• Wednesday, June 19, 2024
businessday logo

BusinessDay

The Nigerian Electric Power Sector in 2015

Su-Kam partners with Sims for Nigerian power market

Proem

Nigeria’s fifth uninterrupted elections take place in a few weeks. Specifically, the presidential election holds on the 14th of February 2015 and it is typical of the Nigerian economy to slow down in every election year and then pick up after the electioneering process.

Interestingly, the imminence of the elections this year is unlikely to drastically slow things down in the electric power sector. This is particularly so because everyone, irrespective of political inclination, concurs to the fact that so much stills needs to be done and more investments need to be made in the sector. Hence, activities would continue and it is expected that irrespective of the party which makes it to Aso Rock, activities would continue in the Nigerian Electricity Supply Industry (“NESI”). In the next two editions of this column, we shall be taking a peep into the year 2015 and some of the things to expect in the NESI in that period.

The analysis would include what the consumers, the new investors themselves, politicians and even financiers should expect. Some of these expectations would seem unpalatable, others very much desired whilst others neutral. We look at these expectations in no particular order in this edition and next.

The Expectations:

Slightly Improved Power Infrastructure

The Nigerian Electricity Market Stabilization Facility consisting approximately of US $1.5 Billion (the “NEMS Facility”) was established by the federal government very recently. The aim of the NEMS Facility is to assist new owners of the privatized companies stabilize in the wake of the realization that the funds required to improve the NESI exceed, substantially, the initial estimates.

The NEMS Facility was set up to support the new owners of the power generation and distribution companies with (a) the settlement of the legacy gas debts which stands at N36 billion, (b) the execution of agreed metering programs (c) the procurement of transformers by distribution companies and (d) the execution of maintenance programs and procurement of equipment by generation companies.

Although, the other specific details of the NEMS Facility such as interest rate etc. are being completed; reports suggest that the beneficiary successor generation and distribution companies are expected to repay the loan over a period of 10 years from their revenues.

We are of the view, there is proper monitoring of the utilization of the funds and the enforcement of the pre-agreed performance guarantees stipulated in the relevant Performance Agreement, the new owners of these companies would be forced to improve on infrastructure and service delivery.

Read also: Developing liquidity solution for Nigerian power sector (2)

Consequent upon the foregoing, we expect that some improvement in the electricity infrastructure would be experienced, such that some of the decrepit equipment and facilities currently being utilized in the NESI, would be replaced.

Emergency Power Policy

The federal government of Nigeria is expected to pay more attention towards the delivery of temporary solutions to power shortage in the country whilst long-term solutions are currently being cultivated. As part of the solutions, creative businessmen have found haulage by trucks of compressed natural gas (“CNG”) from gas fields/ processing plants to where they are required, as same is seen as useful alternative to the currently poor gas pipelines supply infrastructure.

Costlier Electricity

The primary law governing the NESI is the Electric Power Sector Reform Act, which inter alia, established the Nigerian Electricity Regulatory Commission (“NERC”). NERC as the key regulatory body, for the NESI has powers which include amongst other things, the power to ‘create, promote, and preserve efficient industry and market structures, and to ensure the optimal utilisation of resources for the provision of electricity services’.

Furthermore, NERC was required to ‘ensure prices charged by licensees were fair to consumers as well as sufficient to allow the licensees to finance their activities and to allow for reasonable earnings for efficient operation’. To ensure that the objectives of fair but reasonable prices were in place in the power sector, Section 76 of the EPSRA empowers NERC to establish one or more tariff methodologies for regulating electricity prices.

Very recently, the MYTO 2.1 was amended such that the price of electricity was increased. However, most of the customers will only be required to begin to pay the increased tariffs by June 2015. The belief, in our view, is that there would be an improvement in service delivery prior to June 2015 so that consumers would be more willing to pay the new tariffs. 

To give a proper perspective on the issue of increase in tariffs, an illustration may be apt as follows: An R2 customer in Lagos falling under the Eko Electricity district who previously paid –N- 16.63/kWh will now pay –N- 19.12. To further put things in perspective, a home which previously paid an average of –N-16, 630 a month, will now pay –N- 19, 120 in such periods.

Further the Kilovolts Ampere (KVA) charge has been re-introduced. The KVA charge is one payable by large consumers on electricity distribution networks. The amount and class of consumers to pay same are subject to distribution networks companies’ studies and concurrence to the foregoing by NERC. The re-introduction of this may further make electricity more expensive.

New Imbalance Compensation System

The rules as to imbalance payments are now such that where an electricity distribution company (“Disco”) does not take its allocation for any reason other than instructions from the System Operator (“SO”) then the said Disco would not receive imbalance payment. Further, where a Disco continuously fails to take its allocated load due to the instructions of the SO, then its load allocation would be proportionally reduced to reflect its capacity and such a Disco would receive imbalance payment from the Disco to which the energy made available is supplied. It would also be the case that, where a Disco is required to take load from a circuit because it is the only one with the capacity, it shall not make imbalance payments to the other Discos.

For more details about the power sector, please read text the Nigerian Electric Power Sector, by Ayodele Oni.

Ayodele Oni   {[email protected]}, a solicitor, specializes in international energy (oil, gas and electricity) investment law and policy. He holds a mini-MBA in power & electricity. Follow me @ayodelegoni.