Electric Power Sector Reform: Privatisation, Regulation and Other Challenges

1. Electric Power Sector Reform: Privatisation, Regulation and Other Challenges By Mrs. Irene N. Chigbue Director General Bureau of Public Enterprises Presentation at the National Workshop on Electric Power Sector Liberalisation 30th March, 2006

2. Outline • Introduction • Why Reform? • Sector Investment Needs • Key Components of Reform • Reform Programme • Regulation • Establishment of NERC • Challenges • Conclusion

3. Overview of the Nigerian Power Sector • Nigerian Power Sector: Pre-Reform • Significant mismatch between demand and supply in Nigerian electric power sector • Supply grossly inadequate, and of poor quality to meet demand • Inadequate/obsolete transmission & distribution facilities • Annual average per capita consumption of power in Nigeria is less than 200kWh (2004) • Inadequate and non-complementary investment in generation, transmission and distribution. • Inappropriate industry and market structure • Industry was hitherto fully owned, funded, operated, controlled and regulated by FG. • Vague delineation of roles and responsibilities of institutions • Incessant political intervention, non-commercial obligations, limited managerial know-how

4. Why Reform? • Massive FGN investment into PHCN (NEPA): • Still only about 36% of Nigerian population have access to electricity • Consumers experience substantial and sudden power cuts per year (approx. 600) • Average generation availability stands at about 3500MW against a daily requirement of >6000MW • Available transmission capacity limited to 3000MW • High transmission losses implies even the little generated cannot be fully delivered

5. Why Reform? - 2 • Distribution network inadequate; obsolete equipment; high technical losses • Inadequate billing and collection methodology • Electricity theft • Therefore low revenue ( a minus for sustainability & development) • Little or no sector regulation (reduces investor & consumer confidence) • Sector cannot be sustained and developed like this • Manufacturing, commercial, domestic front suffer • NESI inefficiency has probably had the largest negative impact on development of Nigerian economy – loses about $1b per annum • Generation needs about $3.2b; Transmission $1.5b; Distribution $ 4.5b to meet current demand • FGN resources face competing demand from other infrastructures • FGN NEEDS cannot thrive without sufficient electricity

6. Why Reform? - 3 • Nigerian Power Sector Reform is aimed at: • Improving the performance and operation of the utility through increased private sector participation • Attracting private sector investments • Meeting current and future demand for electricity • Instituting new market structure/rules and trading arrangement • Redefining the roles of sector players i.e. FGN, FMP&S, Operators, and establishing an independent regulator to oversee affairs • Promotion of competition, transparency and efficiency

7. Sector Investment Needs • Investment of more than US$7.5billion needed to achieve target of generation and associated transmission and distribution infrastructure in 2006. • FG investing in host generation and encouraging development of IPPs • Generation • Additional capacity required to meet electricity demand • Efficiency improvements • Transmission • Expansion, upgrade and reinforcement of grid to support generation expansion • Reduction in T & D losses (energy audit and metering) • Distribution • Improvement in revenue collection • Additional investment in network to support generation and transmission plan • Appropriate and effective metering etc. • Energy conservation and demand side management

8. Key Components of Reform • Reform in Power Sector • Components of reform • Restructuring and Privatisation • Privatisation is change in control (management) and/or ownership • Restructuring involves: • Change in industry structure to stimulate competition, choice & promote financial accountability • Unbundling into constituent functions (generation, distribution & transmission) • Establishing commercial trading arrangement

9. Reform Programme • Reform initiated in 2000 with the constitution of the Electric Power Implementation Committee (EPIC), which prepared sector policy (NEPP 2001) and Electric Power Sector Reform (EPSR) Act 2005. • The Reform encompasses restructuring & privatisation • Two pronged approach adopted for sector revitalisation • Priority action to address technical & commercial problems • Rehabilitation of existing plants and undertaking essential investments • Reinforcement and upgrading operations and transmission facilities etc • Holistic reform aimed at addressing structural, organisational and institutional issues • Appropriate industry structure & decentralisation of sector to foster choice and competition • Clear delineation of roles and responsibilities – FG (Policy, direction and monitoring & evaluation of implementation and performance), Private Sector (operations), Regulatory Commission (licensing, technical & economic regulation)

10. Reform Programme -2 • Nigerian Power Sector in Transition: • Establishment of an independent Regulator • Encourage private participation in the sector • Development of the electricity market to reflect market-based system and cost reflective pricing • As a minimum to improve supply, (10,000MW of generation capacity is targeted by 2007) • National Energy Development Project (NEDP)/TDP executed with World Bank to finance sector expansion, reinforcement & rehabilitation • Presidential Advisory Committee on Sustainable Energy Development Plan (25-year plan being developed) • Establishment of successor companies to promote competition, transparency, efficiency

11. Privatization Update • Privatization program for the NESI is unique • Essence of the program is to ensure improvement in existing infrastructure and service delivery • Privatization proceeds is not a primary objective of the program • Attracting quality investment rather than revenue to the government • Removal of the burden of funding the sector in the Short, medium to the long term • Development of system integrity through private sector driven industry • Preparation of the SC for privatization in advanced stage

12. Privatization Update - 2 • Strategy for privatization of the power sector different from other sectors • Working with World Bank to develop incentive package for investment in the successor companies and the power sector in general • Commenced corporatisation of SCs including engagement of new managers and development of corporate governance rules to ensure that companies meet international best practices. • Commenced privatization of the Transmission Company through a management contract. • Management expected to last between 3 to 5 years • Private managers to train local staff • Private manger to assist in developing transmission infrastructure and system integrity • Private operation of the TCN will increase investor confidence in the electricity sector • Privately managed TCN will assist in developing the market and make for early and orderly introduction of private sector participation

13. Strategies for Privatisation • Strategies to be adopted during privatisation include: • Core investor sale • Asset sale • Operate & Manage contract • Concessions • Core Investor Sale • Concession Arrangement DisCos TranSysCo • Operate and Management • Core Investor Sale • Asset Sale • Concession Arrangement GenCos

14. Proposed 2006 Timelines

15. Steps to Achieve Timelines • Public awareness programme on investment opportunities in the sector • Direct marketing of successor companies through foreign embassies, chamber of commerce and internet to prospective investors • Showcasing potentials in Business summits/workshops, trade missions, stakeholder meetings, road shows etc • Preferred Strategy to diversify government ownership - • concessions • Asset sales • Management Contract for Transmission Company of Nigeria • Advert calling for EOIs for Management Contract of TCN is current out and some investors have expressed interest • Evaluation Committee inaugurated to review EOIs

16. Regulation • A firm, independent and well funded sector regulator is critical to the successful implementation of the power sector reform programme. • The key objective of the regulator is to umpire the affairs of sector participants. • Ensure rules, regulations, operating codes of sector and national grid are enforced in a fair, transparent and equitable manner. • Key regulatory tools of the sector are Economic (tariff, pricing and licensing) and technical (engineering, quality standards, environmental and maintenance of system integrity)

17. Establishment of NERC • The EPSR Act 2005 establishes NERC and outlines the functions of the Commission as: • Promotion of electric market competition and private sector participation • Tariff setting to ensure prices are cost-oriented and consumers/competitors interests are protected • Establishment/approval of appropriate operating codes, safety, reliability and quality standards • Establishment of appropriate consumer rights and obligations regarding the provision and use of electricity services • Licensing and regulation of persons engaged in the generation, transmission, system operation, distribution and trading of electricity • Approving amendments to the market rules • Monitoring of the operation of the electricity market

18. Current Focus of NERC • Developing an effective and orderly power sector transformation and tariffs • Licensing existing and new power operators • Developing a comprehensive and transparent rules governing grid code access and usage • Improving sector investment climate and the prospects of private sector participation

19. Challenges to Effective Regulation • Funding to keep independence • Rules for licensing and tariff have to be fair, unambiguous and transparent • Deployment of appropriate information technology system for data gathering and analysis • Current regulation issues are complex creating a need for stakeholder dialogue and coherence in the application of rules • Build capacity of staff in various regulatory areas • Adherence to international best practices

20. Issues and Challenges to Privatization • Need to improve generation capacities • Devise an appropriate labour Strategy • Ensure appropriate and credible private sector investors take over the utilities • Establish an efficient industry market with appropriate energy trading and payment discipline • Establish appropriate incentive structure to attract private sector

21. Issues and Challenges to Privatization - 2 • Reversing the technical insolvency of the Discos • Need for efficient and effective independent regulation of sector • Institute a tariff structure that is cost reflective • Create sustainable fiscal and economic policy regimes • Decrease technical losses • Develop other renewable energy sources • Reducing revenue losses (of about N4,400 billion per month) of all Discos • Continue stakeholder support for the privatisation and reform programme • Ensuring adequate public understanding of on going reform • Continued government investment in transmission post NIPP • Introduction of adequate measures to check energy theft (executive & legislative)

22. Conclusion • The expected outcome of the reform programme is to transform the nation’s electric power sector industry into an efficient and effective sector that would meet the increasing energy demand. • Private sector participation is critical to sustainable growth and development of the sector. • A well structured power industry will stimulate private sector investment and drive to achieve investment target. • Effective regulation of the sector will sustain the gains of the reform in terms of quality standard, expansion of electricity infrastructure and attract the right private investment • We would collectively assure Nigerians that the reform of the sector will achieve its ultimate objective of improved standard of living and national socio-economic development and growth. • We urge all Nigerians to embrace this positive effort.

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