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After decades of neglect, Nigerian electricity generation is being addressed. A reform program involving government regulation and partial privatization of electricity generation, transmission and distribution, aims to fill the gap between power supply and demand.
Current energy supply
Nigeria relies on two principal sources for its energy production: hydro-electric power and thermal plants (gas-fired). Large hydro installations (dams on the rivers Niger and Kaduna, among others) account for about 41.7% of grid electricity generation in Nigeria today while natural gas accounts for the balance of 58.3%.
Most developed countries rely on a palette of different energy production sources that include natural gas, hydro-electricity, coal, nuclear, solar, and wind power. It will be Nigeria’s challenge in the coming decades to diversify its production palette accordingly (see chart comparing Nigeria and South Africa).
Current projection points to a gradual decrease in total share of hydropower installed capacity from 21% to about 11% by 2030 (see chart), while the share of natural gas based power capacity will drop to about 55% at that future horizon.
Coal and nuclear are currently not in use for power generation but are projected to account for 15.6% and 6.8% by 2030.
One of the paradoxes of the Nigerian energy scene is that the country has unused production capacity, both on the thermal and the hydro-electric fronts. Because of various inefficiencies, namely the mothballing of several thermal plants over the past decades, there is generating capacity that sits idle.
A significant unknown is the true load factor at the thermal generating plants across the country. This has been in steep decline, yet some of the generating capacity that was mothballed over three decades of neglect, should be able to be effectively reconnected and used. How much this represents remains a mystery.
For hydro-electric production, the Energy Commission of Nigeria estimates that large hydropower projects could represent about 11,250 MW of annual production, although this would be from large-scale projects with investments of several hundred million dollars. On a somewhat smaller scale, small hydropower projects could add 735MW of energy capacity to the grid. Furthermore, this is low-carbon, sustainable energy production of the kind that helps the world globally.
Current energy demand
Nigeria’s economy has grown phenomenally since 1999. GDP growth peaked at 7.5% in 2011. The International Monetary Fund (IMF) is projecting a 6.6% real GDP growth rate for 2012.
Yet the combination of high economic growth and chronic under-investment in the power sector over the years has created a gaping discrepancy between power supply and estimated power demand. According to some estimates, the projected annual demand is a whopping 12,000 MW vs. an estimated supply of only 4,420 MW. In other words, only onethird of power demand is being satisfied.
What explains this gap?
The prime culprits are five-fold.
- Insufficient generation units. Although generating capacity has been increasing over time (see chart), the current peak generating level, 4,420 megawatts, is in fact estimated the highest ever attained historically.
Attaining this level of generation has been possible due to continuous improvement in capacity of generation stations across the country. This is quite an achievement since the beginning of the power reforms of 2005. At that time, of the 79 generation units in the country, only 19 units were operational. Back then, the average daily generation was only 1,750 MW, or less than half of the current level. And these improvements were made without investments in new generating capacity – just via better operation, maintenance and efficiency improvements.
- Lack of access. An estimated 90 million people (about 36% of the population) are without access to the electric grid. This enormous untapped potential will be a tremendous growth driver for new investors in the sector.
- Poor maintenance of transmission lines. Transmission lines are poorly maintained and frequently vandalized, resulting in transmission losses of over 25% of the electricity produced, compared to a normal loss rate of less than a ten-thousandth of one percent in developed countries. The lack of new transmission lines is another contributing factor.
- Vandalism and theft.
- Non-payment. According to the most accurate estimates of industry losses, over 30% of electricity delivered is never paid for by the end users. This gap in financial receivables is due to poor billing procedures.
The reform program
The Electric Power Sector Reform Act of 2005 was the seminal stepping stone in the reform of the a longneglected power sector. This road map for electricity generation and distribution nation-wide set the stage for the reform process to unfold.
As part of the reform, on October 31, 2005, the government created the Nigeria Electricity Regulatory Commission (NERC) as an independent regulatory agency. NERC is mandated to carry out the monitoring and regulation of the electricity sector, to issue licenses to market participants and to ensure compliance with market rules and operating guidelines.
In July 2008 a new electricity pricing mechanism was introduced by NERC, called the Multi-Year Tariff Order (MYTO), to help determine charges and tariffs for electricity generation, transmission, as well as retail tariffs, over the period from July 2008 to June 2013.
MYTO also provides a 15-year tariff path for the sector with limited minor reviews each year in the light of changes in select parameters and periodic reviews.
This pricing regime provides the structured framework to reassure and encourage investors, and provide fair entry levels for them.
In January 2012, the Power Ministry executed the first radical transformation in the electricity sector. It liquidated the Power Holding Company of Nigeria (PHCN), setting the scene for a positive evolution of the sector.
“PHCN is no longer legally in existence”, the Minister of Power Barth Nnaji said, putting an end to what was largely viewed as a huge failure.
The move, which marks a milestone in the federal government’s complex plans to guarantee security of electricity supply, increase electricity generation, while keeping electricity affordable, effectively opened up opportunities for the 18 unbundled successor companies of PHCN to be sold to successful bidders by the end of the first quarter of 2012 as projected by the Bureau of Public Enterprise (BPE) and the Power Minister.
The main components of the reform program are:
- elimination of the old PHCN for the benefit of 18 replacement institutions, covering the areas of electricity generation, transmission, and distribution;
- increased privatization. The reform has focused primarily on promoting private sector participation in the form of investment in generation, management and technical operations and ensuring a level playing field for both local and foreign investors.
- ensuring that all capacity, irrespective of its relative inefficiency, continued to operate. The reform strategy points to an increase in losses in the electricity transmission lines as a result of this inefficient use of thermal capacity generation. Thus, how effective the new policy will be in ensuring that generating units are not cannibalized for spare parts is a key question. The level of cannibalization will determine the trade-off between maintenance investments and new facility investments.
- Elimination of untargeted spending in the sector.
The government pushed the reform package to reduce the supply-demand gap. In parallel, companies throughout the country were complaining about the high cost of doing business. The reforms reflect pressures far beyond the Nigerian boundaries. At times when companies are looking for ways to boost efficiency, the electricity sector was lambasted for its negative impact.
Although the groundwork has been laid, there remains much to be done by the government to create a clear and stable investment environment, and thus encourage funds to flow at the scale and pace needed to keep the lights on.
The framework requires that the state-owned power entity, National Electric Power Authority (NEPA) unbundle its activities in the generation, transmission and distribution areas. NEPA must provide for the transfer of assets, liabilities and staff to successor generation, transmission and distribution companies, thus creating a competitive market for electricity services in Nigeria as well as setting up an independent regulator.
The Electricity (Amendment) Decree 1998 and the NEPA (Amendment) Act 1998 were passed, terminating the monopoly status of NEPA and officially inviting the participation of the private sector into the country’s electricity sector.
In November 2005, 18 new successor companies comprising six generation companies, one transmission company and 11 distribution companies were incorporated. The market rules to guide the operations in the sector were approved in 2008 and the liquidation of PHCN began later in April 2011.
The strategy for the successor regulatory company also was put into place, defining the rules of engagement for the private sector participation. The distribution companies (Discos) were to be privatized through equity sales to core investors. The transmission company (TranSysCo) and the generating companies (GenCos) were slated to be auctioned off to core investors or through concession.
The GenCos put up for sale include the thermal stations, Geregu Power Plc in Kogi State (North Central Nigeria) which has installed capacity of 414 MW, the Ughelli Power, (Delta State, Nigeria), built between 1966 and 1975 with installed capacity of 972 MW, the Sapele Power in Sapele, also in Delta State with installed capacity of 1020 MW and the Afam Power, located in Rivers State, with installed capacity of 776 MW.
The hydroelectric generating stations are the Kainji Hydro Electric, comprising Kainji and Jebba plants. This is the first hydro power station established on the River Niger and has total installed capacity of 1,344 MW. The Shiroro Hydro Electric established in 1990 has installed capacity of 600 MW.
There are also three non-operational thermal stations slated for asset sale. These are Calabar with 7.6 MW installed capacity, the Ijora thermal power station in Lagos with installed capacity of 60 MW and the Oji River power station in Enugu State (East Nigeria) with installed capacity of 30 MW. This is a coal-fired station close to the coal mine.
The federal government has yet to conclude the process of privatization of these utilities but have so far received bids from 207 pre-qualified bidders: 80 bids for the Discos, 87 bids for the thermal Gencos and 40 bids for the hydro Gencos.
These ambitious reforms underline the federal government’s ambitious target of reaching a generation capacity of 40,000 MW by 2020. To achieve this target, the government estimates that it will take an investment in power generating capacity alone of at least $3.5 billion per annum for the next 10 years.
Vast plans require vast resources. Because of thirty years of relative neglect, the Nigerian power scene is a shambles. How much is required to make things right? Various figures have been bandied around. The estimates for the cost of restructuring Nigeria’s power infrastructure range between $500 and $800 billion, depending on the growth scenario. The federal government currently bears the burden of financing issues in the sector.
However, challenges other than financial also lie ahead. International experience indicates that electricity reform can raise thorny technical issues, such as market design, market structure and regulatory arrangements. Managing this transition will prove to be a considerable challenge for the Power Minister.
Another priority for the Nigerian authorities is to balance out the production palette, which currently relies solely on hydroelectric and thermal sources. First signs of diversification are appearing. Zuma Energy, a wholly indigenous company, is prospecting for coal, its focus being to provide enough coal for electricity generation by 2015.
Nuclear energy is also being considered, despite doubts given the enormity of financial resources, required skills and the technology available locally.
Solar energy’s commercial deployment remains limited for the short to medium term. According to the government’s master plan, it is projected to account for about 8.3% of generating capacity by 2030.
Nigeria remains very richly endowed with renewable energy resources that remain hugely untapped. Biomass, wind, solar, geothermal and ocean energies are available but still not explored or limited to pilot and demonstration projects.
What are the main challenges to the development and diffusion of new technologies for the new electricity generation? The absence of ready markets, as well as the lack of appropriate policy, regulatory and institutional frameworks to spur demand and attract investors.
Mediaside thanks Charles Ike-Okah, Deputy Editor of Business Day daily newspaper, based in Lagos, for his assistance with this analysis.
Finding new life in old turbines
Why embark on a costly capital expenditure program when idle capacity can be found?
There exists a major gap between installed capacity and available capacity. Installed capacity in Nigeria exceeds 13,000 MW, but only up to 4,800 MW is available on a daily basis for actual power generation.
“Why is this installed equipment sitting about idle?,” asks John Aggelakos, associate director at KPMG. “There are several issues that impact power availability. Three of them deserve more ample explanations.” Firstly, there is the difficulty of supply chain inefficiencies: the fuel supply, be it natural gas or oil, is alas often not delivered as it should, meaning that machinery sits idle.
Secondly, there is inadequate maintenance of assets. The budgeting of power generation projects includes funds for both initial setup and for maintenance, but these latter funds often disappear, since it is difficult to store the funds away in an “power escrow” account, so to speak. This issue needs firm government handling.
Lastly, there is the perennial problem of insufficient recurring investment. Although the bulk of power capex does occur during the power plant’s initial installation, when construction and equipment costs – especially for costly imported turbines – are incurred, funds do need to be set aside for the unexpected snafu’s that are bound to occur.
“How can the government quickly re-capture some of the idle capacity?” pursues Aggelakos. “One possible solution to Nigeria’s power generation supply deficit is rehabilitating existing capacity so as to almost triple available capacity. Our analysis shows that there are three “sources” for untapped capacity (see chart).”
The twelve existing federal government power stations could provide an additional 3,500 MW of electricity. The main “lazy plants” in this category are Delta Power and Afam Power. Just those two plants, if dusted off and booted up, could provide a whopping 1,300 MW of additional power.
The second source of adiditonal capacity is less productive: the six independent power producers are only about 250 MW below full capacity. The two RSG plants are worth mentioning here though since they could add about 200 MW.
The third source are the ten power plants of the National Integrated Power Project. These are all offline but could kick in to provide almost 4,800 MW of power (see chart).
How can the government get this done, whilst reducing its financial exposure and ensuring that proper technical expertise is deployed? For KPMG, the most effective financial framework is the public-private partnership (PPP) model, whereby the government grants concessions for the relevant projects to the private sector. Thereby the state maintains ultimate ownership of the assets, but outsources the rehabilitation and subsequent operations and maintenance to its private partner.
KPMG is currently advising a state-sponsored IPP (Integrated Power Project) project. Unlike other IPP projects, this one will be entirely owned by the state government during the development phase. As construction nears completion, the project will be flipped to private power producers under a PPP arrangement. The appeal of this structure? The state government assumes the pre-sale risk, and is better positioned to negotiate a suitable PPP arrangement – one that both better serves social interests and satisfies private sector demands for adequate risk-adjusted investment returns.
sam, fév 17, 2018
sam, fév 17, 2018
sam, fév 17, 2018