Third-party power producers tackle national grid shortages

A new trend among the recently privatised electricity distribution companies (Discos) in the country towards the use of embedded power generation promises to make up for supply shortfalls until flow from the national grid picks up significantly.

To this end, third-party power producers are poised to supply off-grid power to enable the Discos shore up supply within their networks.

Industry watchers say this will facilitate the much-needed step-up in power supply across the country, especially to industrial and heavily-populated cities such as Lagos, Port Harcourt and Kano, as well as enhance capacity utilisation for industries and other businesses, which will translate into expanded job and revenue creation.

Power supply from the national grid in Nigeria has remained lower than the level expected by most of the Discos when the successor companies carved out of the defunct Power Holding Company of Nigeria (PHCN) were privatised last year. The 11 Discos across the country have been unable to meet the electricity demand within their networks.

The increasing reliance on self-generation of electricity by businesses has heightened their expenditure on diesel and maintenance of generators.

Analysts have said that the high costs involved in businesses generating their own power has made it difficult for small and medium-scale businesses to sustain profits. Lack of reliable electricity supply over the years has continued to take a toll even on large companies.

The high cost of doing businesses in the country, largely due to insufficient power supply, accounts for 30 to 50 percent of the cost of production.

Gross available generation capacity from the grid as at March 31, 2014 when electricity tariff was reviewed was 4,306 megawatts (MW), 52 percent below the 9,061MW which the Nigerian Electricity Regulatory Commission (NERC) had projected when the Multi Year Tariff (MYTO2) was set in June 2012.

Embedded power generation involves the establishment of small-scale power generation not exceeding 20MW within a distribution network connected directly to the Discos for onward supply within their networks. It could potentially be a new power plant or excess capacity from a captive power plant in use by a large manufacturing company.

“Embedded power generation offers investors an alternative framework to the current structure in the power sector,” said Dolapo Oni, energy analyst at Ecobank.

“It is likely to provide investors who missed out on the privatisation of the PHCN and NIPP assets with another opportunity to participate in the power sector. Thus some of the experienced local power companies, such as Negris Power and Shoreline Power, could play a significant role in the embedded power segment,” Oni said.

BusinessDay had recently reported that 41 companies including Aggreko, one of the world’s leaders in the field, were bidding to supply embedded power to Eko Disco. The company is looking to procure additional 400MW of embedded power within its network.

Aggreko, which is currently looking to grow its permanent power solutions business in Africa, is also in talks with four other Discos. The Scottish power company intends to approach the 11 Discos to explore embedded power generation options with them, according to David Taylor-Smith, Aggreko’s Regional managing director.

The big power consuming firms, especially multinationals and manufacturing concerns in the country, have in recent years invested in generating their own power off-grid through captive power plants. They include Dangote Cement (258MW), Lafarge WAPCO (90MW), Flour Mills (60MW), Indorama Eleme Petrochemicals Limited (225MW), BUA Cement (45MW) and Notore Fertiliser (50MW), with some of them having spare capacity.

 Under the current framework, the National Bulk Electricity Trader (NBET) assumes the risk of poor collections by the distribution companies and makes payments for power to the generation companies.

Thus, investors in power generation are reliant on the financial state of the bulk trader, as against the Discos which actually make the collections from the customers, according to Ecobank Research in its new note released last Tuesday.

NBET currently has a capitalisation of about $800 million, Rumundaka Wonodi, its managing director, told BusinessDay on phone.

Ayodele Oni, energy law and policy expert and senior associate at Banwo & Ighodalo law firm, said once there were credible off-takers, the discerning businessman would take advantage of that and in the mid-term, there would be near sufficient electric power.

“In fact, at the moment, a number of people are looking at developing renewable power. With ready and credible off-takers, their projects would move faster and they are more likely to get finance as their project become more bankable,” he said.

Investors have direct exposure to the distribution companies’ collections but have the added advantage of being able to enter negotiations directly with customers for tariffs, the Ecobank report said.

“Thus embedded power generation presents investors with the opportunity to target specific consumers within the electricity market, meaning an embedded power plant could target the base stations of all the telecommunication networks within a state, or area up to 20MW,” the report said.

It said that highbrow residential neighbourhoods and small scale industries are also likely to constitute a major target for these embedded power generation plants, adding that embedded power investors are also allowed to sell directly to their customers through an Independent Electricity Distribution Network (IEDN) licence.

However, there are likely to be several challenges with developing embedded power generation, ranging from capacity and regulatory concerns to determining the right level of embedded power generation capacity per distribution network, the Ecobank report noted.

“If several embedded power plants are built and national grid supply improves, a number of these plants are likely to be rendered obsolete. Investors could lose their capital, as customers are likely to consider shifting back to cheaper national grid supply, except where contracts are in force,” it said.

The report said the NERC’s strict monitoring of the procurement and contracting of embedded power could create a bottleneck for licensees, adding that this was due to the likely large number of embedded power plants, compared to the national grid-connected power generation plants that the NERC typically has to supervise.

“Notwithstanding these challenges, embedded power generation companies are likely to play an important role in bridging the power supply gap in Nigeria over the short to medium term. Due to their size, they are relatively easier to set-up and connect to distribution networks,” said Ecobank Research.

Banks are also likely to support the embedded power plants with financing, once bankable power purchase agreements are signed and financiers are provided with adequate securities, it said.

In 2012, NERC issued regulations on embedded generation and independent electricity distribution, as part of efforts to improve power generation in the country.

FEMI ASU