to forge a delicate balance between having emergency power plants and the terms of such contracts particularly where many people believe that grid power could increase shortly. Hence, some questions worth considering revolve around tenure, pricing, government intervention and gas related issues as far as emergency power delivery is concerned. Though this is a period where any proposal to grant incentives will be frowned at, the authors propose that special incentives should be granted to companies seeking to provide emergency power, as that may immediately lead to an increase investors’ interest to that part of the electricity value chain.
Beyond building emergency power plants, a national power audit is necessary for the proper determination of the actual volume of electricity required; the type and the periods when such power is required by various geographical regions of the country. The power audit is likely to show for example, that certain areas require very little power (have little load) at certain times of the day or month. It then means that the system operator can ensure that there is a proper balancing and scheduling so that (for example), largely commercial areas engaged in certain types of business can have more power wheeled to them at certain days or periods. Non-partisan Regulator As a regulator, the Nigerian Electricity Regulatory Commission (“Commission”) has performed well. However, shortly before the general elections, a