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Reform of power sector will transform lives of Nigerians– Onagoruwa, DG, BPE

Director General of the Bureau of Public Enterprises (BPE), Ms Bolanle Onagoruwa, is passionate with her job, especially as it relates to the privatization of the power sector. Last week, Ms Onagoruwa was in Lagos to brief Business Editors on what the BPE was doing to drive the power sector reforms of the Federal Government to its logical conclusion.

She disclosed that the World Bank was providing guarantees to assist in mitigating critical government, commercial and regulatory risks that the private sector would be reluctant to assume in the course of the privatization of the power sector.
According to her, similar World Bank Guarantees are also being put in place for existing and prosposed gas supply agreements through the Nigerian Electricity and Gas Improvement Programme (NEGIP).

She said applications have already been forwarded to the World Bank in respect of some Independent Power Project (IPPs) and that they are at present being processed. Onagoruwa, however, insisted that the ‘Bulk Trader’, which would be the beneficiary of the guarantee, has to be operational and then licensed by the Nigerian Electricity Regulatory Commission (NERC) before any new Power Purchase Agreements (PPAs) can be signed and the Performance Risk Guarantees (PRGs) provided by the World Bank. Ms Onagoruwa spoke on other issues concerning the power sector and how the BPE is managing the challenges arising from the process of PHCN privatization.

Power sector reform
It was to address the challenges in the power sector that the National Council on Privatisation (NCP), in September 2000, constituted the Electric Power Reform Implementation Committee (EPIC), which was mandated to undertake a comprehensive study of the electric power industry and make recommendations for the promotion of a policy to usher in total liberalization, competition and private sector-led development of the sector. EPIC’s membership was drawn from the Federal Ministry of Power and Steel, BPE, Federal Ministry of Finance, the National Assembly, NNPC, Energy Commission of Nigeria and the organized private sector.

The key objective of EPIC was to prepare a power policy blueprint that would define government’s new direction for the electric power sector. One of the key outcomes of EPIC was the preparation of a draft National Electric Power Policy (NEPP) in March 2001. The policy was subsequently approved by the Federal Executive Council (FEC) in September 2001.

The policy document made far- reaching recommendations that would lead to the total transformation of the sector. It recommended the establishment of the Nigerian Electricity Regulatory Commission (NERC), the privatisation of the sector, a market trading design and new rules, codes and processes.
These recommendations have been captured in the Electric Power Sector Reform (EPSR) Act 2005, which was drafted to provide a legislative framework for the reform of the Nigerian power sector in accordance with the policies set out in the National Electric Power Policy.

The Act removes operational and regulatory responsibilities of the electricity industry from the Federal Government. It provides the legal backing for the unbundling of PHCN and the formation of successor companies to take over the various functions, assets, liabilities and staff of NEPA. It is also the law that will enable the development of a competitive electricity market, and has created a regulatory body that licenses and regulates the generation, transmission and distribution of electricity.
In addition, the Act provides for the determination of tariffs and for other related matters. Furthermore, the Act repealed the Electricity Act and the National Electric Power Authority Act.

Key provisions of the EPSR Act 2005
The key provisions of the EPSR Act include the creation of the Initial Holding Company (PHCN) to assume the assets, liabilities and employees of NEPA; unbundling of PHCN into 18 successor companies and ensuring greater operational autonomy; market development; privatisation of successor companies which empowers the Bureau of Public Enterprises to undertake this responsibility and establishment of the Nigeria Electricity Regulatory Commission (NERC).

The Electric Power Policy 2001 and Electric Power Sector Reform Act 2005 identified the private sector as the key driver for the future of Nigerian Electricity Supply Industry (NESI). The government is to primarily provide policy and independent regulation. On the other hand, the private sector is expected to provide investment, managerial capacity, technology; and competition. To achieve government objectives, the private sector is expected to acquire interest or take over existing assets in the sector and develop green field projects.

The ambition of the Federal Government is to meet the vision 20:2020 target of 40,000 MW which requires investment in power generating capacity alone of at least US $3. 5 billion per annum, for the next 10 years. In addition, large investments will also have to be made in power transmission and distribution. Since the Federal Government cannot accommodate the cost alone, there is the need to incentivise the private sector to partner with the Federal Government in this endeavour.

Privatization strategy
In designing the model for the selection of the preferred bidder for Nigeria’s distribution companies, BPE has taken into consideration the fact that the current Aggregate Technical, Commercial and Collection (ATC&C) losses sustained by the various distribution companies are estimated at between 40 and 50 percent of the power wheeled to them. This level of losses is unsustainable and if not halted will continue to make the Nigerian Electricity Supply Industry (NESI) absolutely unviable for full and unsubsidized private sector participation.

In view of the above challenge, approval was obtained from the NCP to use the ability of the bidders to reduce Aggregate Technical, Commercial and Collection losses over an agreed time frame as a basis for the selection of the preferred bidder. This recommended core investor selection strategy is aimed at addressing the identified primary needs of the distribution segment of NESI. That is, rapid reduction in the current levels of ATC&C losses and sustainable investment in system rehabilitation, upgrade and expansion.

Under the proposed privatisation strategy for distribution companies, a private sector operator will acquire controlling equity interest in any of the distribution firms with a view to rapidly improving its operational efficiency. So, unlike the traditional transaction approach where bidders merely bid on price for the equity shares, bidders will bid on the basis of a trajectory of technical, commercial and collection loss improvements, usually during the first five years of post-privatisation operation (or other number of years agreed with the regulator and advisers).

Furthermore, this method will be built around the Multi Year Tariff Order (MYTO) issued by the Nigerian Electricity Regulatory Commission (NERC), which essentially sets out the commercial and economic indices that provide the financial model for the entire NESI. MYTO will stipulate the annual investment requirement, allowable operational expenditure, approved rate of return on equity and other allowable expenses for each distribution company. The valuation of the distribution companies will derive from the regulated asset base contained in the MYTO assumptions. This approach will eliminate the problem associated with undervaluation or overvaluation of public assets. NERC is currently valuing the assets of the distribution companies.

Thus, the revised MYTO will ensure that cost reflective tariffs are charged in the NESI. NERC is now undertaking the review of the current MYTO with a view to promulgating a revised MYTO by July 2011. It would be recalled that the BPE had between December 13 and 20, 2010 placed advertisements in local and foreign media requesting for Expressions of Interest (EOIs) for the successor companies. They are the 11 distribution companies; four thermal companies and two hydro firms. At the deadline for submissions of applications, 331 EOIs were harvested. They are 174 for generating companies and 157 for distribution companies. Pre-qualified bidders will be required to sign a confidentiality agreement and to pay $20,000 fee for each company of interest. Evaluation of the Expressions of interest is ongoing as I speak.

Requirements for distribution companies
Pre-qualified bidders will receive an Information Memorandum and Request for Proposal; bidders will be given access to physical and e-data room; bidders will be able to carry out physical due diligence; bidders will be issued with draft copies of the Multi-Year Tariff Order (MYTO); bidders are encouraged to submit comments on MYTO; and bidder comments on MYTO will be subject of a conference to be organized by sector regulator, the Nigerian Electricity Regulatory Commission.

Generation companies
While privatisation of distribution companies will focus on reduction of AT&C losses, privatisation of generating companies will focus on recovery of lost capacity and reliability.
As for the generating companies, potential bidders/concessionaires, who should be existing local and/or international power generators or investors with power generators as long-term technical partners, will be responsible for operating the stations, improving the generation capacity and making the necessary investments in line with the objectives of the Federal Government of Nigeria set out in the NEPP. Privatisation of thermal plants will be by core investor sale of at least 51% of their equity, while the hydro plants will be concessioned.

The Transmission Company of Nigeria

The Transmission Company of Nigeria (TCN) Plc. performs three key functions, namely – transmission service, which is essentially the wheeling of power, system operations which is control and dispatch of power and market operations which deal with commercial aspects of the business. The transmission system will remain an asset of the Federal Government but will be run by competent private operators that will be engaged as management contractors for the system.

The engagement of a management contractor for TCN is currently on. The World Bank has given the BPE a ‘No Objection’ to re-engage British Power International as our advisers for the engagement of the management contractors. We will soon commence process for the engagement of the management contractor. There is already a shortlist of three bidders from the original exercise and we are likely to invite others.

Market trading arrangements

The objective of the reform is to create an electricity market, and the Market Rules set out stages for market development. Pre-Transition: Under this segment, there will be preparation for unbundling and future privatisation, articulating performance incentives for discos and gencos, implementing and testing the Grid Code and the Market Rules. The Transitional Market: The market will be characterized by contract-based trading, entry of new generation and introduction of competition in the generation sector.

The Medium Term Market: This will be characterized by further generation competition, with the introduction of a market-led balancing mechanism. We are now at the threshold of commencing the Transition Stage Electricity Market.

Nigerian Bulk Electricity Trading Plc.
During the transition stage of the Nigerian electricity market reforms, the Nigerian Bulk Electricity Trading Company Limited, also known as the ‘Bulk Trader’, will be responsible for buying power from Independent Power Producers (IPPs) and the successor generating companies, and reselling the power to the distributors. It will not be the sole authorized buyer, as other entities, such as distributors that have reached commercial viability, will be able to procure power directly from generating companies as well, if advantageous.

The Bulk Trader will have the following primary responsibilities: Assume PHCN’s existing Power Purchase Agreements ( PPAs) with IPPs. During the pre-transition stage, there will be negotiation and execution of PPAs with IPPs under NERC-approved tariff. We will also conduct competitive procurements for new capacity, within a framework approved by NERC; sign PPAs with new IPPs; and resell the IPP power to distributors through vesting contracts.

The main reason for setting up the Bulk Trader is to ensure an orderly transition for the establishment of a competitive market in the electric power sector. The Bulk Trader will take over responsibility for the IPP contracts from PHCN as a step in the implementation of the Electric Power Sector Reform Act of 2005, which provides that PHCN’s assets and liabilities will be transferred to successor companies.
Securitization: Privatisation/Reform Enhancement through Partial Risk Guarantees.

The Electric Power Sector Reform Act requires that the electricity tariff regime is cost reflective and guarantees a reasonable rate of return on investment. While it is accepted that ensuring cost-reflective tariffs is the best way to attract investment into the sector, it is also understood that in the transition to a credit-worthy electricity market that encourages entry of increased capacity and competition amongst service providers, securitization or credit enhancement/support arrangements in the early stages of the transition will help to build investor confidence in the electricity market.

Global experience indicates that World Bank guarantees have been of tremendous support in this regard. They catalyse private investment flows into the utility/infrastructure sectors of developing countries by mitigating critical government, commercial and regulatory risks that the private sector is reluctant to assume. In the Nigerian electricity sector reform/privatisation programme, the World Bank Partial Risk Guarantee (PRG) will provide credit support to the Bulk Trader as it enters into PPAs with successor generation companies and IPPs.


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Posted by on Apr 27 2011. Filed under Headlines, Power Sector. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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