CHANGING POTENTIAL TO REALITY - Brand Spur · 2017-08-14 · Page | 3 Research Power Sector Report Changing potential to reality PSRIP - Government’s response to these challenges

POWER SECTOR REPORT

CHANGING POTENTIAL TO REALITY AUGUST 14, 2017

Page | 2

Research

Power Sector Report

Changing potential to reality

This report captures our analysis of post -privatisation challenges of Nigeria’s

power sector, government’s policy response and our outlook of the sector. See

report highlights below;

Investment Thesis - Reasons to be positive despite challenges

Nigeria’s power market is fundamentally attractive for investment, given the

country’s growing demand for electricity. Nigerians use far less electricity per

capita than citizens of comparable economies in Africa - only about 151

kilowatt hours (kWh) per capita, compared with 4,326 kWh per capita in South

Africa and 1,697 kWh in Egypt. The power sector offers significant long -term

opportunities for bold investors as the Nigerian economy strives to evolve

from its frontier status to an emerging economy. With urbanization

progressing at about 3.8% annually, which is higher than the country’s annual

population growth rate of 3%, more than 60% of Nigerians are projected to

live in cities by 2030 pushing up demand for electricity in the residential

areas. The country’s growing middle class estimated at c.23% of the

population and youthful population further add up to the robust energy

consumption story outlook.

Current State - Challenges and Threats

In spite of these opportunities, investors are wary about the viability of the

electricity market in Nigeria for several reasons. The biggest of these is the

financial viability of the distribution companies, which suffer large losses

across the distribution system. Electricity grids in developed markets expect

losses below 15%, but the losses by Nigeria’s utilities over the past fiv e years

has been as high as 30%. About one-third of that loss is technical, but the rest

is lost to pilferage. Also, the electricity pricing assumptions under the

amended Multi-Year Tariff Order (MYTO) have been largely unrealistic as FX

and inflation rates have breached the set levels without a complementary

adjustment to electricity tariffs. The impact has been lack of cost -reflective

tariffs and accumulation of deficits by power companies which has caused

liquidity strains and has reduced the attractiven ess of the sector to lenders

and investors.

Damilola Lawal - Energy Analyst

[email protected]

Tosin Ojo, CFA - Team Lead

[email protected]

14th August, 2017

mailto:[email protected]

mailto:[email protected]

Page | 3

Research

Power Sector Report


PSRIP - Government’s response to these challenges

To address the liquidity challenges, the Central Bank of Nigeria approved the

N701 billion Power Assurance Guarantee fund primarily targeted at reducing

the backlog owed to generating companies. The federal government also

released the policy document titled “Power Sector Recovery and

Implementation Program (PSRIP)” in March 2017, a series of carefully though-

out policy actions and interventions to be implemented by the Federal

Government to reset the Nigerian Electricity Supply Industry and address the

financial viability of the sector. The biggest component of the PSRIP in our

view is the practical approach to resolving the market viability of the sector

which will involve some form of government subsidy until the sector becomes

investment-friendly again. The plan will be carried out over a five -year period.

Page | 4

Research

Power Sector Report


Contents

The Power Value Chain .................................................................................................................... 5

Policy and Regulation ................................................................................................... 5

Generation ................................................................................................................... 6

Transmission .............................................................................................................. 10

Distribution ................................................................................................................ 10

Investment thesis – reasons to be positive despite challenges ..................................................... 12

Abundance of natural endowment ............................................................................ 12

Growing residential and industrial consumption, low per capita consumption present investment upside...................................................................................................... 12

Support from new government, elevated need for revenue diversification increasing the viability of recent reforms ................................................................................... 13

Substantial and rewarding opportunities across the value chain ............................. 13

Current State - Challenges and Threats .......................................................................................... 16

Consumers’ perspective ............................................................................................. 16

From stakeholders view-point ........................................................................... 18

PSRIP - Government’s response to these challenges ..................................................................... 23

Address the financial imbalances and start the transition to a competitive market 23

Address infrastructure gaps ....................................................................................... 29

Restore proper sector governance ............................................................................ 31

Policy Measures ......................................................................................................... 33

Challenges of the power value chain not covered by PSRIP .......................................................... 35

Longer term outlook – Beyond PSRIP ............................................................................................. 39

Appendix 1: Power Sector Development in Nigeria ....................................................................... 43

Appendix 2: Evolution of Nigeria’s Electrical Supply Industry ........................................................ 44

Appendix 3: Snapshot of reform progress ..................................................................................... 45

Appendix 4: Geregu Power Generation Plant ................................................................................ 46

Appendix 5: Transcorp Ughelli Power Generation Plant ................................................................ 47

Appendix 6: Eko Distribution Company Limited............................................................................. 48

Appendix 7: Ikeja Distribution Company Limited ........................................................................... 49

Disclosure .......................................................................................... Error! Bookmark not defined.

Page | 5

Research

Power Sector Report


The Power Value Chain

Policy and Regulation

The Ministry of Power, Works and Housing (MPWH) has the overall

responsibility for policy setting in the electricity sector whilst the Nigerian

Electricity Regulatory Commission (NERC) is an independent regulatory

agency created in 2005 by the Electric Power Sector Reform (EPSR) Act 2005.

NERC's function is to regulate and control the generation, transmission and

distribution of power in compliance with the existing legislation as well as

directives and policies dictated by the Federal Government of Nigeri a (FGN).

In 2014, the Nigerian Electricity Management Services Authority (NEMSA) Bill

2014 was passed by the National Assembly to take over the functions of the

Electricity Management Services Limited, one of the successor PHCN

companies created by the EPSR Act. The NEMSA bill established the Nigerian

Electricity Management Services Authority to regulate and enforce technical

standards in the power sector. The EPSR Act is the major instrument of

regulatory control adopted by NERC in carrying out its regulat ory functions.

Besides establishing NERC, the EPSR Act also establishes certain regulatory

instruments in the power sector such as the Market Rules and the tariff

regulation methodology. The Market Rules define the organisation of and

trading arrangements for the Nigerian electricity market and in addition, set

out the conditions, general procedures and methodologies for the

administration of the Electricity Market. The Market Rules is a key regulatory

instrument in the power sector. While NERC is not respo nsible for drafting the

Market Rules, any amendments to the Market Rules has to be approved by

NERC for such amendment to be effective. The Multi Year Tariff Order (MYTO)

Methodology is a tariff methodology adopted by NERC to regulate wholesale

and retail electricity prices in line with the provisions of section 76 of the

EPSR Act. MYTO sets generation, transmission and distribution tariffs based

on a number of tariff setting principles and assumptions developed and

agreed between NERC and the licensees. MYTO provides for certainty of tariffs

to licensees and investors in the power sector. The MYTO methodology was

first introduced in 2008 and has undergone several revisions over time.

Page | 6

Research

Power Sector Report


Generation

Currently, there are 25 grid-connected generating plants in operation in the Nigerian Electricity Supply Industry (NESI) with a total installed capacity of 12,522MW. Most generation is thermal based, with an installed capacity of 10,592MW (84% of the total). Hydropower from three major plants accounts for 1,930MW of total installed capacity.

The power plants are classified, based on ownership, as either:

Successor Companies After the unbundling of the Power Holding Company of Nigeria (PHCN), six successor generation companies emerged with controlling stakes in the hands of private investors following the subsequent privatisation exercise that followed the unbundling.

Independent Power Producer Independent Power Plants (IPP) are power plants owned and managed by the private sector. They include those set up by international oil companies (IOC) - Shell and Agip and state governments - Rivers State.

National Integrated Power Projects The National Integrated Power Project (‘NIPP’) is an integral part of the Federal Government’s efforts to combat power shortages in the country. It was conceived in 2004 as a fast -track public sector funded initiative to add significant new generation capacity to Nigeria’s electricity supply system.

16%28%

10%19%

37%

72%

1%

84%70%

90%79%

61%

28%

94%

0% 2% 0% 2% 2% 0% 5%

0%

20%

40%

60%

80%

100%

120%

Nigeria India Egypt China Pakistan Brazil South Africa

Renewable Thermal Nuclear

Figure 2: Power Composition in Nigeria vs. OPEC Peers

Source: EIA

Page | 7

Research

Power Sector Report


110

135

150

180

190

294

335

335

414

434

450

450

480

500

504

561

570

600

685

720

720

724

760

900

1320

0 200 400 600 800 1000 1200 1400

OMOKU

RIVERS IPP

TRANS AMADI

AES GAS

IBOM

ASCO

OLORUNSOGO GAS

OMOTOSHO GAS

GEREGU GAS

GEREGU NIPP

SAPELE NIPP

IHOVBOR NIPP

OKPAI

OMOTOSHO NIPP

SAPELE

ODUKPANI NIPP

JEBBA

SHIRORO

AFAM VI

ALAOJI NIPP

KAINJI

AFAM IV-V

OLORUNSOGO NIPP

UGHELLI

EGBIN

Source: Nigerian Power Baseline Report

Figure 3: Available Grid Generating Capacity in Nigeria

Page | 8

Research

Power Sector Report


Table 2: List of all Generating Licenses in Nigeria

S/N Power Station Classification Capacity

1 Ikorodu Industrial Power Embedded1 39MW 2 Island Power Limited Embedded 10MW 3 Kaduna Power Supply Company Embedded 84MW 4 African Oxygen & Industrial Gases Ltd Generation off-grid2 19MW 5 Akute Power Limited Generation off-grid 13MW 6 CET Power Projects (Ewekoro) Generation off-grid 6MW 7 CET Power Projects Ltd. Generation off-grid 20MW 8 CET Power Projects Ltd. Generation off-grid 5MW 9 CET Power Projects(Sagamu) Generation off-grid 7MW 10 Contour Global Solutions (Nig.) Generation off-grid 10MW 11 Contour Global Solutions (Nig.) Generation off-grid 4MW 12 Contour Global Solutions (Nig.) Generation off-grid 7MW 13 Coronation Power and Gas Generation off-grid 20MW 14 DIL Power Limited Generation off-grid 114MW 15 Energy Company of Nigeria Generation off-grid 3MW 16 Ewekoro Power Ltd Generation off-grid 12.5MW 17 Mabon Ltd Generation off-grid 39MW 18 Ilupeju Power Limited Generation off-grid 2MW 19 Income Electrix Limited Generation off-grid 6MW 20 PZ Power Company Limited Generation off-grid 4MW 21 Shoreline Power Company Generation off-grid 9MW 22 Tower Power Abeokuta Limited Generation off-grid 20MW 23 Tower Power Utility Limited Generation off-grid 20MW 24 Unipower Agbara Limited Generation off-grid 6MW 25 Wedotebary Nigeria Limited Generation off-grid 5MW 26 AES Nigeria Barge Limited Generation on-grid3 270 MW 27 Afam Power Plc Generation on-grid 987.2MW 28 Agbara Shoreline Power Limited Generation on-grid 100MW 29 Alaoji Generation Co. Ltd (NIPP) Generation on-grid 1074MW 30 Anita Energy Limited Generation on-grid 90MW 31 Azura Power West Africa Generation on-grid 450MW

1 Embedded generation involves the establishment of small-scale power generation not exceeding 20MW within a distribution network connected

directly to the distribution company for onward supply within the DISCO’s network. It could potentially be a new power plant or excess capacity from a captive power plant in use by a large manufacturing company. 2 Off-grid generation can be described as stand-alone power generation systems or mini-grids, which typically provide smaller communities (e.g. rural

areas; industrial clusters or residential estates) with electricity through independent electricity distribution network systems. 3 On-grid generation refers to a system of power generation evacuated through the national grid to off-takers which may be the Bulk Trader, who

through vesting contracts supplies power to distribution companies; or directly to eligible customers.

Source: NERC

Page | 9

Research

Power Sector Report


Table 2: List of all Generating Licenses in Nigeria (Contd.)


32 Benin Generation Company Generation on-grid 450MW 33 Calabar Generation Company Generation on-grid 561MW 34 Century Power Generation Generation on-grid 495MW 35 Delta Electric Power Limited Generation on-grid 116MW 36 DIL Power Plc Generation on-grid 135MW 37 Egbema Generation Company Generation on-grid 338MW 38 Egbin Power Plc Generation on-grid 1320MW 39 Benin Generation Company Generation on-grid 450MW 40 Eleme Petrochemical Company Generation on-grid 135MW 41 Energy Company of Nigeria Generation on-grid 140MW 42 Enersys Nigeria Limited Generation on-grid 10MW 43 Ethiope Energy Limited Generation on-grid 2800MW 44 Farm Electric Supply Ltd Generation on-grid 150MW 45 First Independent Power Generation on-grid 150MW 46 First Independent Power Generation on-grid 136MW 47 First Independent Power Generation on-grid 95MW 48 Fortune Electric Power Generation on-grid 500MW 49 Gbarain Generation Company Generation on-grid 225MW 50 Geometric Power Ltd Generation on-grid 140MW 51 Geregu Generation Company Generation on-grid 434MW 52 Geregu Power Plc (BPE) Generation on-grid 414MW 53 Hudson Power Limited Generation on-grid 150MW 54 Ibafo Power Station Limited Generation on-grid 200MW 55 Ibom Power Ltd Generation on-grid 190MW 56 ICS Power Ltd Generation on-grid 624MW 57 Isolo Power Generation Generation on-grid 20MW 58 JBS Wind Power Limited Generation on-grid 100MW 59 Kainji Hydro Electric Plc Generation on-grid 570MW 60 Kainji Hydro Electric Plc Generation on-grid 760MW 61 Knox J&L Energy Solutions Generation on-grid 1000MW 62 Lotus & Bresson Nigeria Generation on-grid 60MW 63 MBH Power Limited Generation on-grid 300MW 64 Minaj Holdings Ltd Generation on-grid 115MW 65 Nigerian Agip Oil Co. Ltd Generation on-grid 480MW 66 Nigerian Electricity Supply Generation on-grid 30MW 67 Notore Power Ltd Generation on-grid 50MW 68 Ogorode Generation Co. Ltd Generation on-grid 450MW 69 Olorunshogo Generation Co. Ltd Generation on-grid 750MW 70 Olorunsogo Power Plc (BPE) Generation on-grid 335MW

Source: NERC

Page | 10

Research

Power Sector Report


Table 2: List of all Generating Licenses in Nigeria (Contd.)


71 Omoku Generation Company Generation on-grid 250MW 72 Omotosho Generation Company Generation on-grid 500MW 73 Omotosho Power Plc (BPE) Generation on-grid 335MW 74 Paras Energy & Natural Generation on-grid 96MW 75 Sapele Power Plc Generation on-grid 1020MW 76 Shell Petroleum Dev. Co. Ltd Generation on-grid 642MW 77 Shiroro Hydro Electricity Plc Generation on-grid 600MW 78 Supertek Electric Limited Generation on-grid 500MW 79 Supertek Nig. Ltd Generation on-grid 1,000MW 90 Ughelli Power Plc Generation on-grid 942MW 81 Westcom Technologies & Energy Generation on-grid 1000MW 82 Zuma Energy Nigeria Ltd (Gas Generation on-grid 400MW 83 Zuma Energy Nigeria Ltd(Coal Generation on-grid 1200MW

Transmission

The operation of the electricity transmission network is vested in the

Transmission Company of Nigeria (TCN), one of the successor companies

unbundled from the Power Holding Company Limited. The TCN is made up of

three major departments: Transmission Service Provider (TSP), System

Operator (SO) and Market Operator (MO). TSP is responsible for the

development and maintenance of transmission infrastructure. MO is charged

with administering the wholesale electricity market, promoting efficiency a nd

where possible, competition. The SO manages the flow of electricity

throughout the power system from generation to distribution companies. The

TCN is the only successor company in the electricity value chain still in

government control. Nigeria’s transmission network consists of 159

substations with a total (theoretical) transformation capacity of ~19,000MW

and 15,022km of transmission lines.

Distribution

Distribution companies represent the last link in the electricity value chain

and interface directly with the final end-users. NERC sets the tariffs that these

off-takers must pay the GENCOs just as it sets the remuneration the DISCOs

shall receive from consumers. There are 11 electricity distribution companies

(DISCOs) in Nigeria.

Source: NERC

Page | 11

Research

Power Sector Report


Table 3: Coverage network of distribution companies in Nigeria

S/N Distribution Companies Load Allocation

Regions Covered

1 Abuja Distribution Zone 11.5% FCT Abuja, Niger, Kogi and Nassarawa 2 Benin Distribution Zone 9% Edo, Delta, Ondo and part of Ekiti 3 Eko Distribution Zone 11% Lagos Island 4 Enugu Distribution Zone 9% Enugu, Abia, Imo, Anambra and Ebonyi 5 Ibadan Distribution Zone 13% Oyo, Ogun, Osun, Kwara and part of Ekiti 6 Ikeja Distribution Zone 15% Lagos Mainland 7 Jos Distribution Zone 5.5% Plateau, Bauchi, Benue and Gombe 8 Port Harcourt Distribution Zone 6.5% Rivers, Cross River, Bayelsa and Akwa Ibom 9 Kaduna Distribution Zone 8% Kaduna, Sokoto, Kebbi and Zamfara 10 Kano Distribution Zone 8% Kano, Jigawa and Katsina 11 Yola Distribution Zone 11.5% Adamawa, Borno, Taraba and Yobe

Source: NERC

Page | 12

Research

Power Sector Report


Investment thesis – reasons to be positive despite challenges

Abundance of natural endowment

Nigeria is richly blessed with primary energy resources. The country is

endowed with the world’s tenth largest reserves of crude oil currently

estimated to be about 37.5 billion barrels and has been described as a natural

gas island given an estimated natural gas reserves of 5,475.2 billion standard

cubic metre which includes associated and non-associated reserves. This

places Nigeria among the top ten countries with the largest gas reserves in

the world. Other significant primary energy resource endowment in Nigeria

include: Tar sands – c.31 billion barrels oil equivalent (4.216 billion toe) as

well as coal and lignite – estimated to be c.2.7 billion tonnes (1.882 billion

toe). Renewable energy sources such as water, win d and biomass are also

abundant. According to the International Renewable Energy Agency, small

hydro and biomass have a potential of about 3,500 MW and 10,000MW

respectively. Solar Photo Voltaic potential is estimated to be about 325 TwH

if 1% of the available land is utilized. Wind is estimated to have a potential of

14,369 MW and 363MW at capacity factors 20% and 30% respectively

assuming 0.25% of the land is available.

Growing residential and industrial consumption, low per capita

consumption present investment upside

More than 50% of the population - around 80-90 million people - do not have

regular access to electricity. Compared to world (3,014kWh) and Sub -Saharan

Africa (488kWh) averages, per capita power consumption is significantly low

in Nigeria. Per capita consumption of electricity in Nigeria averages just 151

kilowatt-hour (kWh) annually. By contrast, the annual average per capita

consumption in South Africa is 4,326kWh and 1,697kWh in Egypt. The power

sector offers significant long-term opportunities for bold investors as the

Nigerian economy strives to evolve from its frontier status to an emerging

economy. With urbanization progressing at about 3.8% annually, which is

higher than the country’s annual population growth rate of 3%, more than

60% of Nigerians are projected to live in cities by 2030 pushing up demand for

electricity in the residential areas. The country’s growing middle class

estimated at c.23% of the population and youthful population further add up

to the robust energy consumption story outlook. The rebasing of Nigeria's GDP

Page | 13

Research

Power Sector Report


in April 2014 indicates that the power intensive manufacturing sector

accounts for a much larger proportion of the economy than initially thought.

Industries such as auto assembling, construction, agro -processing and mining

consume large amounts of energy. As such, investment in the power sector to

support burgeoning manufacturing industries is a major area of opportunity.

Support from new government, elevated need for revenue

diversification increasing the viability of recent reforms

The Buhari-led administration has said it will continue with the power reforms

initiated by Presidents Olusegun Obasanjo and Goodluck Jonathan despite the

challenges in the sector. We view this as further sustaining the viability of the

past administration’s reform program given that the failures of some of the

past reforms in Nigeria were largely fueled by lack of continuity following the

cessation of the administration that introduced them. Also, whilst the need

for Nigeria’s econom ic diversification has always been a recurrent national

matter, we think that the sustained downturn in crude oil price, will force the

government to press harder on the reforms in the power sector- as there can

be no meaningful development without steady power supply. Recognizing

this, the federal government instructed all stakeholders in the sector to

convene for monthly meetings on matters arising in the industry. The

decisions reached in these meetings would be binding on all stakeholders. The

meeting would be rotated among the various GENCOs, DISCOs, TCN and other

stakeholders across the country. This move is already yielding dividends – the

committee recently resolved a right of way issue being experienced by the

Niger Delta Power Holding Company along the Itu -Calabar Axis that hindered

a transmission project. Construction work has commenced at the Azura plant

after the signing of the required approvals by the federal government. The

project had hitherto been awaiting government approvals for over a year .

Substantial and rewarding opportunities across the value chain

Many traditional opportunities, such as the development of generation

capacity, as well as non-traditional opportunities will emerge across the value

chain if the above mentioned suggestions are followed through . Some of the

more exciting opportunities that will unfold across each segment are

discussed below.

A. Generation. Besides traditional opportunities in thermal power projects

there will be many others such as:

Page | 14

Research

Power Sector Report


Investment in over-sized captive plants by players in process industries,

e.g. cement and petrochemicals manufacturing companies. Lafarge

Africa uses only 40MW to 50MW out of 90MW generated by its local

power plant and is looking to sell the excess. Flourmills of Nigeria has

excess capacity and could potentially supply c.5MW to the national

grid.

Setting up group captive plants to access relatively price insensitive and

creditworthy customer segments. An excellent case study is the Lekki

Peninsula Independent Power Plant which supplies 8.5MW of power

through a 22km dedicated distribution network to critical public

facilities in the Lekki, Victoria Island and Ikoyi areas of Lagos State.

Participating in trading activities by leveraging the various arbitrage

opportunities that will emerge. India has five regional electricity grids

namely Eastern, Western, Northern, Southern and Northeastern. The

electrical regions in India are in different geographical zones and thus

have very wide diversity in type of resources, climate and therefore

have different demand pattern over the year and even during the day.

The above diversity results in the formation of surplus and deficit

regions indicated by respective frequency of the region at any

particular time of day. The difference in frequencies resulting into

different unscheduled Interchange rates (price) of power creates a

favorable condition for arbitrage between regions.

B. Fuel and related infrastructure. Upstream companies with access to gas

reserves should consider integrating forward to get more value for their

assets. This could provide higher earnings if utilised to supply power plants

or related entities. The Shell -owned Afam plant is an excellent illustration.

In October 2008, the Afam VI power plant began generating electricity, fed

by natural gas from the Okoloma gas plant. This integrated project

contributes 14% to 20% of Nigeria’s current power supply.

C. Distribution. Distribution will become a very large and potentially

profitable opportunity. Large investments in metering could provide

opportunities for equipment makers . There will also be demand for

turnaround specialists—players with expertise in specific areas like

network management, billings and collections, and for smart technology

providers—players who can develop, commercialise and support

technologies such as prepaid cards, real -time meters, tamper-proof meters

Page | 15

Research

Power Sector Report


and smart grids. There are a number of mid-size companies providing

ancillary services to power distribution companies in the electricity value

chain. We highlight two of them below;

Name Description

Mojec International Offers services on meters repair, manufacture of

electric meters and accessories in Marina Lagos.

Momas Systems Nigeria Limited Offers services on meters repair, manufacture of

electric meters and accessories in Surulere Lagos.

D. Solar power . With one of the world‘s highest solar intensities, Nigeria has

the potential to become a global force in solar energy. An emerging

regulatory regime and high peak prices make this opportunity real and

attractive. In May 2015, the Nigerian Federal Executive Council approved

the National Renewable Energy and Energy Efficiency Policy (NREEEP). The

NREEEP outlines the national thrust of the policy and measures for the

promotion of renewable energy and energy efficiency. Feed in Tariffs

applicable for solar projects for 2016 as indicated in Schedule 5 of REFIT

Regulation consists of Capital Cost $/MWh176.85; Operations and

Maintenance $/MWh0.15, making a total of $/MWh177.00 per MWh.

E. Demand-side management . Growing focus on demand-side management

with resultant shifts to compact fluorescent lamps (CFLs), enforced

building and appliance codes, will create long term opportunities for

professional services firms with expertise in the design and construction

of green buildings and in the development and implementa tion of energy

management solutions and products.

F. Equipment and EPC services . With the creation of additional

generation capacity, Nigeria will be one of the largest markets in the

world for equipment and component suppliers. Some of the largest

suppliers in the world already have a presence in Nigeria (GE and

Siemens) with others set to follow as the market grows. Attractive

opportunities include the supply of key components, such as heavy

castings and forging, special steel pipes, balance of plant and

engineering, procurement and construction services.

Page | 16

Research

Power Sector Report


Current State - Challenges and Threats

Consumers ’ perspective

Unreliable Electricity Supply

Nigeria has been experiencing a power crisis induced by rapid growth

in electricity demand coupled with prolonged underinvestment in new

generation capacity. According to the NERC, electricity demand is

projected at 28,360MW based on a current growth rate, as well as an

urbanisation rate of 3.8%. However, only c.25% of Nigeria’s 12,522MW

of installed capacity reaches the end user. Due to widespread

inefficiency only 3,687M (Q1’17 average) is operational. Most of the

short fall which was around an average of 5,381MW for Q1’17 is due to

obsolete equipment and poor maintenance, or to ongoing maintenance

and repair activities at existing power plants. Also, about 3,454MW is

non-operational primarily due to gas, water, high frequency, and line

constraints. The weak transmission grid and distribution bottlenecks

further compound the losses and reduce the electricity available to end

users. The implication is that Nigeria experiences power shortages and

regular interruptions in service . According to the World Bank, Nigerians

experience electricity outages about 32.8 times in a typical month and

total power outage for about forty six days annually, leading many

consumers to rely on very costly generators as an emergency stopgap.

This estimate does not take into the account th e 60% of Nigerians not

connected to the grid. According to Sahara Energy, about N3.5 trillion

($21.9 billion) is spent yearly by businesses, families and others in

Nigeria to buy fuel for power generation. Also, according to a World

Bank Enterprise Survey for Nigeria, frequent power outages mean big

losses in forgone sales and damaged equipment - 6% of turnover on

average for formal enterprises, and as much as 16 % of turnover for

informal enterprises unable to provide their own backstop generation.

According to the World Bank, losses due to electricity outages can

amount to 16% of annual sales.

Page | 17

Research

Power Sector Report


Stagnant and Inequitable Access to Electricity

Nigeria has a low electrification rate. According to the International

Monetary Fund, less than 45% of Nigeria’s population has access to

electricity, compared with about 70% in Ghana and more than 85% in

South Africa. Nigeria’s own target is to make electricity available to 75%

of the population by 2020 and 100% by 2030. There is also an obvious

inequity in energy access based on levels of income and population.

Whilst population growth has been relatively split between urban and

rural areas, a greater proportion of those lacking access to electricity

are in the rural areas. For those that do have access to electricity in

Nigeria, average residential electricity consumption per capita is

149kWh per year, equivalent to around 20% of the average level in

China, 9% of Europe ’s average per capita electricity consumption and

3% of that of United States of America (USA). Consumption per capita

is significantly lower in rural areas, typically in the range of 50 to 100

kWh per year. For a five person household, annual consumption of 50

kWh per person could, for instance, allow the use of a mobile phone,

two compact fluorescent light bulbs and a fan for five hours a day. In

urban areas, households generally own more appliances, such as

television sets, refrigerators or an electric water heater. There are also

disparities in consumption levels across and within sub -regions. Access

rates also vary substantially amongst the states of Nigeria. For instance,

according to the projections of the Japanese International Cooperation

Agency (JICA), Taraba State had the lowest electrification rate 4 in 2010

with 21% and Lagos the highest with 96%. Out of the 13 states that

registered the lowest electrification rates, 10 were located in the

North-West and North-East. The 8 states with the highest

electrification rates were located in the South -West or South-South.

Prevalence of Backup Generators

To circumvent the effects of the loss and unreliability of electricity

supply, majority of users rely on back-up power generation – inverters

and generators (diesel and petrol fired generators for residential and

medium sized enterprises, gas or diesel fired generators for industrial

users). Electricity from back-up generators is more expensive than

electricity from the grid, thereby increasing the weighted average cost

4 Electrification rate is the percentage of the population that has access to electricity.

Page | 18

Research

Power Sector Report


of power to consumers and businesses. Apart from the direct costs

relating to acquisition, fuelling and maintenance of generators, there

are also indirect costs that are less straightforward to identify and

quantify. Indirect costs range from the inconvenience of having to

reschedule activities to accommodate maintenance works to the

injurious effect of generator fumes on health and quality of life and

noise pollution. There are also environmental costs as the prevalence

of poverty compels many households to subsist on natural resources

(like firewood), causing overexploitation of these resources and

resulting in social ills like deforestation, smoke and contamination of

drinking water sources.

From stakeholders view-point

Power tariffs are not cost reflective

In Nigeria, the tariffs paid by end-users are subject to two primary, and

typically competing, considerations: the importance of recovering the

costs of supply, as a step towards earning the necess ary return on

investment and fund future capital spending; and the social imperative

to keep prices at levels that allow consumers to benefit from affordable

energy services. In Nigeria and many other developing countries

particularly in Sub-Saharan Africa, utilities often appear trapped

between these two objectives: tariffs are either too high for consu mers,

or too low in relation to the costs of supplying them with power.

The risk is that this locks the power sector into a cycle of low revenues,

high debts, inadequate maintenance, under-investment and poor

quality of service. The average effective electricity tariff in Africa is

$0.14 per kilowatt-hour (kWh) against an average of $0.18 per kWh in

production costs. Therefore, electricity consumption is effectively

subsidized, but with significant disparities among African countries. For

example, while electricity tariffs in South Africa ($0.09) and Zambia

($0.07) are among the lowest in the world, prices in Djibouti ($0.31)

and Gabon ($0.22) are among the highest globally. The average tariffs

in Africa are also much higher than in other developing regions . The

average effective tariff in South Asia is $0.04/kWh, whilst that for East

Asia is $0.07/kWh.

Page | 19

Research

Power Sector Report


Electricity tariffs are higher in Nigeria relative to international

standards. The high power prices are due in part to high fuel costs.

Nigeria generates its electricity using a combination of coal, renewable

energy and natural gas. In comparison, electricity generation in Sweden

comes from nuclear and hydroelectric power (83%). Cogeneration from

combined heat and power (CHP) plants accounts for 10 % of the

electricity output in Sweden, and these are mainly powered by biofuels.

About 7% of the electricity in the country comes from wind power.

Reliable power supply crippled by obsolete transmi ssion network

Apart from the problems of fuel availability and operational capacity,

Nigeria’s troubled power sector is also hamstrung by a constricted

transmission system. Underinvestment in maintenance and

infrastructure has constrained our transmission grid, limiting the

wheeling capacity to 5,300MW. The transmission network is highly

stressed and weak, thus making it prone to frequent system collapse

and exceedingly high transmission losses. Such energy losses reduce

the reliability of power supply, which is already insufficient to meet

demand. In Nigeria, transmission and distribution (T&D) losses reduce

the supply ultimately available to end users by more than 20%. T&D

0.08

0.09

0.09

0.10

0.10

0.14

0.15

0.19

0.20

0.21

0.27

- 0.05 0.10 0.15 0.20 0.25 0.30

Sweden

Finland

South Africa

US

South Korea

China

UK

Germany

Japan

Italy

Nigeria

Figure 4: Global electricity prices ($)

Source: EIA

Page | 20

Research

Power Sector Report


losses are noticeably lower in South Africa and North Africa, at 10% and

14% respectively. The loss rate in Nigeria is also more than double the

world average and that of many developing countries in Asia. The

economic impact of these losses is two-fold; potential revenue losses

to the generation and distribution companies and an increase in energy

costs since consumers have to rely on alternatives. Power from backup

generators is much more expensive than grid power, which increases

the weighted average cost of power to consumers. On average

Nigerians spend about N3,374 ($11) on their monthly electricity bills,

according to data from NOIPolls. On average the monthly cost for the

fuel to run these generators adds an additional N9,529 ($31) to a

household’s bill. That is three times the cost of direct supply.

Sabotage of key assets Apart from the current low level of power

generation caused by vandalism of gas pipelines, which results in low

gas supply to power generating companies , transformer theft and

vandalism of power line cables are also problems at the

transmission/distribution end of the value chain. Sabotage is rampant

and has been on the rise due to poor socio-economic conditions. The

impact of these acts of sabotage include the following: 1) rise in the

cost of maintenance to restore service, 2) loss of revenue to the utility

companies, gas producers and businesses, 3) rise in customer costs as

they are forced to rely more on more expensive alternative channels

and 4) resultant socio-economic losses due to noise pollution and

increased carbon footprint.

Beyond the metering muddle

The latest data (FY’16) on the level of metering released by the NERC,

showed that c.55% of electricity consumers are unmetered. In

contrast, the percentage of unmetered consumers in South Africa is

negligibly small (less than 10%). A concept study by the NERC, suggests

that distribution companies loose N12.53 billion ($39.78 million)

annually by their inability to bridge the metering gap. Metering all

users offers a promising solution to the commercial losses the sector is

currently experiencing and the attendant disputes that go with

estimated billing. In developing an estimated bill for an end -user,

distribution companies measure the number of units in terms of KWH

of power that goes into a particular district, deduct the amount for

Page | 21

Research

Power Sector Report


metered customers on pre-paid and metered credit meters and then

divide the remainder amongst unmetered customers in that district. In

most cases, these bills are disputed leading to a lengthy arbitration

which consumes time and financial resources. According to the NERC,

47,127 complaints were lodged by consumers against the eleven

distribution companies during the last quarter of 2016. This is an

indication of high customer dissatisfaction in the Nigerian Electricity

Supply Industry (NESI). Metering and billing for electricity actually

consumed by users is integral to commercial management of an

electricity utility company. Effective performance in both functions is

critical to ensure the financial viability of the company.

Human Capital Challenge in the Power Sector

The power sector requires expansion of capacity across the value chain

including equipment manufacturing, fuel resources, construction,

project management as well as operations and maintenance. While

there’s continuous investment by stakeholders to address the various

challenges, availability of skilled manpower is a major constraint. With

foreigners accounting for most of the skilled manpower in the power

sector, the lack of high quality domestic human resources is becoming

a key constraint to planned large scale investments and projects in the

sector. The prevalence of expatriates increases overall personnel cost

given necessary considerations for security, accommodations and

payment of salaries in foreign currency . Apart from the dearth of skilled

domestic manpower, many power companies are still dealing with

unresolved pre – privatization labour issues. There have been several

media reports of service disruptions by striking workers.

Input constraints – Pipeline Vandalism

Thermal plants (gas-fired plants) in Nigeria have a total installed

capacity of 8,457.6MW and account for 81% of the total capacities of

power generating plants. Natural gas has many advantages - it is

abundantly available in Nigeria, relatively cheaper than diesel and

other fuel oils, and burns cleaner also – 117lbs of CO2 emitted per

million British thermal units (Btu) of energy vs. 161lbs and 229lbs for

diesel and coal (anthracite) respectively . All of Nigeria’s natural gas

comes from the Niger Delta, and must be transported via pipelines to

power plants around the country. Pipelines are essentially the veins of

Page | 22

Research

Power Sector Report


gas-powered generation; they provide the route for the transportation

of natural gas from where they are mined to the power plants where

they are needed, which are often hundreds of kilometres away. In the

wake of the return of hostilities in the Niger Del ta region, the supply of

electricity across the country has worsened due to the loss of about

1,995MW of power as a result of the disruptions in gas supply to

operators of electricity generation facilities . This has resulted in drastic

reduction in power generation. With current national power generation

at an average of 3,687MW5, the impact of this incident is very

significant.

Macroeconomic problems

Nigeria’s economy which contracted in 2016 (-1.8%), performed much

better in Q1’17 (-0.5%) on the back of improved oil production and

manufacturing output. Nonetheless challenges persist in the domestic

economy and like other sectors in the economy, the power sector is not

immune to the ongoing travails of Nigeria’s macro-economic landscape.

In addition to the cash-flow strains faced by many power companies

(distribution and generation), high cost environment and a steeply

depreciating currency are worsening the situation given higher import

costs of inputs such as gas and strained ability to service foreign

currency denominated debts. Also, high inflation has an impact on

power consumption even though power is a primary necessity. With

better purchasing power, people can move to larger homes and use

more electric appliances leading to increased electricity consumption.

However, in a high inflation environment, consumers are actively

rationing to manage higher price levels and will therefore find ways to

cut down on power consumption to reduce their electricity bills and for

those without prepaid meters, find ways to avoid paying bills

altogether.

5 Q1’17 Average

Page | 23

Research

Power Sector Report


PSRIP - Government’s response to these challenges

The Power Sector Recovery and Implementation Program (PSRIP) is a series of

carefully thought out policy actions, as well as operational and financial

interventions to be implemented by the Federal Government to reset the

Nigerian Electricity Supply Industry and address the financial viability of the

sector. In summary the PSRIP focuses on reducing market shortfalls as a result

of a lack of cost reflective tariffs. Under the PSRIP, the federal government

will bear the funding shortfall in the power sector until such a time that the

tariffs are fully cost reflective which according to the PSRIP proposal will be

2021. The PSRIP was developed testing different scenarios of tariff increases

and the receptiveness of stakeholders’. The scenario with the likely most

favourable outcome will result in a cumulative subsidy of N2.4 trillion ($7.6

billion) from 2017 to 2021, the period covered by the plan. In summary, the

PSRIP aims to reduce market shortfall by assuring the performance of GENCOs

(through a payment guarantee) while ensuring that there’s improvement to

remittances by DISCOs. Overall, the PSRIP comprises of 17 components /

reform actions in four groups of interventions – financial,

operational/technical, governance, and, policy interventions. We elaborate

on the key components of the PSRIP below;

Address the financial imbalances and start the transition to a competitive

market

1. Dimension and commit to fund future sector deficits from 2017 to 2021

The PSRIP recognizes that until tariffs reach cost recovery, the government

must make up the difference between the costs that the tariff allows

market participants to recover and the full cost of supply. The PSR IP

envisages that the future shortfall will be funded from the sale of

government owned power plants, borrowing from the World Bank and

other multilateral financial institutions and from the national budget.

Work is ongoing to elaborate on the detailed mechanism for funding the

shortfall by taking into account fiscal considerations, how the funding will

be provided to market participants, interactions with regulator, as well as

governance and institutional reforms needed to enforce market discipline.

The difference between cost recovery tariff and allowed effective average

tariff – will be covered by the government through the Electricity Market

Support mechanism, subject to annual amount allocated in the budget. The

actual government contribution will be calculated m onthly, based on the

Page | 24

Research

Power Sector Report


information provided by licensees (energy billed and amount billed, to

calculate actual average tariff of each DisCo) and reviewed by NERC. NERC

will report the amount due to each Disco (as a result capped tariff) to the

federal ministry of finance as well as the debt to NBET and to the Market

Operator as informed by those licensees. With this information, the

federal ministry of finance will allocate the market support for each DisCo

as (i) a payment to NBET on behalf of the DisCo for outstanding (monthly)

payment; (ii) a payment to the Market Operator on behalf of the DisCo for

outstanding (monthly) payment; and (iii) the remaining amount (if any)

sent to the DisCo as support for its distribution expens es.

Action Steps Analysis of fiscal sustainability and contingent liabilities of the sector

and analysis of the multiplier effect of the proposed government

support; and

Incorporation of government contribution in the Medium Term

Expenditure Framework and in annual budget proposals that are

submitted to the legislature.

2. Eliminate historical sector revenue deficits (2015 and 2016)

The power sector liabilities/deficit before privatization in 2013 was

absorbed into NELMCO. Separately, MYTO 2, as adopted in June 2012,

underestimated ATC&C losses and overestimated energy delivered to

customers. The end user tariff charged by DisCos at p rivatization in

3.50

5.6

6.6

7.6 7.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

FGN Budget Allocation NIPP Sales World Bank AfDB Total

Figure 5: Funding Sources ($)

Source: EIA

Page | 25

Research

Power Sector Report


November 2013 was lower than the cost reflective levels then. Each MYTO

review since June 2012 has understated the end user tariff. This has

created a cash flow deficit – which is a debt owed by Nigeria’s electricity

consumers to its power sector.

Table 5: Tariff and Market Shortfalls 6

Tariff Deficit (N) Market Shortfall (N)

ABUJA 44,863,980,800 64,102,401,003

BENIN 53,117,905,427 41,879,416,897

EKO 27,395,923,488 24,017,307,731

ENUGU 44,160,795,180 56,936,561,525

IBADAN 58,810,736,003 50,642,075,274

IKEJA 37,156,754,007 57,246,818,445

JOS 36,682,954,768 30,697,763,433

KADUNA 47,654,564,826 51,297,518,900

KANO 39,952,399,439 34,842,039,388

PH 47,624,527,132 47,327,268,004

YOLA 20,624,417,296 14,024,911,678

TOTAL 458,044,958,367 473,014,082,279

Action Steps A process for settlement of deficits due from DisCos in net payable

positions to be agreed between the DisCos, NBET and the Ministry of

Finance (MoF), and communicated to the MoF, Ministry of Budget &

Planning and the Ministry of Power, Works and Housing.

3. Eliminate historical MDA debts and automate future payments

The payment of historical MDA electricity debts and for power used by

MDA’s going forward would significantly reduce the sector’s deficits going

forward. Total unpaid electricity bills by MDA’s claimed by DisCos is N64

billion (US$203 million). FGN is currently conducting an exercise to verify

MDA power invoices with DisCos. FGN has resolved to settle all

outstanding arrears from MDAs after a reconciliation and verification

process aimed at confirming the size and allocation of the dues for each

6 Market Shortfall of N473 billion (US$ 1.5 billion): This is the total amount underpaid by all the DisCos to NBET (and MO) for invoices submitted to each DisCo for electricity delivered to their distribution networks. Tariff Deficit of N458 billion (US$1.4 billion): This is the aggregate amount of shortfall in the allowed revenue for each DisCo due to the lack of a cost reflective end user tariff. The N15 billion (US$47.5 million) excess of the Market Shortfall (A) over the Tariff Deficit (B) is, by definition, the net amount due from DisCos as a group to the “market. In aggregate, these deficits reflect payments due to all sector stakeholders – gas suppliers, GENCOs, and payments due to service providers like the SO, MO, NBET and NERC.

Page | 26

Research

Power Sector Report


MDA. CBN will develop an MDA debt payment system, and FMoF will

implement a centralized mechanism for regular payment of MDA

electricity bills in future. N45 billion (US$143 million) was included in the

2017 federal budget to pay MDA electricity debts.

Action Steps Ensure that MDA debts are paid upon completion of the verification

exercise; and Implementation of FGN’s prepaid metering for MDAs to ensure

regular payment for power consumed and encourage energy efficiency at all MDA’s.

4. Move towards cost reflective tariffs over the next 5 years and review the

tariff setting methodology

To incentivize private sector investment in the power sector, the end user

tariff must be set at a level that reflects the full cost of producing

electricity. FGN recognizes that a cost reflective tariff must be achieved

over the next 5 years in order to allow market participants to recover and

the full cost of supply. The private sector (both international and local)

will only invest in Nigeria’s power sector if there is clarity on how the earn

a decent return of and on their invested capital. Approximately 70% of the

cost of electricity in Nigeria is linked to the USD/Naira exchange rate (cost

of turbines for power plants, natural gas to power the turbines, and other

operating and maintenance costs). Due to the depreciation of the Naira,

and, decrease in gas supply from the Niger Delta, the average electricity

tariff is now much lower that what it needs to be to adequately cover the

cost of producing, and delivering electricity to consu mers. Current tariffs

are N28.8 per kWh (US$ 9.1 cents/kWh), compared with current cost

reflective levels of N50.3 per kWh (US$ 16 cents/kWh).

Action Steps

FGN issues Electricity Tariff Recovery Policy covering the transition

path to achieve full retail tariff cost recovery within five (5) years and

government support to cover the gap during the transition; and

NERC to conduct tariff review reflecting provisions of the Tariff Policy.

5. CBN Payment Assurance Facility

The Payment Assurance Facility is a N701.9 billion CBN loan to NBET,

guaranteed by the Ministry of Finance, to support NBET payments to

GenCos and in turn, to gas suppliers. For the payment assurance program

to be effective at this point of our market development, it is important

Page | 27

Research

Power Sector Report


that it is not viewed as a bailout facility that supports the existing market

behaviour but one that supports a credible plan towards achieving an

efficient and self-sustainable market. It is expected that the market will

improve on its bill payment performance with decl ining drawdowns from

the facility, to address payment gaps, over the next 2 years .

Action Steps CBN and NERC to finalize terms of the Facility ; NERC to incorporate relevant terms of the Facility into the MYTO

model; NBET/ CBN should assure payment to the GenCos in a timely manner;

and NERC should ensure clear penalty regime for DisCos underperforming.

6. World Bank Group Funding

The World Bank Group has expressed its willingness to assist the F ederal

Government in preparing and supporting a credible power sector recovery

program. The World Bank Group has indicated potential support for the

Program totalling up to US$2.6 billion and support of IFC and MIGA to

mobilize up to US$2.7 billion in potential private sect or investment.

Table 6: World Bank support for the Nigerian Electricity Supply Market

Item WBG Potential Funding ($’Bn)

Performance based loan for financial support to eliminate cash flow deficits

1.0

Loss Reduction in Distribution including Metering 0.5

Support to TCN 0.4

Rural electrification initiatives 0.4

Guarantees 0.3

Action Steps FGN to fulfil the Conditions Precedent set by the WBG in order qualify

for the funding.

Page | 28

Research

Power Sector Report


1. CONDITIONS PRECEDENT A. FEC approval of the Power Sector Recovery Implementation Program (PSRIP) B. Sources of funding identified for the PSRP C. Appointment of Boards (NBET, TCN, NELMCO, NDPHC, REA, BPE) D. Appoint BPE professional Directors on DISCO Boards E. Policy statement issued by FMoPWH on cost-reflective tariff / subsidy path endorsed by FMoF F. Update MYTO methodology consistent with policy G. Carry out tariff review (per MYTO review schedule) H. Budget containing provision for MDA debt approved I. Announce the operational mechanism for subsidy J. Institutional arrangements in place for oversight, implementation and monitoring of the PSRIP K. Issue the gas pipeline vandalism prevention strategy L. Implement [approved actions] to reduce gas pipeline vandalism M. Review and confirmation of gas and transmission infrastructure investment required for PSRIP N. Conduct legal review of sector contracts including Performance Agreements, Vesting Contracts

and PPAs to facilitate hitch-free contract activation O. Review by BPE/NERC of Disco investment/performance improvement plans P. Market Operator submits generation adequacy report to NERC Q. Review of timing of projects in preparation and issue policy for competitive procurement R. Issue communications strategy for PSRIP and begin implementation

Page | 29

Research

Power Sector Report


Address infrastructure gaps

1. Ensure a minimum of 4,000 MW generation capacity is available daily from 2017 to ensure grid stability. Power outages have created dissatisfaction among electricity customers

who have become frustrated with the poor quality of service. Furthermore,

to reduce cash deficit in the sector, generation needs to be stabilized at a

level that ensures sufficient cash is generated for DisCos to meet their

fixed costs. FGN sees customer satisfaction as a prerequisite for any tariff

increase, especially in the most economically vulnerable (R1) residential

customer class. The PSRIP sets out power generation targets starting with

a baseline generation level of 4,000MW in 2017 (the “Baseline Power

Generation Level”) and increasing to 5,500MW by 2021. Key to achieving

the Baseline Power Generation Level is the resolution of constraints

affecting thermal power plants, especially gas as the transmission grid as

of today can wheel more than 4,000 MW. Whereas gas supply needs to

guarantee at all times a floor generation level of 4,000MW is estimated to

1,348 MMscf/d, gas supply to power plants (excluding own -use supply to

Afam VI and Okpai) averaged only 553MMscf/d and 450MMScf/d in 2015

and 2016 respectively. These gas molecules were supplied on a reasonable

endeavour basis as no gas supply contract is effective. Nevertheless, the

government is confident it can increase gas delivery to power plants to

required levels as Nigerian gas production is sufficient to meet demand

(daily production is circa 9 MMscf/d). The Government will address major

issues constraining gas availability to the power sector, notably pipeline

vandalism, arrears due to gas suppliers and lack of payment security for

gas deliveries.

Action Steps

Identification and prioritization of power plants to be supported to

achieve the minimum 4,000 MW baseline;

Full disbursement of NEMSF to ensure historical debts are paid to gas

suppliers (also captured under the historical arrears work stream);

Ministry of Petroleum Resources to develop clear plan on gas

vandalism prevention strategy;

Implementation of the N701 billion guarantee as a means of sending

a strong positive signal to power generators and gas suppliers that

they would be fully paid going forward; and

Page | 30

Research

Power Sector Report


Project manage the delivery of key gas pipeline infrastructure in order

to ensure that gas is readily available where it is needed.

2. Capacity of Transmission Grid to rise to 7000MW from 5000MW currently

The TCN has transmission capabilities of about 5GW. Nigeria’s

transmission infrastructure is made of approximately 6,680 km of 330 kV

lines, 7,780km of 132kV lines, 330/132kV substations with installed

transformation capacity of 10,166 MVA and 132/32/11kV substations with

installed transformation capacity of 11,660MVA. Average transmission loss

(line losses) is less than 9%. In the last three years, TCN has been able to

achieve significant improvements in its operations, system reliability and

efficiency. For example, incidences of system collapse have drastically

reduced from 42 system collapses in 2010 to about six system collapses

recorded in 2016. Nonetheless, the system is operating well below

international reliability and security standards. Frequency and voltage

recordings often exceed established norms. System collapses (when not

caused by generation outages due to gas pipeline vandalism) are primarily

as a result of inadequate maintenance of outdated equipment and the lack

of a comprehensive and modern SCADA system to have real time data and

manage real time operation and control to keep in balance the power

system

Action Steps A total of 2,650 km of 330 kV and 7,101 km of 132 kV transmission

lines and 2,850 MVA of 330/132 kV and also 2,900 MVA of 132/33 kV

transformation capacity will be added to the network in the next two

years going by project schedules of TCN.

In addition, there are on-going reinforcements of existing 330 kV and

132 kV lines and substations to raise transmission wheeling capacity

to 7GW.

3. Addressing gas pipeline vandalism

Gas is the predominant fuel for power generation in the Nigerian power

sector. Most of the gas supplied to the power plants are on a reasonable

best endeavour basis. This has been compounded by power producers’

large payment arrears that it is unable to settle (total gas supply

indebtedness of power plants from January 2015 to December 2016 is

NGN155 billion (US$500 million)). As such supply has been erratic and low

resulting in 1,400MW of constrained generation. Vand alism on oil and gas

delivery infrastructure has also shut down gas production which resulting

Page | 31

Research

Power Sector Report


in another 2,900MW of constrained generation. A more conciliatory

approach taken by the federal government to militants in the Niger Delta

has reduced the threat of damage to oil and gas infrastructure.

Action Steps

Strategic level engagement led by His Excellency, The Vice President

with Minister of State for Petroleum and 9 state governors to identify

critical development priorities for each state in the regi on;

Operational and programmatic engagement by representatives of

various MDAs, including the Office of the Vice President to convert

the region’s development priorities into specific projects;

Ownership stakes by host communities in oil and gas assets will make

them guard their assets; and

Engaging host communities to secure assets in their townships.

Restore proper sector governance

1. Restore proper sector governance to improve investor confide nce

A prerequisite towards restoring confidence of the private sector, and the

participation of DFIs like the World Bank in funding the PSRP would be

empowering / equipping regulators for their role of sector guidance and

policing. A key step would be the appointment of boards to sector related

parastatals and development of a capacity development plan for

regulators and of a training program for FGN’s board representatives. In

addition, current BPE directors will be replaced with qualified independent

(be without conflict of interest) board members through a transparent

process.

Action Steps

Identification and appointment of credible Boards of sector agencies

including NBET, TCN, NELMCO, NDPHC, REA and BPE

FGN Board positions in DisCos to be filled by co mpetent and

professional individuals from the private sector

Provide for extensive on-going training for FGN Board representatives

FGN to put in place a special police department or provide Discos with

required police staff to help them enforce their right s

2. Establish data driven processes for decision making across the sector

Transparency ensures that information is available on which the

performance of the power sector participants can be monitored and

assessed. A transparent power sector also promotes tru st between market

Page | 32

Research

Power Sector Report


sector participants, and, deters corruption. PSRP’s success would be

underpinned by process transparency and buy-in by sector stakeholders,

various arms of the Nigerian government, and the Nigerian public.

Currently absent in the Nigerian power sector is operational data

transparency as well as commercial data transparency.

(a) Operational data transparency: This applies to all market participants

(NERC, NBET, GENCOs, TCN and DisCos). The ultimate users of these

services are the consumers as the sector should be fully transparent and

accountable to its consumers. All licenced market participants and the

regulator are expected to use their websites to promote openness and

facilitate public knowledge about their core activities by making

information and documentation available on their websites. The

willingness to disclose information, including documenting and making

public processes and rationale for decision making, results of monitoring

and enforcement, and conditions in the power sector demonstrates that

each and all functions are being carried out as required.

(b) Commercial data transparency: Promoting transparency of power

companies’ revenues, costs and profits is an important aspect to rebuild

consumer confidence in NESI. Allegations of power companies, especially

DisCos, benefitting from non-transparent billing, settlement and payment

systems reduce consumers’ confidence, and, are contributors to the

persistently high collection losses. To rebuild trust and confidence in the

sector, a system needs to be put in place that is robust, useful, and

accessible.

Action Steps

Improved transparency and access to information on the sector by the

public.

Implementation of an integrated ERP system to support real time

issuance, review and settlement of energy and services invoices

industry wide.

3. Make electricity market contracts effective

FGN’s ultimate goal with the sector reforms is to create an efficient

electricity sector that delivers electricity to Nigeria’s homes, businesses

and industries at affordable prices. Without contracts being effective, it

will be difficult to hold sector participants accountable for their

Page | 33

Research

Power Sector Report


operational and management failures. For the privatized GENCOs and

DisCos, it will also be difficult to enforce the improvements in their various

companies that the Sponsors of each company signed up to at

privatization. The trading arrangements – Vesting Contracts between

DisCos and NBET, and, PPAs between NBET and IPPs/GENCOs – have not

been formalized. This has been a work in progress since privatization in

November 2013, primarily due to the cash deficits in the sector. Having a

contract-based electricity market, where penalties are imposed on sector

participants that fail to fulfil their contractual obligations is a necessary

step towards returning confidence to the sector participants and potential

investors.

Action Steps

Activate electricity industry contracts including Vesting Contracts,

PPAs, and Gas Supply Agreements – at least, as many as are required

to meet and maintain the minimum 4.000MW available generation

capacity that is required to maintain grid stability .

Policy Measures

1. Develop and implement an FX policy for the power sector

Approximately 70% of the cost of electricity in Nigeria is linked to the

USD/Naira exchange rate (cost of turbines for power plants, natural gas to

power the turbines, and other operating and maintenance costs). Due to

the almost 55% depreciation of the Naira, and, decrease in gas supply from

the Niger Delta, the electricity tariff is inadequate to cover the cost of

producing and delivering electricity to consumers. Similar to refin ed

petroleum products like PMS, the power sector would require a mechanism

that will ensure the USD/Naira exchange rate is relatively stable for the

sector. Furthermore, sector participants, especially the GENCOs, have

complained about the lack of access to FX to meet OPEX, CAPEX, and debt

servicing obligations and structuring the financing for Greenfield projects

in a manner that is in line with international project finance.

Action Steps

CBN establish and implement clear forex rate and access policy for

the power sector in collaboration with key power sector MDA’s.

2. Increase electricity access by implementing off grid renewable solutions

Page | 34

Research

Power Sector Report


Beyond restoring the Nigerian power sector’s immediate viability, the

PSRIP is also focused on the sector’s long term robustness. As a result of

challenges with connecting every Nigerian to the grid, off grid solutions

present viable alternatives to ensuring every Nigerian has dependable

power supply. A complementary program of the PSRIP aims to accelerate

electricity access mainly in rural areas focused on off -grid solutions. The

Government program for off-grid will consist of the following:

(a) Rural mini grids: This component would fund the electrification of

unserved and underserved areas that have high economic pote ntial. The

focus would be on solar-based mini grids, which can be rolled out quickly,

and later be integrated with Discos. The tentative target is 200,000

households, subject to scaling up or down during project preparation.

(b) Stand-Alone Home Solutions: this component would provide Solar

Home Systems (SHS) and solar lanterns, among other products, for areas

where mini-grids are not viable. The standalone solutions may include

individual photovoltaic (PV) systems that can provide sufficient electricity

to satisfy the needs of households and small commercial enterprises (e.g.,

for lighting, radio, TV, fan). These systems will provide critical services to

the hardest-to-reach customers.

(c) Reliable power for federal universities and teaching hospitals

(Energizing Education): the focus will be on Nigeria’s Energizing Education

program, which has been under development by the government for some

time. The objective is to provide new or improved electricity service to 37

federal universities and 7 university teaching hospitals across the country

(including street lighting for illumination of campuses). The Federal

Ministry of Power will implement this component. The power will come

from off-grid systems ranging from 1MW to 10MW.

Action Steps

Increase electricity access by implementing off grid renewable energy

solutions: Rural Mini Grids, Standalone Home Solutions (SHS), IPPs for

federal universities and teaching hospitals

Finalise negotiation with credible on-grid solar project developers

Page | 35

Research

Power Sector Report


Challenges of the power value chain not covered by PSRIP

Securing fuel supply

Though Nigeria has one of the world’s largest reserves of natural gas,

inadequate fuel supply is constraining the growth of its power sector. Gas is

the primary feedstock for the Nigerian power industry and any interruption

to supply has a large downstream impact on all players from generation to

distribution. Current and future power plants will not meet power demand

unless gas supply improves significantly. To deal with this problem, the

government needs to:

Upgrade gas processing and pipeline infrastructure: This will entail

building additional gas processing facilities. According to the

ministry of petroleum resources, gas processing capacity in Nigeria

is six billion cubic feet (bcf/d) per day. In contrast, capacity is

12bcf/d in Saudi Arabia. Numerous projects are planned/ongoing for

the improvement of gas infrastructure in Nigeria. Distribution

pipelines and processing facilities currently being developed by the

private sector and government will guarantee the availability and

reliability of gas supply across diverse geographical regions in

Nigeria. The CINDA consortium – made up of many leading Chinese

state-owned companies – would invest in setting up one new gas

central processing facility at a cost between $3 billion and $3.54

billion. The consortium will also build a new pipeline that would run

from Port Harcourt to Kano at the cost of between $4.3 billion and

$5.4 billion. These investments are part of the MOU worth over $80

billion that was signed with China as part of efforts to bridge the

infrastructure funding gaps in the Nigerian oil and gas sector. The

Trans-Saharan Gas Pipeline (TSGP) which is currently being

developed at different phases is a pipeline system that will move

gas from Nigeria’s Niger Delta through Niger and Algeria into

Europe, terminating at Hassi R’Mel in Algeria at 4,400km. Investors

are already positioning strategic projects along its r oute to take

advantage of gas-based opportunities around this network and its

expected spur lines. The main domestic gas distribution artery the

Escravos-Lagos Pipeline System (ELPS) is currently being upgraded

to double its capacity (presently 1.1 tscf pe r day). The new ELPS II is

a 36”diameter, 342km pipeline that will transverse the Nigerian

Page | 36

Research

Power Sector Report


states of Delta, Edo, Ogun and Lagos and will be completed in 2017.

Upon completion, it will ensure reliable gas supply to many power

plants on its route and also spur new power plants. It will induce

the growth of other gas-based opportunities. Additionally, the

Ogidigben Gas Revolution Industrial Park (OGRIP) is a gas park being

developed to support gas-based projects with numerous

government incentives. By mid-2017, Dangote Groups’ twin 550km

subsea gas pipelines will be completed. The system will increase

domestic gas supply from 1 bscf today to 4 bscf according to the

group’s chairman, Aliko Dangote.

Improve the economics of pricing : Low domestic gas prices do not

justify investment in gas development by upstream oil and gas

companies. Recent tariff increases have improved the situation but

according to stakeholders further increases are needed to fund

projects requiring new infrastructure. Policy-makers have an

important role to play by moving upstream industries towards the

free market and attracting more participation from the private

sector. One of the major deterrents of gas investment &

monetization by International Oil Companies (IOCs), indigenous

producers and other downstream gas companies has been the price

of gas in Nigeria. This has originally been below $1.00 per mscf. It

was reviewed from $1.50 per mscf before 2015 to $2.50 per mscf.

The 2016 MYTO tariff sets gas prices at US3.20 per mscf. This upward

review has increased gas investment appetite and spurred many gas

infrastructure development. However, the complete deregulation of

the sector is necessary to increase investments in the sector and

realize its potential. This will also help reduce gas flaring. It is

estimated that nearly 70% of the associated gas is burned off at the

wellhead because of insufficient gas-collecting mechanisms. With

improved economics, companies will invest in pipelines and

processing plants to capture and sell the gas.

Explore the use of Liquefied Natural Gas

In 2016, the Minister of Works, Power and Housing – Babatunde

Fashola - provided a clear picture of the costs of pipeline

vandalization to the power sector value chain using the Escravos

Lagos Pipeline System as an example. The pipeline which supplies

Page | 37

Research

Power Sector Report


160 mscf per day of natural gas to power generating plants used for

generating about 660MW of power was vandalized by Niger Delta

militants. According to the Minister, daily revenue loss to power

stakeholders due to the pipeline vandalism was N470 million ($1.5

million). These losses are comprised of about N80 million ($254.0

thousand) per day in lost gas sales, and N390 million ($1.2 million)

per day in lost revenues to the generation and dist ribution

companies. Liquefied natural gas (LNG) is a liquid fuel and typically

does not require pipelines for its transportation. They are mainly

transported via trailers on trucks, or rail cars. They are not

vulnerable to pipeline vandalism and are theref ore important

alternatives that should be considered when developing strategies

for mitigating the impact of vandalism on power generation. Whilst

LNG is more expensive compared to natural gas (N15KwH vs.

N6.6KwH) due to the need for liquefaction, storage, transportation

and its regasification capacity, it is more expedient for power plants

fed by the most vulnerable pipelines to develop a fuel diversification

strategy that will require that they source about 30% of their fuel

from LNG. Since only 30% of the effective fuel mix will be from LNG,

the effective cost increment will be only about N3/kWh.

Resolving the grid problem -

Adding capacity alone will not suffice as a response to Nigeria ’s soaring

demand for power. There is a need to upgrade the transmission network to

expand its network coverage (currently covers only 40% of the nation) and

limit transmission losses. This is can be achieved through the following;

Attracting investments via public private partnership : Currently,

limited funding is a core barrier faced by the government owned

Transmission Company of Nigeria. One of the possible solutions is

public-private partnerships (PPPs). Not only would PPPs make the

procurement and installation of power transmission infrastructure

and technology more affordable, it would also help deploy global

best practices and capabilities within the country. However, Nigeria

may face challenges in fulfilling PPP projects if attributes such as

regulatory uncertainty, political interference, graft and

unsophisticated risk allocation are not thoroughly addressed in

time. An efficient solution used by many developing countries with

Page | 38

Research

Power Sector Report


a challenging business environment is to customise PPP contracts

that anticipate major risks and provide guarantees against them.

Rapidly scaling up transmission infrastructure: The government

and other agencies need to play a central role in conceptualising and

prioritizing projects aimed at increasing transmission lines in

Nigeria, especially in the areas/regions not well covered. This will

help increase the geographic coverage of power transmission and

substantially improve reach within the country. However, given the

implementation-related challenges, special oversight should be

provided throughout the project lifecycle to ensure timely

completion. Also, provision of added security and protection may be

required in certain areas, to safeguard against potential attacks.

Furthermore, options such as implementation of off -grid solutions

in select regions may be considered (based on a cost -benefit

analysis), especially in strategic distant rural areas. For example,

China launched the China Township Electrification Program in 2001

to provide renewable electricity to 1,000 townships, one of the

largest of such programs in the world. This was foll owed by the

China Village Electrification Program, also using renewable energy,

aimed at the electrification of a further 3.5 million households in

10,000 villages by 2010, to be followed by full rural electrification

by 2015. The Chinese government paid the total costs involved in

connecting these areas to the grid and subsidizes the amount paid

by consumers in these areas.

Page | 39

Research

Power Sector Report


Longer term outlook – Beyond PSRIP

From our analysis of similar emerging markets, we believe a longer term

target of 1,000kwh per capita power consumption is a reasonable target that

Nigeria can aim towards over the next 15 years. In our view, the successful

implementation of the PSRIP over the next five years is imperative to set stage

for the investments needed to attain the 1000kwh per capita consumption 15

years from now.

Table 3: Per capita power consumption (annual) for comparable emerging market economies (non-exhaustive)

Country Power consumption per capita in kWh Population in millions

Malaysia 3,724 30 Ukraine 3,324 44.8 Brazil 2,249 208 Turkey 2,088 79 Egypt 1,877 91.5 Uzbekistan 1,621 29.2 Vietnam 1,465 93.4 Indonesia 910 258.0 Morocco 873 34.0 Phillippines 682 101.0 Sri Lanka 588 21.0

Pakistan 357 189 Bangladesh 234 161 Nigeria 151 160.0

To raise per capita consumption to 1,000kWh, Nigeria will need to increase

installed capacity to 55GW. Amongst growth markets, sizeable increases have

been observed in Brazil and Vietnam, where installed capacity has increased

by 31.1GW and 28.3GW respectively between 2005 and 2015. This was driven

by comprehensive power development plans, which were supplemented with

aggressive public and private investment. For Nigeria, especially given that

32.8 GW of power generation projects have been announced, we consider the

stretch target of a 50 to 55 GW increase in capacity (over fifteen years) to be

realistic. Assuming that all power generation projects currently in the pipeline

will be completed on schedule, Nigeria will need to add a further 9.7GW of

capacity. Nigeria’s power sector will need investments of about $10.4 billion,

Page | 40

Research

Power Sector Report


assuming an average construction cost of $1,073 7 per kWh and that the

additional capacity is provided by natural gas power plants .

To raise this amount of capital, projects must be financially viable, which in

turn, will entail addressing distribution risks. The PSRIP focuses primarily on

addressing pricing and distribution risks over the next five years as well as

ensuring the stability of power generation at a minimum of 4000MW., to

achieve our hypothetical per capita power consumption of 1000MW in a

decade and half from now, the challenges around the security of fuel supply

for power generation and dilapidated distribution/transmission infrastructure

must be resolved. Also, the full metering of all electricity consumer types (in

addition to the explicit target of metering “all maximum demand users” sp elt

out in the PSRIP) must be priority. We examine these areas and proffer

recommendations that can help resolve these challenges thereby ensuring an

efficient functioning of the power value chain, such that is needed to raise

consumption to our hypothetical target of 1000MW in 15 years.

Aligning upgrade in distribution infrastructure with transmission

expansion: Currently the distribution capacity (8,873MW) in Nigeria is

higher than operational transmission capacity (5,300MW). Assuming

we achieve a total generation capacity of 55GW and based on a

capacity utilisation of 55% and transmission loss of 7% 8, the grid should

have at the minimum a wheeling capacity of about 28GW.

Consequently, distribution infrastructure needs to be upgraded to

accommodate the expanded capacity. There is a need for proper

communication and coordination between the Transmission Company

of Nigeria and the distribution companies, to ensure alignment in

planning and execution.

Reducing losses by improving distribution infrastructure: According

to the NERC, average distribution losses have been officially indicated

as 46% of the electricity generated. These losses are often caused by

overloading aging infrastructure that have seen little maintenance or

have been poorly repaired. To combat this, DISCOs need to have a

sustained focus on managing physical assets with pre -planned

strategies (and budgets) for maintenance and upgrade of critical

7 World Bank estimate for constructing a gas fired power plant 8 Average capacity utilisation and loss rates in countries that have undergone power reforms

Page | 41

Research

Power Sector Report


infrastructure in a timely manner. The NERC set an annual CAPEX

benchmark of N550 billion ($1.75 billion) for DISCOS (N50 billion -

$158.7 million per DISCO). This covers CAPEX for maintenance as well

as upgrades. Capex projections are based on existing and projected

demand and the need to reduce AT & C losses to improve coverage and

quality of supply. This is grossly inadequate, because DISCOs will need

about N78 billion ($247.6 million) to meter about two million

customers alone, not considering other areas of investment.

Discussions are ongoing to enable Discos front -load part of their capital

expenditure, however the NERC has mandated that any frontloading is

strictly dedicated to metering consumers

Reducing ATCC losses and revenue leakage - Smart metering: Large-

scale application of advanced metering infrastructure can significantly

reduce the incidences of revenue leakage. Smart meters will be linked

to a central server that will enable DISCOs have accurate meter

readings for every consumer at all times. Integrating this system with

a commercial management system (CMS), makes pre -paid consumption

of electricity possible. Credit bought by consumer is loaded onto theirs

account in the CMS; many options are available for purchase and

loading, including use of mobile phones. The company can easily

implement operational procedures allowing the custom er to have

access to the remaining credit, receive alert messages from the

company when the credit is about to expire, buy new credit, receive

disconnection message, etc. The effectiveness of this tool to detect and

discourage theft and other ways of unmetered consumption is

enormous, as shown by the recent experience in developing countries

such as Poland, India, Malaysia, Dominican Republic, Honduras, and

Brazil. We examine the smart metering system in Poland in the section

below.

Page | 42

Research

Power Sector Report


Impact of Advanced Metering System on revenue collection and loss reduction. A Polish Case Study

Background

Energa Operator was the first utility in Poland that implemented a massive rollout (Stage One)

of Smart Meters, thus confirming its position as a leading investor in Polish Distribution System.

This deployment took place in 2012, when Energa Operator installed 109,000 Smart Meters

delivered by ADD GRUP as a first stage of rolling out Advanced Metering Infrastructure.

Approach

Following a series of AMI pilot projects conducted during 2007-2011, involving about 23,000

smart meters from 12 vendors, Energa Operator made a decision for AMI rollout. The first stage

of rollout would involve implementation of 109 ,000 smart meters based on S-FSK IEC 61334-5-1

communication technology. The implementation of AMI project begun with physical installation

of various components of the system followed by their logical integration. The physical activities

of the project included the installation of the following network components:

Residential Meters

Data Concentrators

Balance Meters

3GPP/CDMA modems

Impact

Energa Operator has one of the most successful AMI projects in Europe. The smart meters

seamlessly transmits 15 minutes interval data to the operator for billing and monitoring.

Energy theft cases dropped from 62 cases to only 12 cases after the implementation of

AMR and overall losses dropped to 6% from 13% before the rollout

Consumers now pay for actual consumption, not for estimated one. This is the most

important benefit as perceived by Polish consumers. According to a research realized by

GfK Poloniaiv, 82% of Poles pointed out that paying for the actual electricity consumption

is important, as it allows a better planning of family budget and gives a feeling of control .

Web Interface allows each to check their own consumption. Information flow enables

households to rationalize consumption and lower electricity bills.

Remote reading is important to 36% of consumers, who prefer not to be visited by data

collector.

65% of consumers are willing to change their habits to reduce their electricity bill.

Page | 43

Research

Power Sector Report


Appendix 1: Power Sector Development in Nigeria

The passage of the Electricity (Amendment) Decree and the National Electric Power

Authority (NEPA) (Amendment) Act in 1998 laid down the first steps for the

implementation of the power sector reform. The objective of the reform was to build a

more competitive power sector with the creation of a level playing field fo r private

sector participation. However, the main restructuring steps were taken with the

enactment of the Electric Power Sector Reform Act in 2005. This reform led to the

unbundling of the state owned power entity into eighteen (18) new successor companies

comprising of six (6) generation companies (GENCOs), one (1) transmission company and

eleven (11) distribution companies (DISCOs). The end of government monopoly made

the emergence of Independent Power Plants operated by Shell, Agip and AES possible.

The reforms also introduced a new set of players such as the Ni gerian Electricity

Regulatory Commission (NERC), a quasi -independent regulatory body in charge of

overseeing the electricity sector and the Nigeria Bulk Electricity Trading (NBET) were

established. The NBET, also known as the “bulk trader” is responsible f or purchasing

bulk power from generating companies and Independent Power Providers for onward

sale to distribution companies under a vesting contract. A Rural Electrification Fund

(REF) was also established to enhance electricity affordability by low incom e consumer.

By November 2013, under the administration of former President Goodluck Jonathan,

the privatization of these state-owned utilities and assets was completed whilst the

transmission company was placed under the management of Manitoba Hydro

International. Even though the reforms of the power sector, attracted new

investments, the main objective of the reform which is the establishment of a long -term

electricity market structure wherein multiple operators provide efficient services on a

competitive basis for the broadest range of customers is yet to be realised.

Page | 44

Research

Power Sector Report


Appendix 2: Evolution of Nigeria’s Electrical Supply Industry

Source: Nigerian Power Baseline Report, CSP Research

Electricity Corporation of Nigeria is created.

ECN and NDA are merged to create the National Electric

Power Authority

Unbundling of assets (transmission, distribution and generation)

Implementation of ten National

Integrated Power Projects (NIPP)

Nigerian Bulk Electricity Trading Plc was

incorporated

Transitional power market was established

NDA (Nigeria Dams Authority) was established to develop the

hydropower potentials in Nigeria.

Electric Power Sector Reform Act

Regulator (NERC) established

Formation of Power Holding Company of

Nigeria

Appointment of a body to oversee progress of unbundled generation and distribution companies • Multi-year tariff order was

approved

Handover of privatized GENCOs and DISCOs to

private investors

1950

1962

1972

2005

2006

2008

2010

2013

2015

Page | 45

Research

Power Sector Report


Appendix 3: Snapshot of reform progress

Supply Side Issues

Pre Reform Post Reform

Power supply affected due to fuel shortage – gas Power supply improves on the back of sharp improvement in domestic gas supply

Tariff related issues between the utility company and consumers

Tariff related issues continue with no resolution in sight

Congestion in transmission due to inadequate capacity

Marginal improvement in inter-regional transmission capacity

Low power supply from renewable sources due to unreliability and high cost of generation

Power supply from renewable sources see a new era with falling generation costs. (specifically solar power)

Minimal additions to generation capacity Increase in capacity additions from the private and public sector. This has however slowed in recent times.

Capital from private sector was virtually zero Increasing non-performing assets make capital scarce, especially from private sector.

Demand Side Issues

Pre Reform Post Reform

Power purchasing ability of distribution utilities worsens due to heavy financial losses Scenario still remains

Attempts to improve distribution infrastructure and efficiency fail

Orders under new schemes (CAPMI) are underway – Yet to see the real implementation

Consumer demand for power grows at a tepid pace due to low economic growth

Scenario remains same

Page | 46

Research

Power Sector Report


Appendix 4: Geregu Power Generation Plant Corporate Profile

The Geregu Power Plant was commissioned in 2007 with three Siemens open cycle gas

turbine power generation units totaling 414MW of installed capacity. The three

operational units have a rated capacity of 138MW each, and are fueled with gas from

two pipelines from a natural gas treatment plant. These are able to satisfy the fuel

requirements of 3 units running on a full load of 414MW. To help address generation

concerns and encourage private investment, in 2013 the federal government began a

partial privatisation process that led to the sale of fifteen (15) state generation and

distribution companies, previously included under the umbrella of the Power Holding

Company of Nigeria. Forte Oil via its subsidiary, Amperion Power Distribution Company

Limited, acquired a controlling stake (51%) under the privatisation programme. Amperion

Power paid the minimum bid price of $132 million for its stake in the asset. The plant

has seen improvements following the overhauling process which saw installed capacity

rise to 435MW.

STRENGHTS WEAKNESSES

The newest of the plants that were either

sold or concessioned under the reform

program

Recently underwent a refitting program that

increased installed capacity to 435MW

Power purchase agreement

Strong technical partnership with Siemens

and State Grid Corporation of China’s, the

world's largest utility company

Single fuel mix. Disruptions to gas supply

bode negatively for operations.

Huge debt profile threatens cashflow

OPPORTUNITIES THREATS

Support from the federal government via

funding interventions and technical support

Full implementation of the transitional

electricity market

Growing demand for power

Impact of federal government intervention

on industry operations – tariffs, regulations

Exchange rate and interest rate volatility

which could lead to increased costs

Page | 47

Research

Power Sector Report


Appendix 5: Transcorp Ughelli Power Generation Plant Corporate Profile

The Ughelli Power Plant was built in 1964 with an installed capacity of 72MW from two

Stal-Laval gas turbines. Then the station was called Delta I under Electricity Corporation

of Nigeria (ECN). Over the years the plant has undergone several capacity addition

programmes and today, installed capacity stands at 900MW. Ughelli Power has four (4)

power plants, Delta I, Delta II, Delta III and Delta IV with the Delta I retired. Custom fitted

Engine starters in Delta II and Delta III turbines enables the station to black start 9 the

National Grid in case of emergency or cases of total or partial system collapses. On

September 25, 2012, Transcorp Ughelli Power Limited (TUPL) (which comprises Wood

Rock Energy Resources Limited, Symbion Power LLC, Thomassen Holding Limited, Medea

Development S.A., Tenoil Petroleum and Energy Services Limited and PSL Engineering

and Control Limited) won the $300m bid for the acquisition of the Ug helli Power Plant,

one of the six power generation companies of the Power Holding Company of Nigeria

(PHCN) being privatized by the Federal Government of Nigeria. Symbion Power divested

in September 2015. Transcorp Ughelli Power gets supply of natural gas from Shell

Petroleum Development Company (SPDC) for Delta II & III and Nigeria Gas Company

(NGC) for Delta IV, but both SPDC and NGC can complement each other in times of

emergency through a tripartite gas line valve.


Power purchase agreement

Strong technical partnership with General

Electric

Single fuel mix. Disruptions to gas supply

bode negatively for operations.

Gas and high frequency constraints restrict

capacity utilization to 38%

Huge debt profile threatens cashflow





electricity market





9 Black Start is the procedure to recover from a total or partial shutdown of the transmission system which has caused an extensive loss of supplies. This entails isolated power stations being started individually and gradually being reconnected to each other in order to form an interconnected system again.

Page | 48

Research

Power Sector Report


Appendix 6: Eko Distribution Company Limited Eko Electricity Distribution Plc is one of the successor companies created following the

unbundling of PHCN. EKEDP covers the lice nse area of southern part of Lagos state and

Agbara in Ogun state. For the ease of operations and division of work, the license area

of EKEDP is segmented into 3 Circles and 8 Districts, namely:

West Circle: It has 3 Districts – Agbara, Ojo, Festac

Central Circle: It has 3 Districts – Ijora, Mushin (also covers Orile areas), Apapa

East Circle: It has 2 Districts – Lekki (also covers Ibeju areas) and Island (also covers

Ajele areas)

EKEDP receives its bulk power supply from the following two transmission sources:

Akangba (330/132 KV) and Ajah (330/132 KV); and thereafter, through 10 nos. of 132/33

KV transmission stations. There are 40 injection substations with a total installed

capacity of 1137.5MVA. This capacity and system reliability will further increas e with

induction of various NIPP projects in EKEDP’s high tension network (HT – 33 KV & 11 KV),

expected to be completed by 2017. There are 6000+ distribution Substations with total

installed capacity of around 2500 MVA, good enough to serve a present base of around

0.4 million customers and existing load demand on the network.


Eko Disco is responsible for distributing

electricity in the commercial and financial

hub of Lagos State.

Legacy challenges - The switchgears,

transformers, relays, underground (U/G) &

overhead (O/H) network, etc. inherited by

the company in November 2013, are in a

dilapidated & unsafe state.

42% of customers are unmetered leading to

significant collection losses



funding interventions and technical

support

Increased developmental activities

particularly in Agbara and Lekki provide

scope for additional revenues






electricity market which could lead to

sanctions and fines

Page | 49

Research

Power Sector Report


Appendix 7: Ikeja Distribution Company Limited Corporate Profile

Ikeja Electricity Distribution Company (IKEDC) manages electricity distribution in the

mainland segment or northern part of Lagos State. The investors in the company are

NEDC/ KEPCO Consortium. It is the largest power distribution network and is divided in to

six (6) business units which are Abule Egba, Akonwonjo, Ikeja, Ikorodu, Oshodi and

Shomolu. It boasts of a customer population of 667,931 .


Technical partnership with KEPCO, the

largest electricity utility company in Asia in

terms of Transmission and Distribution

Good financial backing from parent

company.

2nd largest customer base

Legacy challenges - The switchgears,

transformers, relays, underground (U/G) &

overhead (O/H) network, etc. inherited by

the company in November 2013, are in a

dilapidated & unsafe state.

32% of customers are unmetered leading to

collection losses









electricity market which could lead to

sanctions and fines

Page | 50

Research

Power Sector Report


Disclosure

Analyst Certification

The research analyst(s) denoted by an “*” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analysts denoted by an “*” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst(s) cover in this research) that: (1) all of the views expressed in this report accurately articulate the research analyst(s) independent views/opinions, based on public information regarding the companies, securities, industries or markets discussed in this report. (2) The research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific recommendations, estimates or opinions expressed in this report.

Analysts’ Compensation: The research analyst(s) responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Investment Banking and Asset Management.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any security /company mentioned herein. You can contact the analyst named on the front of this note for further details.

Frequency of Next Update: An update of our view on the company would be provided when next there are substantial developments/financial news on the sector.

Conflict of Interest: It is the policy of CardinalStone Partners Limited and its subsidiaries and affiliates (individually and collectively referred to as “CardinalStone”) that research analysts may not be involved in activities that suggest that they are representing the interests of CardinalStone in a way likely to appear to be inconsistent with providing independent investment research. In addition, research analysts’ reporting lines are structured so as to avoid any conflict of interests. For example, research analysts are not subject to the supervision or control of anyone in CardinalStone’s Investment Banking or Sales and Trading departments.

However, such sales and trading departments may trade, as principal, on the basis of the research analyst’s published research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests.

Important Regional Disclosures The analyst(s) involved in the preparation of this report may not have visited the material operations of the subject Company (ies) within the past 12 months. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a Non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any Non-U.S. analyst contributors: The Non-U.S. research analysts (denoted by an * in the report) are not registered/qualified as research analysts with FINRA; and therefore, may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Each analyst (denoted by an *) is a Non-U.S. Analyst and is currently employed by Cardinal Stone.

Legal Entities

Legal entity disclosures: CardinalStone Partners is a member of The Nigerian Stock Exchange (NSE) and is authorized

and regulated by the Securities and Exchange Commission (SEC) to conduct investment business in Nigeria.

Documents

CHANGING POTENTIAL TO REALITY - Brand Spur · 2017-08-14 · Page | 3 Research Power Sector Report Changing potential to reality PSRIP - Government’s response to these challenges