Engerati host, Adi Bokobza: Hello, and thank you for tuning into this Engerati briefing with Berwin Leighton Paisner, or BLP. Before we start, I would like to go through a couple of housekeeping items. Firstly, this presentation is available to download as a pdf file and also as an MP3 audio file for easy access [from the Energati website only]. The briefing is also available on demand and Engerati so you can share it with your colleagues and please do, we encourage it. Now Engerati briefings follow a simple steps format. We will hear from today’s speaker and follow this with a moderated question and answer session. If you have any questions, kindly tweet them via @Engerati. Now this organised part of the Power in Africa in Focus Track on Engerati. For further information about this track, please access the link shown on your screen now.
So in this briefing we will be discussing the Nigerian power sector, looking at it from a contextual point of view, where we’ve gone, where we are and where we could go in the future. Our speaker today is Segun Osuntokun, partner, Energy Disputes Practice and head of the Africa Group at Berwin Leighton Paisner. I will now, or better still to kick things off rather, I’ll now bring Segun in to give us a quick look on where we are in Nigeria contextually from a key economic and demographic perspective.
Segun Osuntokun: Thank you Adi and hello everybody. What I want to do, as Adi has intimated, is to set the scene a little bit before we delve into the ins and outs of the Nigerian power sector as it is and the challenges it faces in the future. Set the scene, by giving you some factual background into the economics, politics and history of Nigeria and thereby ensuring that when we do move onto the power sector analysis you bear in mind where Nigeria sits in economic terms and demographically.
So, running through some general facts about Nigeria. Nigeria has a population of 180M people, it is estimated to grow at an annual rate of 2.8% and such is Nigeria’s population that by the year 2050 it will be estimated to be the third most populous country in the world, with over 300M people, with a land mass of about 924,000 sq metres, the major language is English, which is a [lingua fanca] the language of business, the three principle languages of the constituent tribes, Yoruba Hausa and Igbo. The major religions are Christianity and Islam and a relatively low life expectancy at birth of 52 years.
So economic facts. Nigeria has fared quite well over the last five years and coming out of the great financial recession did relatively well. It is now the largest economy in Africa, with a rebating of its GDP, now has GDP of $570B. It is larger than the South African economy which until the rebasing was the largest economy in Africa.
As I said, Nigeria fared relatively well, coming out of the great recession but have hit harder times particularly because of the collapse in the oil price and that is evidenced by the declining GDP growth rate going from a peak of 6.3% in 2014 to 2.8% last year in 2015.
Some more economic facts, just to put matters in context, the inflation rate has spoked recently again reflecting the difficult times that Nigeria is going through, the economy is composed of three principle sectors agriculture, industry and services and obviously the oil and gas sector is in there somewhere in the industry sector however it is not the predominant sector in terms of composition of economy of course it is the country’s largest revenue foreign exchange earner but that's another matter in terms of the sectoring composition is actually agriculture as you will see and services play significant roles in the economy.
Now very quickly, I will just touch on some history and some politics to further set the scene. Nigeria has been independent since 1960 when it won independence from the UK. It had a tumultuous history sadly when they had a three year civil war in the 60s which some of you might remember or may have read about and you have got intermittent civilian war interspersed by military rules if I can call it that. The longest spell of military rule being from 1984 to 1989.
Since 1999 there has been civilian rule. t is the longest stretch of civilian rule in Nigeria’s history and you have had four presidents since 1999 starting with President Obasanjo and then President Yar’Adua, President Jonathan and currently President Buhari. President Buhari is a member of the APC which is the current ruling party. It took over power in 2015 following some historic elections in which it was the first in which a civilian government had peacefully handed power to another civilian government and opposition party.
I have put up there three principle actors in the government. President Buhari himself who doubles as the Petroleum Minister. His Vice President Mr Osinbajo who plays a key role in the Power Sector and of course the Minister for Power, Mr Fashola. Mr Fashola is also a portfolio for roads and housing so he is something of a super minister holding some of the three most important infrastructural ministries.
So that's my run through the context for the power in Nigeria.
Adi Bokobza: Thanks Segun, it’s interesting that you have already put up the power section in Nigeria that is probably the thing that we were probably most looking forward to hear and you know listening to you it shows a country on the up and quite a complex one at that, right? You know, huge potential consumer base equally a huge one at the moment as well but also economic growth and challenges with oil prices and GDP. So how do all these complexities relate or reflect the current situation in the power sector?
Segun Osuntokun: The power sector in Nigeria is like, I will put up a slide giving you a snapshot of where things are at the moment, is that the situation in Nigeria given the background and given the huge economic potential it has, is I don't say it lightly, but I think it is currently pretty dire. They are in dire straits in terms of energy. For the largest in economy in Africa to have a power sector as it currently is, is a significant constraint on the country’s potential. Some statistics which I will summarise on the slide, bear this out. Nigeria has a total installed generation capacity of just about 12,500 megawatts as of August 2015 and that composed of mainly thermal based gas fired appliances which supplied about 85% of that installed generation capacity and 15% hydro. This is in contrast to South Africa which has an installed generation capacity of 40,000 megawatts even though its population is less than a third of Nigeria. The gas supply comes from Nigeria’s large reserves. It is currently the seventh largest natural gas reserves in the world. There is very little renewable produce at the moment although the government hopes that will change. That rather woeful picture in terms of installed generating capacity is actually translated into equally depressing operating capacity because as the slide shows on average, in 2015, there was less than 4,000 megawatts of operational capacity and less than 25% of installed capacity actually reaches the end users. Where does it all go? Well, the 12,500 meg watts dwindles down to 4,000 in terms of operation capacity mainly due to constraints from maintenance, gas supply, water for the hydro, transmission and distribution factors which dampen the rather inadequate installed generation capacity down to 4,000 megawatt being actually generated. The picture is perhaps most stark in terms of the figures of electricity consumption per capita as you can see it is estimated that Nigeria has an electricity consumption per capita of 126 kilowatt hours compared with Ghana a much smaller economy which has the same per capita number of 361 kilowatt hours and South Africa which is again a much smaller economy with fewer people, its electricity per capita number is 31 times higher than it is in Nigeria.
The last statistics of the slide is that 95,000,000 Nigerians are currently without access to electricity, that's about half the population do not have access to grid electricity and those who do face extensive outages with the result that most Nigerians get a significant portion of their electricity from private generators which cost over twice as much as grid based power. So I am afraid that is a picture that is a snapshot of the current situation in Nigeria. There have been efforts to reform the sector and admirable efforts at that, this slide shows you what the timeline of reform is and I started it in 2004 with inception of the National Integrated Power Project which is a fast tracked public sector funded initiative by the government of President Obasanjo and the idea was to fast track significant new generation capacity. There were 10 NIPPs which were to bring to the grid a total of 5,450 odd megawatts. Those NIPPs are still in existence we will see a little bit later on what the government’s intention is with those NIPPs but the real drover for the reform came in 2005 when the electricity power reform act (the “EPSR”) came in and it put in place a radical reform system, which essentially took apart the old national electricity power authority (“NEPA”) and created the Power Holding Company of Nigeria. Nigerians for many years have had lots of fun playing around with the acronyms of NEPA and THCN which I will, which are quite happily jokes now so I won’t go into them, but THCN as it now is, as it was in 2005 comprised six generating companies, 11 distribution companies and one transmission company.
In 2010, the power sector reform road map was published and this was designed really to accelerate the SPR reforms and its key tenant was the privatisation of the generating and distribution companies which were owned by THCN. The GENCOs and DISCOs as they were called and it is estimated that the reforms or the privatisations of THCN was one of the boldest privatisation transactions in the power sector globally. It is estimated that it had a transaction cost of about $3Bn, we will see a little bit later on how that has panned out.
In 2013, the government started the sale of the NIPPs which it had commenced or had commenced the sale of those NIPPs, those NIPPs some ten years earlier and finally before we look at some of the entrenched challenges I thought I would just give a flavour around the regulative framework bought in by the ESPR but also just to reflect the realities of the power sector in Nigeria. So you’ve got on top the Federal Minister of Power, which formulates broad policies for the development to the sector and co-ordinates activities within the sector. Then you’ve for the transmission company of Nigeria, which is the overseer of the transmission system and looks after the security and reliability of the grid. It is currently managed by a Canadian company, Manitoba Hydro International. The NERC - The National Electricity Regulatory Commission – it’s remit is to promote the perfect efficiency and access to electricity services by issuing licences for generation for distribution, transmission, trading and also regulating practices through what is known as the multi-year tariff order. That’s a 15 year tariff path, which is reviewed is every five years. The latest review took place quite recently in December 2015 new tariffs coming in on 1 February 2016. Then you’ve got the NEBT, which is a bulk purchaser of power – purchaser and seller of power from the GENCOs to DISCOs and it’s role is to enter into acceptable PPAs with IPPs and other generating companies. It is there to hold the ring until such time as the DISCOs themselves can enter into direct purchase agreements with the GENCOs. And lastly on this slide, you’ve got the gas aggregator, whose role really is to manage the strategic domestic supply of gas and it’s role is to include streamlining the process, whereby wholesale gas can be sold from the gas producers to gas purchasers, given the importance of gas supply claims in the Nigerian electricity industry. There are other players in the regulatory landscape. You know, you’ve got the Nigerian Electricity Management Services Authority, the Bureau for Public Enterprises and a number of others, but for the sake of brevity of time, I have focussed on … I have highlighted the role of the main players.
So I hope that gives you a bit of a snapshot of where we are in terms of the power … the reality of a power generation distribution and transmission in Nigeria, as well as the playing field into which any investor would be committing itself.
Adi Bokobza: It does actually show that, thanks for that. One of the key stats that stood out for me there was that about 93,000,000 people without connections of electricity. But then … and there are plans on the way, including, it took about ten years for any of those projects to start being sold. So it begs the question, right, because I imagine if you are General Electric, or Siemens or an investor in the past, there is opportunity here. But it’s not really happening by the speed. Why is that?
Segun Osuntokun: The challenge is, are enormous. But the enormity of the challenge is, the way I see it, is normally the challenges reflect the enormity of the opportunities. The challenges which the country faces on the path it faces, is one of, it’s a classic case of gross under-investment. As the country’s population boomed through the 60s and 70s, fuelled with Petro Dollars the successive governments simply failed to invest sufficiently in its power sector … in the power sector across the entire supply chain. I mean to put the scale of under-investment into context, it has been calculated that if Nigeria is to hit a growth rate of 10% per annum a GDP growth per annum of 10% which is, I think, widely accepted or regarded as the sort of growth rate you want to see for Nigeria to sustain and keep up with it’s burgeoning population. As I said, the country will hit £300,000,000 people by 2030. For that sort of growth rate, Nigeria will require about 30,000 megawatts of electricity by 2020 and 78,000 megawatts by 2030. Bearing in mind that installed capacity is only 12,500 and operating capacity is only 4,500 or less than 4,000, that is an enormous reach. And that’s the scale of the under-investment. As I said, the under-investment is evident along the entire supply and value chain from generation through to distribution. The key constraint on generation is the inadequacy of gas supply required to fire 22 of 25 power plants that Nigeria currently has. And many energy companies are just reluctant to incur large investment costs required to upgrade a decrepit processing and pipeline infrastructure, you know, without a cost-effective tariff being put in place.
With regard to transmission, the historic under-investment is evident in the fact that average transmission capacity is higher than operational generating capacity but lower than installed generation capacity. So that even if you improve operational capacity and start to generate more and more electricity, the transmission is such that … the capacity there is such that it can’t cope and there were examples of that last year … in the Autumn last year, when there were system collapses when operational capacity actually got better. You know, the transmission system has been bedevilled with ineffective maintenance, poor assistant management and system collapses are not unknown. In fact in 2014 alone, there were 42 such collapses. It’s gone slightly better now, being reduced to only 13 in 2014.
But that distribution challenge continues or is reflected also in the distribution sector, when the DISCOs, having received electricity from the generating companies though the transmission company, they then find themselves suffering significance losses as well. So in 2014, 46% of energy distributed to or delivered to DISCOs was lost. The losses, as the slide shows, that 46% lost in 2014, is broken down between technical losses, poor infrastructure. You then have got commercial losses, which are losses as a result of energy supplied but not actually built – if you can imagine that – and collection losses, which is the converse, which is energy that has been billed, but which customers refuse to pay for. And that’s a significant loss. That’s 28% of all energy delivered to DISCOs are lost that way. Customers are refusing to pay.
The DISCOs, I think, find themselves, you know, in a tight spot following privatisation, because they made commitments to expand the grid and to spend money on meters, but when they were faced with such a high level of collection losses, they soon found that they were under significant financial stress. To compound matters in 2015, any RC, in rather a strange ruling, ruled that the DISCOs could not pass on the losses they suffered through higher tariffs. So customers are not paying but the DISCOs are supposed to just absorb the losses without reflecting that in the prices they are charging. And as a result many DISCOs just plead declared force majeure and say we can’t carry on this way. The new government has reversed that decision and a new tariff structure was brought in in February this year. So, hopefully that situation will improve, but that’s the challenge which the sector faces.
Adi Bokobza: OK Segun. Well it’s quite interesting there, because, you know, there are quite some serious issues here. But at the same I still kind of feel like there is, you know, a soccer punch coming here in terms of opportunities. I mean on … the problems with outage, probably technologies could fix this. You know, fraud prevention is also another sector booming with solution providers. I mean ultimately, how do you feel about where we are going to next? Are there any … is there a silver lining for this cloud, especially for the investor space?
Segun Osuntokun: Yes, as I said at the start of my slides on the challenges to the sector, that it’s in the challenges that the opportunities lie. But more than that, there are reasons to be hopeful. There are challenges no doubt, but the manner in which successive Nigerian governments have gone about tackling those problems, does give one reason to be optimistic. The effort to take on the sectors started before the present regime. But this regime has continued that relentless focus. You’ve got the on-going work of the presidential taskforce on power. That taskforce was in all the rages in 2010 as part of the power sector reform … the power sector roadmap and it is continued under the present regime. You’ve got the Vice President’s advisory power team and you’ve got the person of Mr Fashola being tasked with handling the most important infrastructure sector in the country. Mr Fashola was largely credited with turning around the legal state … the fortunes of legal state and been given the portfolio for power I think is an indication of the seriousness with which the present government views the situation.
You’ve got also in addition to Nigeria’s own technocrats, you’ve got significant external support for the government’s efforts. I’ve mentioned the VP’s advisory power team, which was embedded in the VP’s office and that’s supported by experts from the Nigerian infrastructure of advisory facility, which is fund by extras from the …. which is funded rather by the United Kingdom’s Department for International Development and you’ve also got the power Africa initiative from the US, which kicked off in 2014 with an MOU between the US and FGN – The Federal Government of Nigeria. That has seen significant financing support for the power sector, including the reformed … the privatisation reforms for the gas sector reform and the development of rebuilt renewable energy. That’s actually opened up significant financing to the Nigerian financial sector for lending to the GENCO’s DISCO’s which are facing CAPEX – capital expenditure constrained.
I’ve already mentioned the latest multi-year tariff order which came into force in February this year. That tariff structure is intended to be more cost-reflective and recognises that there are potential investors who want to enter the market with fuel sources other than natural gas. So, for instance, wind, solar and coal.
Perhaps most excitingly, the new government has also taken steps to ensure that two significant IPPs, which had been stalled under the previous regime, were giving fresh impetus. I think probably the most significant in terms of its development is the 450 megawatt Azura Edo IPP. That faced a significant delay, various causes for it, for instance, there were issues around whether the Nigerian government would give a sovereign guarantee which was required by some of the lenders, but as I say, that has been resolved and it actually reached financial close in December 2015. Construction started in 2016.
Probably a little bit behind in terms of its development is the Exxon Mobil IPP, which is a 500 megawatt plant beam built in the [Quar Ebel] area. But that also has had boosts given to it by the government, because it signalled its intention to carry on supporting that and those, particularly the Azura IPP, the move on that will undoubtedly boost investor confidence. I think it will drive progress on the other gas fired IPPs, including Exxon Mobil and there are a couple of other IPPs which are in the pipeline.
The last point is that there continues to be significant financial incentives for investors in the power sector in Nigeria. Under one of the principal acts brought in 2004, companies or rather foreign investors, or indeed any investor in the Nigerian power sector, particularly building IPPs, is eligible for a tax holiday of up to five years and there are significant other tax and import duty incentives which the government hopes will make the sector an increasingly attractive destination for all investors.
Now the last couple of slides really reflect the opportunities, which are the flip side of the challenges I have outlined. And it doesn’t … you don’t need to be a … have a crystal ball to see whether those opportunities lie, such as the infrastructural deficit that massive investment is required across the entire supply chain. If you start with generation, there are opportunities to develop alternative sources to gas, principally hydro and renewables. The presidential taskforce, for instance, estimates that there is potential for about 11,500 megawatts in large hydro plants. As I said earlier, the tariffs introduced by the NERC are also aimed at promoting investments in renewable energy sources and the NERC itself has said that it wishes to see about 2,000 megawatts of electricity generated from renewable sources by 2020. There are opportunities to finance the sorely needed capital expenditure requirements of GENCOs and DISCOs and with regard to transmission there are underway from 26 TCN – that’s Transmission Company of Nigeria- projects worth approximately $1.5 billion, designed to strengthen the network and there are a further 118 NIPP projects which have also been approved. The difficulty is, that with generation, delivery is slow. Only 22 of those 26 TCN projects have actually been completed.
However, there is various sources of external funding from the likes of the World Bank, The African Development Bank, made available to fund and finance new transmission projects. The opportunity … the challenge is defined as bankable projects.
And lastly, reducing distribution losses. As you said, there must be ways in which those losses could be reduced. Yes, I have no doubt that the deployment of technology, smart meters, mobile meters, can be deployed to ensure that the 28% in collection losses which DISCOs suffer at the moment are reduced. And we have seen how technology in Africa has leapfrogged many stages. And I think there is a real market in designing fit for purpose metering devices. You know, metering devices which can fit on the phone and can be mobile and ensure that people who are using electricity pay for it and conversely, where electricity is supplied that the DISCOs actually bill for it, because those are the commercial losses which they currently suffer.
So again, I haven’t gone into detail about each and every opportunity which exists, but I think that the challenges which I have explained as well as the reforms which have been implemented and are indeed implemented, make it almost self-evident where the opportunities are for those investors and other suppliers who are prepared to sit up and take notice. So that’s where I will end my formal slides.
Adi Bokobza: That’s fair enough. I was actually going to and permit me to, actually put you back in the hot seat there. You know, you have mentioned quite a few opportunities and challenges. In your personal opinion, you know, where do you feel the big change could come from, or will come from?
Segun Osuntokun: I think that the big change will come from the generation of sufficient capacity. There is an argument to be had that along the supply chain you need to fix everything at the same time and that makes sense. But reality is things move at an uneven pace and if I have to pick out one of the three sectors to focus on now, I would say it was generating …. improving generating capacity. Once you have the capacity, it may not be completely operational, but when you have a capacity then the impetus for building out a transmission network and getting a distribution system that works, is all the greater. It’s having the engine, if you like of a car working before you fix the clutch and the accelerator, which is what I would regard the transmission and distribution sector does. Build the engine and the rest will follow, is what I say.
Adi Bokobza: Thank you very much, Segun, for that very insightful presentation and answer as well.
Segun Osuntokun: Thank-you very much, Adi.
Adi Bokobza: OK and to you the audience, thank-you for listening in to this session, presentation and answers-wise. We would also like to hear your questions, so feel free to tweet them via apps and through #AEF16 and let’s keep the conversation going. If you would like to hear more about life after Azura Power Project and some of the initiatives on the generation side that are taking place in the Nigerian power sector, feel free to checkout our other webinar discussions or find your way down to the AAS 2016 Summit in London. Thanks for tuning in. Good-bye.