Presentation Transcript

1. THE POWER SECTOR IN FOCUS Presented to THE LAGOS CHAMBER OF COMMERCE & INDUSTRY by Engr. Beks Dagogo-Jack FNSE Chairman, Presidential Task Force on Power Tuesday 3rd June, 2014
2. CONTENT ROADMAP TO NIGERIA’S ELECTRICITY SECTOR TRANSFORMATION THE PRESIDENTIAL REFORM AGENDA THE PRIVATISATION THE TIMELINES OF REFORM MARKET STATUS & OUTLOOK SECTOR STATUS & OUTLOOK CHALLENGES OF THE POWER SECTOR REFORM TECHNICAL CHALLENGES COMMERCIAL CHALLENGES DEVELOPMENTAL CHALLENGES FUNDING ISSUES SECTOR REQUIREMENTS REGULATORY ISSUES DEVELOPING AND NURTURING THE NASCENT MARKET POLICY ISSUES ENERGY MIX ACCESS TO ELECTRICITY HUMAN CAPACITY SUMMARY & CONCLUSIONS
3. ROADMAP TO NIGERIA’S ELECTRICITY SECTOR TRANSFORMATION
4. ROADMAP: THE PRESIDENTIAL POWER SECTOR REFORM AGENDA Handing over of power companies In 2010 on becoming President and Commander in Chief of the Federal Republic of Nigeria, President Goodluck Jonathan made the Reform of the Nigerian Power Sector a cornerstone of his Administration and his Transformation Agenda. He immediately set about creating an Action Plan to effect this Reform. Subsequently, and later in 2010, The Roadmap for Power Sector Reform (“Roadmap”) was officially launched. President Goodluck Jonathan clearly presented his administration’s agenda on power stating: “……The full implementation of the Electric Power Sector Reform has been a key priority for this administration…….In developing this Roadmap we have built on the solid foundation laid down in 2001/2002 by the adoption of the National Electric Power Policy, and in 2005 with the promulgation of the Electric Power Sector Reform Act. This Roadmap heralds our advance to the final and very important stage in the reform process. This is the stage where we ensure that the fundamental changes to the ownership, control and regulation of the sector envisaged by the legislation are achieved and the downstream benefits are realised…..” EPSRA (2005) The Electric Power Sector Reform Act (EPSRA) 2005 can therefore be seen as the Strategy Document defining the Reform Agenda. The Roadmap is the Implementation Document for the EPSRA – the Action Plan defining the Reform Process. ROADMAP(2010)
5. ROADMAP: THE PRESIDENTIAL POWER SECTOR REFORM AGENDA With the operational handover on the 1st Nov 2013, the Privatisation of the successor companies of the Power Holding Company of Nigeria (PHCN) was essentially and successfully been concluded. This has been the largest power privatisation ever in Africa and represents most-likely the most complete single-stage sector privatisation. Handing over of power companies After a process praised for its transparency and showcasing the appetite of local & international financiers and investors, the much-promised, long-awaited, private-sector led Nigerian electricity market finally arrived. The first stage of the reform process as detailed in the Roadmap in 2010 has been delivered ushering a sector with the best-ever potential to provide sustainable growth and reliability of supply. The Presidential Task Force on Power (PTFP) - a special project delivery vehicle of the Presidency - is proud of the roles played at the design and implementation phases of this significant milestone in the Power Sector Reform Agenda. Acknowledgement is richly due to the administration of President Goodluck Jonathan with whose political will and leadership this impressive feat was made possible.
6. ROADMAP: THE PRIVATISATION WHAT WAS ACHIEVED Privatisation of all 11 PHCN Distribution and 7 PHCN Generation Companies Total Size of the PHCN Transaction: 2.60 Bn US$ = 416Bn NGN Payout to Labour : 360Bn NGN (So far) This does not include retires and disputed staff numbers ~ 2,000 Financing was carried out principally by local, onshore banks demonstrating their appetite for the new sector and their revitalized lending capacities after the sector restructuring following the Global Financial Crisis of 2007/2008. Despite the fact that the majority of the transaction sums went to settling labour claims, with the transfer of historic liabilities to NELMCO (Nigeria Electricity Liability Management Company), the market is now liability free and ready for the much needed investment to meet consumer demand. Privatisation of the 10 NDPHC Generation Companies is scheduled for 2014. Handing over of power companies
7. ROADMAP: TIMELINE & MILESTONES Reform Milestones Completion of Industry Agreements Feb2013 Execution of NEGIP/PRG Implemention of Cost-reflective Tariff for Gas Apr2013 Sep2010 Establishment of Mid-term Transmission Funding Plan Establishment and Operationalisation of NBET May2013 Establishment of NELMCO Aug2011 Presentation of TCN Network Expansion Blueprint Jan2010 Procurement of TCN Management Contractor Reconstitution of NERC Aug2013 Conclusion of Labour Settlement/ Operational Handover Jun2012 Oct2010 Operationalisation of NELMCO Implementation of Cost-reflective Tariff for Power Nov2013 Announcement of TEM NDPHC Privatisation Feb2011 Jul2012 Q3-2014 2010 2011 2012 2013 2014 2014 Aug2010 Jun2012 Apr2013 Launch of Roadmap for Power Sector Reform Execution of MoU for 30,000 MW Presidential Power Retreat Transaction Signing Summit
8. ROADMAP: MARKET STATUS & OUTLOOK By December 2013 all the deliverable milestones contained in the very bold and ambitious Nigeria Power Sector Reform Roadmap launched by Mr. President in August 2010 had been achieved except two namely : Declaration by the Hon Minister of Power of the Transitional Electricity Market Stage (TEM) to kick-start a fully contracted and rules-governed electricity market wherein the sanctity of contracts shall be full to protect market liquidity and incentivize increased investment; A well incentivized & liberalized domestic gas market expected to be delivered by the pending Petroleum Industry Bill (PIB). With certain CPs outstanding, it was impossible for NERC to advise the Hon Minister of Power as required by the law to declare TEM. Conscious of the risks associated with handing over the companies for privatized company operation without TEM – or a substitute – the Presidential Task Force on Power made repeated representations to the Ministry of Power , NERC and BPE leading eventually to an acceptance by NERC to develop and institute a set of Interim Rules to conduct the market in the pre-TEM phase until the declaration of TEM– the Interim Rules Period (IRP) .
9. ROADMAP: MARKET STATUS & OUTLOOK The original IRO (Interim Rules Order) issued by NERC in December 2013 scheduled the end of the IRP/ start of the TEM for March 1st 2014. This was not achieved, and due to this slippage and to certain significant sources of concern – which were capable of impacting very negatively on the commercial sustainability of the market – the IRO was modified with the revision taking place with effect from May 1st 2014. At the moment the Nigerian Electricity Market (NEM) remains in its pre-Transitional stage progressing towards the start of the TEM. This is the critical next step in its evolution towards the fully-competitive market as defined in the EPSRA 2005.
10. ROADMAP: MARKET STATUS & OUTLOOK Handing over of power companies EPSRA (2005) Trajectory of the Nigerian Electricity Market Long Term Electricity Market Medium Term Electricity Market Willing Buyer/ Willing Seller Competition at Wholesale and Retail Electricity Markets Transitional Electricity Market 2014 Pre-Transitional Electricity Market Beginning of bi-lateral contracts. Market participants establishing track record. Government supporting reducing. We are here 2010 Beginning of commercially-based market. New participants with limited track record. Government supporting the market via Bulk Trader for centralisation of Credit Risk Preparation of commercially-based market.
11. ROADMAP: SECTOR STATUS & OUTLOOK Handing over of power companies Due to an absence of effective system planning, additional generation capacity has not always translated into additional power to consumers, due to the following issues: Non-establishment of fuel supply and transportation for gas-fired generation plants; Inadequate power evacuation corridors from newly-built generation plants; Poor design & location of transformation capacity in T&D networks leading to reduced network capability. As the market becomes fully-commercialized these issues can be expected to reduce. Following is a breakdown of value-chain capabilities now in 2014 and projected to 2020 based upon the following implementation plans detailed below: Gas (2020): NNPC Strategic Gas Plan [Gas Supply projected at 3Bn SCF/D] GX (2020) : New Projects – FG Hydro Investment program given to BPE from PHCN privatisation New IPPs with plans submitted by developers verified by PTFP TX (2020) : TCN Network Expansion Blueprint (NEB) DX(2020): Investment program given to BPE from PHCN privatisation
12. ROADMAP: SECTOR STATUS & OUTLOOK Handing over of power companies IPP developers are projecting gas-fired capacities close to 18,000 MW; however, based on the currentNNPC Strategic Gas Plan there is only enough gas for 10,500 MW. The currentTCN Network Expansion Blueprint projects National Power Wheeling Capacity of 20,000 MW. Therefore – unless gaps can be closed and capacity increased at a faster rate in the Gas and Transmission value-chains, these will become the limiting factor in the quantity of power that can be supplied to end consumers.
13. CHALLENGES OF THE POWER SECTOR REFORM
14. CHALLENGES: CLASSES OF RISKS, ISSUES, & THREATS Level of energy produced inadequate for market to generate adequate funds from customers to pay market overheads and maintenance. Market enters Default and Service Delivery Collapses Insufficient Energy & Technical Performance Insufficient Discipline and Market Development Insufficient Money & Commercial Performance Market Participants fail to follow rules of the Market and to meet the various obligations expected from them in Market codes. Drop in confidence of Market and Reforms Level of money returned is inadequate to pay for cost of generating energy and the associated costs of transmission and gas and other market participants. Defaults occur & Service Delivery falls
15. CHALLENGES: TECHNICAL PERFORMANCE Power Generation Assumptions: MYTO II assumes a certain average level of power generated by the Generation Companies for wheeling to the distribution companies and onward sale to their customers. If the market cannot achieve these levels then the ability of the market to cover its costs adequately will be called into question. Currently daily AVERAGED power generated should be 4,875 MWH/H. This has not been met. With the return of ELPS-A, daily AVERAGED power generated has been [3,800 MWH/H] Unless the market can generate and wheel this amount of power, the Market will have immediate issues achieving liquidity in the short and solvency in the medium to long terms. There is adequate Available Capacity in the privatized sectors of Generation and Distribution to meet these power levels; the issue arises due to parts of the value chain owned and financed by the Federal Government. The issues can be detailed thus: Stranded Generation: Available Turbines but inadequate Gas Supply to operate due to: Supply Issues Transportation Issues Trapped Generation:Available Turbines but inability of Transmission to evacuate due to: Network Capacity Issues Network Reliability – Operational and Maintenance Issues
16. CHALLENGES: TECHNICAL PERFORMANCE Current power assumptions in the Tariff may not be achieved given the current project timelines in critical gas and transmission projects. If this occurs, this will result in a Market unable to adequately generate the funds to cover its fixed and variable costs. This inability will present itself by shortfalls in energy sold and subsequently in market payments. Remedies include: Tariff recalculation (under new assumptions); Acceleration of on-going projects; Execution of new projects
17. CHALLENGES: COMMERCIAL PERFORMANCE MARKET FUNDS AND PAYMENTS. Currently the Interim Rules Order (IRO) prescribes minimum payments that each Distribution Company must produce and minimum payments that each generation Company must receive. These amounts are meant to represent targets that are achievable and which when performed should be able to keep the market in a well-defined shape on its progress to TEM. These minimum payments are not being met and consequently during this post-handover period, market liabilities are building up and the resolution of these is not yet determined. A large part of this issue is a lack of visibility in what is happening at the retail end of the market where payments are being made. Within a regulated market as soon as a market participant is unable to meet its obligations due to circumstances beyond their control, they are obliged to open their books to The Regulator or its agent. This has yet to happen and as such there is increasing discomfort within The Market as to who is and who is not justly-bearing the discomfort during the IRP.
18. CHALLENGES: COMMERCIAL PERFORMANCE DISCOS There has been no improvement in the post-handover commercial performance. Performance is comparable to PHCN and DisCos do not remit even the minimum payments demanded by the IRO. If continued, this will lead to: Increasing Market Liabilities Decreasing Market Liquidity & Solvency Market Failure GENCOS Monies paid to the GenCos have not improved either. If continued, this could lead to: Plant shutdown by new owners or their financiers; Reduced confidence from financiers in NDPHC privatisation.
19. CHALLENGES: MARKET DEVELOPMENT THE INTERIM RULES PERIOD: At Privatisation – the handover of the successor companies on November 1st 2013: The Market had not established the necessary processes and procedures to start the Transitional Electricity Market (TEM) signaling the start of Commercialisation, and There were outstanding issues concerning the validity of the assumptions within the MYTO-II Tariff that would significantly impact upon: The financial performance of The Market and its commercial viability, and The contracted performance improvement that were conditions of the Privatisation. As a result of this, The Interim Rules Period (IRP) was specifically established to provide a period of predictability, order and discipline post-handover for The Market to transit towards the TEM. In this period, work necessary to close out outstanding issues would be completed and there would be a safe and credible ‘test-driving’ of critical Market Processes before TEM. 3 activities need to be achieved before the IRP can conclude and the TEM begin: The conclusion of all legal and operational Condition Precedents (CPs) to ensure a viable TEM and Market ready for Commercialisation – TEM Work Program (TEM-WP) The conclusion of Baseline Loss Studies to form the basis of performance measurement as a requirement of the Privatisation – Baseline Loss Studies Work Program (BLS-WP) The re-validation of Tariff inputs and to ensure that a commercially-viable Market is established – Tariff Revalidation Work Program(TR-WP)
20. CHALLENGES: MARKET DEVELOPMENT THE INTERIM PERIOD (CONTD): At the issuance of the Interim Rules Order (IRO), the IRP had been initially-scheduled to conclude on March 1st 2014. This date has slipped. Marginal progress has been achieved in the 3 work programs, and the IRP originally designed as a short stop-gap has been significantly re-configured to ensure The Market can function properly to provide adequate Service Delivery to customers and continued support and confidence to the Reform program. Currently the end of the IRP/ start of the TEM is September-2014, but this date is dependent upon: Prescribed activities of work from public agencies and private enterprises. Few Enterprises/Agencies have provided any detailed work programs to support their completion forecasts got monitoring by PTFP The end of the current MYTO-II subsidy period in June-2014 This may cause additional complications as consumer tariffs are expected to rise to compensate for this loss of market funding and revenues may be affected by collection efficiencies. The delivery of “Adequate Levels of Power” Due to issues of pipeline vandalisation the supply of gas to generation plants and power delivered has been below levels for the Market to achieve commercial viability. “More Power” is required, but this precise power level has not yet been pronounced by the Regulator as it is a critical component of the Tariff Revalidation Work Program.
21. FUNDING ISSUES
22. FUNDING ISSUES: SECTOR REQUIREMENTS [I/II] Handing over of power companies Provided private investors can be assured of suitable risk-adjusted returns, funds will be sourced to invest in the Nigeria Power Sector. For this to happen: the Market has to demonstrate beyond reasonable doubt that it is commercially-viable and that it can fully pay for the power provided to it at a price reflective of all the costs to produce, generate, transmit and distribute. Given the size of Nigeria’s market and its current supply deficit, large investments will be required to reach this point (20GW). Below is a breakdown of potential additional investments assuming 20GW of generation with an approximate 15GW/5GW Thermal/Hydro split. [NB IOCs provide their own gas].
23. FUNDING ISSUES: SECTOR REQUIREMENTS [II/II] Handing over of power companies Sector Funding Capacity Limit The size of the funding required to reach the 20GW goal suggests that current investment capacities may prove another bottleneck to power supply growth. Currently funding is provided via domestic, banking institutions. They are limited by balance sheet and sector credit limits that will be tapped out by both the 2013 PHCN privatisation and the expected 2014 NDPHC privatisation. To expand the current capacity to finance the Sector Reform, any of the following might be considered: Domestic, Public-sector financing SolutionsFederal Government to support financing effort by any of the following: directly via debt and/or equity investments; or indirectly via Special-Purpose-Vehicles or Financial Insurance to recycle domestic, private-sector banking balance sheets. Foreign, Private-sector financing SolutionsInternational Banking and Capital Markets expected to participate dependent upon the following: Improved and sustainable Market Commercial Performance; and Federal Government Investment Insurance Domestic, Private-sector financing SolutionsExpansion of domestic financing capacities via: Financial Sector Reform to allow domestic Capital Market participation and access to long-term private-sector/ pension funds.
24. REGULATORY ISSUES
25. REGULATORY ISSUES: DEVELOPING & NURTURING THE NASCENT MARKET Handing over of power companies DEVELOPING A PROPER MARKET CULTURE The decades of having a vertically-integrated, government-run power company has impacted the psyche of many both within and outside of the sector – from customers to contractors. New patterns of behaviour need to be established if the Market is to be established, developed and grown. The concept of contractually-defined behaviour with its associated incentive structure will take time to establish its roots. However it is important that this formalization of behaviour is enforced at all levels: Consumers – especially government consumers – need to understand that bills are to be paid; Market Participants – need to understand that they have both technical and commercial rights and, as importantly, obligations; The Regulator – needs to understand that a market needs to be grown and developed and that a firm, fair hand and discipline are critical in establishing this. Market Discipline & Enforcement needs to be established at as early a stage as possible, and the Regulator needs to demonstrate to the Nigerian Electricity Market its bark and, most-importantly, its bite. Legacy Debts created during the PHCN/NEPA era need to be resolved to encourage future investment and embed the payment culture.
26. REGULATORY ISSUES: DEVELOPING & NURTURING THE NASCENT MARKET Handing over of power companies ESTABLISHING PROPER MARKET STRUCTURE “It is impossible to predict and plan for the supply of any commodity to the Poor, when the Rich themselves are having trouble obtaining it.” “You may be able to fix the price or the quantity of a traded commodity, but never both.” The above quotes could be applied to the current Nigerian Electricity Market. Although seen as a developmental necessity to be provided to all citizens, access to reliable affordable power appears to be a luxury product. For this reason, it is necessary that a proper market structure is established to ensure long-term sustainability. The following needs to be promoted: The design of solutions to allow the supply of electrical power at pre-agreed prices and service levels to willing consumers; and The culture of zero tolerance at all levels of the Market for payment defaults of goods and services delivered. Cost Reflective Tariffsneed to be established. If subsidies are to be required, intra-market solutions should be considered before external or government solutions.
27. POLICY ISSUES
28. POLICY ISSUES: DIVERSIFYING THE ENERGY MIX Handing over of power companies DIVERSIFYING GENERATIONSOLUTIONS With the large gas reserves available in Nigeria there has been a focus of power generation on gas-fired power plants. However, recent problems with vandalism and attacks on crude and gas pipelines has revealed a significant risk point of the reform in this regard. Given this fact, it is imperative that ‘solution diversity’ is sought to increase the energy mix, promote energy security and maintain system robustness to fuel supply volume and price shocks. Options that now need to be considered from a policy and regulatory view point and commercially-developed are: Hydropower solutions [especially small-to-medium hydro in Northern Nigeria] From over 300 agricultural dams, approximately 40 have been identified for retro-fitting to supply powerto local consumers. Solar-power solutions [especially in North-Eastern Nigeria] The North-Eastern region of the country is the farthest away from any network generation point – this raises network stability and power quality issues. Wind-power solutions [especially in North Western Nigeria] There is already a 40 MW Wind-Power project in Katsina Coal-fired power solutions [especially in the coal regions of Eastern and Central Nigeria] Nigerian coal – like its crude – is of ultra-low sulphur content. Biomass power solutions To assist in the promotion of power solutions to agro-communities with low or no grid access.
29. POLICY ISSUES: INCREASING ACCESS & SECTOR CAPACITY Handing over of power companies INCREASING ACCESS TO ELECTRICTY Due to the sheer size of the country, an enabling environment needs to be created to allow for increased access to power in rural and peri-urban areas. With the recent privatisation and the dramatic growth in urbanization, there is a likelihood that investors will tend to focus on and cherry-pick urban areas where the customer densities can guarantee more-predictable returns. Policy and regulation now needs to be focused to create commercially-viable solutions for: Off-grid power supply; and Long-term/ multi-year grid expansion. SECTOR CAPACITY SUPPORT & GROWTH The requirement to take the Power Sector Reform beyond its starting point of gas-fired, grid-delivered power solutions will require an increase in the Sector’s human capacities – especially to structure the development of the suitable Policy, Regulatory and Commercial environments. Already gaps are appearing in the response time of Government bodies to the work practices and demands of private-sector operators. Clearly the nascent market – and its governmental sector stakeholders – will grow and mature with time; however, a focus on aggressive human capacity growth is required to be developed and maintained.
30. SUMMARY & CONCLUSIONS
31. SUMMARY: Handing over of power companies THE TRANSFORMATION The Privatisation of the Nigerian Electricity Market is unprecedented in both its scale and its scope. Never before has there been as broad a transfer of a critical sector from Public to Private hands. Many did not believe that so wide a Privatisation could be achieved. They were wrong and now The Sector Reform previously inevitable has now become irreversible. Each Sector Reform come with its own characteristics and there remain many aspects particular and peculiar to the Nigerian Power Sector Reform. It has just started and for success to be achieved there needs to be not only transparency and fairness but also creativity and flexibility. A new born Market has been born from a Nation pregnant with the expectations of massive socio-economic development. This new-born will need careful nurturing and attention to ensure that it grows healthily from infancy through childhood to develop into the strong, viable and independent sector that the Nation expects of it. All stakeholders in the NEM now need to play their roles in ensuring this new-born reaches adulthood.
32. Thank You