Reform, Regulatory Framework & Post Privatisation Issues in the Power SectorBack

The power sector is very crucial to any society, as it is essential to the rapid transformation of the economy, and undoubtedly a factor directly determining the standard of living of the individuals in said economy. In Nigeria, the power issue or lack thereof has been the subject of many a discussion. It has, over the years being epileptic at best.

 

 

The much touted reform and privatisation efforts of the Government appear to have yielded little or no improvement. One of the concerns in the post-privatisation era is the incessant complaint by electricity consumers of increase in their electricity bills, without commensurate increase in the quantum of power supply to their homes and businesses. This is a monumental issue in the sector as consumers and participants see this as a setback and a direct opposite of public expectations of what power supply should be in a privatised sector.

 

 

This paper seeks to investigate the situation as stated above. In doing this, it shall give a brief overview and history of the power sector and the relevant framework governing the sector presently. It shall also attempt to identify the post privatisation challenges as well as opine on some possible solutions to tackle same.

 

 

Brief History of the Nigerian Power Sector

 

The first utility company, the Nigerian Electricity Supply Company, was established in Nigeria in 1929. However, electricity generation in Nigeria had started over 30 years before the establishment of the first utility back in 1896. At the onset of the democratically elected civilian administration in 1999, the Nigerian electric power sector had reached perhaps the lowest point in its 100 years history. Of the 79 generation units in the country, only 19 units were operational. In addition, no new electric power infrastructure had been commenced and completed between 1989-1999 with the youngest plant and last transmission line having being completed and built in 1987 and 1990 respectively. At the time, accurate and reliable estimates of industry losses were unavailable, but believed to be in excess of 50% (fifty per cent).[1]

 

 

Due to this, the Federal Government in collaboration with the Bureau of Public Enterprise birthed the Electricity (Amendment) Decree 1998 and the National Electric Power Authority (NEPA) (Amendment) Act 1998 which once passed, terminated the monopoly status of NEPA and invited private sector participation in the electricity sector. This eventually led to the National Electric Power Policy of 2001. This Act served the purpose of kicking off the power sector reform in Nigeria, leading to several other reforms over the last decade,[2] same of which will be discussed in more detail during the course of this paper.

 

 

Over the past decade, the Federal Government has been able to complete the privatisation process, although the positive effect on the power sector of this is still under debate.[3] The Federal Government retains the ownership of the transmission assets (management under concession) while the generation and distribution sectors are now fully privatised.[4] Under subsequent subheads, we shall give a trajectory of events and consequent legislative reforms leading to this privatisation and the current challenges the sector is facing due to same.

 

Regulatory Framework

 

Relevant Regulatory Bodies.

 

There are several key bodies currently regulating the power sector. These include but are not limited to:

 

 

  • The Federal Ministry of Power
  • The National Electric Regulatory Commission
  • Energy Commission of Nigeria
  • The Rural Electrification Agency
  • The Presidential Task Force on Power.

 

However, for the purposes of this paper, we will focus on the Federal Ministry of Power and the National Electric Regulatory Commission, as these are the bodies that deal directly with the topic at hand.

 

The Federal Ministry of Power

 

This is the Government’s administrative arm that deals with policy formulation and provides general direction to other agencies involved in the power sector.

 

The key function of the Ministry is to develop and facilitate the implementation of policies for the provision of adequate and reliable power supply in the country. In carrying out its functions, it is guided by the provisions of the National Electric Power Policy 2001, the Electric Power Sector Reforms Act (ESPRA) 2005, the Roadmap for Power Sector Reform, 2010 as well as the Transformation Agenda on Power of the Federal Government.[5]

 

The Minister for Power is the political head of the Ministry while the Permanent Secretary is the administrative head.

 

The National Electric Regulatory Commission

 

The Nigerian Electricity Regulatory Commission (NERC) is an independent regulatory agency which was inaugurated on 31st October 2005 as provided in the Electric Power Sector Reform Act 2005.

 

The Commission is mandated to carry out the monitoring and regulation of the electricity industry, issuance of licences to market participants and to ensure compliance with market rules and operating guidelines. The first Commission was inaugurated in October 2005. The present Commission was inaugurated in December 2010.[6]

 

Reforms

 

National Electric Power Policy 2001

 

Prior to the enactment of the EPSRA, 2005, the Federal Government was responsible for policy formulation, regulation, operation, and investment in the Nigerian power sector. Regulation of the sector was done through the Federal Ministry of Power with operations through the National Electric Power Authority (NEPA), which at that time was solely responsible for power generation, transmission and distribution.[7]

 

To address the twin issues of NEPA’s poor operational and financial performance, the Federal Government amended the then prevailing laws (Electricity and NEPA Acts) in 1998 to remove NEPA’s monopoly and encourage private sector participation. The amendments, however, were not far-reaching. This informed the Federal Government of the need to undertake holistic policy, legal and regulatory reforms.[8]

 

The first step taken in that direction was the drafting of The National Electric Power Policy 2001, issued by the National Council on Privatisation. This set the go-forward framework for power reform in Nigeria, specifying the reform agenda. It was the precursor to the Electric Power Sector Reform Act 2005, which will be discussed subsequently. Indeed, most of the significant provisions of the National Electric Power Policy are included in the Electric Power Sector Reform Act.[9]

 

The National Integrated Power Sector (NIPP) and the Independent Power Producers (IPP)

 

The NIPPs were initiated in 2004 to boost electricity generation capacity by the opening of gas power stations across the country.[10] This was followed as part of the reform in the electricity sector by the decentralization and the granting of licenses to different Independent Power Producers (IPPs). This phase of the reform was tagged the Infrastructure Expansion Phase and it had as part of its components the granting of licenses to investors to establish private power plants known as the Independent Power Projects (IPPs). These IPPs are to then generate and sell electricity privately to utilities or the general public[11]

 

However, it is apposite to note that the IPPs in the new Nigerian electricity market could not secure financing, because of the lack of creditworthiness of the Nigerian electricity market.

 

The creation of the Nigerian Bulk Electricity Trading Company (NBET) was then created to solve the major problem with bankability of electricity projects.[12]

 

The Electric Power Sector Reform Act 2005

 

The Electric Power Sector Reform Act (ESPRA) 2005 can aptly be described as the foundation of the restructured power sector in Nigeria. The Act, which as mentioned earlier, evolved from the National Electric Power Policy, established the basis under which private companies can now participate in the generation, transmission and distribution of electricity. It provided for the creation of a Holding Company for the assets and liabilities of the then National Electricity Power Authority (NEPA), provided for the unbundling of the Power Holding Company of Nigeria (PHCN) through the formation of several companies to take over the assets, liabilities, functions and staff of the PHCN; established the Nigeria Electricity Regulatory Commission thereby creating a platform for the development of a competitive electricity market as well as a basis for the determination of tariffs, customer rights, obligations and other related matters. This in turn emphasized the role of renewable electricity in the overall energy mix, especially for expanding access to rural and remote areas.[13]

 

In a nutshell, EPSRA provided the legal basis for the development of the electricity market currently in existence today, the establishment of a dedicated regulatory body and the establishment of a rural electrification agency.[14]

 

Power Sector Reform Road Map 2010

 

Following the creation of the ESPRA, the initial aims and objectives of the Act[15] were frustrated by a variety of factors, some of which will be briefly discussed under subsequent sub heads. Due to this, the implementation of the reforms as set out in the Act experienced a stall[16]. However, in August 2010, President Jonathan restarted the reform process and launched the Power Sector Reform Roadmap 2010. The Roadmap set out the timetable by which the first phase of the privatisation process would commence, culminating in the purchase of PHCN by private investors.

 

Post reform/ Privatisation- Issues and Challenges

 

The reform process kicked off in 2005 with the unbundling of the state-owned NEPA into 11(eleven) distribution companies, 6 (six) generation companies, a single transmission company (Transmission Company of Nigeria), and the incorporation of an initial holding company (Power Holding Company of Nigeria) Plc. (PHCN).

 

It proposed that a single subsidiary will control the transmission sector leaving the six generating companies and expected independent power producers to sell electricity to the distribution companies. The distribution companies will in turn, control the supply of electricity within their designated geographical area.

 

However, due to some obstacles some of which include: the maintenance of an inappropriate pricing regime; the failure to establish a bulk purchaser in line with the provisions of the EPSR Act; the failure to address investors’ concerns about the creditworthiness of the distribution companies/bulk purchaser during their eventual transition to financial viability; the operational and financial risks to potential acquirers of successor companies, in turn posed by the failure of the Government to reach an agreement with the labour unions on the settlement of outstanding arrears (of salaries, pensions and other benefits) and on severance pay; the uncertainties generated by the delay in operationalising the Nigerian Electricity Liability Management Company (NELMCO)[17]; the delay in contracting out the management of the Transmission Company of Nigeria (TCN); amongst others,[18] the power sector reforms were put on hold and did not kick off until the Power Sector Reform Road Map in 2010.

 

The first phase of the power sector privatisation was completed on November 1st 2013. On this auspicious date, the Federal Government of Nigeria handed over to private investors the 11 (Eleven) distribution companies (Discos) and 5 (Five) generation companies (Gencos) formerly owned by the defunct Power Holding Company of Nigeria.[19]. Today these companies are privately owned and the TCN is now under the management of the private sector.[20]

 

 

However, after privatization, the challenges of electricity regulation have not vanished overnight. Rather, they have changed and taken new form. Some of these challenges will be discussed subsequently.

 

Reduction of Electricity Generation at initial take off.

 

Despite the privatization of PHCN in 2013, Nigeria’s electricity generation capacity has declined from the peak generation level of about 4,517.6 mega- watts (MW) recorded in December, 2012 to about 3,670 MW in January, 2014. The electricity generation forecast was 12,800 MW of electricity, energy generation capacity 3,670 MW hour per hour (MWH/H), while actual electricity sent out into the national grid was 3,585.32 MWH/H.[21] These figures are discouraging as it brings to the fore the fact that rather than the anticipated increase in power generation, the sector is experiencing a decided decrease.

 

Funding

 

The power sector is a highly capital intensive industry. Many of the investors that acquired the unbundled PHCN borrowed money from banks and having acquired these loans from these banks, continuous financing of the projects has now become a herculean task. Nigerian banks provided 70 per cent of the funds in loans and equity of the N 404, 000, 000, 000. 00 (Four Hundred and Four Billion Naira) paid for the power assets. These acquired loans and Federal Government intervention funds disbursed through Money Deposit Banks will not be sufficient to fast track the rapid turn- around expected in the sector.[22]

 

The Transmission Company of Nigeria is also facing the initial challenge of funding as it requires about $4, 400, 000, 000. 00 (Four Billion, Four Hundred Million Dollars) to increase power transfer capacity, make the network more stable and reliable, and improve efficiency of electric power transfer by reducing transmission technical losses, thereby enabling the TCN to increase transmission capacity to 16843 MW (Molecular Weight) by the end of 2018.[23]

 

Inadequate Gas Supply and Transmission

 

The power sector reform is anchored on the use of gas to power systems in order to meet the needs of the country. The availability of gas to ensure consistency in power supply has been a great challenge. This challenge is a result of the inadequate infrastructure needed for gas gathering, processing and transportation.

 

Speaking on the state of the power plants, the Chairman, Technical Committee of the National Council on Privatisation (NCP), Mr. Atedo Peterside[24], warned that if the problems of weak transmission and gas constraints are not dealt with, the country’s aspiration to achieve steady power supply after privatisation will be hampered, and that while gas supply constraints arising from capacity shortfalls/lags can be foreseen, the impact induces damaging shocks to the health of the entire electricity value chain.

 

He also said that transmission, which is the ‘life-blood’ of the entire electricity eco-system, is potentially the weakest link at present. According to him,

 

“Transmission is the life-blood of this entire electricity eco-system, and it is also potentially the weakest link at present. I am reliably informed that currently, stranded capacity due to transmission evacuation constraints is in the region of 100MW. …The other weak link is gas supply and gas transportation, as Nigeria is predominantly reliant on gas-fired power plants…”

 

He expressed concern over the slow pace at which the board of the Transmission Company of Nigeria (TCN) is handling the Federal Government’s mandate to it, owing to squabbling and internal fighting.

 

“Unfortunately, the Board of TCN is yet to get its act together. Since the appointment of a chairman and some initial board members was first announced some months ago, so much time appears to have been lost in squabbling over whom does what, when and how,” he said.[25]

 

The negative effects of saboteurs and vandals in gas production also affects the availability of gas.[26] At some point, generation capacity dropped as low as 2,500 MW, throwing the market into a minor crisis. The immediate reason for shortage of gas is pipeline vandalism. But the long term reason is weak policy and commercial framework for gas supply to power plants. Due partly to the low tariff that power pays for gas, gas suppliers are more inclined to supply gas to other industries and to export as Liquefied Natural Gas (LNG). There are also gas fields in the hands of persons who have low incentive to develop them. All these combine to undermine the efforts to grow generation capacity. The looming tragedy is that if nothing drastic is done to revamp gas supply to power plants, the market will experience severe stress. This may lead to the eventual collapse of the sector.[27]

 

Pricing.

 

The efficient pricing of electricity is central to a well-functioning power sector.

 

Power pricing guides investment decisions and is critical for cost recovery. It also signals to users the cost of marginal consumption and should ideally encourage the optimal utilization of installed capacity. But achieving efficient power pricing is easier said than done. The power sector is characterized by substantive up-front fixed costs, and it takes many years for capacity to be fully utilized.

 

Electricity prices in Nigeria are currently below production costs. Therefore, the industry is barely able to generate enough revenue to cover its operating costs let alone meet its considerable capital expenditure needs. This is a huge challenge the new owners will have to contend with as they cannot source for funds from the Government the way PHCN did. Whatever approach the new owners adopt must take into consideration the ability of the end users to pay.

 

In an attempt to address this tariff issue, Nigerian Electricity Regulatory Commission (NERC) has been charged with the dual function of ensuring that the prices charged by licensees are fair to the consumers and sufficient to allow the licensees finance their activities and allow for reasonable earning and profits for efficient operation. NERC has developed a new tariff approach called the Multi Year Tariff Order, (MYTO). At the centre of this is an order that calculates electricity based on revenue requirements of the whole industry. The workability of this approach still remains to be seen.[28]

 

Rapprochement of assets and liabilities of PHCN

 

One of the reasons leading to the unbundling of NEPA/PHCN was that it could not attain self- sustainment by generating enough revenue to remain in operation. This fact owes a lot to lacklustre management. Due to this, there now exists the challenge of incomprehensive information detailing the assets and liabilities of the erstwhile PHCN. In a bid to solve this issue the Federal Government set the Nigerian Electricity Management Company (NELMCO), as a Government Special Purpose Vehicle based on the understanding that it would assume and manage extant assets, liabilities and other obligations that could not be easily transferred from PHCN to the Successor Companies. This may lead to a conflict of interest between the new investors and the Government over the quality of assets that were privatised as the assets will require additional huge investment to upgrade same to such standards as will ensure smooth running of the equipment. [29]

 

It is very important to state that the above is in no means an exhaustive representation of the challenges of the newly privatised electricity sector, as we have only mentioned a few. However, with regard to same, we will now attempt to proffer some possible and practicable solutions to same.

 

Possible solutions and recommendations.

 

In a paper by Dr. Sam Amadi[30] on regulating the Nigerian Power Sector[31], some of the challenges plaguing the privatised power sector were discussed and six disciplines for the structural transformation of same offered as a solution to said challenges. These disciplines are: right pricing for electricity services, independent and effective regulation; prudent, transparent and regulated public sector funding, smart project management, consistent policy making and public participation in sector reform.[32]

 

In my view, these are possible solutions to the current issues in the power sector. In as succinct terms as possible, if, in the setting of tariffs the regulator (NERC) focuses more on recovering

 

  • Prudent Cost and ensuring that at a time when the market has stabilized such that distribution costs are less, there is a complimentary reduction of consumer charges; a compulsory mandate is set in place requiring consultation with the consumer before approving tariff; the regulatory body is made largely autonomous and free from Government bureaucracy which in turn will inspire stakeholder confidence; the Government retains;

 

  • Transparent control of the transmission of electricity, simultaneously addressing the issue of the nonchalant project management; policies are continuously and consistently made in respect of the improvement and advancement of the privatised electricity sector, and very importantly, public participation and buy-in of the reform process becomes an addressed consideration of the Government and thus encouraged, the envisaged and intended effect of the reforms and privatization of the power sector may actually be achieved.

 

 

Conclusion.

 

November 2013 marked the end of an era and the beginning of another. It was the end of the era of structural transition. Structurally, the template of a competitive private electricity market was set and put in place. However, the end of structural reform is the beginning of cultural reform. Cultural reform in this context refers to issues of values and governance.

 

 

The power sector is facing many challenges post privatisation, some of which has been mentioned above[33]. However, it is apposite to state that the problems crippling the power sector are not just technical in nature, there are also adaptive. The main challenge after reform is that of corporate governance of the industry and lack of financial discipline. It is easier to change the structure of the industry than to change the operative principles and value system of same.[34]

 

 

Understandably, the hope of Nigerians that electricity supply would improve with privatisation of the sector was quite high. Indeed it was an emphatic promise of Government, and to the best of public knowledge, that promise has not been retracted. Nigerians are now deservedly disappointed about the state of electricity today. This disappointment could however be channelled into positive inducement for the regulator (in this case the Government in conjunction with the private generation and transmission companies) to push for increase in power supply. It is important to note that if this disappointment snowballs into scepticism about the value of the entire privatisation process, it could lead to an unfortunate regression of the recorded success of the reform.

 

 

We must however make allowance for the fact that the current electricity market is operating in a fairly new regulatory environment. In the interest of fairness, the power transmission companies should be given adequate time to operate in this present regulatory environment so as to enable them correctly determine the optimal pricing for the seasonal variations in the cost of power to them. In addition, the independent regulatory body (NERC) should be given the autonomy to incisively act towards the prevention of monopoly pricing. This singular factor constitutes a large percentage of the problems of the privatised power market presently. If the Federal Government takes a full steam approach in addressing this issue as well as the others earlier mentioned, it would aid to a large extent in the creation of an environment fostering the growth and development of the new privatised power sector, eventually leading to a great boost in the economy at large and a reasonable standard of living for the average Nigerian.

 

 


[1] KPMG- A Guide to the Nigerian Power Sector, December 2013. Retrieved from www.kpmg.com

[2] Ibid

[3] IseOlorunkanmi O. Joseph Department of Political Science and International Relations, Landmark University, Omu-Aran, PMB 1001, Omu- Aran Kwara State, Nigeria- “Issues and challenges in the Privatized Power Sector in Nigeria” Journal of Sustainable Development Studies ISSN 2201-4268 Volume 6, Number 1, 2014, 161-174.

[4] KPMG- A Guide to the Nigerian Power Sector, December 2013. Retrieved from www.kpmg.com

[5] The Federal Ministry of Power - www.power.gov.ng

[6] The National Electric Regulatory Commission - www.nercng.org

[7] Nigeria Electricity Privatisation Project- Nigeria Electricity Privatisation (PHCN) - www.nigeriaelectricityprivitisation.com

[8] Ibid

[9] KPMG- A Guide to the Nigerian Power Sector, December 2013. Retrieved from www.kpmg.org

[10] Okolobah v Ismail Z - On The Issues, Challenges and Prospects of Electrical Power Sector in

Nigeria International Journal of Economy, Management and Social Sciences 2(6) June 2013,

Pages: 410-418

[11] Lawal, L. (2008). Nigeria: A case Study in Power Shortages. Energy Tribune, April 10, 2008

[12] Retrieved from https://www.premiumtimesng.com/opinion/158378-regulating-nigerias-power-sector-opportunities-challenges-prospects-sam-amadi.html#sthash.IRAj6QHr.dpuf

[13] Ibid

[14] Federal Ministry of Power and Steel, Federal Republic of Nigeria- Renewable Electricity Policy Guidelines, December 2006. Retrieved from www.iceednigeria.org.

[15] See 4.2 above

[16] IseOlorunkanmi O. Joseph Department of Political Science and International Relations, Landmark University, Omu-Aran, PMB 1001, Omu- Aran Kwara State, Nigeria- “Issues and challenges in the Privatized Power Sector in Nigeria” Journal of Sustainable Development Studies ISSN 2201-4268 Volume 6, Number 1, 2014, 161-174

[17] Nigerian Electricity Liability Management Limited(NELMCO) was incorporated under the Companies and Allied Matters Act, 1999 in August, 2006 as a company limited by guarantee, with registration number as RC664658, as one of the “other transferees” companies envisaged under S.22(1)EPSR Act.2005 the EPSR Act 2205. The National Council on Privatisation (NCP) approved their set up and subsequent incorporation as NELMCO.

[18] IseOlorunkanmi O. Joseph Department of Political Science and International Relations, Landmark University, Omu-Aran, PMB 1001, Omu- Aran Kwara State, Nigeria- “Issues and challenges in the Privatized Power Sector in Nigeria” Journal of Sustainable Development Studies ISSN 2201-4268 Volume 6, Number 1, 2014, 161-174

[19] Ibid

[21] Information retrieved from www.nigeriapowerreform.org

[22] Punch, December 26, 2013

[23] Vanguard, March 1st 2014

[24] Speaking at a recent forum on financing the Power Sector Reforms for Economic Development, organized by the Bankers Committee

[25] Vanguard News. Power Privatisation- Many Challenges Ahead. November 4th 2013. Retrieved from http://www.vanguardngr.com/2013/11/power-privatization-many-challenges-ahead/

[26] Ibid.

[27] Retrieved from https://www.premiumtimesng.com/opinion/158378-regulating-nigerias-power-sector-opportunities-challenges-prospects-sam-amadi.html#sthash.IRAj6QHr.dpuf

[28] IseOlorunkanmi O. Joseph Department of Political Science and International Relations, Landmark University, Omu-Aran, PMB 1001, Omu- Aran Kwara State, Nigeria- “Issues and challenges in the Privatized Power Sector in Nigeria” Journal of Sustainable Development Studies ISSN 2201-4268 Volume 6, Number 1, 2014, 161-174

[29] Ibid

[30] Dr. Sam Amadi is the Chairman/CEO of the Nigerian Electricity Regulatory Commission, (NERC)

[31] Dr. Sam Amadi- Regulating Nigeria’s Power Sector: Opportunities, Challenges, Prospects, presented at a Lecture at the Annual Public Lecture of the Institute of Chartered Secretaries and Administrators of Nigeria (ICSAN) on Thursday, March 27, 2014. Retrieved from https://www.premiumtimesng.com/opinion/158378-amadi.html#sthash.IRAj6QHr.dpuf

[32] See 30 above.

[33] See paragraphs 5 and 6 of this paper

[34] Dr. Sam Amadi- Regulating Nigeria’s Power Sector: Opportunities, Challenges, Prospects, presented at a Lecture at the Annual Public Lecture of the Institute of Chartered Secretaries and Administrators of Nigeria (ICSAN) on Thursday, March 27, 2014. Retrieved from https://www.premiumtimesng.com/opinion/158378-amadi.html#sthash.IRAj6QHr.dpuf

 

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