The Nigerian Electric Power Sector in 2016 – Concluding Part

We had stated previously, that there had been several happenings in Nigeria’s electricity supply industry (NESI) in the last fifteen years or so, commencing with the issuance of the Nigerian Electric Power Policy (NEPP) to the enactment of the Electric Power Sector Reform Act (EPSRA), the establishment of the Nigerian Electricity Regulatory Commission (NERC), the recent privatization of the generation and distribution aspects of the electricity supply value chain, the less than modest improvement in the power sector despite the privatization of the sector, the failure recorded in the proposed privatization of the power plants built under the auspices of the Nigerian integrated power projects, the illiquidity in the NESI and the huge debts running into trillions of Naira owed gas producers especially by the power companies with the Power Holding Company of Nigeria (in liquidation) amongst other occurrences.

We conclude this piece by taking a look at other things that are likely to happen in the electric power sector, this year.

New Entrants in the Genco and Disco Space

Some of the new owners of the formerly government owned electric power generation (Gencos) and distribution companies (Discos) are now realizing that the situation of things is not exactly what they bargained for and some of them are likely to divest notwithstanding the fact that the contractual arrangement between them and the government (represented by the Bureau of Public Enterprises (BPE)) which requires these owners to remain the core investors for at least five (5) years from the year 2013. Even the federal government and the BPE are beginning to realize that many of the terms and conditions of the documentation which formed the basis for the divestment of government’s interests in the Gencos and Discos need to be revisited in the light of current realities.

With reasonable stability and clarity that the current administration would not reverse the sale of the Gencos and Discos to the new owners, new investors are already beginning to consider acquiring stakes from these new owners and in a few cases, we expect private equity firms and foreign investors with deep pockets and with access to cheaper funds to acquire interests in these companies and that would start from this year and go on for a while. Some current owners of the Gencos and Discos would be forced to divest completely from those companies, or dilute their shareholding.

More Creativity by Gencos and Discos

To generate additional revenue outside the pre-set internal rate of return, Gencos and Discos would, in particular, become more creative by rendering services and support to telecommunication companies (“Telcos”) such that they could share facilities or provide some form of support or the other to these Telcos. There are circumstances where the Telcos require certain infrastructural support etc. which these Gencos and Discos could provide to the Telcos and any other party that may require same and that would provide the opportunity to generate additional revenue.

Many of the Discos have right to landed property and useful facilities and infrastructure which could be leased or licensed for additional revenue to these companies and the expectation is that they would explore this opportunity.

Metering and Customer Service would Improve

There is a huge metering gap running into tens of millions of units. Although, the cost to do this is enormous, provision is being made for this regardless. In the financial plans and budgets of almost all of the Disocs, there is provision for metering and a number of them are undertaking customer enumeration projects. With the removal of the fixed charge component of billing and the push by the regulator to cap estimated billing, there are further incentives to ensure that as many customers as possible are captured and as many of these are also metered.

The writer believes that this would be a year for the reduction of the metering gap in the country such that many consumers would be adequately metered and would pay for they use and this point would also help increase by several notches, customer care/ service quality such that where there is a damage to a meter, transformer or any facility the relevant Disco, knowing it would be losing revenue (in fact getting zero revenue from such situations due to the removal of the fixed charge component of the billing system), would immediately try to repair such damage.  There would be more efficiency and improved maintenance of facilities, equipment and infrastructure especially those that ensure revenue generation by Discos.

Government’s Continuous Funding

Funding would still be a serious challenge because of the state of the sector and the government would either get the central bank to continue the disbursement of the stabilization/ intervention funds or have a new funds or institution to cater to the funding of the sector in the short to medium term. The government may initially push back; however, in the end, government would rather the sector (and banking sector thrived) than experience major crises.

There are still substantial problems with gas supply, gas infrastructure and the grid. To ensure that things improve, there is just no way, the government would not continue to intervene until there is substantial improvement in the power sector.

The Minister of Power may Struggle

From the writer’s close interaction with the sector and understanding of how things have worked in the past and how they stand now, particularly at the ministry of power, it would appear that the minister of power is struggling and would continue to struggle unless there is a change in strategy and some personnel at the ministry of power. Due to political sensitivity and the need to tread cautiously, the writer would not go into additional details on this point.

Power Supply would not Improve Substantially      

Despite the best efforts of the current administration, it is unlikely that there would be much improvement in power supply this year. There would be contracts and arrangements to improve power generation and efforts would also be made to improve the distribution system together with efforts to have embedded power generation take-off; however, there would only be a marginal improvement because these efforts would require at least two (2) years to begin to crystalize.  The writer doubts that anything can be done to experience substantial changes immediately. Gas supply could improve marginally and the gird too but those improvements would not translate to any serious improvement in the power supply to the populace. The writer expects that there would be disputes between the national assembly and the executive on the new tariffs expected to take effect from February 1 and same may not even take effect at that time.

The conclusion is that the power sector would indeed struggle this year, with only marginal improvement.  If the country does experience a substantial improvement, then it would be nothing short of a miracle.

Ayodele Oni

For more information on the power sector, read the text, the “Nigerian Electric Power Sector: Policy. Law. Negotiation Strategy. Business by Ayodele Oni”.

AYODELE ONI, ([email protected]), a solicitor specializes in international energy (oil, gas & power) investment law and has a mini MBA in power & electricity. You can follow me on twitter @ayodelegoni.