Emerging trends in the deregulated power industry

By Irene Chigbue

Irene Chigbue, DG, BPE

THE power sector critical to the development of any country and Nigeria is no exception. For many years the electric sector has been plagued by a plethora of problems ranging from low generation of power, decaying facilities, Corruption, leakages, poor distribution, non collection of tariff and many other problems. The Electricity Sector is unlike most other sector in any economy. Many countries prior to reform had largely one mammoth state owned corporation carrying out all the activities in that sector .

These monopolies came with the usual baggage of Inefficiency and poor service delivery . In Nigeria, that structure was represented through the years by the Electricity Power Authority Act which created the corporation and monopoly known as NEPA.

Several attempts in the past to revamp the National Electric Power Authority (NEPA) have yielded little or no dividend. Before the creation of NEPA in 1912 there were several government owned entities or corporation (See for instance the Electricity Corporation of Nigeria and the Niger Dams Authority ) Carrying out the Various aspects of electricity business from generation to transmission .

The Creation of NEPA brought all this entities under one monopolistic corporation that is now sought to be reformed through an initial process of unbundling. Given problems in the electricity industry in Nigeria it became imperative that in order to bring about significant improvement in the sector a more holistic approach must be adopted towards making changes in the sector. To this end Nigeria commenced an electrify sector reform Program In 2000 as part of its overall economic reform program. This paper considers the strategy of reform adopted by Nigeria under the Electric Power Sector Reform Act in the context of privatization and liberalization.

It is clear that privatisation is not a stand alone answer to reform in any sector and this is even more so in the energy and power sector s. Several factors are constantly at play which require delicate inter balancing to ensure that state monopolies do not transform to private in efficient monopolies with dire consequences to economic and political security of the country in question. In contrast, whilst many sectors are easy to liberalize and deregulate, factors such as technology, environment and economic imperatives make power sector reforms a lot more complex.

It is in this context that this paper examines the road to reform in the Electricity sector Nigeria. In 1972, the National Electric Power Authority (NEPA) was established by Decree No. 24 ,as a wholly and vertically integrated electricity monopoly to the responsible for generation, transmission and distribution of electricity in Nigeria. This Decree merged the generation and distribution activities of the Niger Dams Authority (NDA) and the Electricity Corporation of Nigeria (ECN), respectively.

In 1990, the NEPA Act was enacted and this replaced the previous existing Statute (Degree No. 24). The Act re-established NEPA as a commercial and self accounting authority and vested it with the power to develop and maintain an efficient, coordinated and economic system of electricity power supply to all parts of Nigeria.

The Act constituted the principle legal and regulatory framework that governed electricity generation, transmission and distribution activities in the country. In addition to the NEPA Act 1990, there are other relevant legislations that were regulating some aspects of the electricity industry which included:

1. Utilities Charges, Commission Act, 1992. This Act vested the Commission which the power to regulate tariff charged by public utilities including NEPA

2. Environmental Impact Assessment Act , 1992, which prescribes mandatory impact Assessments to be undertaken by power projects specified in the Act. In 1998, a major step towards the liberalization of the electricity industry was taken with the amendment of NEPA Act 1990 to allow for limited private sector participation in the generation sub-sector .

The amendment removed NEPA’S monopoly in power generation thereby paving the way for independent power producers (IPPS) for which Enron / AES blazed the trail.

Despite the amendment to the Act, the sector was still characterised by a number of flaws that made it nearly impossible for private sector investments to flow in. The utility on its part was Characterized by operation institutional and organizational shortcomings, which made it highly ineffective and inefficient .

some of the most pronounced short- comings of the sector were : the lack of effective regulation , lack of market and industry structure , opaque policy and objectives, lack of clarity and focus of roles and responsibilities, lack of a commercial orientation, inefficient allocation of resources, inadequate production and supply capacities, obsolete transmission and distribution facilities , high system losses, poor billing and collection regime etc. It is important to note that private capital prefers a safe environment that would guarantee its return on investment (ROI).

Needless to say, the electric power industry in Nigeria did not fit this bill. Further , as a public utility , considerations of public interest, which is the key motivating factor for the functioning of public agencies , can not be relied upon to ensure transparent and responsible management and / or limiting political interference with operations of the utility .

In order to breach the gap in the Industry , government undertook a holistic reform of the sector that encompassed both the enthronement of a policy (National Electric Power Policy , 2001 ) and legal and regulatory framework ( Electric Power sector reform Act 2005 ). The reform comprises of two main components restructuring and privatization. 1. Restructuring of the Nigeria power industry involved three main components: First , the change of the industry structure to stimulate competition and choice as well as promote financial accountability; second , the unbundling of power utility into the constituents functions ; and third , putting in place a new commercial trading arrangement. 2. Privatization, on the other hand , is the change in control and / or ownership of the utility.

The state of the infrastructure in the sector was such that the Federal Government also felt the need for short term solutions to improve the sector . This led to vigorous investment drive by the government through the building of new generation plants and refurbishing of existing plants. The stability of the grid is critical to the success of many of the steps in the reform program. Currently , Nigeria has installed generation capacity of about 6,000MW from its 7 –power generation stations, but only produces about 2000 3500 MW because of the inefficient and ineffective operation of the sector. There are plans to increase the capacity to about 10,000MW and to ensure we attain that level, the federal government , in 2002, invested in 4 new thermal power generation station to add 1, 434 MW to the national grid. The stations are:

1. Papalanto (335MW) ,

2. Omotosho (335MW), 3. Geregu (414MW) and 4. Alaoji ( 504MW) In 2005, further investments were undertaken in the sub-sector under the National Integrated power projects (NIPP). This is aimed at adding 2810 MW to the national rid. Plants under the NIPPare: 1. Calabar ( 500MW) 2. Egbema (350MW)

3. Eyaen ( 500MW)

4. Gbarain ( 250MW)

5. Ikot Abasi ( 300MW)

6. Sapele ( 500MW)

7. OMoku ( 225 MW), and

8. Ibom ( 180 MW) As stated earlier , government’s investment in the sub-sector was essential to increase the generation capacity of the nation, given the capital intensive nature of electricity between supply and demand makes it clear that the goal of the reform will not be met if there is sole reliance on the private sector to bring in the massive investment required immediately. It is also not anticipated that the in short run government will totally withdraw from investing in the sector .

It is important however to clarify that government does not intend to manage any of the new plants it is building and they are all up for privatization. Privatization as a Reform strategy privatization as a reform strategy first came into being in the 80’s indeed it is on record that the word first appeared in standard dictionaries only in the early 1980’s.

Privatization as a reform strategy has different perspectives depending on the sector that is driving it. From the economist’s point of view , the need to privatize arises from the anticipation that it will enchance efficiency in the supply of products and service in that particular sector. Chigbue is the Director General, Bureau of Public Entreprises

‘SPDC is in Nigeria to stay’

Mr. Mutiu Sunmonu is the Managing Director of Shell Petroleum Development Company of Nigeria Limited (SPDC). Prior to his appointment on January 1, 2008, he had, since February 2006, been SPDC’s Executive Director, Production. Last Tuesday, he met with reporters in Lagos in maiden media meeting. Excerpts:

How do you see the prospects of Shell in Nigeria against the background of the Niger Delta crisis?
For me, it’s really have been a very exciting journey and the way I look at it is that the journey has just begun. Not just for me as a person but when I look at the prospect of oil and gas in Nigeria and I look back at the contribution Shell has made in the sector, I see quite a lot of promising future for the Country and it is my desire that Shell will continue to play a leading role and on my part I will also want to be associated with that future.So, I can tell you that regardless of all the difficulties we have faced as a Company, from the crisis in the Niger Delta , problems of funding, Shell is here to stay., We still believe in the future of Nigeria .

We believe in the Energy future of this Country and we like to be a strong player in Nigeria and we are hoping that some of the difficulties we are facing will be a thing of the past.Funding continues to be a major challenge for us. The problem is still there , it hasn’t gone away, but I am confident that given the level of discussions that we are having with government that we will find a solution to the whole issue of funding.

On the security situation, we will continue to do our best within our areas of operation to make sure that we can continue to have a harmonious relationship with our stakeholders, with the communities, at the state level and also at the local government level. So when I just look at some of the difficulties today, I see them as challenges and in my own opinion, that is what will really determine how resilient we are as a Company, how we are able to overcome these challenges will actually show our strength as an organization and we will continue to develop the human capital in Nigeria.

A lot of things that Shell has done, have not been publicized. People still believe that SPDC still has a lot of Expatriates holding key positions . We really need to look at the data. If you look at the top echelon of SPDC, eleven out of the 14 Senior managerial positions are being held by Nigerians but a lot of people don’t appreciate this. Some people say we have too many Expatriates but we have less than 5 percent of Expatriates in SPDC. Five percent is less than 300 and in the same token, if you look at how many Nigerians are abroad, you are talking about 270,280. So people in most cases only see one side of the equation without looking at the other side, that we have almost the same number of Experts we have in Nigeria outside. I do believe that we are doing our best in human capacity development. The Shell Intensive Training Programme is something which I will continue to support .This was a programme we started almost 10 years ago to help bridge the gap in the educational development of young graduates . We will bring them out of Nigerian Universities put them into Shell school which is facilitated by Robert Gordon University in Aberdeen and we train them for one year after which we absorb some of them and those we cannot absorb are free to seek employment elsewhere. And if I look at the performance in the last ten years, we have trained almost 1200 Nigerian graduates, coming through this our programme , fully funded by Shell and we pay them allowance. Apart from that fact, we take them into our operation; some of them are also in employment with other oil and gas Companies in the Country. So, I just think it is important for me to put some of those achievements on the table.

How is the situation in the Niger Delta affecting your operation?
Our production has been severely curtailed because of the crisis in the Delta.For almost one and a half years, we produced almost nothing from the Western division. But I can say we are slowly getting back into production in the Western division, we are not yet at full capacity in the division but we have made very good progress within the very short time that we have been able to move in safely. So, I will expect that our production will improve depending on how the Niger Delta stabilizes. With effect to gas supply to NLNG, I can tell you that in 2007, we actually exceeded the plan for LNG supply . But we need to be aware that it is not only Shell that supplies gas to NLNG.

How many barrels are you currently shutting in; and what is the state of your restructuring exercise?
In 2006, our entire production in the Western division was completely shut down. And that is something in the order of 400,000 barrels . But since, we have been able to claw back about half of that. So we still have between 150,000 barrels to 200,000 barrels per day still locked in. And we will continue to work on how to unlock the remaining barrels . But that will depend on how much funding we get to support our operations. We are committed to government efforts concerning the gas domestic market. As you probably know, government in 2008 has provided specific funds for every Operator which they said must be spent on domestic gas and IPPs. We have a number of domestic Projects which we are working on and we will deliver on these Projects again subject to funding. So we are committed in supporting government’s aspiration for the gas sector .

Restructuring is still on hold but I am very very confident that we will reach an amicable solution with our joint venture partner very soon. We have had some very useful discussions, the undersanding on both sides has improved significantly and I have a lot of confidence that we would reach a resolution on this impasse within the shortest possible time.

Are you completely in charge at SPDC , if you are , where does it leave Pickard and also this issue of government saying Shell had spent $1.3 billion on projects in 2007 without authorization?
I am the Managing Director of SPDC while Pickard is the Chief Executive of Shell in Africa. We have operations in Gabon, Libya and others and the African office is based in Nigeria. We have serious funding problem. What government has said is that we have over performed. We have over performed means that we have done more work than government was able to fund. That is the simple explanation. If you look at 2007, we had a work programme that was something like $6.6 billion.And at a stage, government said it could only fund $2.7 billion but we ended up executing jobs costing $4 billion. It was not that we spent more money doing the same work but that we spent more money doing more work. That is the difference.

Is the company sacking 3,000 workers?
In terms of streamlining our staff strength, it is going to affect both Nigerians and Expatriates. I think that is a subtle point that people tend to be missing and as I always said in my all my presentations, the percentage of Expatriates will not increase as a result of the rationalization. So, if we rationalize staff, it will affect both Expats and Nigerians.But, I think it is also important, I said it earlier in the House of Reps, that the figure of 3,000, I don’t recognise. I do not recognise the figure at all.

Then, what is the correct figure?
Whatever figure I give you now will be speculative. If we had continued with the exercise, we would have finished our designs, we would have known how many jobs are going to be become redundant, and how many people will be redundant. But because we have stopped the design work midway, we have not been able to get to that kind of final figure.

We learnt that some Staff had already been laid off?
Not a single soul has been laid off as part of the exercise.

The new benchmark price of $59 per barrel in this year’s budget , is it okay?
The new benchmark price is for oil is good news because what that will do is that it will make a lot more money available for appropriation.

It was learnt that Shell is planning to pull out of OK LNG Project. Is this true?
I can tell you that on OK LNG, we still remain committed. Whatever you are hearing about OK LNG is again, mere speculation.

What is your view on the gas flare out deadline which is expiring this year?
On gas flaring, it is not just an issue for Shell, it is an issue for the entire Industry. As you are aware, the entire Industry under the auspices of OPTS is working with representative of government, World Bank Consultants, in terms of getting a better handle on what will become a more realistic timing for for achieving flare out. Discussion is ongoing because it is very clear to parties both in the Industry and government that 2008 is not realistic. So we are working with government on what will be a more realistic time table. Having said that , I will like to make a point, that Shell as a Company will comply with the law. Whatever the law says with respect to gas flaring we will comply 100 percent.

What about downstream integration issue?
Downstream integration is a business issue. You have to look at opportunities on a case by case basis. However, I am here as an upstream person, am not a downstream person.