Power supply: Predictions comes true

on   /   in Sweet Crude 9:00 pm   /   Comments

As 2012 closed, President Jonathan records another high in power supply. On December 23, 2012 the Nigerian electricity supply industry generated 4,500 megawatts. This is a significant improvement if we consider where we were in 2010 when President Jonathan assumed power as Acting President.

Of course, we are still nowhere in sight of the hullabaloo 40,000 megawatts of vision 2020. And many homes and businesses have not witnessed much improvement in power supply in spite of the increase in generation. But there is a great difference between 2000mws in 2010 and 4,500mws in 2012 considering the long gestation period for power projects.

As the regulator of the sector to see the year close at about 4,500 megawatts is a prediction come true. In July 2012, as electricity generation picked up after the massive drop in hydro power, there was so much reckless optimism in the air as many delighted public officials promised that we will end the year at about 9,000 megawatts.

I knew that such expectation was unfounded because the fundamentals of the electricity industry do not assure such massive haulage of power. I knew that it will be totally unrealistic to expect the NIPP to fire all its plants or even most of it before the end of the year, even as NIPP managers work very hard.

President Goodluck Jonathan

President Goodluck Jonathan

I knew also that as much as the handshake between gas and power is getting firmer and the regulatory frameworks of the two sectors are more effectively interfacing, we still can’t expect delivery of gas to all the scheduled power plants in such a short time.

As a regulator, I crunched the data coming from operators and debunked the expectation of 9,000 megawatts. But I promised that we will hit a princely 4,500 megawatts by December 2012 which is a significant increase from the 3,600 megawatts at that time.

In June 1, 2012 the electricity sector regulator- NERC- released the Multi Year Tariff Order (MYTO-2). The MYTO had some set of inbuilt assumptions about the macroeconomic fundamentals that will affect generation, transmission and distribution of electricity.

Some of them are inflation rate, exchange rate and cost of gas. It also has sets of technical assumptions like the generation availability, the power factor and the percentage of power sent out to the grid. MYTO subjects itself to biannual minor reviews to track changes in these variables.

Last week NERC completed the minor review and the good news is that there were no significant deviations from the predictions of NERC to warrant a change in the wholesale price of electricity. Getting it right is important to driving the reform in the power sector.

Unfounded optimism may lead to misappraisal of the gains of the sector and induce a loss of morale in steering forward the reform. The key insight is that predictive power depends on ability to comprehensively assemble data and to analyze them intelligently. My prediction of 4,500megawatts derived from the financial and technical assumptions which NERC used to build the Multi Year Tariff Order (MYTO-2) model.

MYTO has restored confidence in the Nigerian electricity supply industry. It is that confidence that will enable Nigeria to generate and effectively transmit and distribute 40,000megawatts in 2020 or soon thereafter. The restoration of confidence of international and domestic financial markets in Nigeria’s electricity market is the singular most important achievement of President Jonathan and not the growth in generation capacity, as desirable as it may be.

This is so because it is such confidence that will ensure periodic haulage of megawatts in a sustainable manner to keep pace with growth in population and energy demand. Even if by some miracle we cranked out 9,000megawatts by end of 2012 and the market structure, including its financial protocols, does not guarantee prudent and efficient investment in the sector yearly, we will soon hit the bottom as we did in the late 1990s when per capita wattage became one of the lowest in the world.

President Jonathan can take pride as the President who created a real market of electricity in Nigeria. It is true that a robust electricity market is yet to emerge. But the building blocks are mostly in place. The President’s singular determination to reestablish the regulator and allow its independence was a game-changer.

Let us not forget that the nascent power sector was truncated and no foreign investment came for power projects when President Ya’aradua was ill-advised to disrupt the work of the regulatory commission. President Jonathan’s commitment to uphold the integrity of the regulated markets makes the difference between the old and the new.

Now, the success of the privatization of underperforming state assets is clearly in sight. The credit should go to both Professor Barth Nnaji and Ms Bola Onagoruwa who tenaciously pushed the wagon to the finishing line. But you get nowhere if President Jonathan and his deputy who chairs the National Council on Privatization do not guarantee a stable political and policy environment for privatization.

President Jonathan’s unusual transparency and disinterest in who become the preferred bidders shifted the mode from cynicism to enthusiasm. The history of such reforms in the past in this part of the world is a story of audacious takeover by the big man upstairs.

Here in Nigeria, the world was pleasantly surprised at the rigorous process set up to guarantee that preferred bidders are competitive on technical and financial proposals. They could not believe that Nigeria could present such quality of information and processes that encourage credible bidders to enter the game.

The Nigerian power privatization is being studied as possibly the largest single privatization in electricity industry in the world. The Harvard Business School has developed a case study on the privatization as part of its teaching materials for business management students.

Similar case studies in the past either highlighted the failure or success of a grand reform effort. In the case of Nigeria, it is increasing becoming a story of success. Not just that the bidding process was transparent but the background regulatory and policy framework of post-privatization is strong to withstand any subversive conduct of new entrants into the electricity market.

I am a student of public sector reform and have written a book on privatization that highlights where it had failed in the past and why. One reason for failure is that the privatization ends up as sweetheart bazaar sale. Another reason is the reckless optimism of the reformers who believe that without doing more a private electricity market will cure all the pathologies of the public electricity market.

These sanguine reformers discount the obvious fact that the principal-agency problem that undermines public enterprises is also rife in private enterprises. Both reasons for failure derive from incomplete diagnosis of the nature of the pathologies and insufficient institutionalization of effective market governance. The transparent bidding process set up by the BPE took care of first cause of failure. The regulatory framework established by NERC hopefully takes care of the second cause of failure.

The bidding was conducted in the context of the structure of regulations and industry agreements which the regulator helped to put in place. These documents effectively allocated risks in such manner that investors were encouraged to bid for the PHCN successor companies.

The MYTO model which the regulator published is the peg around which the long term investment plans and loss reduction strategies of the bidders are based. With the backing of President Jonathan and the support of the Ministry of Power, NERC put out a tariff structure that promised cost recovery for investors without compromising efficiency and fairness in electricity supply. With a cost reflective tariff in place, bidder crossed the threshold of fear.

The lack of financial viability that plagued the industry in the years before President Jonathan is being cured. Then electricity tariffs did not cover the costs of electricity supply. The distribution companies were supported by federal budget and never bothered about collecting tariffs from customers.

Federal budget provided personnel cost and nothing was spared for investment in maintaining and expanding the network. Post-MYTO, the story is changing. Market discipline is being introduced. In November, Eko Electricity Distribution Companies reported that it collected enough money to settle all its obligations in the market and finance improvement of its network. Other distribution companies are fast on the heels of Ikeja to achieve 100% financial viability.

The evidence is clear that MYTO has worked to put electricity operators on the path of financial viability. The price of electricity recovers the costs of electricity supply in Nigeria. The would-be investors can do the back-of-envelop calculation and be assured that he can recover his costs and earn decent profit from the business. This removes a major risk in the electricity market.

What is left now is to drastically improve collection and strengthen the integrity of the settlement system such that cost of energy billed to customers is recovered and the monies are prudently used to finance investments that improve the capability of the networks to deliver safe, reliable and adequate electricity. This is the next focus of NERC for 2013

The MYTO does not only assure investors of strong prospect of cost recovery it also provides a definitive regulatory framework for ensuring continuous investment in the network by the new entrants such that efficiency can be improved dramatically.

The MYTO signals viability for both Greenfield and brownfield investments. Since the launch of MYTO 2 a lot of transactions are going on in the finance market such that there is greater hope that both the preferred bidders and the licensed independent power producers will be financially bankable.

Financial bankability is partly a function of predictability. And predictability depends on regulatory certainty. If financiers know what to expect in the event of a breach, or know what risks their clients carry at the end of transaction they are more willing to assume risks, all things being equal. This certainty comes because the regulatory framework is transparent, durable and sensible.

The greatest achievement of President Jonathan in the power sector reform is that he has created, through the work of the regulator, a more predictable, stable and transparent electricity market that is safe and profitable for investment. He has not fallen to any temptation to scramble or distort the regulatory framework. And in Africa, that temptation could be overwhelming.

To further solidify the predictability and reliability of the electricity market, NERC has put out a ‘fit and proper’ test criteria that ensures that any of the preferred bidder who gets to be authorized to manage any electricity network in Nigeria has the technical and financial capability to meet its responsibility to generate, transmit or distribute adequate, safe and reliable electricity in Nigeria.

NERC is releasing other regulations ahead of the entry of the preferred bidders, so that the electricity market in Nigeria is designed against the lessons of failures and shortcomings observed in other sectors. For one, there will be no Nigerian model of family business in the electricity industry that NERC is constructing.

The technical and financial nature of the market militates against that. But additionally, the corporate governance post privatization second-guesses the assumptions of perfect rationality and the self-correcting market. We will use pricing and regulations to deepen commitments to prudent investment and quality service.

As the year closed, it is clear that the reform agenda on the power sector is running smoothly. There has been some turbulence, recently, the uncertainty about the management contract for Transmission Company of Nigeria (TCN). Thankfully, that is over.

Mr. President has restated the contract and got the controversial edges worked out. He has gone further to constitute a credible Board for the company. This puts it beyond peradventure the commitment of President Jonathan to speed through the roadmap for power reform. Just a few issues will be worked in the New Year to de-risk transmission.

As we celebrate the highest generation of electricity in Nigerian history it is important not to lose sight of the silent revolution going on in Nigeria. The recreation of the electricity industry through strong political leadership, the establishment of a transparent and smart regulatory and policy regime of electricity market in Nigeria, and the removal of bureaucratic control of production and supply of electricity in Nigeria guarantee that in the next three years and beyond we will no longer celebrate the addition of 1000 megawatts to the grid.

The silent revolution is capable of ensuring that we continuously add substantial new capacities every year to the national grid such that sooner than later we attain adequacy with sustainability.

The predictions of the National Electric Power Policy (NEPP) 2001 and the Electric Power Sector Reform Act (EPSR), 2005 are coming true. The President should take glory in this achievement because he has maintained continuity. To finish the deal he has to remain fully engaged with the construction of the new electricity market.

He should not outsource that responsibility to any official or any other person. He had to continually interface one-on-one with all the people he has appointed to construct this market. He achieved his best results because he did just that, sitting weekly in action-oriented meetings on power. That model should not be abandoned as we get to the finishing line of the roadmap on power, before a competitive electricity market is fully established.

Dr. Sam Amadi is Chairman and Chief Executive Officer of the Nigerian Electricity Regulatory Commission (NERC)

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