Elecoblogs

Did you miss the first three parts of this series? Find them here, here, and here.

That steady state market was achieved on 1st February 2015 when the Transitional State Electricity Market was declared by NERC. The same NERC stopped it on 24th March. Having barely got to that ideal state where we could say we had a true market, the market has fallen back and is frozen in that retrograde state. A regulator that issues three different tariff orders in 12 months without a material or devastating change in economic or technical conditions is not one that inspires confidence. It cannot lay claim to being credible. The pain and disappointment is very hard to describe. Nevertheless, as far as tariffs are concerned, Discos now have a very generous tariff that appears to exceed “cost-reflective”. The only fly in the ointment is a Federal High Court order restraining NERC and Discos from increasing tariffs. There is also news of a House of Representatives resolution that tariffs should not be increased. These are extra-regulatory interventions by third party stakeholders that raise a whole new dimension of uncertainty. 

Does it mean that every time a tariff process is completed (these are long-running processes), a High Court Judge or the National Assembly can issue a stop-work order that effectively increases the losses being incurred by particular parties or prevents necessary capital expenditure from being undertaken until these interveners are satisfied (which could be whenever)? Both the legislature and the Judiciary look set to introduce serious but perhaps unintended dire consequences if the situation is not well managed. Surely, there must be a way to enable aggrieved customers have their day in court while also permitting the legitimate business of the electricity sector to proceed.  

Today is the effective date for these new tariffs established by MYTO-2.3 to kick-in. I can’t say more on this now because that may amount to contempt of court. Suffice to say as a general proposition, however, that I am yet to see a court of law in a liberal economy (even one like ours) that could order the laws of physics, economics and finance to stop working naturally. That would be the definition of futility. So let’s wait and see if tariffs will be changed and, if they are, what the judicial consequences would be. Much wisdom is called for here. The situation seems to have reached an inflection point with major players in all 3 arms of Government – Executive, Legislature and Judiciary – seemingly poised to make far-reaching regulatory interventions; with what seems to be inadequate information and understanding of the Nigerian energy (gas-to-power) market. There is unbelievably much to do that has not started. Yet until this fundamental tariff matter is resolved, very little else will get done. 

There is cause for grave concern. The biggest challenges in the Nigerian electricity industry today are poor communications, uncertain policy guidance, a regulator with ever-dwindling credibility that needs to be given capable leadership, deep distrust of the entire market by customers and a lack of clarity by most stakeholders about how the energy space from gas supply through generation, transmission and distribution to the customer is a closely interconnected matrix that calls for understanding and patience. We do not seem to realise the implications of the stark truth that what we have is a market that trades an average of less than 3800MW daily and collects less than 60% of the required revenue. In a country the size, population and ambition of Nigeria this is effectively nothing. 

We have missed the bus of energy market growth and development each time it has come round to Nigeria since 1960. We are blissfully unaware that what we really need to serve us STILL DOES NOT exist and has to be built almost from scratch for decades into the future in order to catch up with our massive energy deficit. We do not appreciate that we do not possess the financing and management capacity internally to undertake this physical upbuilding. It cannot be done without significant financing and project/engineering management capacity, two vital ingredients Nigeria does not have. We stumble on, swearing by that dubious mantra: “we have a huge, untapped market.” 

If we had the 150,000MW-plus market, that we would have now if we had enjoyed the benefit of focused, competent and honest leadership, if we had made sensible plans and used our resources in the right way, maybe we could afford the luxury of freezing our market in time for as long as we have, holding back the further development of the market and by implication the country itself. This cannot continue without grave harm to people and country. The need for upbuilding itself means a nuanced interplay between time, finance, law, regulation, economics, engineering, common sense and above all, honesty and good faith. Take one of these components out and we all have a serious problem, as indeed we have had for quite a while. 

In Part 2 of “Explanations”, the importance of NERC acting as a proxy for competition was noted. We continue to look at the sequence of events that led to the declaration of force majeure (FM) by Discos in April 2015. Ready? Let’s continue… 

2. This work started in February 2014 and ended with the implementation of two regulatory actions and the completion of a financial transaction. First, MYTO-2.1 came into effect by order of NERC on 1st January 2015. Second, the Transitional Electricity Market, which had been 4 years in preparation, came into effect on 1st February 2015. Third, the =N=213bn Central Bank of Nigeria-Nigerian Electricity Market Stabilisation Facility (CBN-NEMSF) commenced disbursement in February 2015 to eligible licensees as they fulfilled conditions precedent to drawdown. Over 40 electricity market participants, commercial banks, sector regulators and Federal Government Ministries were involved in this process. They all agreed in writing that MYTO-2.1, implemented together with the =N=213bn CBN-NEMSF loan, would be a feasible basis for putting the entire market on a sound financial footing that incentivised continuous capacity expansion right across the 4 sectors of the gas-to-power spectrum. 

3. By its order made on 24th March 2015, NERC went back on MYTO-2.1 and reduced the tariffs that had been introduced on 1st January 2015. Unusually, beyond a bland press release, NERC did not provide a reasoned, technical justification for this decision. Let us call this 24th March Order MYTO-2.2. A number of things immediately followed. First, the fledgling Transition Stage Electricity Market (TEM) that commenced on 1st February 2015 stopped, even before it had an opportunity to thrive. Second, Discos, not unexpectedly, reacted to this reduction in tariffs by declaring force majeure, claiming that the tariffs had gone back to being non-cost-reflective, in some cases allegedly to levels lower than even before 1st January 2015. They asserted that they would be unable to perform their obligations under their various privatisation performance contracts signed with the Bureau of Public Enterprises (BPE). Third, the CBN stopped the disbursement of the CBN-NEMSF loan. 

4. The response from NERC, after initial resistance, was to accept that there was something wrong with MYTO-2.2. The Commission then embarked on another long review process, which ended, not unsurprisingly, with issuing a third Tariff Order in the same year (let's call this one MYTO-2.3) on 21st December 2015, stated to be coming into effect on 1st February 2016. One would have thought that NERC would simply have reverted to MYTO-2.1. Anyway, this latest tariff adjustment is to take effect on 1st February but considering recent legislative and judicial interventions in the matter (both have said there should be no tariff increase), we will see whether MYTO-2.3 will take effect on that day. Suffice to say, however, that until tariffs once more become cost-reflective, a credible, effective TEM Market will not happen; and, of course, until these two happen CBN would be ill-advised to continue disbursing the CBN-NEMSF loans. 

These are the facts around the declaration of FM by Discos last year. All said, after over 8 years of very hard work trying to build an electricity market guided by the market participants contracts guided by rules made by a market regulator, the same regulator ended up taking an action that effectively halted all its own previous work. Very few better (or is it worse?) cases of “shooting yourself in the foot” can be found. The seeming intention of the forthcoming MYTO-2.3 is to undo the harm NERC inflicted on itself and the electricity market, yet it contains two seemingly contrasting items. One is the ostensible return of the costs/items removed in February 2015, while the other is the removal of the fixed charge. Looking at various tariff models, it seems to me that the fixed charge was simply taken out as a separately identified component of the total tariff AND INCLUDED in the energy charge component. In anybody’s book that is not a “removal” but a merger or consolidation of tariff components. Hopefully, each Disco will publish not just a new tariff table but produce a “before and after” comparison to show that the Fixed Charge has indeed been removed. 

In any event, MYTO-2.3 is significantly higher than MYTO-2.1 (that was described in March 2015 as “too high”). Effectively, the Discos' return on investment (ROI) seems to have been significantly increased. The nagging question for me is this: if we have come back full circle to a tariff even higher than MYTO-2.1, what was the point of reducing the tariff in February 2015? What was the point of all the back and forth that the entire industry embarked upon from 24th March to 21st December 2015? What losses have been suffered during this period and, if there are any, who will pay for them? What strategy has NERC been pursuing since 24th March 2015? How do we recover the lost time, effort, money and investments that could have been made into electricity but were not because of the uncertainty introduced by NERC with its decision? Nobody can cogently answer, least of all NERC. 

The practical effect of NERC’s MYTO-2.2 Order of 24th March 2015 was completely glacial. Everything in the electricity market has been frozen or retarded since that day. The Commission had been working towards regulating a fully reformed electricity market since it commenced operations in 2006. Various regulations had been drafted and effected, all staff had attended training courses and regulators in other countries (especially in the USA) had been understudied. Regulatory capacity was being gradually built up. From June 2010 when sector reforms re-started after a 3-year break, NERC worked hard to support the privatisation programme and prepare all stakeholders for the inauguration of a genuine rules-based electricity market. Market participants and regulators, went through an active, maturing process that would ultimately bring credibility and create a steady state market with which all stakeholders would be comfortable. Let’s stop here for now. 

So, consistent underinvestment in electricity these past 3 to 4 decades combines with massive population/urban growth to create a development-retarded economy characterised by blackouts, a secondary generator-driven electricity market at least 10x larger than the average 3600MW-3800MW capacity of public supply delivered to customers by Discos. Let’s not forget the money gone into this secondary market that should have been reinvested in more productive activity or saved for our collective future. Who can measure the avoided investment, the industries shut down, the businesses, the huge pool of entrepreneurial talent stultified by our stunted electricity market? Above all, who knows the depth of nationwide dissatisfaction, anger and frustration this situation creates. 

Due to those huge entry costs mentioned in the previous post, it is economically, technically and environmentally very difficult to have competition across the electricity industry. We would have had it in the generation sector but present market conditions make even that impossible until we have generation adequacy (don’t ask me when that will happen). In transmission and distribution, I don’t see competition ever happening in the conventional sense. However, developments in renewable energy generation and energy storage technology will probably create massive disruption to the business model that has driven the sector these past 80 years since engineers in England started experimenting with national grid operations. 

So, combined with the acute shortages across all four sectors of the energy value chain (fuel supply, generation, transmission and distribution), it is difficult to say we have a willing buyer/willing seller energy market. There are only sellers and buyers who, in a strange but perhaps typically Nigerian paradox, are all both hapless and powerful at the same time. The least powerful of these players are customers, you and I at the very end of the food chain. Customers’ only real protection, therefore, is well-defined, forward-looking policy supported by regulation from NERC that genuinely acts as a proxy for competition. Here, you see the importance of having a competent, knowledgeable and hard-to-corrupt regulator that takes cognisance of the various interests with a stake in the electricity market 

These interests are many and varied, including Government and the various customer classes. Customers don’t behave the same way. Manufacturers, for example, generally don’t care about other customers and want every available bit of energy for themselves. “Other customers” can be further divided into urban poor, rural poor, farmers and rich people, middle class, Gov. MDAs, special interests such as churches and schools, operators and various NGOs that claim to represent all manner of other interests. In varying degrees, all customers want to pay as little as possible or even nothing for energy consumed. 

NERC is a creature of statute with the full spectrum of economic and technical regulatory powers conferred on it by all sorts of powers conferred on it. In executing its regulatory function, however, NERC’s only worthwhile and most precious, but also its most intangible, asset is its credibility. When it speaks and everyone listens; when operators seek its understanding and fair decision-making; when customers readily resort to it for the vindication of their rights; when the Government seeks its opinion even in policy-making; when its decisions are unquestioned because they are the outcome of a thoughtful, consultative, evidence-based process; these things happen not merely because there is a law somewhere, but much more because the regulator is credible and respected. 

The Nigerian electricity regulator, NERC, is bound to always act in utmost good faith recognising these various interests and constantly seeking to get these monopoly Discos to operate as efficiently as possible in all circumstances. So, in this framework, NERC’s decision as to what a “prudent cost” under EPSRA would be for any operator/licensee is a vital one. With the above in mind, we may now look at the sequence of events that attended the declaration of FM by Discos in April 2015. 

1. On 1st January 2015, NERC brought in a new Tariff Order, which supplanted the then-extant MYTO-2. Let’s call this new order MYTO (Multi-Year Tariff Order) 2.1. This new tariff model agreed to by the entire market. It followed investigations and preparatory work by all operators, customer consultations across the country, investigation, verification and analysis by NERC regulatory staff drawn from across all 7 Divisions of the Commission, consultation with gas suppliers, Ministry of Water Resources (the “owner” of water used by Kainji/Jebba and Shiroro hydroelectric companies), BPE (representing the FG, holder of 40% equity in Discos). As this process was underway, the CBN and the various “deposit money banks”, at NERC’s instigation, came together to arrange a =N=213bn corporate finance loan to the entire Market in order to clear the accumulated debt that had accrued to players in each of the 4 sectors of gas-to-power market and which had, since the inception of the market in 2007, never been paid in full. 

Someone asked me recently to explain the implications of the allegation that electricity distribution companies had declared “force majeure” (inability to continue performing their contractual obligations). He also wanted to understand the implications of removing the “fixed charge” from the electricity tariff. First, this force majeure (FM) story is actually almost year old. 5 or 6 Discos declared it in March 2015, and then they “sort of” withdrew it. I'm not aware that any Disco has declared FM again since then. Before going into the sequence of events around the declaration of FM in 2015, let me explain something about a phrase that we have heard and will continue to hear for a while to come. I’m talking about "cost-reflective tariffs". 

Section 76(2) of the Electric Power Sector Reform Act (EPSRA), 2005 (please look for and read - don't take my word for it) requires NERC to establish a tariff methodology that enables licensees to recover the "prudent cost" of their daily operations and earn a "reasonable return on investment" (ROI). For each operator in the 3 sectors of the Electricity Industry - generation, transmission and distribution - "prudent cost" must be discovered by NERC, put into the tariff and a reasonable ROI added (in this case 13% return, if I remember correctly). The result is the electricity tariff. There are different tariffs for each tariff class. Look at it the same way you see passengers on an interstate bus or a plane from Kano to Lagos. People pay differently according to the level of comfort and care they receive while travelling. Similarly, since most Discos deliver service of different kinds and levels of complexity/care to customers, they cannot have the same set of costs. 

The revenues generated by these tariffs are collected by Discos (the entity that interacts daily with the customer) and distributed upstream to the various stakeholders entitled to receive a share of those revenues. These are Gencos, TCN, NERC and the Bulk Trader. Therefore, obviously, the “right tariff” is the one that gives each stakeholder no more or less than its actual due, that is actual prudent costs plus ROI. No more, no less (I talked about high/low and right/wrong tariffs in one of my first posts in 2013 and it may be worth giving it a look, here). This means, ultimately, that if a Disco does not collect the revenue for energy delivered to customers, these stakeholders will suffer. Clearly, Discos are a very important element in the electricity value chain. They collect energy from Gencos through TCN and distribute to customers; then they collect cash from customers and distribute that upstream to those who gave them the energy in the first place. 

The bulk of the tariff (about 45%) goes to Gencos (to cover their capital and operating (mostly fuel supply/gas) costs, 1.5% to NERC as the cost of regulatory activity across the Industry undertaken by the Commission and the various Industry panels and working groups, with a much smaller fraction to NBET/Bulk Trader. Another fraction goes to TCN to cover the cost of the 3 different services it provides to other operators - system operation, market operations and transmission grid construction and maintenance. The balance (about 25%) is retained by the Disco to cover its own prudent costs and ROI. 

This continues my thoughts on the huge opportunity presented to Africa by the new President of the African Development Bank, Dr. Akinwunmi Adesina. You will find the first post here.

The AfDB undoubtedly has the capacity to push its African member countries to embark on the policy dialogues that lead to clarity. The next stage will be to bring policy-driven reform and Africa’s myriad opportunities together with finance, project design and management capacity, human resources and the harsh reality of the marketplace. Very few individual African countries have bitten this bullet and the rest have to join the train. Getting African leaders of different temperaments and priorities to join this single platform and drive their countries along its path may well turn out to be, apart from establishing the AU itself, our grandest and most important diplomatic endeavour ever.

Africa’s biggest challenge in squaring the electricity circle is a three-sided financial-technical-demographic riddle. Starting from our very low capacity base, how do we rapidly upgrade our energy networks to that level that catalyses high rate socio-economic growth? And, having attained that level (probably in decades to come), how do we ensure that further capacity expansions meet population growth and its accompanying demand?

To be sure, given the urban focus of existing electricity networks as against the concentration of our unserved populations in rural areas, we must evolve new policy precepts, project development and financing frameworks that address the universal access challenge. We must encourage and take advantage of the science and technology behind renewable energy systems and electricity storage. These offer exciting prospect of rapidly building out distribution networks and bypassing the need for expensive transmission lines.

Our education systems must improve to produce and train the army of engineers, project managers, economists, lawyers, accountants and research scientists required to design, finance, build and operate and maintain these new African electricity networks. The bottom line is that it will be the work of many lifetimes. Needless to say, however, we in Africa have loitered, stagnated and frittered away countless opportunities for so long that it just has to be finally time that we woke up to our duty.

Whatever targets are ultimately adopted, they will NOT BE ACHIEVED unless key regional leaders like Nigeria, South Africa, Kenya, Congo, Egypt, Morocco and Ethiopia get their act together. In the case of West Africa and ECOWAS, the reality is that 50% of the people to be addressed by any targets live in Nigeria. Our country is both the engine room and the soft underbelly of West Africa; and to a considerable extent, of Africa too. Our national leaders appear never to have never really grasped this existential fact and factored it into our national strategy, our policy, and our plans/programmes. The consequences are plain for all to see.

It's time we did the right things (data-vision-strategy-policy-plans-programmes) in our energy (oil, gas, electricity) sector. Nigeria can and should refine products, process/transport gas and generate/transport electricity for West Africa and parts of Central Africa. Regional leaders in other parts of Africa should do the same in their economic areas. Until each get the hang of doing it for ourselves, we cannot do it for Africa. If we cannot do it for Africa, others will come from outside Africa to do it for us.

The new President of the African Development Bank (AfDB), Nigeria’s Dr. Akinwunmi Adesina recently stated his belief that Africa has no reason not to have universal energy access by 2025. In furtherance of that, he has announced an initiative with specific targets – to spend $55bn by 2025 to deliver 90GW (90,000MW) across Africa. As yet another round commences in the annual dialogues between the Nigerian Economic Summit Group (NESG) and the Federal Government, it is appropriate to focus on what, apart from leadership, is perhaps Africa’s single biggest challenge – access to clean, affordable, constant, quality electricity supply.

The need is even more so as his statement comes just as the UN General Assembly signed up to achieving its Global Goals by 2030 and as the next round of climate change talks are about to start in Paris. No African leader at any level has ever made such a bold and forward-looking statement for the continent. First, Adesina specifically mandated UNIVERSAL ACCESS TO ELECTRICITY as an important continental objective. Second, he dared to publicly mention financing requirements for a single sector that appear to be truly daunting. It is very exciting that someone so important in Africa finally has the gumption to publicly start driving Africa to focus on the single biggest continental issue of the day.

Yet, there are issues. $55bn will not deliver universal access to the 1bn-plus people Africa will have by 2025. It will barely tickle the problem. The 90-GW capacity target is not high enough, the human resources are not there to deliver even that and the time to deliver even $55bn worth of capacity is probably too short. Assuming we use the cheapest, most efficient technology currently available –combined-cycle gas thermal, at today’s costs $55bn will deliver barely 15GW across the full fuel supply generation-transmission-distribution value chain. Policy makers tend to ignore this and focus on building big, shiny generating plants, not realising that these are just one-quarter of the equation.

However, this takes nothing away from the great importance of what, for want of a better name, I will call the Adesina Targets. Even if it is not far-reaching enough, it is a bold, timely and much-needed statement of intent. This puts good pressure on leaders of the continent to focus sharply on what must be done – data gathering to establish a baseline, policy-making to establish a common vision and plans/programmes that will turn vision and targets into reality. The important thing is that someone with the capacity and the desire to drive the attainment of whatever goals are set has set the challenge for Africa.

In August 2010, President Goodluck Jonathan nominated seven individuals as Commissioners in the Nigerian Electricity Regulatory Commission (NERC). I was one of them. Following nomination hearings and Senate approval, President Jonathan inaugurated the new NERC on 22nd December 2010 and I assumed office as Commissioner, Market Competition and Rates in early January 2011. In the 56 months since then, NERC undertook and completed a number of major projects. I participated significantly in every one of them, and even had the great privilege of leading some. They include: a. Re-setting electricity tariffs in May 2012;

b. Support to NCP/BPE’s privatisation of Gencos and Discos in August 2013;

c. Establishing an open and transparent framework for the competitive procurement of wholesale electricity (2013);

d. Developing Interim Market Rules and successfully transiting the Industry through a turbulent Interim Rules Period from 1st November 2013 to 31st December 2014;

e. Developing a new, cost-reflective tariff framework for the Industry and its implementation on 1st January 2015;

f. Preparing the entire electricity market between March 2011 and January 2015 for its evolution/progression into the Transitional Stage Electricity Market (TEM);

g. The commencement of TEM on 1st February 2015;

h. The development/implementation of the CBN-NESI “Nigerian Electricity Market Stabilisation (Loan) Facility” between August 2014 and March 2015; and

i. The establishment of an Independent System Operator for the electricity industry.

These 9 projects (the last 2 still ongoing) are significant. Each presented all the technical (economics, engineering, law, accounting, regulation) and political challenges confronting any work that is reforming or pioneering in the infrastructure space. Their purpose, taken together, was to develop an electricity market that would release the huge creative spirit that Nigeria is blessed with. Though outcomes ranged from elating achievement to stomach-wrenching disappointment, that a bunch of Nigerians could conceive, plan and execute these audacious projects, to my mind, is itself achievement enough.

Nigeria’s future as a viable corporate entity depends on developing and sustaining a massive energy (gas and electricity) market. Yes, renewables will become important, but not anytime soon. Instead, Nigeria’s gas-to-electricity market, where we have such a great advantage, must be developed. It must be commercially viable, technically coherent and guided by regulation grounded in law, reason, dialogue and certainty. This principle applies even more to the ECOWAS region – but only if Nigeria can get its act together.

Africa’s population will increase to about 500m by 2050, with Nigeria hosting approx. 220m of that number. Assuming a bare bones ratio of 1000MW to 1m people is needed for real socio-economic development, ECOWAS countries must deliver 500,000MW daily by 2050. Today, however, these countries deliver barely 10,000MW daily to almost 250m citizens. The rest live in perennial darkness or supply their electricity themselves.

Somehow, ECOWAS needs to find 490,000MW (and ancillary fuel supply, transmission, distribution and marketing/customer care infrastructure) between now and 2050. That’s easily $25 trillion, before counting human resources required. We must find the means to do the job or else everything from Nouakchott to Douala will simply become Mad Max country. We will prevent this certainty only if ECOWAS countries bring together economics, law, regulation, engineering, finance and good faith with the huge opportunity before them.

Contributing my utmost to that bringing together in Nigeria has been the sole purpose of my work in NERC since January 2011. There are few privileges on earth for a human being greater than being bestowed with tenure in public service. Of the 5 I have been privileged to hold since 2001, Attorney-General of Cross River State in Donald Duke’s second term was the most pleasant and happiest. My time in NERC, however, has been the most momentous and enriching. While it was not easy, and there was considerable pain and disappointment, thankfully there was also much fulfillment.

A recurring theme of almost every one of my posts is the concept of an electricity value chain. Implicit in this concept is the truism that we will not surmount the electricity challenge by focusing on just one or two, or even three, out of the four primary parts. In the previous post about the first picture, we breezed through a series of costs from 4 sectors before we can contemplate building an additional 1500MW, and then noted the huge project management challenge this presents. 

For the political leader, therefore, this means that it is imperative to identify, understand and line up the various tasks that are within his peculiar competence to deal with; and do so in order of priority. In short, prioritization is essential. Until this is done, there is no commerciality in the market, investors will go cold and projects will not happen. 

So, you have the picture above. The concentric circles in the slide, the arrow and the short explanatory notes pretty much tell the story of Nigeria’s reforming electricity supply industry, where it needs to go and what needs to happen to get there. Much better than a piece of boring technical prose ever could. So, today, let’s read the picture. 

 An Inexorably Interlinked Industry 

Electricity is the output of a manufacturing process that proceeds from fuel supply and transport to generation to transmission through to distribution, before the customer gets supplied with energy. The failure or suboptimal behaviour of any player in this value chain leads inevitably to its inadequacy or even collapse. Today, for example, we all know that whatever the number of generating plants we commission, and their capacity, if they do not have enough gas supply, we might as well not have built the power plants at all. Thus, the metaphor of “the weakest link” in the slide above. 

Concentric Circles of Constraint 

The urgent message conveyed by the concentric circles is many-sided. One side says: “The challenges are diverse and there is no single PR-driven silver bullet”. Another side says: “Each of these challenges must be surmounted if we are to place the electricity industry or market on a firm path to steady growth and sophistication”. Yet another side is the subject of the previous post: “Stop misleading people with politically-driven statements about generation capacity that does not translate to more or better-quality supply to homes, schools, offices and industries.” 

So, the 6 concentric circles each represent a major challenge. Each challenge restricts or constrains generation capacity that can be delivered to customers to the number shown in brackets it. Starting with pipeline vandalisation, as each constraint is removed, more generation capacity comes to the market and is delivered to customers. A live example we have now is the fact that incidents of vandalisation have decreased drastically. Indeed, the fall in crude oil prices and the massive glut in the market have completely removed any incentives to risk life and liberty stealing the stuff. 

The immediate evidence of this “constraint” going away is the fact that more associated gas is being delivered to Gencos and we are back to the happier days at the beginning of the year when average daily generation was between 3800 MW and 4000MW. For the link between steady crude oil production and gas supply to Gencos, please read my recent post, “Emperor Natural Gas” here. Clearly, there is a strong case for continued lower oil prices as the single most important factor in curtailing in pipeline vandalisation. 

Perhaps we will have that debate sometime soon. In any event, as each constraint is surpassed, more electricity is available to customers. The very important point to note, however, is that once we get past vandalisation, removing all the other constraints requires significant investment. This is a direct function of policy and regulatory certainty, two things that are within the peculiar province of government. Moving from 4,000MW today to 8,000MW requires removing 5 different levels of constraint. 

In turn, this means coordination between clear and conducive policy and sensible, knowledgeable and forward-looking regulation. Policy and regulation combine with finance and law, held together by high-quality programme management. Sadly, these are precisely what we have been unable to apply with any degree of consistency, vision and patriotism, since the Electric Power Sector Reform Act, 2005 was passed. As, Part 1, the previous post shows, even getting to available capacity of 6,500MW daily by 2020 is a tall order by itself. However, it can be done and soon we will explore how. 

8000MW is the Realistic Ceiling Today

You might ask where the figure 8,000MW comes from. The answer is straightforward. 8000MW is the most that can be generated by all our power plants, assuming all the other 5 constraints are removed, industrial users of are deprived of their contracted natural gas and it is all delivered to Gencos supplied by the 1bcf/day (1 billion standard cubic feet per day) Escravos-Lagos Pipeline System (ELPS). This will not happen, of course.

This also assumes that the ELPS-2 pipeline, now being built beside the ELPS, is in service. For now, ELPS-2 is close to completion, but it is only a pipeline. Critically, the processing capacity to deliver gas into the pipeline system, typically of Nigeria, HAS NOT yet been built. So, the pipeline may be there but the gas to put into it is not yet available. Similarly, NNPC has, for years, talked about building another 1bcf/d pipeline from the Eastern Delta through Ajaokuta to Kaduna and Kano – the eastern counterpart to the ELPS. We await this one. 

Essentially, if all these other constraints were removed, gas transport (pipeline) capacity will continue to constrain supply for a long time to come and Nigeria will remain at best (with ELPS and ELPS-2) an 8000MW market. This will continue unless a true domestic gas supply market can be created with the appropriate commercial, legal, technical and regulatory incentives that would encourage the construction of gas processing and pipeline capacity on a massive scale. These incentives are still missing. 

In April, a group of Nigerians put forward a plan titled “The Energy Blueprint: Action Plan for 2015 – 2017” that delivered the same message – about getting maximum value out of the energy sector, especially gas-to-power – in 3 documents written at different levels of brevity, detail and complexity. 

One of those documents was a PowerPoint presentation. In this and the next blog post, I will discuss two slides from that presentation that represent two foundational themes of the plan. The first theme is about honesty. For decades, we have lived, and still live, all sorts of lies about our electricity sector, perhaps the most tragic of them are the ones about “generation capacity”. Lies told to us through every Minister of Power from Chief Bola Ige of blessed memory to Professor Chinedu Nebo who just left. 

Well-dressed, clear-eyed, primed by civil servants in the Ministry of Power, they each walk into the numbers trap, solemnly intoning phantom megawatts: “20,000MW by 2020”, “5,000MW by December 2014”, “40,000MW by 2030”. These civil servants know they are peddling blatant untruths. Yet they continue to make Ministers lie. 

Thus, the first slide, shown below, on the need for plain, simple honesty, brutally so if necessary, about what we need to do, how we need to do it and how quickly it can be done. 

The slide shows 4 growth scenarios, two of which are based on real-life country experiences from India (7% p.a. growth) and Vietnam and China (14% p.a.). The other two were set by Nigerian Ministers and civil servants to take us to Electricity Eldorado. These are for 20% p.a. growth, taking us to 10GW (10,000MW) available generation capacity by 2020; and 40% p.a. growth, taking us to 20 GW by 2020. Note carefully the underlying assumption for these growth projections – that by December 2015, the transmission grid will be delivering 5,000MW to all 11 Discos, We are not yet at this baseline, and there is no guarantee that we will do so by December 2015; but let’s assume anyway. 

Now, of the 4 scenarios, which is the most realistic? Let’s not even discuss the 20% or 40% scenarios because those will not happen. We will see why when we discuss the two other, more realistic, scenarios. These are for 7% and 14% growth. 7% of 5000MW is 350MW. This means 100mmscf/day of new gas processing capacity costing approx. $70m (assuming that the pipeline capacity exists already). Generation plant: approx. $650m, including a transmission switchyard. Other transmission investment, assuming a nearby 330kV transmission substation and favourable environmental/geophysical conditions: approx. $35m. Distribution investments to absorb this new capacity: approx. $70m. 

So, the estimated total investment required to build a 350MW IPP and deliver its capacity to customers is about $825m. Compounding and escalating by 7% p.a., we need in the order of $3.5bn or =N=700bn to build and deliver the additional 1500MW that gets us by 2020 to 6,500MW at “India-style” growth rates. To achieve “Chinese-style” growth, simply double the figure. As of today, does any Nigerian investment banker have =N=7bn for the Nigerian electricity industry? =N=70bn? Speak less of the =N=700bn actually needed to make an “Indian Leap”? Or the =N=1.4trn required for a “Chinese Leap” by 2020? The answer is “no”. Whether Indian or Chinese, a pointed “no”! 

The above is the investment banker’s view. From the manager’s chair, what do we see? A project manager’s nightmare, that’s what. Budgets, timelines, design, procurement and construction schedules must be developed for the various projects that must be started and completed to deliver these new capacities. They are required in gas production, processing and transport, in electricity generation, transmission and distribution. Where are the trained and experienced project managers to develop and synchronise these projects so that they do not become like the NIPP programme (which ran for so long before commissioning that the cost and time overruns can never ever be recouped through tariffs)? We just don’t have enough. 

So, the NESI is not yet in the ballpark. Not with the commercial, political, regulatory and management uncertainties we have needlessly created in the sector in the past few months. To return to the theme, policy-makers, regulators and operators need honesty amongst each other; and all of them need to be scrupulously honest with consumers and with political leaders. The big question: if this is the kind of growth we want, are we willing to pay for it? For as long as our preference is to have “low tariffs”, the answer will be another “no”. 

Lack of this honesty is a major reason why we are where we are today. This takes us to the last 2 lines in this “Honesty Slide”. If we are dishonest, we will never have realistic goals. If we do not have realistic goals, we will never have real accountability. Instead, we will have unrealistic targets that will be agreed to without thought or reflection, leaving nobody accountable and everybody behaving in an ill-disciplined manner. When this happens, the market, the only arena for realising the urgent need for growth, will simply disappear. 

Throughout April and May, Nigeria was laid prostrate by an unfortunate strike action by workers of the Nigerian Petroleum Development Company (NPDC) Limited agitating against certain corporate policy decisions. The snowball effect of that strike is an object lesson for every Nigerian, high, low, and those in the middle, about how factors outside the electricity sector, particularly fuel supply, create unintended consequences that cause significant harm to the sector, the country and ultimately its neighbours. It should also be a major case study in how national security, in its true sense, is also affected by things that do not involve firing a single bullet at anyone, a theme that I explored in my last blog post. This blog post, and the next, will be about the two types of fuel – natural gas and water – on which our electricity sector depends.

Back to the strike action. How did the electricity sector come to suffer so much from a strike by crude oil workers? What is the connection between crude oil and electricity? Well, it was the classic chain reaction. NPDC operates the Trans-Forcados Pipeline (TFP), the principal crude oil pipeline in the Western Delta. TFP gathers collects crude oil from various fields in Oil Mining Lease acreages in the area. It snakes its way from Edo through Delta State to the Forcados crude oil export terminal, from whence it leaves the country to buyers of our crude oil. The strike by NPDC workers shut down TFP. Once that happened, Associated Gas (AG – natural gas produced, as its name suggests, in association with crude oil) also got shut down.

With that, the various gas processing plants at Oredo, Oben and Utorogu, which produce natural gas that flows directly to the ten Western Delta Gencos, no longer had feedstock gas to process. They too shut down, thus making very glaring the little-noticed fact that Nigeria does not yet produce Non-Associated Gas (NAG). All identified NAG wells have simply been capped because since crude oil was discovered at Oloibiri in 1958, it has been the policy of successive governments to do nothing about gas production. This is quite unlike countries such as Russia and Qatar which produce massive volumes of gas from pure gas fields, and earn huge income from producing and utilizing gas in things like fertilizer, petrochemicals and power generation.

So, in the chain reaction that started with m the strike, these 10 Gencos – Egbin (Lagos), Olorunsogo 1 and 2 (Ogun), Omotosho 1 and 2 (Ondo), Ihovbor (Edo), Sapele 1 and 2 (Delta), Ughelli (Delta) and Geregu 1 and 2 (Kogi) – with a total generation capability of approx. 3,800MW also were shut down because they had no fuel. Things got so bad that after 8 weeks of this very well-organised trade union attack, the striking NPDC workers had succeeded in extending the disappearance of gas to all Gencos except the 2 IOC-controlled IPPs at Afam VI (Rivers) and Okpai (Delta). These 2 Gencos, along with the 3 hydroelectric Gencos at Kainji, Jebba and Shiroro (all in Niger for almost 2 weeks, were all that sustained Nigeria, delivering between 900 and 1100MW on average daily. Not since the mid-70s (when we had a population of barely 70m and 1 hydro plus 3 thermal plants) have we seen such generation numbers.

The amazing thing about the strike, however, is that as devastating as it was nothing was done to prevent it and once it started it was allowed to go on and on, even though the strike, insofar as Nigerian law itself is concerned, was totally illegal and had no basis in law for being organised. It begs the question whether our leaders are aware of the existence of some of the laws they are supposed to execute.

The news of our dependence on the hydros, plus the presence of abundant rains, led to the revival of one of the long-running myths about the Nigerian electricity system – that the hydros run on all turbines during the rains and this is when their production is at its peak. As a matter of fact, precisely the opposite is closer to the truth. The rainy season, April to October is off-peak for Nigeria’s hydros, while the dry season (especially around the time of the River Niger’s black floods late in the year) are when dams are full (fuel is therefore abundant) and the hydro turbines spin a lot more.

We all know that the source of the Niger is in the Futa Djallon Mountain in Senegal, over 3000km away. When the rains start in April, it feeds the River at its source and these waters must make their sluggish way 2000km to fill up Lake Kainji (for the Kainji hydroelectric station) and, subsequently, the dam for the Jebba hydroelectric dam, which is precisely another 100km downstream from Kainji. This movement is largely very slow and the elevation of the impounded water for the two hydro dams does not suffice for constant generation until OCTOBER when the rains are over. Thus, peak season for Nigeria’s hydros is not the rainy April – September months, but rather the dry October – March months.

To illustrate, let’s look at hydrological data for the Kainji and Jebba hydro plants, which are both are fed by the Niger River. The data presented is current as of Sunday, 14th June 2015. Current headwater elevation (the water level in meters at the dam or impounded in the dam from which water falls into the turbine house) in Kainji and Jebba were 132.64m and 100.37m respectively. On the other hand, the minimum levels below which there will be no generation are 130m and 99m respectively. Both plants discharged 646 cubic meters/second and 849 cubic meters/second respectively but inflowed 202 cubic meters/second and 745cubic meters/second respectively.

In other words, both plants were losing more fuel (water) than they were taking in. This puts the headwater elevation and minimum head elevation (at a mere 2.64m and 1.37m head respectively) in better perspective. In short, both Kainji and Jebba hydroelectric plants do not have much fuel to use. This is why for the past 5 – 6 months, although Kainji has available 4 units with total generation capability of 315MW, on Sunday it could only tie 3 of those units to the grid and all they could deliver was an average 181MW. Similarly, of Jebba Hydro 4 units available with a total capability of 360MW, only 2 with average generation of 172MW could be tied to the grid.

It all sounds counter-intuitive, for one to say that when rains are falling heavily is precisely when hydroelectric dams do not have enough water to turn all their turbines to deliver full output. The truth, however, is that as we have gone deeper into the rainy season, and as the effects of the recent strike wear of, hydro generation has held almost constant around the generation numbers quoted above, while gas thermal output has slowly but steadily been climbing back to pre-strike levels. Contrary to what some of us have assumed, the dams are not full and our hydroelectric plants have to manage their water (fuel) supply very carefully indeed, if they are to remain in business during this off-season.

In my last blog post, I alluded to how national security is affected by matters not directly military. Here, I explore that theme a little bit more. 

The Americans (who else to turn to) situate “national security” at the confluence of domestic policy (energy especially), foreign policy, military affairs and intelligence gathering/analysis. This is why for decades Presidential required approval (and not given until after the shale boom) for the export of natural gas and climate change is a major item on the agenda for discussion with China and India. It is also why America, in a self-interested extension of the 192-year old Monroe Doctrine, imposed relentless sanctions and other non-military pressure on Cuba and Venezuela because of their socialist national ideologies.

Contrast with Angela Merkel’s Germany, the most ardent, outside the Chinese, in pursuing an aggressive policy of increasing the country’s stock of renewable energy while also discarding reliance on nuclear power for electricity. Such a policy is a no-brainer given Germany’s heavy dependence on natural gas supplies from the same Russian Bear that is said to be menacing Europe with its alleged resurgence of soviet-style imperialism. However, it is this dependence that also explains why Germany adopts a softly-softly approach when it comes to Russia. 

When South Africa says that it is working with Congo to realise the full hydroelectric potential of the Congo River, said to be as high as 40,000MW, does this spur us to speed up the realization of our potential for generating hundreds of thousands of MWs of electricity via natural gas? With interconnectors being built and synchronized by the West African Power Pool (WAPP) at the various borders in the ECOWAS region, one would expect that soon electricity would move across the entire sub-region with ease. However, what has Nigeria done about reforming and preparing its electricity sector to become the energy supplier of choice to the entire ECOWAS sub-region? Very little of substance, in spite of years of reform. 

South Africa, on the other hand, has dominated the Southern Africa region through the Southern Africa Power Pool (SAPP). However, WAPP, whose mainstay was always recognised to be Nigeria, has survived only via assistance from development finance agencies and Nigeria exports less than 300MW daily to Niger, Benin Republic and Togo while ready markets as far west as Cote D’Ivoire, Mali and Guinea go without Nigerian electricity that would positively change lives all over the region. 

In Nigeria, has BH ever been as disruptive as the recent termination of electricity supply nationwide by the NPDC workers union? Can any algorithm, formula or rule of econometrics tell us how much we lose each day we have 65% of our population never having had access to electricity? What is the consequence of the failure to extend the West African Gas Pipeline, mooted 33 years ago, beyond Ghana’s city of Takoradi, when it was intended to get to Senegal? What is the cost in trust/credibility due to Nigeria’s inability to maintain consistent gas quality and volume? 

In spite of all we have gone through, we do not have a national institution similar to America’s National Security Council, so these questions are as yet unanswered. Nigeria’s NSAs so far have come from the military and it appears now that the Federal Government’s concept of “national security” is really about military affairs and domestic politics. The next National Security Adviser is likely to be yet another retired senior Army officer, whose attention is also likely, as with his predecessor (the NSA will certainly be male), to be consumed by military affairs in the NorthEast. As he enters office, let us recall that only 3 of America’s 24 NSAs since 1953 have been military officers. Indeed, the most recent, General Jim Jones, a former Commandant of the US Marine Corps, was appointed as much for his energy policy expertise as for his record of military achievement. 

The questions above, mostly about the energy sector, can also be asked agriculture, the management of our Exclusive Economic Zone and mineral and tropical rain forest resources. Not to speak of education, culture (Nollywood and music, for example) and public health (remember Ebola?). We talk about Africa being the centerpiece of our foreign policy but a common trade area stretching from Cairo to Cape Town has been quietly in the making for over almost for a decade. It is now going live and Nigeria and ECOWAS are not a part of it. 

I read this recently, published here http://blogs.ft.com/beyond-brics/2014/10/21/guest-post-the-imminent-collapse-of-nigerias-power-privatisation-is-a-good-thing/ but reproduced as screenshots below, if you are not up for subscribing to the Financial Times.