Political Economy of Nigerian Power Sector Reform

Eric Kehinde Ogunleye

THE CONTEXT

The Nigerian power sector is currently undergoing one of the most ambitious, comprehensive, and bold reforms in the history of Africa. The ultimate aim is to privatize all power assets with a view to ending the country’s chronic power shortages and long-standing monopoly of the sector by the state-owned power entity. The reform is based on the 2005 Electric Power Sector Reform Act, 2010 Roadmap for Power Sector Reform, and subsequently the 2013 Roadmap for Power Sector Reform Revision 1, among several other policy documents. While the Act provides a legal backing for the reform, the roadmaps serve as instruments for fast-tracking the proposed fundamental changes to the ownership, control, and regulation of the sector as envisaged in the Act and ensure these are achieved and realized, especially for the ultimate benefit of electricity users. For additional policy initiatives, pronouncements, and documents that have been initiated by the government to guide the power sector reform process, see Ogunleye (2016).

The Act focuses on creating a regulatory agency that would serve as the umpire for ensuring effective enforcement and compliance with the rules of the game in the electricity sector. It emphasizes privatization of a hitherto government-owned electricity company that has monopolized electricity generation, distribution, and transmission for decades. Through this action, the reform seeks to remove obstacles to private sector investment in this critical sector. It also attempts to improve energy independence and diversify energy sources towards cleaner energy such as solar, geothermal, and wind. The objectives of the reform include highly ambitious targets for the power sector. It was projected that power generation would reach over 13,000 megawatts (MW) by 2015 and 40,000 MW by 2020. While the 2015 target has been missed and 2020 is unrealizable, efforts are still being made to scale up and maintain a steady pace and timely implementation of the reform.

The reform was conceived out of obvious challenges facing the country’s energy sector with serious negative effects on business. Power outage is a common and daily experience; Nigeria is one of the countries with the lowest electricity consumption per capita in the world at around 100 kilowatt-hour (kWh) per annum. Installed capacity remains low at around 8,000 MW, out of which only 4,000 MW is operable and less than 2,000 MW available to generate energy. The gross inadequacy of energy generation becomes glaring when compared with South Africa’s almost 5,000 kWh per capita. Indeed, 60 per cent of the time, there is no access to electricity in Nigeria (Aliyu, Ramli, and Saleh 2013).

The goals of the reform can be broadly categorized into: (1) defining a new national power policy that positions the private sector as driver of the sector on funding, innovation, and leadership; (2) designing an enabling regulatory, policy, and commercial framework for engagements of all stakeholders in the sector; and (3) commercialization of the sector. In more specific terms, the Roadmap for Power Sector Reform outlines specific tasks to include: establishment of a bulk purchaser/trader; strengthening the Nigerian Electricity Regulatory Commission (NERC); provision of Federal Government Credit Enhancement; operationalizing the Nigerian Electricity Liability Management Company (NELMCO); strengthening the training institute, NAPTIN (National Power Training Institute of Nigeria); strengthening technical and managerial capacity of the Transmission Company of Nigeria (TCN); and sale of Nigeria’s generating companies and distribution companies to the private sector.

The reform was planned in three phases. Five activities were scheduled for the first phase. These are unbundling and privatization of the long-lasting government-owned monopoly power company, National Electric Power Authority (NEPA) subsequently known as Power Holding Company of Nigeria (PHCN), creation of an independent power sector regulator (NERC) to ensure sanity in the market and carry out other standard regulatory functions, incorporation of the Power Holding Company of Nigeria (PHCN) successor generation and distribution companies, creation of a multi-purpose entity that would have the function of procuring electricity from the independent power producers and newly created generation companies for subsequent sale to the distribution companies, and establishment of the training institute, National Power Training Institute of Nigeria (NAPTIN). The second phase, which has a medium-term horizon, involves developing a cost-reflective electricity tariff to ensure competitive pricing that would attract private sector participation in the sector. The third phase, which is the final long-term phase, focuses on achieving a completely competitive power sector.

It is noteworthy that modest progress has been recorded in the course of implementing the reform. First, the first phase of the privatization process has been successfully concluded with the unbundling of the hitherto state-owned monopoly in the electricity sector—NEPA and later PHCN—giving way to the emergence of 11 distribution companies, six generation companies and a transmission company. Second, the regulatory and institutional framework for the power sector reform has been established and fully functional (see Ogunleye (2016) for a complete list of these institutions). Third, a cost- reflective tariff (multi-year tariff order or MYTO) that would make the sector attractive to both local and foreign investors has reached a very advanced stage of implementation, albeit fraught with some challenges that are discussed later in this chapter. Fourth, there is emergence of several independent power plants with combined capacity to generate additional 2,500 MW of electricity. Fifth, regulatory institutions responsible for implementing the proposed reforms have been established. Sixth, significant efforts are ongoing to improve the gas-to-power infrastructure which is the greatest binding constraint on electricity supply, resulting from pipeline vandalism and gas pricing policy. Lastly, several policies and market rules are being developed to guide the emerging privatized power sector at different stages of the reform.

Despite the progress, challenges remain. The most prominent of these is the political environment surrounding the reform, mainly regulatory and institutional issues. First, it can be argued that the long-lasting monopoly of the sector by government exacerbated by over-regulation was the dominant factor behind the deterioration in the country’s energy sector over the years, culminating in its current deplorable state. Second, the reform is generating emerging challenges that require development of an effective post-reform strategy on regulatory, institutional, and human capacity issues. Third, the state of insecurity in the country, especially in the Niger Delta region, induces incessant gas pipeline vandalism with serious implications for the progress of the reform as gas supply to the power stations is being constrained. Fourth, a cost recovery challenge has emerged recently, an outcome of the alleged overpriced power plants and distribution companies during the bidding process by the eventual buyers.[1] Fifth, the MYTOs have also been a thorny issue, with incessant complaints by industrialists while residential consumers engage in sporadic demonstrations and protests over energy bills that they claim do not match supply availability and quality of service. Sixth, weak political will to invest in the sector now further exacerbated by the country’s current challenging fiscal revenue position. This is a major concern because transmission remains under government ownership, though managed by an independent private firm. Lastly, there is challenge with energy security due to limited investment in clean energy, especially hydro and solar, that would help achieve optimal mix of energy sources.

A few studies have attempted to assess the energy sector reform in Nigeria (see Adenikinju 2003; Oke 2008; Okoro and Chikuni 2007; Sanyaolu 2008; Tallapragada and Adebusuyi 2008; Idris etal. 2013; and Joseph 2014). Some have focused on the investment opportunities and pitfalls associated with the reform (David-West 2014; Onochie, Egware, and Eyakwanor 2015). Others have assessed the impact of the reform (Adoghe, Odighe, and Igbinovia 2009). Yet others have looked at it from consumer perspective (Ochugudu and Onodugo 2013). Generally, most of these studies have focused mainly on the challenges and opportunities offered by the reform without paying particular attention to the political economy of the reform process. Indeed, none provided a detailed, comprehensive, and historical assessment of the reform in within institutional, regulatory, and legislative contexts. This study fills these gaps.

Following this introduction, Section 20.2 outlines the key challenges threatening the reform. An assessment of the reform is the focus of Section 20.3, while Section 20.4 concludes with a way forward.

  • [1] Some generation and distribution companies have claimed that the power assets purchasedduring the privatization process were overvalued because the data and information provided tothem by the government was wrong and inflated. Examples of such alleged wrong data includethe customer base and aggregate technical, commercial, and collection loss level.
 
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