Unbundling of PHCN and the Inherent Opportunities

The growth, prosperity and national security of any country are critically dependent upon the adequacy of its electricity supply industry. The link between electricity supply and economic development is closely connected in any serious economy, and Nigeria should not be an exception.

The availability of reliable electric power to the homes and businesses of Nigerians has been one issue of concern in our national life that has been approached with so much hope, yet it has experienced so much frustration over the past decades. For several years, despite consistent perceived cash investment by the Federal Government (FG), power outages have been the standard for the Nigerian populace. In the recent decade, subsequent regimes have devoted billions of naira to reverse the neglect and mismanagement which has characterised the sector. Where this leaves the sector in the near future is left to be seen.

The South Africa Experience
South Africa’s only nuclear facility, Koeberg, is located outside Cape Town and has an installed capacity of 1,800 MW. It has average production of 11,482 kilowatt-hour (GWh) in the last 3 years. The plant accounts for approximately 7% of the country’s total electricity generation. According to the 2012 British Petrochemical (BP) Statistical Energy Survey, South Africa had in 2011 electricity production of 262.54 terawatt-hours, an increase of 1.1% and equivalent to 1.19% of the world’s total.

The electricity supply industries of Southern Africa are dominated by the State owned utility of South Africa, Eskom. Eskom generates around two thirds of the electricity produced in the whole of Africa and is extending its transmission grid north into neighbouring sub-Saharan countries. Eskom generates 35,200 MW from 20 power stations; it is one of the largest utilities in the world, generating approximately 98% of South Africa's electricity. Generation is primarily coal-fired, but also includes a nuclear power station at Koeberg, two gas turbine facilities, two conventional hydroelectric plants, and two hydroelectric pumped-storage stations. The company also owns and operates the national transmission system. Power from coal-fired generating plants amounts to 34,882 megawatts or 89.1% of Eskom's nominal generating capacity.

South Africa has huge deposits of coal and its base-load stations are mainly fired by coal. Eskom supplies electricity to Lesotho, Swaziland, Botswana and Namibia as well as exporting to Mozambique and Zimbabwe. The South African government introduced an electricity "poverty tariff" in November 2001 that reduces electricity prices for the poor. However, nearly half of rural households in South Africa still do not have power.

Divestiture of Successor Companies
The government has divided the current Power Holding Company of Nigeria (PHCN) distribution sector into separate companies or entities that are called Local Electric Distribution Companies or Local Distribution Companies (LDC) among the regions. These bodies manage the National Integrated Power Project (NIPP). The Bureau of Public Enterprises (BPE), the agency handling the privatisation of the power sector on behalf of the Federal Government, completed the verification of all the bank guarantees provided by the preferred bidders for PHCN and the final negotiations of transaction documents. The development paved way for the handover of the successor companies to the core investors.
The challenges in the bidding process for some of the power stations in the country can be attributed to the cumbersome privatisation process. The impasse between the Nigerian Labour Congress (NLC) and the FG is also a major concern. Issues such as staff entitlements, land and property titles are among the major subjects in the front burner.

It is expected that when the privatisation process is concluded, the level of electricity delivered to the consumer would increase significantly. Recently, the FG handed over the PHCN generation and distribution companies to core investors during the second quarter of 2013. However, the distribution company in Kaduna and the generation company in Afam, Rivers State were exempted from the exercise because no preferred bidder had emerged for the firms.

The generation companies slated for privatisation include:
1.    Ughelli Power Plc
2.    Sapele Power Plc
3.    Geregu Power Plc
4.    Kainji Power Plc
5.    Shiroro Power Plc

The Need for Appropriate Pricing Regime
Unreliable power supply constitutes a major challenge to Nigeria’s economic growth and development, hence solving the lingering electricity problem is critical to realising the nation’s quest to become one of the 20 largest economies of the world by 2020 and also becoming a preferred investment destination in Africa. With the participation of the private sector seen as germane towards ensuring improved power supply in the country, the establishment of an appropriate pricing regime is aimed at making sure the sector becomes financially viable throughout the value chain, as end-user tariff must, at least, be at a cost-reflective level. Without a pricing regime that supports financial viability in the sector, it simply makes no sense for a private sector operator to come into the market.

The Nigerian Electricity Regulatory Commission (NERC) increased electricity tariff from ₦8.50 to ₦10.00 per kilowatt in July 2012 in a bid to boost revenue and stimulate investment in the troubled sector, which is also in line with the implementation schedule of the 2008/2013 regime of Multi-Year Tariff Order (MYTO). According to the new tariff template, electricity consumers in the Residential Two (R2) category (residential customers with single face meters) are expected to pay between ₦10.85 and ₦14.60 per kilowatt as against the current rate of ₦7.30 per kw/h, while those operating on R3 (Maximum Demand) consumers, would be charged between ₦16.50 and ₦22 per kw/h.

In the same vein, ‘Residential One (R1)’ category, comprising the lowest paying customers who are paying ₦2.20 per Kw/h, will start paying ₦3.30 and ₦4.40 Kw/h while the highest paying customers, who now pay ₦15.60 would be expected to pay between ₦23.40 and ₦31.20 respectively when the new tariff regime takes off. It is on record that between 2008 and now, the MYTO has undergone two minor reviews in line with the methodology.

Nigerians are of the opinion that there is no justification for another increase in tariff because they are not getting value for the huge amount being paid for electricity as power situation has worsened in recent times. The Federal Government is of the opinion that the tariff being proposed is based on 4,500 Megawatts, and it will come down considerably when electricity generation hits 7000MW and above.

Opportunities in the Power Sector Industry
The ongoing privatisation of power assets will attract significant non-oil foreign direct investment (FDI) into the Nigerian economy in the short-to-medium term. Separate developments in the sector, including the linking of gas pipelines to gas-fired power stations, has helped push up power supply from 3,500 megawatts in 2012 to the current 4,500 megawatts. This increase in power supply from the grid has reduced the amount households and businesses spend on running diesel-powered generators, which has significantly lowered their electricity costs.

As the country’s power supply increases and becomes more reliable over the medium to long term, it is expected that cost of production will drop. It is believed households’ discretionary income will also increase, on the back of increased power supply. It will cause an ‘explosion’ in the economy with entrepreneurs springing up and businesses re-investing funds to expand their business, rather than using such money for alternative power generation.

Way Forward
While Nigerians do not absolutely embrace the proposed price hike, they have called on the Federal Government and the NERC management to improve service delivery, giving the growing demand for improved power supply.

To tackle the numerous challenges facing the power sector, government has been advised to revive most of the electricity projects under the Independent Power Projects (IPP) and invest in facilities to bring in constant supply of gas to the plants; ensuring that operations are not hampered by paucity of fuels to run the turbines. Once the electricity problem is resolved, Nigeria will naturally start working itself into economic prosperity. Costs will be reduced in the bigger manufacturing companies where the contribution of self-supply of electricity inflicts about 60% cost on their total cost of production.

It is a fact that the positive multipliers that would be unleashed on the economy will bring back the industries that have fled the country and attract new investments. Government needs to address the unresolved issues in the power sector, especially as they relate to the privatisation of the PHCN and its successor companies. All stakeholders should also be carried along in order to ensure a hitch-free and successful completion of the power reform programme.

In context, Nigeria’s regulated end-user tariff is far below the prices paid in most West African countries (as shown in the table below) and is even much lower than the prices paid in more efficient markets, where demand is fully satisfied and the costs to produce electricity are considerably less (e.g. the US and the UK).

The stalled expansion of Nigeria’s grid capacity combined with the high cost of diesel and petrol generation has crippled the growth of the country’s productive and commercial industries. If this situation were to persist, the cost by 2020 in terms of lost in GDP would be about ₦20 trillion (about $130 billion) every year.

Nigeria’s per capita electricity consumption is amongst the lowest in the world and far lower than many other African countries. Nigeria’s per capita electricity consumption is just 7% of Brazil’s and just 3% of South Africa’s. Brazil has 100,000 MW of grid-based generating capacity for a population of 196 million people. South Africa has 40,000 MW of grid-based generating capacity for a population of 50 million people. As at April 2013, the peak generation supplied by Nigeria’s PHCN was just 4,500 MW for a population of over 150 million people.