Reviewed Investor's Guide 2006

Investor’s Guide 2006 – POWER SECTOR

OVERVIEW OF THE POWER SECTOR

Electricity supply in Nigeria is currently being undertaken by the National Electric Power Authority (NEPA), established by Decree No. 24 of 1st April 1972, with the amalgamation of Electricity Corporation of Nigeria (ECN) and Niger Dams Authority (NDA). From a combination of hydroelectric dams, coal and gas power generating sources, it supplies electricity power to an estimated four (4) million customers in Nigeria and the Niger Republic. NEPA, the state-owned, vertically integrated monopoly, controls about 94% of the generation capacity and 100% of the transmission, system operation, distribution and marketing sectors of the industry.

The national electricity grid comprises three (3) hydro and six (6) thermal generating stations with a total installed capacity of 5906MW. The transmission and distribution networks include:

Transmission

5000 kilometers of 330KV lines
 6000 kilometers of 132KV lines
 23 of 330/132KV sub-stations
 91 of 132/33KV sub-stations
Voltage Policy Control330KV + 5% & -15%, 132KV + 10% & -15%
Frequency control Policy50Hz + 0.4% & – 0.4%
Distribution23,753 kilometers of 33KV lines
 19,226 kilometers of 11KV lines
 679 of 33/11KV sub-stations
 20,543 of 33/0.415KV or 11/0.415KV sub-stations
Frequency Control50Hz: 33KV +/- 10%
 

In addition, there are 1790 distribution transformers and 680 injection sub-stations.

Like most state-owned enterprises (SOEs), NEPA has suffered from severe under-funding and under-capitalization, inappropriate capital structure, excessive executive interference, and sub-optimality in decision-making. The result has been a huge investment gap particularly in the distribution sub-sector, an uncompetitive and poorly motivated workforce, and a lack of maintenance of existing infrastructure and facilities.

The consequence of this trend is a structural imbalance between electricity power demand (estimated at 10,000mw in 2005, forecast to rise to 20,000mw in 2010), and supply. Although installed capacity is about 6,000MW, the maximum load, ever recorded, was 3,083MW. With a 40% generation and distribution losses, the resultant power outages cost the nation an estimated $1 billion per annum (2.5% of GDP).

Given the dwindling finances of government along with the inadequacy and the un-sustainability of grants and subventions to fund NEPA’s infrastructural improvement, fundamental structural reforms have become imperative in order to arrest the current deteriorating conditions in the sector such as the ever-rising consumer debts, mismanagement, vandalisation of NEPA’s installation, high cost of maintenance, inadequate gas supply, high cost of foreign exchange and the abysmally low tariff regime.

 

ELECTRIC POWER SECTOR REFORM PROGRAMME

Recognizing the importance of the availability of energy at economically acceptable costs and in sufficient quantity, the following objectives, defined by the Federal Government, constitute the framework for present and future programmes in the power sector in Nigeria:

  • Promotion of competition to facilitate more rapid provision of service throughout the country;
  • Creation of a new legal and regulatory environment for the sector that establishes a level playing field, encourages private investment and expertise, and meets social goals;
  • Restructuring NEPA and privatizing the business units to be created out of NEPA;
  • Encouraging the NEPA’s successor companies to undertake an ambitious investment programme.

Thus, the power sector reforms aim at ensuring that Nigeria has efficient, safe, affordable and cost-effective electricity industry that will not only provide continuous electricity supply to consumers in all geographical areas in Nigeria but will also support a more robust economic growth in the country.

These objectives will be met largely through the implementation of the following processes:

  1. Vertical separation of NEPA into generating, transmission and/or dispatch and distribution.
  2. Establishment of a transmission company (TransysCo)
  3. Horizontal unbundling of each of the functional segments into a number of competing, successor companies (NBUs) as follows:
  4. 6 Generating Companies (GenCos)
  5. 11 Distribution Companies (DisCos)
  6. The creation of a Special Purpose Entity to act as a financial vehicle to take over NEPA legacy debts and stranded costs
  7. The establishment of a regulatory agency that will be called Nigerian Electricity Regulatory Commission to oversee and monitor the activities of the NBUs
  8. Creation and operation of a wholesale electricity market in Nigeria
  9. A Rural Electrification Agency to expand access to electricity to the rural areas
  10. A Power Consumer Assistance Fund to subsidize the tariff for underprivileged consumers
  11. Privatisation of the newly established generation and distribution companies as separate entities
  12. Management Contract for the Transmission Company

 

CURRENT STATE OF THE REFORM PROGRAMME

The Electricity Power Sector Reforms (EPSR) bill that will provide the legal backing to the power sector reforms was adopted by the Senate and the House of Representatives in February 2005, and has been signed into law by President Olusegun Obasanjo The promulgation of the Bill into law, has opened the way for jump-starting the following processes:

  1. The legal unbundling of NEPA into new business units;
  2. The establishment of an Independent regulatory agency;
  3. The establishment of a Consumer Assistance Fund to ensure the efficient and targeted application of subsidies to less privileged members of the society;
  4. The establishment of a Rural Electrification Agency to manage the Rural Electrification Fund to ensure a separate but equally focused application of subsidies for rural electrification projects.

 

NEPA’S SEMI-AUTONOMOUS BUSINESS UNITS

Prior to the passage of the Bill, NEPA had commenced the internal un-bundling of the distribution business units (DBUs) along the lines of the existing NEPA zonal arrangement except for the Lagos Distribution zone which has been split into two (Ikeja and Eko distribution) zones. The existing distribution zones of NEPA are as follows:

Abuja ZoneJos ZoneIbadan Zone
Benin ZoneEnugu ZoneKaduna Zone
Kano ZoneLagos ZonePort Harcourt Zone
Yola Zone

These DBUs are manned by Chief Operating Officers (COOs) and their management support teams. NEPA has also commenced the use of financial statements for each of the 18 business units to provide each business unit with a good perspective of its overall cost structure and the imperatives of operational and financial viability. The launching of the Transfer Pricing Systems together with the implementation of the newly designed Market Operating Rules, tariff regimes, will institutionalise market discipline and leverage competition in the industry.

Since the commencement of the restructuring programme, there have been indications of marked improvements in the Key Performance Indicators adopted by NEPA to engender competition amongst the DBUs. For instance, NEPA’s revenue has stabilized at about N5.5 billion per month (US$430 million) for the six month period ended 31st December 2004, up by almost 30% when compared with the levels prevailing in the first six months of 2003.

The generating business units (GBUs) that will come on-stream will be along lines of existing NEPA generating facilities as follows:

  • Kainji Hydro Power Station
  • Jebba Hydro Power Station
  • Shiroro Hydro Power Station
  • Afam Thermal Power Station
  • Delta Thermal Power Station
  • Egbin Thermal Power Station
  • Sapele Thermal Power Station

The two stations (Kainji and Jebba) will be merged eventually to become one company as they are located on the same hydro source – River Niger.

INTRODUCTION OF COMPETITION

A key aspect of the reform programme is the introduction of competition through the re-structuring of the Electricity Industry through the un-bundling of NEPA as follows:

Generating and Bulk Power Market

  • 6 Generating companies plus the new and existing Independent Power Producer companies
  • Bilateral contracts between the Generating companies and the 11 Distributing companies
  • Generating companies to pay full price for gas and other fuels
  • Generating and distributing companies to initiate capacity expansions
  • The Transmission Company will be responsible for projections and capacity requirements
  • The Nigerian Electricity Regulatory Commission to approve capacity expansion plans and oversight tenders

The Transmission Company will manage

  • Open access (dispatch 20mw generated)
  • System operations (power lines>132Kv)
  • Market settlement (will neither buy nor sell electricity)
  • Network expansion and planning

The Distributing Companies will:

  • Manage Network lines<132 kV
  • Not build or own generating plants in excess of 20mw
  • Not own shares in the Transmission Company

Ownership and Cross- ownership

  • Generating and Distributing companies will not own shares in the Transmitting company
  • Generating and Distributing companies will not cross-own shares
  • Not applicable to off-grid systems
THE BUSINESS OPPORTUNITY

The huge gap of 69% between the historical maximum load of 3083MW and the 2005 level of electricity power demand (which is forecast to increase to more than 85% gap level by 2010)  presents a spectacular opportunity for very capable and resourceful investors who are keen in exploiting such an opportunity in the electricity industry in Nigeria, which is rare in the African continent. This opportunity exists in NEPA’s successor-companies in both the generation and distribution sub-sectors.

METHOD OF PRIVATISATION

NEPA’s successor companies in generation and distribution will be 100% owned and managed by the Private sector while the successor transmission company will remain publicly owned but managed by the private sector.