Ogaji: Blame government for power sector failure
Executive Secretary, Association of Power Generation Companies, Joy Ogaji, in this interview with KINGSLEY JEREMIAH, explains on key challenges that have left the power sector hamstrung.
Five years after privatisation of the power sector took place, how have we fared?
Looking back from 2013, a number of issues affected the performance of the Power sector. One of the issues is lack of adequate monitoring and enforcement. The government agencies charged with the responsibility of monitoring the performance of the privatised entities were not aware of their full responsibilities until about a year later. You may be aware that the generation, as well as, the distribution subset of the value chain entered into a performance agreement with the Bureau of Public Enterprises (BPE). Those performance agreements had Key Performance Indicators (KPI), which ought to be monitored and benchmarked (with responsibility on the Bureau of Public Enterprises (BPE) as well as the Nigerian Electricity Regulatory Commission (NERC).
BPE because it is the privatising entity and the midwife of the exercise, and NERC as the licensing authority, charged with monitoring them on the licensing terms. So, it is incumbent upon them to monitor these firms to ensure that the terms and conditions contained in the various agreements are kept. Till date, both agencies are trying to develop a viable monitoring template. International best practice is to put side-by-side with the privatisation, a monitoring mechanism that will benchmark the various companies to ensure full compliance and forestall activities reminiscent of profit maximisation (The reason why the performance agreement was put in place to ensure they do not go outside their KPIs – the KPIs are projects and activities that were promised and written in their business plans). In addition to the lack of monitoring template, is a “fight” between the two agencies (BPE and NERC) on who should monitor and who should not monitor.
So, if you ask me what has happened, I would say the sector has not fared well and I put the blame largely on the government. The actions and inactions of government and its agencies are largely to be blamed. The operators have failed in some way but there are regulations to checkmate such excesses. In the United Kingdom, The Office of Gas and Electricity Markets (Ofgem) in the UK are able to hold operators accountable to efficient performance.
Section 32 and 96 of the Electric Power Sector Reform Act of 2005, gave NERC so much power that they can bite and nobody can question them, and the good news is that they are backed by the National Assembly. Unfortunately in spite of the existence of these codes and regulations developed by NERC, they are not effective when they are contravened, as there are no consequences, such as sanctions and penalties. In a few cases where NERC wielded the big stick, they have been forced to beat a retreat on their decisions by the same government. This makes such regulations toothless. Another reason why NERC regulations are not effective is because they are not policy backed. NERC in trying to fill up the gap of lack of policy made so many regulations that are not policy-backed. It is a well-known fact that policy give effect to regulation. Policy is the bedrock upon which any law/regulation rests. For example, the 2005 Electricity Power Sector Recovery Act was backed by the 2001 Nigeria Electric Power Policy. That policy underpins everything so that no one can challenge it.
It is expected of the ministry to realise its roles and focus on policies to cover up all those regulations without policy backing to give effect to all such regulations, rather what we saw was the ministry also seeing itself as a regulator. What we are actually facing in the sector is a state of anarchy, lawlessness and lack of coordination. Who is the leader in the sector? How can you achieve progress? When there is no leader, there is no coordination. NERC feels it is in charge while the Minister says he is both the regulator and policy maker. Five years after, things have really fallen apart.
The Ministry of Power headed by Babatunde Fashola claimed power has significantly improved. As a stakeholder, what is your reaction to this?
“Res Ipsa loquitur” is a Latin word popularly used by lawyers meaning, “the matter speaks for itself”. The state of electricity in the country can be best described by the consumers. If the Minister of Power, Works and Housing, Babatunde Fashola thinks power has really improved, then I expect the consumers to react because I am not omnipresent. I can only tell you what my generation companies are generating; what they have available, since we are not in charge of transmitting or distributing power.
Generation companies are saddled with the responsibility of ensuring that they recover capacity with no guarantees on payment except for the smoke screen called NBET. Within five years, each of them was given a number of capacities to recover. For example, Ughelli took over when the capacity generated was about 160megawatts (MW) and were expected to ramp up the capacity to 650 megawatts in five years. As at June 2017, in less than four years after takeover, Ughelli Transcorp had recovered capacity and even exceeded by 51 MW. This means instead of 650MW, it recorded 701MW. It is on record just like other GenCos, Ughelli has not been able to send out all the 701MW. This is because, while the generation companies were saddled with the responsibility of recovering capacity, the distribution and transmission networks were not being developed concurrently
It is a well-known fact that technology has not developed to the level of bottling power for sale, hence it has to be consumed as it is being generated. The implication is, Gencos are losing so much in terms of rejected power(not compensated for available capacity), operating below their optimal level, leading to loss of about 20 per cent gas from inefficient operation of the facility with the associated increased maintenance schedules (Such cost not covered by the Multi Year Tariff order).
The distribution companies have given several reasons on their inability to collect and remit sufficient market funds or money on electricity sold. I want Nigerians to ask themselves, why generation companies should continue to recover capacity given the above challenges in addition to the abysmal state of payment for power Generated. The current market at best can be described as that of an unwilling buyer and a willing seller, a situation where GenCos are ready to generate and sell power, but lacks a willing and capable buyer. A market where NERC and TCN begs the DisCos to take power and after selling, they are begged again to pay.
There’s a disjoint. Government needs to urgently focus on improving the distribution and transmission network to a level of both exceeding the available generation by more than 2000MW in addition to dealing with payment for the power. Since decisions about investments in power generating capacity depend on expected returns and costs, collection and remittance uncertainty is a problem.
One way of knowing if power has improved, is to check how much of the available capacity/ power is being utilised by the various categories of customers in the market. I can also tell you that for the past three years, I am still using my power generating sets, and as I speak to you, they are on. So, I do not know which part of the country is experiencing power improvement so much so that people are no longer using their generator. I expect the consumers to react and either affirm the assertion or deny it.
Yet another determinant of whether power generation has increased or not is the demand side of it. Grid electricity at the moment cannot be stored for future use, so supply must vary dynamically with changing demand. Statistics from the system operator on load demand over the last three months averages over 22,000MW. This means that there is a suppressed demand of over 17,000MW when compared to what is being generated and utilised today. This could potentially escalate when there is stability of supply and high ticket consumers who are currently self-generating, decide to turn to the grid? How do we plug this gap?
No doubt with the payment assurance programme introduced by FGN, GenCos have had a breather and are motivated to generate more but alas, where will the power go to, given the poor state of offtake network (transmission and distribution). The recent declaration of Eligible Customer by the Honourable Minister of Power, Works and Housing is a step in the right direction to improve power offtake, but implementation has been fraught with challenges. The discussion on this I am willing to take another day.
How can we solve the current liquidity challenge in the sector?
Data in the right quality and volume is at the center of every human endeavour. Hence, to understand an existing situation such as the illiquid state of the market, quality data is critical. Prior to the reform, data was not needed as nothing depended on it. There was little emphasis on accountability and profitability. Financial requirements for infrastructural development was derived from the government; investments for the growth of the generation sub-sector did not depend on the returns from the distribution sub-sector.
The federal government routinely intervened or invested to ensure the development/sustainability of the sector by “throwing” money and other resources at the problem with little or no understanding of the magnitude or type of problems that existed. This has impacted the sector to the extent that critical data, such as customer population, customer demographics, energy demand requirement per customer, billing and collection efficiencies, ATC&C loss factors, etc were lacking. This dearth of data has not changed, five years after privatisation, and is detrimentally impacting the system, principally the liquidity.
The appropriate/cost reflective tariff is equally data dependent. This is because, basic tariff principle suggests that the more the customer number, the less the marginal tariff. If that’s the mathematics, then what is the incentive of declaring more customer numbers if I can declare less and be given or permitted to charge higher tariff. If the regulator does not have its data to corroborate, then anything can happen. The regulator needs independent data to benchmark and monitor the operators. But in a situation where operators alone own market data, many things will be on best endeavour and conjecture; no independent means of verifying such figure.
Apart from the financial challenges, what are the other pressing issues bogging down power generation companies, and their possible solutions?
The Gencos face many challenges in the current electricity market. One of these challenges has to do with constrained power dispatch, which is caused by transmission. A well-known principle of the global electricity market is that the capacity of the transmission should nearly double that of the generation capacity while distribution capacity should also be much greater than transmission capacity. This makes for adequate redundancies in the overall system. In Nigeria, the reverse is the case.
Currently, we have a generation available capacity of about 8, 000mw and a wheeling or transmission capacity that’s not more than 6, 000mw. The distribution system on the other hand cannot take more than 4,500 megawatts. There’s a disjoint! The Nigerian Government needs to urgently improve the distribution and transmission network if it is really serious in resolving electricity issues.
A further challenge faced by Gencos is that of Gas. There are no effective contracts in the market, so what’s currently happening is a supply based on best endeavour. Nobody is bound to perform under this regime of operation. With the current liquidity challenge, where the DisCos are paying only 20 per cent of their invoices, Gencos are constrained and cannot enter into long term contracts with the gas suppliers.
The management of the grid is another issue. The unchecked ups and downs in system frequency is very technical, and the level of volatility of the network destroys our machines. In the morning, a single unit can be asked to bring up power at its capacity say, 112MW. When it is set and starts going, despite responding to free governor mode operation, the power station will be called and asked to either shut down by force or reduce its generation to half its capacity. That forcefully ramping or shutting down destroys our machines and force us to carry out mandatory maintenance several times before the Original Equipment Manufacturer (OEM) set time, if operated under expected operating regime. Unfortunately, If we don’t comply with this indiscriminate directives of ramping or shutting down, people will not get electricity.
The other challenge we face is in the area of forex. CBN pays us at the rate of N306, but we cannot gain access to much needed foreign exchange at this N306. For much needed spares and other foreign payments, we buy from the parallel market, which is around N360 with no one taking responsibility for this difference. That is a loss, not recognised or paid for by the market.
In terms of solutions, I am advocating the need for a more transparent billing and collection system. This is because, on the one hand, consumers claim that they are paying, while on the other hand DisCos are saying that they are not. When two people are engaged in a controversy, the best way is to bring in an independent body to bring neutrality. We need a situation where all the stakeholders will see how the money is coming in. When this is the case, nobody can blame the other because there’s neutrality. If you do that, the distribution companies will be vindicated from the blame of collecting and keeping money. By the end of the month, we will know exactly what came in and allocate it to each operating stakeholder based on a previously established sharing formulae.
I also think that government needs to divest its 40 percent stake in each Discos, to new and experienced players who will inject more expertise into our existing distribution companies. Currently, government doesn’t even understand how the distribution companies work. Most of government’s representatives are only on the board, they don’t appear to have any impact on crucial decisions neither do they compel the Discos to work in tandem with established guidelines. It appears the interest of these representatives are to get their allowances and submit reports that they know nothing about.
Finally, Government should come out clearly and let consumers know the state of things. By telling the citizens that social amenities/services do not include free power, in other words, consumers should be made to know that electricity is a luxury that must be paid for. This state of incessant inefficiency does not pay anyone and the consumers suffer more.