‘It is difficult investing in an unpredictable power sector environment’
Aug. 05, 2020
Years after unbundling the power sector, teething problems still exist making it impede economic growth. Government recently said it will allow for a cost-reflective tariff, but agitation against the move culminated in the National Assembly putting it on hold. In this interview with FEMI ADEKOYA, the Chief Operating Officer of Nestoil Group and Managing Director/Chief Executive Officer of Century Power Group Limited, Dr Chukwueloka Umeh, believes the intervention of the legislators is not right, especially as underlying issues are yet to be addressed. Excerpts:
Nigeria’s power sector, with all the investments sunk in, still remains at the same stage pre-privatisation. There have been issues especially around the recent postponed tariff increment with some users saying there should be improved power supply before increment. Where is the sector today, and as a rocket scientist, is the problem a rocket science that cannot be solved? The problem in Nigeria’s power sector is not rocket science, and if it’s rocket science, you have rocket scientists that are able to deal with it. There’s no reason why we shouldn’t get it right. Well, there are several factors that I think a lot of folks don’t understand about our sector. You know, there’s a lot of conversation in the sector where we will say, yes, we’re willing to pay more money for electricity as long as we are sure we’ll get power 24/7 coming into our homes, our offices, our factories and whatever you have. However, it’s a little bit of a chicken and egg situation; if you don’t pay enough, the power sector doesn’t get fixed. If the power sector gets fixed and you don’t pay enough, it can’t be sustained. So there’s a little bit of dance to do around there. We have a value chain that we speak of and the value chain, if we focus right now only on gas-fired power plants, we’re talking about gas production, gas transportation through pipelines or whatever means you have and the power generation companies (GENCOS), and then you transmit the power through transmission lines and finally get to distribution networks. The distributors now take the power and distribute it to their customers’ homes, factories, and offices. This is the entire value chain. So, gas flows from one site, all the way to the GENCOs to generate the power, and then it flows all the way to the customers. Then the money flows from the customers all the way back to pay everyone along the value chain. If any of these pieces is broken, the power sector doesn’t work. And it sounds very simple.
However, the amount of investment needed to make this value chain work is humongous. If you want to produce enough gas to fire a 495-megawatt power plant, you need to invest at least $250 million for a brand-new processing plant. Now, I’m not even talking about the investment that the gas producer makes to drill in his fields to bring out the gas. This is just the processing facility and then you need to run pipelines, depending on where the plant is situated. If it is situated right next to the gas processing plant, it could cost anywhere from a couple of million dollars to get the gas to the GENCOs or hundreds of millions of dollars to build a long pipeline to get it where it’s going. Currently, the AKK pipeline is about to be built. The AKK pipeline is over 600 kilometres long, and it costs several billions to build a pipeline. Someone is making that investment.
Beyond that, someone is also going to make the investments to upgrade our transmission lines in the country. That’s a whole lot of money. We’re talking about hundreds of millions of dollars to build. And then finally, we get to the DISCOs. The DISCOs, when they were sold; what we were told was that the Discos have ATCL losses of around 45 percent. That is the Aggregated Technical Commercial Collection (ATCL) losses. Now, what we’re finding is that those DISCOs, some of them have ATCL losses above 60 percent. What that means is for example, if you give them 10 megawatts of power, and they sell, they are able to collect only 40 percent money for the power that they’ve given. Everything else is gone and lost. How can the DISCO survive? You can’t run a business this way.
That means it is an issue with the tariff system. Is the MYTO still working as at today, is it still relevant? Within the tariff structure that we have today, what we’re working with is the Multi-Year Tariff Order (MYTO). The MYTO was set up by Nigerian Electricity Regulatory Commission (NERC) to encourage investment, and to make sure that customers are not getting price gouges. It’s a nice system in theory, but in practice it is not working.
It was inside the MYTO that about 38 percent of the whole tariff goes to GENCOs, about eight percent goes to the transmission line, and about 48 percent goes to the DISCOs. And then there’s another six to seven percent that goes to the VAT, to the government and then services. When you break that down, the question is; how much is actually available for the entire value chain to work? It is quite small.
Today, residents are charged, I think maybe N26 now to N29/kwh. Businesses are charged anywhere from N30 to N46 depending on the Discos. On paper, it sounds good, however, in reality, that’s not enough money for these businesses to run the value chain and make it work. So, we need to go back to the drawing board, and my argument has always been, let’s look at a sector that has worked in Nigeria, which of the privatized sector has actually worked, and the only example I have right now is the telecoms industry.
What did we do differently? The government completely divested from telecoms. What happened after that? MTN came to Nigeria and they put down infrastructure. I can argue that the tariff that MTN was charging that year was more expensive than the tariff that they were charging anywhere else in Africa. But what happened thereafter? Other businesses started coming to invest in telecoms. So today, you have GLO, you have Airtel, and you have 9mobile, and so on. And because they are competing, the tariff has gone way down, because of competition there are different telcos. You can constantly see that they are driving to give better services; they are driving to give better tariffs to the end user. So, the competition has made the price stay competitive so people can actually get a good service at a price that makes sense to them. It’s not the government telling them what to charge.
Are the businesses within the value chain charging what they need to charge to be able to provide good service? Are they charging the tariffs that made sense to be able to make the investment needed to have the infrastructure value? But they also have competitors. And it is the competition that drives pricing. If the same were to happen in the power industry, companies will come to make required investments across the entire value chain to make it work. But this is not the case that is being put forward by the different regulators that the government has set up. The visible outcome today is that they are stifling growth in the country. They are stifling growth across the energy industry.
Can you throw more light on that area? How are the regulators stifling the sector? It is important we keep talking about it. Some years ago, NERC put out some regulations that were supposed to help renewable energy sources come up. The estimation was that by 2020, this year, we will have about 2000 megawatts running mostly from solar. How many megawatts have we put in solar? If we pull one over and over and we are not seeing the result, isn’t it time for us to start thinking completely differently? You can’t keep doing the same thing and expect a different result. It does not work. It has never worked and it will never work. It is time for us to take a very different approach. Stop looking at what they did in India or what they did in London or what they did in Argentina. We know what they did. The experts have come to tell us, we have written regulations by experts. A lot has been spent yet no solution in sight.
What can be done to really revamp the sector and make it work? We spent millions and millions of dollars in this country. That’s why it’s still not the right way to get it done. We have created a power sector recovery programme, PSRP. It’s not working. I argue that it’s time for us to do it differently and deregulate the sector. I’m not telling the government to close down all the regulators, you can keep them there. They have created some nice regulations that we can actually use. Don’t scrap all of them because we can use them. However, we need to understand that it’s a brand-new market that we’re trying to grow. So put the horse before the cart. Allow the sector to grow, and then you can regulate it. In allowing the sector to grow, allow the private companies that are willing to make the investment to make their investments, charge what they need to charge, and then let competition drive the prices down.
Let’s talk about regulations and regulators. How are they preventing the sector from growing, and can you kindly give us an example of how they impede the sector? I am in generation, and we have the plan that we designed from scratch from 2012 and 2015. We initiated a power purchase agreement with the Nigerian Bulk Electricity Trading Plc. (NBET), the bulk trader at a certain tariff. Well, guess what? From 2015 till now, nothing has happened. Several of the regulations that we worked under have been changed, several of the agreements that we had initially have been changed. How do we invest money in an uncertain environment? You can’t. The investor will not give you one dollar to invest but the money is there ready to be invested, but nobody is going to give it to you in the uncertain environment that we are in.
You sign an agreement today, in two years it is obsolete and you can’t even enforce it. So, the rule of law to enforce the agreements is not there. How can you invest? You borrow money on a certain day, when a dollar was N360 but today, a dollar is N475. The investment you made has completely gone. The expected returns completely eroded. How can you plan? The MYTO, however, is still at the same level. We were told that on July 1st, we were supposed to see a new tariff. Just before that day, what happened? The National Assembly supposedly got together with the DISCOs and said, oh, we’re not ready for that, let’s move into next year.
The increase that we were supposed to see in tariff has gone away. But Nigerians still expect power to come; it is not going to come. I said this year in, year out, as long as we keep doing this, the way we are doing it now, we would never see any additions, any meaningful action to the power industry. That’s what we see today. So, every year, I can say the same thing, and every year, you’re going to see the same result. A new minister comes in and says by the end of the year we will see 10,000 megawatts added to the grid, it hasn’t happened; and it’s never going to happen unless we change the way we do things.
What policy and market issues are needed to be resolved to facilitate investment for the stability of the power industry? The policies guiding tariffs and the regulations thereof, and the ability of GenCos to directly sell power to DisCos or end users need to be relaxed in a way that is investment friendly. They need to be relaxed to allow a free market to exist. For investment to come into the sector and be spent, potential local and foreign investors alike need to see that policies are stable, agreements entered into between companies and government-related entities are respected once executed, and that our legal framework fully protects such agreements.
Why can’t the GENCOs and DISCOs invest in the power themselves with sufficient metered power for everyone before talking about cost-reflective tariff? I believe this should be available first.
It is a good one; however, I ask you this, have you ever gone to a bank to try to borrow money? If you go to try and borrow money from the bank, the bank wants to see what you are going to use that money for, and how are you going to pay back. Where are you going to pay the money back from? Is it from the money that you make from that business that you’re trying to build? So, you need to show your business model first of all and be sure that the business can actually pay that money back. Without that, no bank will give you N1. It is the same way for a GENCO to build the plant. For example, a 500 megawatt plant, they need to spend about $700 million, not Naira. They need to see that the money that they are going to make, they can pay it back. If a Disco is going to invest to provide infrastructure, transformers, lines and so on. Guess what, that Disco also needs to show that it can collect enough money to pay back for the investment that they’re going to make. They need to show a viable business. Without showing it, they cannot raise the money they need to invest. This money is not coming from our pockets, it is coming from loans. They need to show that they can make money before they get the power to make the investments. In the same way you don’t ask someone in an airline company to bring planes first before they know that they can charge a high price or whatever price they need to be able to pay for the plane and pay the salaries of all workers. It doesn’t happen that way. This is business.
What role is the current gas pricing regime playing in the current bottlenecks being encountered by the GENCOs?
Gas pricing is one of the most important determinants of generation tariff, that is, electricity tariff is most sensitive to gas price. In order to produce and transport sufficient gas to GenCos, gas producers need to build, operate and maintain their gas production and processing infrastructure, which requires massive investment. Gas transportation via gas pipelines or virtual pipelines (trucks or barges) also requires sizeable investments to set up. These investments would therefore need to be amortized over time in form of cost-reflective gas supply and gas transport charges, which are ultimately passed through to electricity tariff. Without proper gas pricing there will be no investment in gas production and transport infrastructure. If this situation does not change the power sector cannot grow, no matter the lip service. Note that presently, only about 21% of the gas produced annually in Nigeria is used locally for power generation, petrochemicals, and others.
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