Oladele Adeniji and Obinna Osisiogu of Stillwaters Law Firm in Lagos look at the reforms affecting the country’s power sector
The Nigerian power sector has witnessed attempts by successive governments to attain stability. The democratic government of 1999 undertook rehabilitation of the existing power infrastructure. In 2004, the National Integrated Power Project (NIPP) was initiated to boost power supply by the launch of gas-powered stations. The National Electric Power Policy (NEPP) of 2001 resulted in the Electric Power Sector Reform (EPSRA) Act of 2005 establishing the Nigerian Electricity Regulatory Commission (NERC). The EPSRA provided the statutory basis for the privatisation of the power sector. A key step in this plan was the setup of the Power Holding Company of Nigeria (PHCN) and subsequent unbundling into 18 successor companies.
The implementation of the Roadmap for Power Sector Reform of August 2010, (the Roadmap) led to the privatisation of the power sector on November 1 2013 with the formal handover of the successor companies to private investors as six generation companies (GENCOs) and 11 distribution companies (DISCOs) and the establishment of the Transmission Company of Nigeria (TCN).
Major post privatisation challenges
The economic rationale for the privatisation targets a realisation of the objectives of the NEPP and the Roadmap, which is primarily the establishment of a long-term electricity market structure in Nigeria wherein multiple operators provide efficient services on a competitive basis for the broadest range of customers.
While the road to success seems far and the challenges seem high, Nigeria has recently recorded some improvement (albeit minimal) in the power sector. By August 2014 for example, Nigeria’s production capacity increased from 3,670MW in January to 4,237MW, a record high in recent times. This improvement is largely due to the Nigerian Gas Company’s increased gas supply to the thermal plants. Vision 20:20 for Nigeria is to generate 40000MW. The realisation of this target may be a little difficult in the face of the challenges that currently face the privatised power sector.
A primary challenge is the issue of funding. In fact, Nigerian banks provided 70% of the funds in loans and equity of the N404 billion paid for the power assets. The estimated $4.28 billion capital and rehabilitation expenditure may also be financed by Nigerian banks with support from international financial institutions. However, there are concerns from many quarters that Nigerian banks may not be capable of providing the capital and rehabilitation expenditure because of the configuration of their balance sheet. Therefore, continuous financing of the projects from their present position may not be as smooth as envisaged by the investors.
In order to combat the issue of funding, at least to a certain extent, the government controlled TCN, has been provided certain initiatives and a number of loans from various quarters to overcome the challenge of funding and to improve transmission.
Directly linked to the issue of funding is the insufficient supply of gas to power the power generating systems. DISCOs have decried insufficient capacity generation by the GENCOs. Gas supply challenges are currently being addressed by considered moves by the government to divert about 10-15% of the spot market of the Nigeria Liquefied Natural Gas (NLNG) gas to the plants operated by the GENCOs. The Nigerian Gas Master Plan (NGMP) also establishes a Strategic Gas Aggregator (SGA) to manage gas demand and supply in the Strategic Domestic Sector (SDS) wherein Power has been categorised. The National Integrated Power Project (NIPP) is a key module in the government’s plan to boost power generation. The NERC has also made access to gas a mandatory requirement before licensing Independent Power Projects (IPPs).
The Federal Government, also in August 2014, approved a loan of $1 billion by the NDPHC to boost the supply of gas in the country.
Pricing and end user tariffs
The NERC established by the EPRSA is an independent regulatory agency mandated to undertake the monitoring and regulation of the power sector, the issuance of licenses to the industry players and the safeguarding of compliance with market rules and operating guidelines. It was established to develop and implement regulations, which encourage profitable pricing and effective competition among market players and an investor-friendly market. Consequently, the NERC regularly sets the industry pricing index by its Multi-Year Tariff Order (MYTO).
The MYTO-2 Financial Model 2012, was birthed as a result of an early review of its 2008 predecessor following complaints about high tariffs by both domestic and commercial consumers and after consultations with stakeholders and the public. It comprises three new Tariff Orders on distribution, transmission and generation for the period of June 1 2012 to May 31 2017. In addition to a major review every five years, it introduced a bi-annual minor review to provide adaptability to variables like, exchange rates, capital and operating expenditure requirements etc. Electricity prices are calculated based on revenue requirements of the whole country and tariffs are either fixed monthly charge or energy charge (consumption based). It created about 14 billing classes and categories of customers including, residential, commercial and industrial.
The government also provided a tariff subsidy in MYTO2 on distribution, to aid implementation.
The Nigerian power sector reform has created more opportunities for investors attributable to the increasing demand for sufficient supply of meters, transformers, cables, transmission towers and other generation, transmission and distribution facilities. Several areas still need to be electrified in line with the government’s Vision 2020. For instance, the buyer of the Port Harcourt Disco noted that despite coverage of four states with a population of 14 million, only 530,000 consumers are presently connected to the national grid.
Whereas there is marked improvement in power stability for the consumers, there still remains large room for improvement in the realisation of the full promises of the Roadmap. The consumers now watch with eager and earnest anticipation of the transition from darkness to light as the Federal Government has put in place the enabling structure and regulatory wheels thereby passing the buck to private investors.
Stillwaters Law Firm
About the author
Oladele has a wealth of experience in corporate and commercial law practice. He has represented local and international clients in a wide range of complex matters including energy and natural resources transactions, cross-border transactions, M&A, project finance and capital markets. He had previously worked in a top Nigerian law firm where he handled various complex commercial litigation and arbitration. He currently heads the commercial practice group of the firm.
Stillwaters Law Firm
About the author
Obinna is an associate with the firm and has been in the active dispute resolution and corporate practice since his call to the Nigerian Bar.
Osisiogu began his career as a state counsel in the Ministry of Justice before moving to Stillwaters Law Firm. He specialises in corporate transactions relating to the energy and natural resources. He also has wide experience in dispute resolution including litigation and arbitration. He routinely represents and advises local and international clients on diverse areas of law in high profile commercial transactions and civil disputes.