…’ Something to learn from Egypt’
A former Executive Chairman and CEO of Nigerian Electricity Regulatory Commission, NERC, Mr Sam Amadi, in this interview, analyses the dynamics in the power sector, stating that the benchmarking and unbundling of Distribution Companies, DISCOs, are urgently needed for short-term, medium-term and long-term results.
BY PRINCE OKAFOR
As an expert in the power sector, how can Nigeria record an appreciable level of success in power generation and distribution within the shortest possible time?
Nigeria needs a deep leap forward in its power challenges. Leaping forward is difficult especially with how we have managed the challenges in the past. It is always possible to make progress. The challenge for Nigeria now is to do a comprehensive review of the journey we have undertaken since 2008 with the enactment of the Electric Power Sector Reform Act and the creation of the electricity regulator. In fact, the journey actually started with the National Electric Power Policy in 2000, NEPP. The policy recommendations of the NEPP are largely good but need review in the light of the experiences of over a decade. We built on some presumptions that are no longer valid. We can’t make good progress unless we are ready to review these presumptions and tinker with the strategic roadmap on power sector reform. I am convinced that we will continue to wobble until we are courageous and intelligent to admit that we built on a faulty model, and smart enough to revise without causing disruption. We can achieve a great leap in the power sector if we smartly review and move forward in a strategic way.
Egypt spent fewer funds to add 10,000 gigawatts to its capacity in 18 months. What can Nigeria and NERC learn from the country?
Egypt’s success in adding 10,000 gigawatts in record time should be a lesson to Nigeria. Egypt did not privatize. In fact, Egypt is planning structured privatization that will be phased with commercialization in about 2-3 years such that by 2023 consumers will be exposed to the fully cost-reflective tariff. As of today, consumption is subsidised by the government. Egypt wisely understood that you don’t privatize and move to full private sector market in utilities like electricity in a state of acute scarcity. This is the singular mistake Nigeria made. We should have fully commercialized and corporatized our electricity sector under effective regulation. Privatization would have come down the line when the sector would have gained efficiency through effective regulatory and good corporate governance. We erred by privatizing so quickly when we were yet to set up a proper regime of corporate governance and when we are suffering from gross incapacity. It is too presumptive to believe that the private sector will invest heavily to build capacity in Nigeria with the kind of risky financial market we have.
Lessons from Egypt
The other lesson we have to learn from Egypt is how they efficiently executed such a massive project in record time. For me, the failure of the power sector reform is a function of modelling error and implementation failure. I think we adopted the wrong model by quickly privatizing Distribution companies, DISCOs, and Generation Companies, GENCOs, in one fell swoop. But beyond that, we also failed because of corrupt and inefficient public procurement. For me, the best policy in the power sector was the Nigerian Integrated Power Project, NIPP. It was a masterclass. But guess what, it was hopelessly mismanaged. If Nigeria had implemented that project smartly and sincerely, we would have solved at 60 per cent of our power problems. The first phase was to deliver about 5,000mws of electricity in 2010 and the second phase would have delivered another 5,000mws in 2015. We would have had 10,000mws new capacity for the proposed private sector electricity market even if we never got additional megawatts from independent power plants. The contracts were awarded to firms with no experience and capacity. Up until now, we are yet to complete the first phase. Even some of the 10 plants that were completed have no good gas supply because instead of citing them close to feedstock, gas, we sited them according to strategic political interests. We are a victim of both our misconceptions and corrupt and inefficient project management. We need to learn strategic wisdom and good project management from Egypt.
There was a successful integration of renewables in some parts of the country, like Sura Market, Ariaria in Aba, and Sabongari in Kano among others. How can such models be replicated on a larger scale by NERC to achieve stability in electricity supply?
It is important to recall that these solutions: Ariaria, Sabongari and others are off-grid solutions. They are not grid power plants. They serve important needs for some localised consumers but not too significant to the constitution of a revolutionary complement to the electricity supply industry in Nigeria. There are also some concerns that these solutions are developed at very expensive and unsustainable costs. Some DISCOs have pointed out the alleged fraud of cherry-picking their consumers and asking these consumers to pay the very high tariff. They argued that it was the regulator that would allow them to charge such discriminatory and cut-throat tariffs to provide 24/7 electricity to such a small class of customers in a place like Ariaria market. These are all accusations. What matters is that we should not mistake the tree for the forest. We are not yet building a national grid in the right way. A country cannot operate with disconnected micro-grids. Micro-grids and mini-grids are needed. We need to integrate renewables into the national grid in an ambitious but sustainable manner like South Africa has been doing. While I was Chief Executive of NERC, NERC had a comprehensive feed-in-tariff which is a core enabler in the development of renewable solutions. Without a bankable contract, it will be difficult to develop a renewable solution even though we are rich in renewable resources like sunlight, wind and small dams. Another critical enabler is a procurement policy that encourages developers of renewable. In NERC we made the embedded generation and independent distribution regulations to enable DISCOs to procure renewable power without going through the bulk purchaser. This innovative regulation provides a context for DISCOs to directly contract power with renewable developers. More importantly, the government needs attractive fiscal support for would-be developers of renewable energy
Given the regular destruction of gas pipelines by vandals and the arguments against hydro, what are the best options for Nigeria at the moment?
Nigeria should continue to optimize its abundant gas supply. Part of the problem of pipeline vandalization is that because of politics we sighted power plants far from the gas supply. Although power needs to be decentralized and there is a high cost of transmitting across a large expanse, the cost of gas is more expensive if you have to transport it from source to power plant. NERC needed to site the power plants closer to feedstock. Another solution is for the regulator to find a way to incentivize the use of ICT to monitor and manage a gas pipeline. The problem is that unlike in other countries, gas transport and electricity are not under the same regulatory regime. So, there is a huge coordination problem and divergence that lead to incentive incompatibility. If we have a single regulatory regime for gas and electricity it becomes easier to incentivize gas transport such that the supplier would use technology to monitor.
Nevertheless, we still need to develop solar and coal. Our coal is good enough to explore. While I was at NERC we licensed many solar and coal developers. We need to support them to project completion. NERC also have to support small dams, we need to focus on everywhere we have a competitive advantage.
The Transmission Company of Nigeria, TCN, has continued to expose the sector to leakages in regards to constant system collapse, despite the huge investment channelled to improve transmission. What do you think is the missing link?
The missing link is that in spite of the improvement in the wheeling capacity of transmission we still have a frail transmission network and totally underdeveloped distribution network. The transmission network is so frail that we are still using manual means to coordinate the entire value chain. One of the realities of unbundling is that it makes it difficult to coordinate the electricity supply. When we had the National Electric Power Authority, NEPA, the same company generates, transmitted and supplied electricity to homes and businesses. Coordination is easier in a vertically integrated electricity network. The advantages of efficiency that come from unbundling require a high level of coordination. We need full SCADA coverage for the entire transmission network. For years we have been talking of SCADA and we are yet to install SCADA and we hope to have a privatized and competitive electricity market without SCADA for coordinated scheduling, dispatch and reliability management of the grid. That is not going to work.
Another problem of the grid is the bankrupt network of DISCOs. The DISCOs are rejecting power because TCN is dropping those loads where DISCOs don’t have the capacity to pick the load. This is six years after privatization and DISCOs can’t pick loads from their network because they are not making even the most rudimentary investment in expanding and maintaining their network. These frailties are what make the grid to collapse often. Since January we have had arguably the largest number of system failures than any time in our history. This is very bad. NERC
If you were to draw short-term and long-term plans for Nigeria on how to achieve some results in the sector, what would it look like?
In the short-term, I will focus on enforcement and rigorous monitoring. There are obvious slippages in the electricity network. The operators seem not to be fully implementing their service level agreements in terms of the long-term investment plan. If the DISCOs are not making such investment, then there is no way we will have incremental power as a former Minister of Power laid down in the power strategic plan. This is the responsibility of the regulator. NERC has the capacity to drive effective regulation of the sector. But it seems to that this capacity is somewhat constrained either because of inconvenient larger political economy or some other internal factors. But we need to see a NERC that polices the working landscape of the electricity market with greater intelligence and political will. NERC is well-staffed, and the Commissioners are up to that.
But, beyond NERC, I believe it will be nice to have an equivalent of a presidential task force that keeps a helicopter view of the industry from the perspective of nudging all task owners toward delivery of their responsibility. Some have argued that this may be another bureaucracy. But anyone who studies reform understands that bureaucracy could be a good thing if well designed. A Presidential Taskforce is necessary to keep traction on short-term optimization required to ensure we achieve moderate stability in half a year. It could be inter-ministerial with a few members from outside, real experts, government. It could be headed by the Minister or report to the Minister but must have periodic briefing (bi-monthly) to the President.
In the medium term we have to begin to reset the electricity market in the context of admission that through a flawed privatization model that focused more on selling off the assets rather than on real capacity to transform the sector and perform far better than the old publicly owned NEPA, we now have power utilities that cannot deliver on expectation. This resetting should take this form. We should use regulation to incentivize DISCOs’ performance. The weakest chain in the network is distributed and it is the most important. Evidence shows that it is the competition that engenders efficiency not necessarily privatization. A privatized electricity without competition and without the simulation of competition that regulation creates will be as inefficient as a public electricity market, if not worse because it will additionally lead to higher prices without the benefit of more and improved power. This is what we have now in Nigeria: a private monopoly in distribution with no incentive for efficient performance. Through the credible and transparent regulatory process, we should benchmark the DISCOs for six months and those who fail will be divided to bring in more operators. There will be a complaint of political risks in this case because it will be done through the regulatory process. We don’t need to cancel privatization. But we need to benchmark the DISCOs and use the clear, transparent and peer-reviewed result of that benchmark to review the exclusive license of the DISCOs. The most important thing is that they don’t lose investment and there is full compensation. The benefit of this intervention is that DISCOs will have a smaller franchise that they can manage. for instance, Abuja could be served by two discos
Another medium-term intervention is to fully commercialize and corporatise the entire electricity value chain. This starts with commercially viable tariff. We have established a good enough tariff methodology that can deliver incentive-based pricing. We need that integrity of the tariff structure. There is no need for why tariff is frozen for about four years. In five years, we conducted three or four tariff reviews. And before we left office we enacted a new tariff regulation that allows DISCOs to consult their consumers.
In the longer term, the government should consider unbundling distribution. The final destination is competition and choice in electricity supply. We must move fast to the stage that we separate distribution from retail so that many firms can compete on efficient power delivery using the network of a single transporter of power. But until we get to this point, we are not yet in sight of adequate, reliable and affordable electricity.
Ultimately, we should bring back the smart state. It is silly to assume that the private sector will respond quickly to build power plants to supply the capacity we need for industrial purposes under a market condition that is too risky. Like in Europe, America and Asian, the state must socialise the risks and fund the infrastructure that the private sector can manage and expand through efficient operation. The private sector will not bear risks that the market cannot mediate quickly. Smart state entrepreneurial engagement is very important. So, we have to rethink the ideological entrapment in the neoliberal orthodoxy that government has to immediately hands off the grid to the private sector, it is a dangerous ideology. Yes, the government should liberalize and even privatize. But it should do so strategically and match private sector with the responsibility it has capacity and incentives to perform. Historically, it is the public sector that can make an investment in electricity.