The New Direction: A Reflection On Nigeria’s Electric Power Sector Development
Public Lecture by Professor Bart Nnaji, CON, NNOM, FAS,
Honourable Minister of Power, organised by the Nigerian Academy of Science on Thursday, May 10, 2012, at Ritz Continental Hotel, Abuja.
It is always a delight to be in the midst of the nation’s most engaging scholars and scientists who make up the Nigerian Academy of Science. Much as I left academia years ago, I have strong nostalgic feelings of research, teaching and publishing. If not for the strong desire to help find a solution to the debilitating electric power crisis in Nigeria, I certainly would have remained in the academic community to this day. Scholarship is the world’s noblest profession. My paper here is primarily meant to share with you my experience as a scholar who has been in government since June, 2010, charged with the task of providing constant and quality electricity to the Nigerian people. Nigeria’s socioeconomic development rests squarely on the resolution of the power challenge.
Our dear county has for decades suffered an acute power crisis for a number of reasons. The most critical of these factors is the law vesting in the Federal Government the monopoly of the ownership and management of the generation, transmission and distribution of electric power. This law naturally stifled initiative, creativity and growth. For instance, Nasco, a well known manufacturing conglomerate in the Middle Belt of Nigeria, was generating and supplying power efficiently in Jos, Plateau State, until someone reminded the authorities that only the state-owned power utility, National Electric Power Authority (NEPA), had the power to supply electricity to the public. Nasco was thus compelled to discontinue power supply. The result was that electricity supply in Jos became as epileptic as the rest of the country.
THE NEW DIRECTION IN ELECTRICITY DEVELOPMENT
Fully conscious of the profound dangers inherent in monopoly in any sector of the economy, the Electric Power Sector Reform Act was enacted in 2005. The Act brought to an end both the Federal Government monopoly in the sector and NEPA, which was replaced with the Power Holding Company of Nigeria (PHCN) and was scheduled to exist for only 18months ; on the PHCN ashes emerged 18 successor companies, comprising six generation companies, one transmission company and eleven distribution firms. The 2005 Power Reform Act also provides that all these PHCN successor companies be privatized except the Transmission Company of Nigeria (TCN), which will remain state-owned, but run by a firm with a robust record of efficient and effective management. To ensure that things are done in conformity with the law and in the overriding public interest in the newly liberalized and competitive environment, the ESPR Act( 2005) created the Nigerian Electricity Regulatory Commission (NERC).
The full implementation of the reform was, however, suspended along the line. The operation of the Rural Electrification Agency, for instance, was put in abeyance even though it is a creation of the law. The NERC leadership was dissolved and replaced with a sole administrator, a position unknown to the law. The consequence was the cessation of capital which had been flowing into the power sector in response to its liberalization and the creation of an appropriate regulatory framework and environment.
President Godluck Jonathan did the right thing when no sooner he assumed duties in 2010 as President of the Federal Republic of Nigeria than he resumed the implementation of the Power Reform Act in earnest, in addition to some steps to make Nigeria leapfrog in its electricity development. He approached the National Assembly for the approval of a 57billion naira supplementary bill, so as to pay the 47,000 PHCN employees monetized benefits owed them since 2003. He set up the Presidential Action Committee on Power (PACP), the highest decision making organ for the electricity sector, with himself as the chairman and ministers and heads of agencies whose offices deal directly and indirectly with power development as members. He also established the Presidential Task Force on Power to operationalise the PACP decisions.
Arising from a comprehensive interpretation of EPSR Act, a Road Map for Power Sector Reform was drawn up which President Jonathan launched in Lagos on August 26, 2010, to the applause of the Nigerian people and the admiration of the international community. The Road Map calibrates the sector’s development up to 2015, complete with timelines. The targets have not been met as we would have liked, but the strategic objective remains incontestable—in fact, inviolate. The Bureau of Public Enterprises (BPE) will privatise seventeen PHCN successor companies this year; Manitoba Hydro International of Canada has just won the bid for the management of the 18th firm, that is, Transmission Company of Nigeria. The attainment of 40,000Megawats by 2020 to enable Nigeria to become one of the 20 largest world economies in eight years’ time may, after all, not be a mirage or wishful thinking. To generate this quantum of power will require investments of 100billion dollars during this period, with 35% going to generation alone. This humungous capital outlay is not available to the Nigerian government, which is battling with all kinds of competition for financial resources. Nor is it available in the country. This amount is available in the international capital markets.
To keep the integrity of the ESPR Act, the government has restored the Rural Electrification Agency to its full and statutory status. It is now headed by a Managing Director, not a Sole Administrator. To critics who wonder if there is a need for an agency like the REA, it is appropriate to bring to their knowledge that there are about 2,000 communities in Nigeria without electricity. There were about 1097 REA projects at various stages of completion when the agency went into limbo in 2009 following a reported N5.2 billion fraud. Besides, contractors executing REA projects are owed N3.4 billion, with some of them now dead and others in penury; some have lost their properties used as collateral to obtain bank loans.
The Bulk Electricity trader has been set up, with the Chief Executive and Board of Directors appointed. The Bulk trader exists to provide confidence and comfort to power generation companies to produce as much electricity as they can right, fully aware it will be paid for. The distribution firms, which purchase power from the generation companies, are not yet creditworthy, and the Bulk Trader will continue to operate until the distribution firms become creditworthy. The World Bank is providing Partial Risk Guarantee to the Bulk Trader.
The NERC leadership has since been reconstituted, in conformity with the 2005 Reform Act. This reconstitution has gone a long way to inspire international investor confidence in Nigeria, as a country governed by the rule of law. The United States Exim Bank, which toward the end of last year signed a Memorandum of Understanding (MoU) with the Nigerian Federal Ministry of Power for $1.5b credit to Nigerian firms operating in the power sector, is willing to review the facility to $2.5b. This is quite interesting. The US Exim bank facility to the whole of Sub Sahara Africa in 2010 was $1.4b, out of which only $200m came to Nigeria. Yet, between $1.5b and$2.5b is coming to Nigeria’s power sector this time.
General Electric, the world’s largest electricity company, has signed an MOU with the Federal Ministry of Power to help provide 10,000MW and even take up between 10 and 15% equity in new generation companies. GE has for several years sold equipment and parts to Nigerian firms, but it has never invested in our country. Therefore, the equity it is taking up represents a paradigm shift and a vote of confidence in the Power reform.
Following in the GE footsteps is Siemens of Germany which in April, 2012, signed an MoU with the Ministry of Power to assist provide 10,000MW and invest in equities in new power stations. It will, in addition, build a service station in Nigeria within 18months, lead a pilot study on the integration of renewable and traditional forms of energy, etc.
The Daewoo Corporation of South Korea and Electrobras of Brazil are among the new world class companies keenly interested in participating in the power sector following opportunities created by the reform.
The unprecedented international interest is not quite surprising. When the BPE called in 2010 for Expressions of Interest (EoIs) in respect of the 17 PHCN successor companies slated for privatization, no one expected more than 80 EoIs, but as many as 331 EoIs were received. The EoIs came from highly respected companies across the world. It was not easy for the BPE to shortlist 205 out of 331 EoIs. $20,000 was paid for each of the 152 which eventually made the pre-qualification list. The bids for the privatization of 17 out of the 18 PHCN successor companies will be submitted in July, 2012, the evaluation done in August and the result announced in September . The handover of the ownership and management of the companies will be performed later in October. This will mark a turning point in the development of electricity in our country. In the same manner, I am pleased to state that one of the Independent Power Producers (IPPS) will start commercial operations from the third quarter of this year. It will really be a new day in Nigeria.
LEARNING FROM THE VODAFONE MISTAKE
Both local and foreign investors are keenly interested in the Nigerian power sector because they want to avoid the Vodafone mistake. Former President Olusegun Obasanjo pleaded severally with Vodafone of the United kingdom, the world’s biggest mobile phone operator, to invest in Nigeria’s telecommunications sector when the GSM licenses were about to be issued in 2011, but it refused because of our country’s undeserving risk profile in the international scene. The refusal left the room for smaller operators like MTN and Econet to have a field day. When Sir Christopher Gent, the Vodafone chairman, was retiring in 2003 and was asked his greatest regret, he quickly answered that it was not investing in Nigeria’s telecoms market. The return on investment in Nigeria’s telecom market is such that Nigeria is now MTN’s cash cow in the whole of Africa and the Middle East. No wonder, Bharti Telecoms of India paid a whopping $10.6b in March, 2010, to acquire Zain operations in Africa, with the Nigerian market as the investment destination. If the telecoms sector—which used to have a mere 400,000 telephone lines in 2001 but now has about 93million registered lines following the liberalization of the sector—could do so well, we can only imagine what will happen to the much bigger power sector soon.
When President Jonathan assumed office in 2010, Nigeria was generating about 2,800MW. But in April of the following year, the quantum of available power had moved to 3,800MW, a record 1,000MW addition in one year. All 3,800MW was put on the national grid. Interestingly, when Nigeria produced 3,800MW for the first time—in August, 2010– and attempted to have it on the national grid, it resulted in a system failure. The transmission infrastructure was too fragile to wheel this quantum of power. In other words, between August 2010 and April 2011, we had carried out considerable repairs and general improvements in the system, as we had also done in the distribution network. Between 2009 and 2011, Nigeria used to experience an average of four system failures every month, but between last December and February, 2012, there was no system failure at all. System collapsed for the first time this year in March the present water and gas shortage problem developed. By the first week of January, 2012, when Nigeria achieved an all-time generation record of 4,400MW, the transmission infrastructure was able to transport this quantum of power from the points of generation to areas of consumption. In readiness of the impending dramatic increase in power generation, President Jonathan has approved the building of a 765kv Super Grid, which will see more than a doubling of the present capacity of the transmission lines which currently consist of 132kv and 332kv lines. Construction work on this state of the art infrastructure will start early next year.
NEW SOURCES OF POWER
Nigeria is truly hungry for electric power. Our maximum output of 4,400MW is grossly inadequate. Ours is a nation of 167m people. South Africa, a nation of 47million people, generates 47,000MW, which interestingly has since 2008 proved insufficient. As you know, South Africa has the world’s largest 20th economy. Brazil, another emerging economy with a population of 194m, generates about 135,000MW. In terms of per capita power capacity measured in watts|person, Nigeria’s record is anything but inspiring. It is 29 watts|person. Compare this figure with Brazil’s 490watts|person or America’s 2,900watts|person or India’s 110watts|person. Even neighbouring Ghana has a superior record because it has 1,800MW for its 21milion people which amounts to 85watts|person. To state the obvious, per capita power capacity is an indicator of a country’s economic performance.
The good news is that a number of power plants are being built across the country. So also are transmission substations and transmission lines, as well as distribution facilities. The Federal Government alone is building 10 power plants plus transmission lines and substations under the National Independent Power Project (NIPP). What is more, hydro stations are to be built at Zungeru, Mambilla andGurara. State governments, which have now been permitted to generate and distribute power, are also building. Nigerian and foreign businesses are not left out. Not to be forgotten is that there are a number of abandoned dams in the country; we hope to generate electricity from some of them, ranging from 1MW to 10MW, which will be domiciled in their respective localities, instead of being on the national grid.
We are going beyond the traditional sources of generating power in Nigeria, which are hydro and thermal sources. The Federal Government is leading the effort to build three coal-fired stations to be located in Enugu, Gombe and Kogi states, with each producing 1,000MW. We may need to remind critics that coal is the biggest source of power in the United States and South Africa, among other places. What is more, Nigeria’s coal is of the highest quality worldwide because, among other properties, it has little sulphur content. As part of the diversification programme, a 10MW wind farm is about to be completed in Katsina state. Studies are already being conducted on how we can make greater use of renewable energy, especially with the initial cost of building solar power facilities declining from 400% above the cost of building a gas-fired power facility of the same size to 150% .
HUMAN CAPACITY BUILDING IN THE POWER SECTOR
Ladies and gentlemen, I regret to observe that the power sector is faced with severe manpower shortage in both quantity and quality. The PHCN stopped staff recruitment years ago, despite increasing retirements, etc. The Benin Transmission Region, for instance, has only one climber called linesman; he will soon retire because linesmen are not allowed to climb towers on attaining the age of 45. It is, indeed, regrettable that the PHCN stopped since 1989 its famous structured staff training. Under this training scheme, a fresh Engineering graduate would first go to the Staff Training School in Surulere, then to the training facility in Ijora and finally to the Training School in Kainji where he or she would decided to specialize in Engineering or Transmission or Generation or Distribution.
As an Engineering Professor, I have a duty to address the present anomaly. The National Power Training Institute of Nigeria (NAPTIN) established in 1989 is now being given its pride of place. Some NAPTIN’s training facilities across the country will be commissioned this year by my humble self and the Minister of State for Power. Since its establishment three years ago, NAPTIN had been conducting only short term courses called modules for the PHCN staff. We have changed the situation considerably. NAPTIN is in the process of admitting 500 graduate engineers who will be trained for one year to make them proper power professionals. NAPTIN should go for excellence. The rapidly expanding power sector is in great need of human capital. After all, the Indian Power Training Institute, established in 1965, has trained one million and seventy five thousand power professionals from all over the world, including Nigeria. It runs respected Bachelor’s and Master’s degree programmes. As has been said times without number, the greatest asset of any nation is its human capital. Countries and territories like Singapore, Hong Kong, Taiwan and South Korea have practically no mineral deposits, yet they have become economically and technologically advanced.
STAFF WELFARE AND LABOUR ISSUES
This administration , in recognition of the primacy of the human capital in the power sector development, takes staff welfare seriously. I had earlier spoken of how the President, on coming to power, quickly made available N57b to the PHCN to pay its 47,000 employees their monetized benefits which were denied them since 2003 when the Obasanjo government introduced the monetization policy. Last June, the President approved a 50% increase in the PHCN staff salary, and went ahead to provide a N9billion grant to enable the company to start paying for the increase. As you are listening to this lecture, thousands of PHCN staff members who have for several years been working as casual employees are collecting letters converting them to the permanent staff with retroactive effect. As early as last year, the President had graciously approved the setting aside for only the PHCN staff a certain percentage of shares of the 17 PHCN successor companies scheduled for privatization.
As Nigeria presses ahead with its power sector reform, the Jonathan Administration is eager to resolve all outstanding labour issues. There are three of such issues, namely, payment of the retirement or severance package; realignment of the existing pension scheme, which is poorly funded, with the 2005 Pension Reform Act which requires public sector employees to operate accounts with the new pension fund administrators; as well as the choice of the body to be responsible for the payment of existing PHCN retirees, considering that the available resources will dry up within one year.
There is a tariff review this year, in accordance with the Multi Year Tariff Order (MYTO), as contained in the EPSR 2005 Act of 2005. This review does not necessarily imply a tariff increase. In the tariff order coming into effect from June 1, 2012, the urban poor and rural dwellers called R1 will not have to pay higher. In fact, they will be paying less in one or two areas. Instead of seven naira per kilowatt hour, they will be paying four naira. They will no longer pay meter maintenance charge. The RI customers are those who consume 50kilwatt hour or less. R2 customers, who belong to the middle class, will be paying only an additional 11% increase, and not 88% higher which was widely reported in the media earlier in the year. The government has provided for a N60b subsidy in this year’s budget and a N50b subsidy in next year’s budget. There will be cross subsidy from 2014. This administration and, indeed, every government in the world have a moral responsibility to protect the weak and poor in our midst. It is important to clarify here the difference between subsidy on petroleum products and subsidy on electricity usage. While that of electricity is production which is designed to enhance socioeconomic progress, that of petroleum products is consumption subsidy. It is also important to point out that unlike the petroleum subsidy, there is no cash involvement in electricity subsidy. The latter subsidy merely shields the poor from high payment.
The R3 customers who are rich consumers will notice a substantial increase in tariff, though not up to the fabled 88%. Different studies have shown that Nigerians are willing to pay a little higher if only they are assured of regular and quality power. Paying a little higher for electricity is far cheaper than the cost of self generation, to say nothing about noise pollution and emission of carbon monoxide which has led to whole families being wiped out in their sleep.
THE CURRENT SETBACKS
Electricity supply had been on the ascent from the last quarter of last year until it dipped in the first week of March, this year. The reason for the sudden change was two-fold: the low levels of water in the dams supplying water to the hydro stations at Kainji, Jebba and Shiroro and the non availability of gas to fire the thermal stations at Egbin, Omotosho, Geregu, Sapele, Ughelli and Olorunshogo. It is our tough luck that we are having the lowest water levels in the dams in 10 years. There was a poor rainy season last year in neighbouring West African countries. You see, there are two flood seasons in Nigeria during which water is harvested for the hydro stations. One is called black flood, and it refers to water from neighbouring countries like Mali. This flood gets to its zenith in November every year. White flood, on the other hand, refers to water derived from the Nigerian territory, and it reaches its peak in July. Hydro plants account for 30% of our power output. With the rainy season now setting in, there will soon be capacity recoveries at the plants which generate about 1,200MW.
The major cause of the ongoing power crisis is, of course, gas non availability. The gas issues arose principally from poor coordination in the past between the Ministry of Power and the Ministry of Petroleum Resources and the agencies under them. Hence, power stations were built without pipelines. There is, in addition, the question of pipelines being available but no molecules in them. To worsen the situation, g as was for long supplied to the PHCN at the incredibly low price of four cents per standard cubic feet. The gas price has now been increased to one dollar per scf in order to incentivize investment in the gas sector. Paying for gas and power supplies, however, has remained a Herculean task for the PHCN because it has been charging electricity consumers a commercially sustainable tariff. The PHCN is currently owing Agip N60b, Shell $78m, Nigerian Gas Company N10b, NIPP N6b and Ibom Power N300m. With a new tariff coming into force on June 1, the PHCN should now be able to pay for gas and power supplies promptly. (The NNPC is owed N110b by various customers, including governments and their agencies which account for 20% of the debt).
Ladies and gentlemen, I am glad to announce that with effect from this month, the NGC, an NNPC subsidiary, will start to increase gas supply to the thermal stations. By December, it will rise to three times the quantity of gas currently made available to the plants. This will mean a tremendous improvement in electricity supplied to the Nigerian people. Still, it will not be enough for the technical capacity we have developed for the power sector. This will be reminiscent of the situation in January, this year, when we developed the capacity to generate 5,500MW, but supplied only 4,400MW because of gas constraints.
I would like to assure this distinguished audience and the Nigerian people that once power supply begins to pick up this time, it will not be reversible. The tremendous work done by the Jonathan administration in the power sector has not manifested well because the gestation period in the sector is fairly long. Put succinctly, things can only get better. Far-sighted Nigerian and international businesses recognize the revolution about to occur and are taking far-reaching steps to take advantage of the unfolding policy and developments. A new day is about to break out for all the Nigerian people.