Power - Lagos Chamber of Commerce & Industry

Report
THE POWER SECTOR IN FOCUS
Presented to
THE LAGOS CHAMBER OF COMMERCE & INDUSTRY
by
Engr. Beks Dagogo-Jack FNSE
Chairman, Presidential Task Force on Power
Tuesday 3rd June, 2014
CONTENT
 ROADMAP TO NIGERIA’S ELECTRICITY SECTOR TRANSFORMATION





THE PRESIDENTIAL REFORM AGENDA
THE PRIVATISATION
THE TIMELINES OF REFORM
MARKET STATUS & OUTLOOK
SECTOR STATUS & OUTLOOK
 CHALLENGES OF THE POWER SECTOR REFORM
 TECHNICAL CHALLENGES
 COMMERCIAL CHALLENGES
 DEVELOPMENTAL CHALLENGES
 FUNDING ISSUES
 SECTOR REQUIREMENTS
 REGULATORY ISSUES
 DEVELOPING AND NURTURING THE NASCENT MARKET
 POLICY ISSUES
 ENERGY MIX
 ACCESS TO ELECTRICITY
 HUMAN CAPACITY
 SUMMARY & CONCLUSIONS
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Presidential Task Force on Power
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ROADMAP TO NIGERIA’S ELECTRICITY SECTOR
TRANSFORMATION
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Presidential Task Force on Power
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ROADMAP: THE PRESIDENTIAL POWER SECTOR REFORM AGENDA
Handing over of power companies
In 2010 on becoming President and Commander in Chief of the Federal Republic
of Nigeria,
President Goodluck Jonathan made the Reform of the Nigerian Power Sector a cornerstone of
his Administration and his Transformation Agenda. He immediately set about creating an Action
Plan to effect this Reform.
Subsequently, and later in 2010, The Roadmap for Power Sector Reform (“Roadmap”) was
officially launched. President Goodluck Jonathan clearly presented his administration’s agenda
on power stating:
“……The full implementation of the Electric Power Sector Reform has been a key priority for this
administration…….In developing this Roadmap we have built on the solid foundation laid down in 2001/2002 by
the adoption of the National Electric Power Policy, and in 2005 with the promulgation of the Electric Power Sector
Reform Act. This Roadmap heralds our advance to the final and very important stage in the reform process. This
is the stage where we ensure that the fundamental changes to the ownership, control and regulation of the
sector envisaged by the legislation are achieved and the downstream benefits are realised…..”
EPSRA
(2005)
• The Electric Power Sector Reform Act (EPSRA) 2005 can
therefore be seen as the Strategy Document defining the
Reform Agenda.
ROADMAP
(2010)
http://www.nigeriapowerreform.org
• The Roadmap is the Implementation Document for the
EPSRA – the Action Plan defining the Reform Process.
Presidential Task Force on Power
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ROADMAP: THE PRESIDENTIAL POWER SECTOR REFORM AGENDA
With the operational handover on the
1st
Nov 2013, the Privatisation
Handing over of power companies
of the successor companies of the Power Holding Company of Nigeria
(PHCN) was essentially and successfully been concluded. This has been
the largest power privatisation ever in Africa and represents mostlikely the most complete single-stage sector privatisation.
After a process praised for its transparency and showcasing the appetite of local & international
financiers and investors, the much-promised, long-awaited, private-sector led Nigerian
electricity market finally arrived. The first stage of the reform process as detailed in the
Roadmap in 2010 has been delivered ushering a sector with the best-ever potential to provide
sustainable growth and reliability of supply. The Presidential Task Force on Power (PTFP) - a
special project delivery vehicle of the Presidency - is proud of the roles played at the design and
implementation phases of this significant milestone in the Power Sector Reform Agenda.
Acknowledgement is richly due to the administration of President Goodluck Jonathan with
whose political will and leadership this impressive feat was made possible.
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ROADMAP: THE PRIVATISATION
Handing over of power companies
WHAT WAS ACHIEVED
•
Privatisation of all 11 PHCN Distribution and 7 PHCN Generation Companies
•
Total Size of the PHCN Transaction: 2.60 Bn US$ = 416Bn NGN
•
Payout to Labour : 360Bn NGN (So far)
•
This does not include retires and disputed staff numbers ~ 2,000
Financing was carried out principally by local, onshore banks demonstrating their appetite for
the new sector and their revitalized lending capacities after the sector restructuring following
the Global Financial Crisis of 2007/2008.
Despite the fact that the majority of the transaction sums went to settling labour claims, with
the transfer of historic liabilities to NELMCO (Nigeria Electricity Liability Management Company),
the market is now liability free and ready for the much needed investment to meet consumer
demand.
Privatisation of the 10 NDPHC Generation Companies is scheduled for 2014.
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ROADMAP: TIMELINE & MILESTONES
Reform Milestones
Completion of Industry
Agreements
Feb2013
Execution of
NEGIP/PRG
Implemention of Costreflective Tariff for Gas
Apr2013
Sep2010
Establishment of Midterm Transmission
Funding Plan
Establishment and
Operationalisation of
NBET
Establishment of
NELMCO
May2013
Aug2011
Jan2010
Reconstitution of
NERC
Procurement of TCN
Management
Contractor
Oct2010
Jun2012
Operationalisation of
NELMCO
Implementation of
Cost-reflective Tariff
for Power
Feb2011
Presentation of TCN
Network Expansion
Blueprint
Aug2013
Conclusion of Labour
Settlement/
Operational Handover
Nov2013
Jul2012
• Announcement
of TEM
• NDPHC
Privatisation
Q3-2014
2010
2011
2012
2013
Aug2010
Jun2012
Apr2013
Launch of Roadmap
for Power Sector
Reform
Execution of
MoU for
30,000 MW
Presidential Power
Retreat Transaction
Signing Summit
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Presidential Task Force on Power
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2014
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ROADMAP: MARKET STATUS & OUTLOOK
By December 2013 all the deliverable milestones contained in the very bold and ambitious Nigeria
Power Sector Reform Roadmap launched by Mr. President in August 2010 had been achieved
except two namely :
a) Declaration by the Hon Minister of Power of the Transitional Electricity Market Stage (TEM) to
kick-start a fully contracted and rules-governed electricity market wherein the sanctity of
contracts shall be full to protect market liquidity and incentivize increased investment;
b) A well incentivized & liberalized domestic gas market expected to be delivered by the pending
Petroleum Industry Bill (PIB).
With certain CPs outstanding, it was impossible for NERC to advise the Hon Minister of Power as
required by the law to declare TEM.
Conscious of the risks associated with handing over the companies for privatized company
operation without TEM – or a substitute – the Presidential Task Force on Power made repeated
representations to the Ministry of Power , NERC and BPE leading eventually to an acceptance by
NERC to develop and institute a set of Interim Rules to conduct the market in the pre-TEM phase
until the declaration of TEM – the Interim Rules Period (IRP) .
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ROADMAP: MARKET STATUS & OUTLOOK
The original IRO (Interim Rules Order) issued by NERC in December 2013 scheduled the end
of the IRP/ start of the TEM for March 1st 2014. This was not achieved, and due to this
slippage and to certain significant sources of concern – which were capable of impacting very
negatively on the commercial sustainability of the market – the IRO was modified with the
revision taking place with effect from May 1st 2014.
At the moment the Nigerian Electricity Market (NEM) remains in its pre-Transitional stage
progressing towards the start of the TEM. This is the critical next step in its evolution towards
the fully-competitive market as defined in the EPSRA 2005.
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Presidential Task Force on Power
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ROADMAP: MARKET STATUS & OUTLOOK
Handing over of power companies
EPSRA (2005) Trajectory of the Nigerian Electricity Market
Long Term
Electricity
Market
2014
We are here
2010
Transitional
Electricity
Market
Pre-Transitional
Electricity Market
Medium
Term
Electricity
Market
• Willing Buyer/ Willing Seller
• Competition at Wholesale and
Retail Electricity Markets
• Beginning of bi-lateral contracts.
• Market participants establishing track record.
• Government supporting reducing.
• Beginning of commercially-based market.
• New participants with limited track record.
• Government supporting the market via Bulk
Trader for centralisation of Credit Risk
• Preparation of commercially-based market.
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ROADMAP: SECTOR STATUS & OUTLOOK
Handing over of power companies
Due to an absence of effective system planning, additional generation capacity has not always
translated into additional power to consumers, due to the following issues:
i. Non-establishment of fuel supply and transportation for gas-fired generation plants;
ii. Inadequate power evacuation corridors from newly-built generation plants;
iii. Poor design & location of transformation capacity in T&D networks leading to
reduced network capability.
As the market becomes fully-commercialized these issues can be expected to reduce.
Following is a breakdown of value-chain capabilities now in 2014 and projected to 2020 based
upon the following implementation plans detailed below:
 Gas (2020): NNPC Strategic Gas Plan [Gas Supply projected at 3Bn SCF/D]
 GX (2020) :
 New Projects – FG Hydro
 Investment program given to BPE from PHCN privatisation
 New IPPs with plans submitted by developers verified by PTFP
 TX (2020) : TCN Network Expansion Blueprint (NEB)
 DX(2020): Investment program given to BPE from PHCN privatisation
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ROADMAP: SECTOR STATUS & OUTLOOK
Handing over of power companies
2014/Q1 2020/Q4
Gas-to-Power (MW Eq)
2,450 10,500
Gas Fired Gen Capacity
Hydro Gen Capacity
IOC Gen Capacity
Other Fuels
4,537
1,270
1,130
-
17,861
4,910
3,380
2,110
Total Gen (GX) Capacity
6,937
28,261
Effective GX Capacity
Transmission Capability
Distribution Capability
4,850
5,500
7,098
20,900
20,000
24,799
End Consumers
4,850
20,000
• IPP developers are projecting gas-fired capacities close to 18,000 MW; however, based on the
current NNPC Strategic Gas Plan there is only enough gas for 10,500 MW.
• The current TCN Network Expansion Blueprint projects National Power Wheeling Capacity of
20,000 MW.
Therefore – unless gaps can be closed and capacity increased at a faster rate in the Gas and
Transmission value-chains, these will become the limiting factor in the quantity of power that
can be supplied to end consumers.
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CHALLENGES OF THE POWER SECTOR REFORM
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CHALLENGES: CLASSES OF RISKS, ISSUES, & THREATS
Level of energy produced inadequate for market to generate adequate funds from customers to
pay market overheads and maintenance.
Market enters Default and Service Delivery Collapses
Insufficient
Energy &
Technical
Performance
Insufficient
Discipline
and Market
Development
Insufficient
Money &
Commercial
Performance
Market Participants fail to follow rules of
the Market and to meet the various
obligations expected from them in Market
codes.
Drop in confidence of Market and Reforms
http://www.nigeriapowerreform.org
Level of money returned is inadequate to
pay for cost of generating energy and the
associated costs of transmission and gas and
other market participants.
Defaults occur & Service Delivery falls
Presidential Task Force on Power
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CHALLENGES: TECHNICAL PERFORMANCE
Power Generation Assumptions:
• MYTO II assumes a certain average level of power generated by the
Generation Companies for wheeling to the distribution companies
and onward sale to their customers.
If the market cannot achieve these levels then the ability of the
market to cover its costs adequately will be called into question.
MYTO II Power
Assumptions
Start End (MWH/H)
Jul-13 Jun-14 4,875
Jul-14 Jun-15 5,890
Jul-15 Jun-16 6,546
• Currently daily AVERAGED power generated should be 4,875 MWH/H. This has not been
met. With the return of ELPS-A, daily AVERAGED power generated has been [3,800 MWH/H]
• Unless the market can generate and wheel this amount of power, the Market will have
immediate issues achieving liquidity in the short and solvency in the medium to long terms.
There is adequate Available Capacity in the privatized sectors of Generation and Distribution
to meet these power levels; the issue arises due to parts of the value chain owned and
financed by the Federal Government.
The issues can be detailed thus:
Stranded Generation: Available Turbines but inadequate Gas Supply to operate due to:
• Supply Issues
• Transportation Issues
Trapped Generation: Available Turbines but inability of Transmission to evacuate due to:
• Network Capacity Issues
• Network Reliability – Operational and Maintenance Issues
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CHALLENGES: TECHNICAL PERFORMANCE
Current power assumptions in the Tariff may not be achieved given the current project timelines
in critical gas and transmission projects. If this occurs, this will result in a Market unable to
adequately generate the funds to cover its fixed and variable costs. This inability will present
itself by shortfalls in energy sold and subsequently in market payments.
Remedies include:
• Tariff recalculation (under new assumptions);
• Acceleration of on-going projects;
• Execution of new projects
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CHALLENGES: COMMERCIAL PERFORMANCE
MARKET FUNDS AND PAYMENTS.
Currently the Interim Rules Order (IRO) prescribes minimum payments that each Distribution
Company must produce and minimum payments that each generation Company must receive.
These amounts are meant to represent targets that are achievable and which when performed
should be able to keep the market in a well-defined shape on its progress to TEM.
These minimum payments are not being met and consequently during this post-handover
period, market liabilities are building up and the resolution of these is not yet determined.
A large part of this issue is a lack of visibility in what is happening at the retail end of the market
where payments are being made. Within a regulated market as soon as a market participant is
unable to meet its obligations due to circumstances beyond their control, they are obliged to
open their books to The Regulator or its agent. This has yet to happen and as such there is
increasing discomfort within The Market as to who is and who is not justly-bearing the
discomfort during the IRP.
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CHALLENGES: COMMERCIAL PERFORMANCE
DISCOS
• There has been no improvement in the posthandover commercial performance.
Performance is comparable to PHCN and
DisCos do not remit even the minimum
payments demanded by the IRO. If
continued, this will lead to:
• Increasing Market Liabilities
• Decreasing Market Liquidity & Solvency
• Market Failure
GENCOS
• Monies paid to the GenCos have not
improved either. If continued, this could
lead to:
• Plant shutdown by new owners or
their financiers;
• Reduced confidence from financiers
in NDPHC privatisation.
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Presidential Task Force on Power
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CHALLENGES: MARKET DEVELOPMENT
THE INTERIM RULES PERIOD:
At Privatisation – the handover of the successor companies on November 1st 2013:
• The Market had not established the necessary processes and procedures to start the
Transitional Electricity Market (TEM) signaling the start of Commercialisation, and
• There were outstanding issues concerning the validity of the assumptions within the MYTO-II
Tariff that would significantly impact upon:
• The financial performance of The Market and its commercial viability, and
• The contracted performance improvement that were conditions of the Privatisation.
As a result of this, The Interim Rules Period (IRP) was specifically established to provide a period
of predictability, order and discipline post-handover for The Market to transit towards the TEM.
In this period, work necessary to close out outstanding issues would be completed and there
would be a safe and credible ‘test-driving’ of critical Market Processes before TEM.
3 activities need to be achieved before the IRP can conclude and the TEM begin:
i. The conclusion of all legal and operational Condition Precedents (CPs) to ensure a viable
TEM and Market ready for Commercialisation – TEM Work Program (TEM-WP)
ii. The conclusion of Baseline Loss Studies to form the basis of performance measurement as a
requirement of the Privatisation – Baseline Loss Studies Work Program (BLS-WP)
iii. The re-validation of Tariff inputs and to ensure that a commercially-viable Market is
established – Tariff Revalidation Work Program (TR-WP)
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CHALLENGES: MARKET DEVELOPMENT
THE INTERIM PERIOD (CONTD):
At the issuance of the Interim Rules Order (IRO), the IRP had been initially-scheduled to
conclude on March 1st 2014. This date has slipped. Marginal progress has been achieved in the 3
work programs, and the IRP originally designed as a short stop-gap has been significantly reconfigured to ensure The Market can function properly to provide adequate Service Delivery to
customers and continued support and confidence to the Reform program.
Currently the end of the IRP/ start of the TEM is September-2014, but this date is dependent
upon:
i. Prescribed activities of work from public agencies and private enterprises.
i. Few Enterprises/Agencies have provided any detailed work programs to support their
completion forecasts got monitoring by PTFP
ii. The end of the current MYTO-II subsidy period in June-2014
i. This may cause additional complications as consumer tariffs are expected to rise to
compensate for this loss of market funding and revenues may be affected by collection
efficiencies.
iii. The delivery of “Adequate Levels of Power”
i. Due to issues of pipeline vandalisation the supply of gas to generation plants and
power delivered has been below levels for the Market to achieve commercial viability.
“More Power” is required, but this precise power level has not yet been pronounced by
the Regulator as it is a critical component of the Tariff Revalidation Work Program.
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FUNDING ISSUES
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FUNDING ISSUES: SECTOR REQUIREMENTS [I/II]
Handing over of power companies
• Provided private investors can be assured of suitable risk-adjusted returns, funds will be
sourced to invest in the Nigeria Power Sector. For this to happen: the Market has to
demonstrate beyond reasonable doubt that it is commercially-viable and that it can fully pay for
the power provided to it at a price reflective of all the costs to produce, generate, transmit and
distribute.
• Given the size of Nigeria’s market and its current supply deficit, large investments will be
required to reach this point (20GW).
• Below is a breakdown of potential additional investments assuming 20GW of generation with
an approximate 15GW/5GW Thermal/Hydro split. [NB IOCs provide their own gas].
Area
Unit
Funded
Capacity
C
Target Unfunded
Cost
o
Capacity Capacity
M US$
s
Thermal Generation
(IOC+IPPs)
Hydro & Others
Transmission
MW
9,220.00 15,090.00
MW
MWEq
2,670.00 4,910.00
13,000.00 20,000.00
Distribution
MWEq
11,597.60 20,000.00
Gas Development
MMSCF/D
Gas Transportaion
N/A
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1,500.00
N/A
4,311.43
Comment/Remark
Assuming NIPP fully completed. 1M USD/ MW
Includes BPE transaction expansion plans
2,240.00
3,360.00 1.5M USD/ MW
7,000.00
4,900.00 2017/ 13GW Plan Secured
Assuming NIPP Projects fully completed.
8,402.40
4,201.20
Includes BPE transaction expansion plans
18,331.20
5,870.00
5,870.00
2,811.43
2,811.43
100 M USD/ 100 MMSCFD assuming all volume
needs to be processed
N
4,200.00 This is the total cost of CAKK, ELPS-2, OB-3, etc…
/
7,011.43
22
Presidential Task Force on Power
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N/A
FUNDING ISSUES: SECTOR REQUIREMENTS [II/II]
Handing over of power companies
Sector Funding Capacity Limit
• The size of the funding required to reach the 20GW goal suggests that current investment
capacities may prove another bottleneck to power supply growth.
Currently funding is provided via domestic, banking institutions. They are limited by balance
sheet and sector credit limits that will be tapped out by both the 2013 PHCN privatisation and
the expected 2014 NDPHC privatisation. To expand the current capacity to finance the Sector
Reform, any of the following might be considered:
• Domestic, Public-sector financing Solutions
Federal Government to support financing effort by any of the following:
• directly via debt and/or equity investments; or
• indirectly via Special-Purpose-Vehicles or Financial Insurance to recycle domestic,
private-sector banking balance sheets.
• Foreign, Private-sector financing Solutions
International Banking and Capital Markets expected to participate dependent upon the
following:
• Improved and sustainable Market Commercial Performance; and
• Federal Government Investment Insurance
• Domestic, Private-sector financing Solutions
Expansion of domestic financing capacities via:
• Financial Sector Reform to allow domestic Capital Market participation and access to
long-term private-sector/ pension funds.
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REGULATORY ISSUES
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REGULATORY ISSUES: DEVELOPING & NURTURING THE NASCENT
MARKET
Handing over of power companies
DEVELOPING A PROPER MARKET CULTURE
The decades of having a vertically-integrated, government-run power company has impacted
the psyche of many both within and outside of the sector – from customers to contractors. New
patterns of behaviour need to be established if the Market is to be established, developed and
grown. The concept of contractually-defined behaviour with its associated incentive structure
will take time to establish its roots. However it is important that this formalization of behaviour
is enforced at all levels:
• Consumers – especially government consumers – need to understand that bills are to be
paid;
• Market Participants – need to understand that they have both technical and commercial
rights and, as importantly, obligations;
• The Regulator – needs to understand that a market needs to be grown and developed
and that a firm, fair hand and discipline are critical in establishing this.
Market Discipline & Enforcement needs to be established at as early a stage as possible, and
the Regulator needs to demonstrate to the Nigerian Electricity Market its bark and, mostimportantly, its bite.
Legacy Debts created during the PHCN/NEPA era need to be resolved to encourage future
investment and embed the payment culture.
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REGULATORY ISSUES: DEVELOPING & NURTURING THE NASCENT
MARKET
ESTABLISHING PROPER MARKET STRUCTURE
Handing over of power companies
“It is impossible to predict and plan for the supply of any commodity to the Poor, when the Rich
themselves are having trouble obtaining it.”
“You may be able to fix the price or the quantity of a traded commodity, but never both.”
The above quotes could be applied to the current Nigerian Electricity Market. Although seen as
a developmental necessity to be provided to all citizens, access to reliable affordable power
appears to be a luxury product. For this reason, it is necessary that a proper market structure is
established to ensure long-term sustainability.
The following needs to be promoted:
• The design of solutions to allow the supply of electrical power at pre-agreed prices and
service levels to willing consumers; and
• The culture of zero tolerance at all levels of the Market for payment defaults of goods
and services delivered.
Cost Reflective Tariffs need to be established. If subsidies are to be required, intra-market
solutions should be considered before external or government solutions.
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POLICY ISSUES
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POLICY ISSUES: DIVERSIFYING THE ENERGY MIX
Handing over of power companies
DIVERSIFYING GENERATION SOLUTIONS
• With the large gas reserves available in Nigeria there has been a focus of power generation on
gas-fired power plants. However, recent problems with vandalism and attacks on crude and gas
pipelines has revealed a significant risk point of the reform in this regard.
• Given this fact, it is imperative that ‘solution diversity’ is sought to increase the energy mix,
promote energy security and maintain system robustness to fuel supply volume and price
shocks. Options that now need to be considered from a policy and regulatory view point and
commercially-developed are:
• Hydropower solutions [especially small-to-medium hydro in Northern Nigeria]
• From over 300 agricultural dams, approximately 40 have been identified for retrofitting to supply power to local consumers.
• Solar-power solutions [especially in North-Eastern Nigeria]
• The North-Eastern region of the country is the farthest away from any network
generation point – this raises network stability and power quality issues.
• Wind-power solutions [especially in North Western Nigeria]
• There is already a 40 MW Wind-Power project in Katsina
• Coal-fired power solutions [especially in the coal regions of Eastern and Central Nigeria]
• Nigerian coal – like its crude – is of ultra-low sulphur content.
• Biomass power solutions
• To assist in the promotion of power solutions to agro-communities with low or no grid
access.
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POLICY ISSUES: INCREASING ACCESS & SECTOR CAPACITY
Handing over of power companies
INCREASING ACCESS TO ELECTRICTY
• Due to the sheer size of the country, an enabling environment needs to be created to allow for
increased access to power in rural and peri-urban areas. With the recent privatisation and the
dramatic growth in urbanization, there is a likelihood that investors will tend to focus on and
cherry-pick urban areas where the customer densities can guarantee more-predictable returns.
Policy and regulation now needs to be focused to create commercially-viable solutions for:
• Off-grid power supply; and
• Long-term/ multi-year grid expansion.
SECTOR CAPACITY SUPPORT & GROWTH
The requirement to take the Power Sector Reform beyond its starting point of gas-fired, griddelivered power solutions will require an increase in the Sector’s human capacities – especially to
structure the development of the suitable Policy, Regulatory and Commercial environments.
Already gaps are appearing in the response time of Government bodies to the work practices and
demands of private-sector operators. Clearly the nascent market – and its governmental sector
stakeholders – will grow and mature with time; however, a focus on aggressive human capacity
growth is required to be developed and maintained.
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SUMMARY & CONCLUSIONS
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SUMMARY:
Handing over of power companies
THE TRANSFORMATION
The Privatisation of the Nigerian Electricity Market is unprecedented in both its scale and its
scope. Never before has there been as broad a transfer of a critical sector from Public to Private
hands. Many did not believe that so wide a Privatisation could be achieved. They were wrong
and now The Sector Reform previously inevitable has now become irreversible.
Each Sector Reform come with its own characteristics and there remain many aspects particular
and peculiar to the Nigerian Power Sector Reform. It has just started and for success to be
achieved there needs to be not only transparency and fairness but also creativity and flexibility.
A new born Market has been born from a Nation pregnant with the expectations of massive
socio-economic development. This new-born will need careful nurturing and attention to ensure
that it grows healthily from infancy through childhood to develop into the strong, viable and
independent sector that the Nation expects of it. All stakeholders in the NEM now need to play
their roles in ensuring this new-born reaches adulthood.
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Thank You
32

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