Evolution of the Power Sector in Nigeria and inherent business opportunities

Evolution of the Power Sector in Nigeria and inherent business opportunities.

OUTLINE• Historical Facts/ Reform Background

• Reform Elements/Updates • Reform Institutions and Roles

• Market Developments so far.

• Achievements and Inherent Business Opportunities

• Questions and Conclusion.

Various regimes in distant past paid little attention to this sector. Billions of Naira has been pumped into the sector to reverse the neglect and

mismanagement, with no tangible result. Nigeria being the most populous nation in Africa, with population currently at 170million,

and expected to grow to 230million by 2030. Rule of thumb for any developed industrial nation is that at least 1 gigawatt (i.e 1000

megawatts) of electricity generation and consumption is required for every 1 million head of the population.

This guiding rule provides a useful indicator as to the scale of the investments that will need to be made in the Nigeria Electricity supply Industry over the coming decades.

Nigeria per capita electricity consumption is among the lowest in the world and far lower than many other African Countries.

Nigeria per capita electricity consumption is just 7% of Brazil and just 3% of South Africa. Brazil has 100,000 MW of grid based generating capacity for a population of 201 million

people. South Africa has 40,000MW of grid based generating Capacity for 50 million people. As at 2010, the peak generation supplied by Nigeria PHCN has just 3,804MW for a

population of 150million people.

Historical facts/ Reform Background.

Self generation of electricity (from diesel and petrol generators) is conservatively estimated at a minimum of 6,000mw i.e more than average output from the grid during 2009.

That the population (and the vast bulk of the country is poor) have no connection to the grid.

Consequence of yawning gap between demand and supply is that although the current regulated (average and levelized) tariff is just N8.51/kwh.

The poor currently pay more than N80/kwh burning candles and kerosene. Manufacturers pay in excess of N60/kwh on diesel or LPFO generation. Everyone else pays annual around N50 – N70/kwh on self generation (diesel or

petrol) High cost of diesel and petrol generation has crippled the growth of the country productive and commercial industries.

Despite capital injections averaging N2B per annum, the available capacity of Nigeria state owned electricity utility has been estimated at about 3,000mw for the past two decades.

The cost by 2020 in terms of cost GDP would be in the order of N20 trillion (USD$130billion) every year.

Historical facts/ Reform Background

Even if 40,000mw were to be met, Nigeria capacity per head of population in 2020 would still be less than a quarter of what South Africa currently enjoys.

Nevertheless to reach 40,000mw will require imperative estimate of US$10billion on the whole value chain in the next ten years.

In 2005, the government launched an ambitious capital investment programme under the title of the National Integrated Power Project (NIPP).

The NIPP projects compose both gas fired power plant, 2 hand mission lines. Anticipated 5,000mw was expected to be added to the country generation capacity within next 3 years.

Drop in ocean compared to required 40,000mw in 2020. The Yar’ Adua government completely applied the brokers to

reversing back to government monopoly solution.

Historical facts/ Reform Background

Solid foundation laid down in 2001/2002 – 2005 promulgation of the Electric Power Sector Reform (EPSR) Act.

Fundamental changes to the ownership control and regulation of the sector envisaged by the legislation are achieved and the downstream benefits are realized.

Birth of a modern, efficient, customer focused, private sector driven electricity supply

industry.

Sector wide reform to be driven by improved service delivery to every class of customers as the electricity sector full implementation of EPSR Act.

Ownership, Control and regulation of the sector as attained in the National Electric

Power Policy 2001 and enshrined in the EPSR act 2005.

Reform Elements/ Updates.

In order to introduce competition, functional segmentation of PHCN was crucial. This required:

- The separation of transmission and dispatch from generation.- The establishment of a transmission company.- The establishment of a number of competing, privately owned generation

companies from existing PHCN generating facilities.- The opening up of generation to new market entrants.- The establishment of a number of distribution and sales (marketing) companies

which will also be privatized- Later, competition in wholesale and retail sales (marketing) will be developed,

including the opening of trade in the sales (marketing) of electricity to generators and to other new market entrants.


Experts suggest the following five major steps in implementing the reform of the power sector, in different orders of preference:

- Getting the investment framework right.

- Deciding on the goals of restructuring and the ideal industry structure.

- Preparing the players to participate in a competitive market.

- Privatizing existing and new assets.

- Ensuring that the competitive market is implemented properly.

Most of the tasks outlined above (Item Nos. 1 – 3) have been completed while Item Nos.4 & 5 are in various stages.


Imperatives of EPSR Act Remove obstacles to private sector investment. Divestiture of the PHCN successor companies. Reform of fuel to power sector. FG strategy on the divestiture of the PHCN successor committee Hydro Power Generating Plants Thermal Generating Plants Transmission Committee of Nigeria The distribution Companies. Gas to power implementation.


Ultimate objectives of EPSR Act Divestiture of successor companies through privatization in some

cases and through concessions in others. The inflow of the large volume of private sector investment

through the creation of new power generation and power distribution companies and

The subsequent developments of a competitive electricity market Roadmap for Power Sector Reform Customer driven sector wide plan to achieve stable Power supply Sector wide reform to be driven by improved service delivery to

every class of customers as the electricity sector full implementation of EPSR Act.


Key early milestones like creation and unbundling of the PHCN achieved.

Followed by corporatization, commercialization and evaluable successor companies in tandem.

Inflow of large volume of private sector investment through the creation of new power separation and distribution entities and subsequent development of a competitive electricity market.


Objectives impacted by 8 obstacles The maintenance of an inappropriate pricing refine. Failure to establish bulk purchaser in line with the provisions of the EPSR act. Failure to address investors concerns about credit muteness of discounted companies/bulk

purchaser doing their evenfall transition to financial viability. The financial and operational risks to potential acquirers of successor companies posed by the

failure to reach an agreement with the labor unions on the settlement of outstanding arrears (of salaries, pensions and other benefits) and on severance pay.

The uncertainties generated by the delay in operationalizing the Nigerian Electricity Liability Management Company (NELMCO).

Delay in contracting out the management of TCN. Concerns about the licensing regime for power generation and power distribution companies. And

the lack of continuity and consistency in pursuing the enactment and commencement of the Electric Power sector reform act and subsequently after the act was eventually parked in following the timeliness established thereon.

For sector to be financially viable throughout value chain the end user tariff must at least be at a cost – reflective level.

PHCN unable to meet recurrent expenditure, and also short term and long term capital expenditure. MUTO to address across 3 customer categories of residential, commercial and establishment of a

bulk industrial purchaser.


REMOVING OBSTACLES Establishment of an appropriate pricing regime. Establishment of a bulk purchaser. The provision of EGN credit enhancement. Creating an efficient and motivated work force. Operationalizing NELMCO. Contracting out the management of the Transmission

Committee of Nigeria. Clarifying and strengthening the licensing regime. Ending the trend of inconsistent policy implementation.


Transition cannot happen overnight thus for an interim period, the FGN through its parastatals will continue to retain direct accountability for service delivery across large parts of the electricity value chain.

To protect against “rate shock” and to ensure low income consumers are provided with a “lifeline” tariff with greater differentiation and introduction of an indigene block tariff whereby the rate paid for electricity varies with given level of consumption.

Carry the general public along every step of the way by ensuring that progress against objectives will be made clear and transparent.

System operator and various DISCOs to undertake more strategic and more predictable load – shedding practices.

Privatized, based on a core investor sale of a minimum of 51% of sort equity in companies.

Methodology to emphasize reduction of technical or commercial losses and increase efficiency of collecting.

Strategy for meeting efficiency target specialized in RFRs. Completion of all the overdue NIPP projects for generation, transmission and distribution. Completion of the outstanding and already indebted NCTC investment in the gas supply

and transportation industry.

Improving service delivery throughout the transition

During transition stage, a special trading entity that will carry out bulk purchasing of electricity and ancillary services and resell these to licensed distribution companies.

Understanding that all contracts entered into by this bulk buyer would be capable of being motivated to the successor DISCOs when the latter attains commercial viability.

Incorporated 29th July, 2010 PPAs with existing IPPs to take up their current stranded generation

capacities already negotiated. Transition entity that will only last as long as it takes decision to be made

(establish individual credit worthiness in a private sector driven market). Bulk trader backed with a credit payment supplied package with MYTO

allows full passage of allowable cash thereby removes the single biggest risk element – lack of credit worthiness and distribution level that has unlimited against the growth of the market.

Improving service delivery throughout the transition

Federal Ministry of Power-Overall broad policy formulation. BPE/NCP-Technical Committee, etc-drives the reform and liberalization/

privatization of the power sector. NERC- carries out regulation and market surveillance; plays critical role in

issuing operating licenses and regulating the sector operators confidence that a level playing field will subsist and that rulers will be followed and enforced.

Presidential Task Force on Power. NELMCO-To manage legacy liabilities and stranded assets. EMS-Carry out consulting services and provide shared services, such as

logistics and meter testing. Nigeria Electricity Bulk Trading Co Ltd Market operations -Account To oversee the market and commercial

arrangements. National Power Training Institute of Nigeria-Provide world class training to

support the utilities manpower

Institutions and Roles.

Market Development

National Electricity Power Policy (NEPP) & Electric Power Sector Reform Act 2005 (EPSR) provides for development of Nigeria Electricity Market.

Wholesale competition was recommended for Nigeria to assist in monopoly, control & cost insensitivity

Implementation of the Nigeria Electricity Market is through a gradual process of increasing competition designed as three market stages- Transitional Market Stage: Characterized mainly as competition for

the market.- Medium-Term Market Stage: Characterized by full wholesale

competition for the market & in the market.- Final Market Stage: Open to full wholesale competition and retail

competition

Contracting Framework

Vesting contracts -Intermediate steps to move from integrated utility to fully competitive market

- Designed to ensure a smooth and orderly transition

Bilateral Contracts. -Only contractual tools used in buying and selling electricity.

DURING TRANSITION

AS MARKET MATURES

Trading arrangements in transition

Trading Structure of NESI in transition

Market Development

Market Reform Model• Types of market-Competitive wholesale market and retail competition in the long term.-Multi-buyer model - (hybrid during a transition period)-Private sector driven-Cost reflective market structure-Encourage full competition in the long term.-Market Operator to be a ring-fenced semi-autonomous entity during the transition.

• NEPP & EPSR Act: Provisions for development of market-Competitive market guaranteed by Act, Policy and Market Rules.-Creation of an independent electricity regulator- NERC

GENCOS-7 Privatized and handed over except SapeleDISCOS-11

Privatized and handed over, based on a core investor sale of a minimum of 51% of sort equity in companies.

Methodology to emphasize reduction of technical of commercial losses and increase efficiency of collecting.

Strategy for meeting efficiency target specialized in RFRs.Transmission Company of Nigeria

Handed over to Manitoba under a 5 year management contract. Requisite skills required to manage the huge and complex

programme of construction and rehabilitation that will be required over the coming decade.

Market Development

HYDRO POWER GENERATING PLANTS BPE strategy to grant concession for the operation of Kainji, Jebba and

Shiroro predicated on magnitude of capital requirements and water rights issues associated with plant.

Also link between sustainable management of hydro power and the development of country’s agricultural resources.

THERMAL GENERATING PLANTS To be privatized via the sale of a minimum of 51% equity to core investors. Care to be taken to ensure a monopoly or oligopoly of market power in the

generation is not created through this. The NIPP plants to be managed under operation and maintenance (O&M)

contracts now being prepared by Niger Delta Power Holding Company (NDPHC) the parent company of the plant

Bid bonds already submitted by potential acquirers for NIPPs.

Market Development

For the sector to be financially viable throughout the value chain the end user tariff must or least be at a cost reflective level.

At former price levels, PHCN can not meet recurrent expenditure requirements, while continually begging government for additional moneys for short term and long term capital expenditure.

National uniform tariff replaced with seemingly lost reflective ceiling on and user tariffs.

Methodology used is the building blocks approach. Fair and equitable tariff methodology should cover allowed revenues

and structure of tariffs to recover revenues Adequate return on capital to be allowed as incentive to invest Costs associated with recovering the capital over the useful lives of

the assets depreciation. Cognizance of efficient operating costs and overhead.

Multi Year Tariff Order

MYTO TARIFF PRINCIPLES Tariff for 3 electricity sectors based on certain principles and assumptions. Cost recovery/financial liability – licenses recover efficient costs including a

reasonable return on capital. Signals for investment – tariffs should encourage an efficient level and nature

of involvement i.e location. Certainty and stability of the tariff framework enables private sector

investment. Efficient use of the network – tariffs should reflect the marginal costs that

users impose on the system, influence efficient use and reduce gross – subsidies.

Risk allocation – tariff framework should allocate risks efficiently to those best placed to manage them.

Flexibility/Robustness– it should cater for unforeseen changes in the market. Social and political objectives – it should provide for the achievement of

social goals such as universal access and demand – side management.

Multi Year Tariff Order

Nigeria blessed with numerous fuel sources for power, including hydro, natural gas, cool, wind solar and an abundance of waste for biomass

Because of this capital costs required to implement, government focused on generating in three areas name: Hydro, Coal and natural Gas.

Gas may be the focus by converting flared gas assets and harnessing non-associated gas for power application.

This requires providing appropriate incentives to international oil companies (IOCs) and other investors in oil and gas businesses.

Done through the National Gas master plan to encourage private sector investment in gas infrastructure.

Goal to fast track bankable gas supply agreements as well as gas transport to both federal government power plants and the independent power producers plants.

Fuel to Power Strategy

Contracting out management of the transmission company of Nigeria This management of TCN contracted out to a private company which has both the requisite project management and technical expertise. Handed over to Manitoba under a 5 year management contract.

Requisite skills required to manage the huge and complex programme of construction and rehabilitation that will be required over the coming decade.

Management of TCN key concern for potential investors in the power generation and power distribution sectors.

Need to ensure commensurate investors in the downstream sector will also take place.

Contracted to Manitoba a private Canadian company adjudged to have both project management expertise and technical expertise.

Transmission Company of Nig.

Established as a government special purpose vehicle to assume and manage extent assets, liabilities and other obligations that was not been easily foreseen from PHCN to any of the successor companies.

To clear issues of unwelcome degree of uncertainty as to the size of the legacy PHCN liabilities which they might eventually find the themselves saddled with.

NELMCO inherits all legacy PHCN liabilities as well as any liabilities associated with the existing PPA agreements and the bulk trader assumes ownership of the existing PPAs and executing new buy and sell agreements with the successor generation/distribution companies and IPPs.

Management of legacy liabilities of both NELMCO and the Bulk purchaser to also be made clear.

NELMCO

Key concern for potential investors in Gencos and Discos- Investors will be reluctant to make large scale investments in the

upstream and downstream sectors of the industry unless they are confident that government investments in the downstream sector will also take place.

- Essential for management of TCN to be contracted to private company with both requisite project management and technical expertise.

- NCP and BPE process completed and MANITOBA given initial five year concession.

TCN

Licenses shall not extend ten years duration although NERC may extend on a rolling basis for additional five years period.

Electricity asset investments involve high costs with a long duration and investment expert license to be aligned to revenue required to recover investment most cases 20 and 25 years and not 10 to 15 years.

Comfort mechanism worked out by government to issue regulation setting out criteria/process for speedy license renewal/extension.

Strengthening The Licensing Regime

Given that if an IPP succeeds in signing a PPA on commercial terms with the bulk purchaser, this PPA is unlikely to be bankable in short to medium term if bulk purchaser is not credit worthy.

At most conditions required for IPP investors to secure funding required for investment and government not ready to wait. This will delay the urgently needed private sector investment in power generation. Thus mechanizing of:

- FGN backed letter of credit (LC) to provide liquidating of the bulk purchaser;

- A rolling guarantee of the obligations of the bulk purchaser issued by multinational banks

- A World Bank partial risk guarantee backed by a FGN indemnity. - An FGN Treasury Bond issue or - A combination of two or more of these options.

Provision of FGN Credit Enhancement

Whatever form of credit support will only create a contingent liability, which in turn will only become an actual liability for Federal Government if:- The power plant is finally financed and built by the IPP

developers.- The power plants generating units are actually working and

available.- The power plant has secured itself the requisite feedstock

and,- A distribution company and in turn the bulk purchaser are

unable to honor their payment obligations to the relevant IPP.

Provision of FGN credit enhancement

Comprehensive agreement on all outstanding issues .

FGN already negotiated with labor as per severance package and Unionization, etc

Settlement of outstanding arrears (of salaries, pensions and other benefits and severance pay sorted out).

Increased physical surveillance to prevent sabotage.

Joint Problem Solving Teams continue as partnership between govt. and Labor

Work Force Related Issues

S/N DESCRIPTION STATUS

1 Create an enabling legal and regulatory environment to support competitive markets in electricity

DONE

2 Unbundle power sector into separate generation, transmission, distribution and possibly retailing sectors to achieve the maximum benefits for customers

DONE

3 Privatization should be a transparent process involving the sale of power distribution utilities as well as generation plants, and covering existing assets as well as new projects.

ON- GOING

4 Open access to transmission and distribution wires, and the ability to trade power between buyers and sellers in an open market, are critical to achieving a competitive framework.

Done

Achievement and opportunities

5 Operate the generation and retailing markets competitively, with a large number of generators selling into a wholesale In Progress electricity market at prices which balance demand and supply throughout the day.

In progress

6 Operate the transmission network under a managementcontract, resulting from a competitive bidding process.

In progress

7 The independent regulator should oversee prices and other incentives for transmission and distribution operations.

Done

8 Restructuring should proceed at a pace consistent with the development of a competitive and unbundled system.

Done

Achievements and opportunities

- Explore Value Chain- Provision of Meters, Transformers and other ancillary services.

- Collaboration activities with other bodies and agencies like BOI (Bank of Industry), AfDB (African Development Bank), USAID, USEXIM and about 5 major international consortium ready to partner with IPP projects which will require Bank Guarantees from a commercial Bank in Nigeria is in excess of $100billon.

- Most IPP project in the pipeline by the above mentioned agencies are Gas related. These projects are capital intensive and long term in nature however but pooling resources together with appropriate deal structure can help.

- First Mover advantage is key and it is the only way to ensure that we lock in transactions with long term benefits.

Business Opportunities.

BIG Thank You!

Documents

Evolution of the Power Sector in Nigeria and inherent business opportunities