A new and critical stage in power reform

With the commencement of the Transitional Electricity Market (TEM) in February, the electricity sector reform has entered a new and critical stage. We have entered the stage of contract trading in electricity with the clear implication that utilities will suffer financial penalties for failure to discharge their contractual obligations. It comes with the advantage that the entire market is now bankable and able to attract more investments, as rules and processes are clearer and more enforceable. The enabler of more adequate and reliable electricity is efficient and sustainable investment.

The reform has entered into advanced stage. There is no doubt that the reform has been mostly successful with the creation of a market that is significantly de-risked and effectively regulated. The liberalisation policy of the reform is also a huge success. Apart from the Nigerian Integrated Power Projects (NIPP) plants all our expected generation will come from private sector plants. Just three months ago, a private firm developer, Azure Power, secured about $900million finances to construct a 500 megawatts plant.  Zuma Energy is finalising financial processes for the construction of 1200 megawatts coal-fired plant. Many others are on readying to take off.

The landscape has changed. Private firms are in charge of generation and distribution of electricity. And with the addition of 220megawatts at Egbin Power Plant by Sahara Energy a few weeks ago liberalisation of generation is paying off. Transcorp is also adding more than 600 megawatts in Ughelli Power Plant. The strategic objective of the reform is to ensure sustainable capacity growth and reliability through the establishment of financially viable and efficient private sector electricity market. The guiding policy of the reform is to use market-based incentives to attract investments that will increase capacity and improve reliability. The results so far validate this logic.

But the problem is that there is a lead time for market stimulus to generate investment momentum. Also, until 2012 the critical market support institutions required for effective transition from a public to a private electricity market were not in place. These include a fully cost-reflective tariff and a credible off-taker. Again, the market may generate insufficient stimulus to unleash capacity growth as quickly and as much as is required. The result is that today we are trading with less than 4000 megawatts daily. This is grossly insufficient to ensure affordable tariff and generate adequate revenue for cost recovery and network investment. It stretches the regulatory framework as it struggles to balance the need for improvement in power supply and commitment to cost recovery.

Therefore the dark spot of the reform is low generation. Ordinarily, we could to generate 6,000 megawatts if we have enough gas and the NIPPs have been fully completed. (That is, discounting our weak transmission). With 6,000 megawatts we can maintain a viable contract-based electricity markets. With less than 4,000 we will stumble through. More worrisome is that low generation increases the unit cost of electricity. For industries and businesses this constitutes a major drag on productivity and competitiveness. While they pay more for grid power they continue to pay much more for off-grid power.

So, low generation of electricity is hurting industrialization and economic growth. This is the reason government is relentlessly pursuing the reform. The establishment of Nigerian Bulk Electricity Trading Company (NBET) as a creditworthy off-taker is to guarantee capacity expansion. The bulk trader has taken time to build institutional and financial capacity and has started signing power purchase agreements. This means that in the next 3-4 years we will begin to see large additions to generation capacity in the country. By then the commercialization of gas to power would have guaranteed that every power plant has enough gas to produce to full capacity.

The problem is what happens in the meantime. Gas to power is not growing fast enough to meet the requirements of the market in the short to medium time.  The new power plants are yet unconstructed. Therefore capacity in the market will remain insufficient leading to higher electricity prices and energy cost. Roll in the devaluation of the Naira and this is bad news for economic development. But something can be done to mitigate this scarcity of generation capacity

NERC’s embedded generation and independent distribution regulations may help out a lot The Embedded Generation regulation allows an independent power producer to embed power within the network of the local distribution company without going through the trouble of connecting to the transmission network. This also allows distribution companies to procure small power and dedicate it to ring-fenced customers who could pay slightly higher price for reliable and adequate electricity supply. With embedded generation and independent distribution regulations, we have a regulatory framework for micro grids that can supplement our weak national grid and, overtime, replaces the macro grid.

Since the new owners took over distribution networks NERC has continued to pressure them to take serious the challenge of procuring additional energy for their customers through the embedded generation model. Some of these discos are at the verge of awarding contracts to power producers who can generate power within 8 -18 months using various feedstock. With our feed-in tariff for renewables we see a good prospect of increasing energy supply through embedded generation before the additional mega power procured by the Bulk Trader comes to the grid.

We can provide adequate electricity for industrial and commercial sectors by further innovating on this framework. The main reason for low development of additional power for the grid is the lack of access to capital and the hitherto financial fragility of the Nigerian electricity market. Independent producers are not coming to market fast because of difficulty of raising capital. But through business cooperatives in industrial clusters, we can socialize the risks of raising capital and come close to a new model of ‘pro-consumer’.

We can encourage industrial clusters to form Special Purpose Vehicles that can procure additional power dedicated to their industrial clusters. This approach overcomes the difficulty of raising funding for project development since the off-take is guaranteed and the project promoters themselves are the beneficiaries of the embedded power plant. This innovative approach to power generation will serve two important purposes. It will ensure adequate power supply to industries and help catalyse industrial development. Industries within a cluster can form an SPV and build equity and secure financing to construct 10 megawatts plant that will sell power to the local distribution company to serve exclusively to them. This ensures that they have relatively cheaper grid power and also secure sustainable business model for the supply of electricity. With dedicated supply to industries the local distribution company have more power from the national grid to supply to residential customers.

This model keeps faith with the strategic objective of market-based approach to capacity growth. It taps into the creativity of local industry to provide financing for generation of adequate electricity for industrial clusters. NERC wants to promote this model as an answer to the acute shortage of electricity that will continue until the Bulk Trader procured power enters the market and the NIPP power plants deliver their full capacity. We want to mobilise all industrial clusters in Nigeria to generate embedded power through a sustainable market based business model that mobilizes resource quicker and more efficiently. We have to retool the old model of capacity growth through grid-based large power plants. Nigeria can champion a new model of capacity expansion through micro-grids that leverages on available local feedstock and local financing through low-risk self-help. We have tried successful this model in community development. It can succeed in electricity generation.

The success of the electricity sector reform is overshadowed by the paucity of generation capacity. If we keep faith with the policy and regulatory framework of the Transitional Electricity Market we will soon build enough momentum to generate tens of thousands of megawatts that can be supplied to electricity consumers. Then our industries and businesses would have enough energy to utilize and increase productive capacity. Till then, micro grids for industrial clusters should become a priority energy and industrial policy.

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