"...for over 5 years, 10 NIPP have been unable to go to financial close due to market liquidity issues"

“...for over 5 years, 10 NIPP have been unable to go to financial close due to market liquidity issues”

Dr. Ransome Owan is the Group Managing D irector of Aiteo Power, Infrastructure and Real Estate. Aiteo, a vertical integrated energy company plays in the upstream, midstream and downstream energy space. Prior to his present appointment, Dr Owan was the pioneer Chairman and CEO of the Nigerian Electricity Regulatory Commission. He started the commission in November of 2005, after the law was passed on March 15, 2005 of the same year. He and his commissioners were responsible for putting together all the rules and regulations that are now currently guiding the growth of the power sector in Nigeria. Today, he’s a practitioner of electricity regulation and reforms in the US, having done so in the state of New Jersey, Pennsylvania, Delaware, Virginia and District of Columbia.

He holds an MBA in Management from Hofstra University in Long Island, New York, and Master of Science and Ph.D in Energy Management and Policy from the Ivy League University of Pennsylvania in Philadelphia, USA. He has been in the energy business for over 30 years, having worked in electric companies and in consulting companies.

In this interview with Majorwaves Energy Report, he speaks on a number of issues plaguing Nigeria’s energy sector, proffering solutions.

What was the blueprint you came up with while heading the NERC and how did it pan out?

The Power Sector Reform Act was the genesis for the reform process on how to transition the Power Holding Company of Nigeria from a governmentowned monopoly into a private sector led business. Our goal was to create market conditions that will attract the private sector to intervene in the market place. So, we set about how to break up the monopoly from 1 company, 18 companies were produced. The Transmission Company of Nigeria (TCN), which is still a monopoly and a government-owned entity and the distribution business was broken up into eleven Distribution Companies and five generating companies. And that’s how we licensed and transitioned PHCN into 18 limited liability companies. The companies were restructured and prepared for privatization.

“Part of the blueprint was to ensure capital inflow in the Nigerian power sector and overtime, ease government out of providing electricity for its citizens”.

Part of the responsibilities was also to come up with the issue of correct pricing to give the correct market signal for private sector to come and invest. So, we set about setting up new tariffs, new rules for the market for private sector to intervene.

Why is the price regime not working? Would you say that the Distribution Companies (DisCos) have failed?

I think one of the issues that happened is a disconnect and interference in the marketplace by the so-called Invisible Hand. We set up a price mechanism that would recognize what the true cost of electricity should be. And in other to prevent rate shock, we offered some subsidies into the marketplace.

“But the goal was to work with TCN and generation side to ensure that generation, while it was increasing, the price would also be going up gradually”

that was gradualism of price increase. And in the course of time, we should come into equilibrium, the intersection of supply, demand and correct pricing and customers would see value for it. However, it hasn’t worked well quite like that. Why hasn’t it worked? Because some of the scheduled 6-moth tariff reviews were missed by the regulator. Therefore, the minor adjustments that were meant to keep - a couple of them have been missed in intervening years. Also, the major reviews were also not done on time and haven’t been done. You can imagine that if every 6 months you are supposed to tariffs and that is not done, then market operators will have difficulty of cost recovering. You cannot recover what the regulator has not approved. Then, sometime around 2015, there was a national rate freeze of R1 (life line rates) and R2 customers. These are residential and small customers. The national rate freeze was during a hot political season and the rates were not allowed to be changed. That also created a gap in the revenue of the Discos and other market operators.

In addition, the expected generation increases have also not kept up with expectations. So you have a large suppressed demand and a shortage of supply to the load demand centers around the country. It is an issue that has to be looked into very carefully for us to balance the two sides of supply and demand. Indeed make clear the problem, generators today can produce about 7,000 MW of power daily but the Disco can only receive about 3,000 MW of daily power. Both TCN and Discos have a technical problem to solve. It is absurd that one can say that Nigeria has excess grid power of 4,000 MW daily when the nation could take over 20-30 MW if grid electricity can be supplied in a reliable manner. It does not make sense, but it is true.

Do you think the DisCos failed?

The DisCos were privatized about five years ago. They bought the 11 distribution assets of PHCN. Part of the problem was that when they bought the assets, nobody knew the true state of the losses. It was simply a sale that was not based on price competition. It was the person who promised to reduce the losses the lowest that won the bid. Government had already determined what each DisCo was worth. So, there was no need to negotiate the price. You now needed to bid on how much over 5 years you would reduce the losses. Most of them were either set by the government at 40 per cent losses or 30 per cent losses, the 11 sold assets. But the labour situation did not allow you to do real due diligence and run a good analysis of was sold. So definitely, you just bought a black box. But buyers were given one year to go back and do a correct assessment and re-establish the losses. So because of that, they found out that the losses were far more than what was sold. The average were 50 per cent to 60 per cent losses.

The losses; was it that the values of these properties were over bloated?

No! Government did did an estimate. They did not have firm and accurate data. The technical and commercial losses where simply too high. In other words, if you bought electricity, you could only collect 30-40 per cent. So, if you are going to collect only 40 percent, you are already in the hole. Also, because the systems

were antiquated, you needed a lot of capital expenditure. So if your collection level is very low, you don’t have funds for capital expenditure (capex) and your balance sheet is not strong to borrow from commercial banks. Therefore, cannot borrow money to buy meters and re-balance your network. So, it became an issue of Cash 22. You bought an asset that was not performing, but now you don’t have money to inject in it and improve on it; because the banks will not give you any loans. Your cash flow is bad. This is a conundrum we find ourselves.

In addition to this, the promise that were made to the Distribution Companies (DisCos) were not kept by the government, including the regulator, in terms of price adjustment and other incentives. So both the seller (government) and the buyer (private sector) have some work to do to correct the situation

How would you assess the transmission company?

The Transmission Company of Nigeria operates the super highway for power. TCN needs to have a highway of about 6 lanes – 3 going and 3 coming. Unfortunately, it has a single lane road. Therefore, there is a lot of congestion. It cannot move all the power when it needs to go. Think of a rush hour when the whole thing road is congested.

“The transmission company does not have the technical ability or a robust network that can allow it the flexibility to move the power where it needs to go.”

So what is happening now in the transmission company of power is what we call Dumping of Power. It’s like when an aircraft is flying and there is an emergency landing, it has to dump a lot of the fuel in order to make the plane lighter, so that it can land safely. That’s what happens. If the transmission company sees that there is too much power in the network, to prevent a system collapse, it will open the wires and whichever DisCo it sees close by , it will dump the power there; whether you want it or not. Otherwise, the 11 DisCos, every day they nominate a day ahead the amount of power they need to come to their networks. But if the

transmission company dumps more power to you, in places you do not need, and later gives you a bill, it increases your losses. At times you are given a window to act but it is often not where you want excess power to be delivered. I give you an example. If you go to a bakery and you ordered only a thousand loaves of bread, the truck arrives and says you must take ten thousand loaves of bread because the truck cannot reach the next destination, instead of telling me please ‘can you help me to sell this bread? What is leftover is my loss. ‘So that you will now know that at the end of the month, he not give you a bill for that excess bread which you did not order. Where you take on excess power where you cannot sell that amount much less collect that much that adds to the problem of the Distribution Companies. So it is the Dumping of Power not the rejection of load that is the problem. If the transmission company is properly funded, it can have the technical solution to make the system more flexible. So what I mean by flexibility – if the power cannot go to Onitsha, you can divert the power to Port Harcourt. You can send it to somewhere else in Nigeria, so that the system does not collapse. But if you don’t have that ability, that’s why we have a lot of system collapses in Nigeria. Check the records for yourself. The system collapses in the whole country have not gone down and it is a mess because of inability to respond effectively to load emergencies by TCN.

This is due to infrastructural gap, right?

Yes, because it’s not just in one area. The business module has 3 parts – generation, transmission and distribution. These 3 business parts must work in consonance. If anyone is not working well, the system will fail. Power production and consumption is like building a bridge. If you build a bridge halfway to the river and stop, no vehicles are going to pass. That’s what is happening. So generation is inadequate; transmission is inadequate; distribution is also inadequate. Therefore, there is little benefit to the people as you can see, stranded investment, stranded assets and stranded benefits.

How much of infrastructure do you think that the transmission company needs to bounce back?

I think the Transmission Company of Nigeria because it’s still owned by the government is a very sympathetic entity in my view; because it gets budget allocation for it to do its own projects. What has happened in the past is any time the transmission company goes to the National Assembly and say, ‘I need N20 billion to do this amount of project,’ they may only approve N3 or N5 billion. Then, if that project is going to last for 2 years or 3 years and it takes you 10 years and you haven’t even gotten N20 billion, then the project will never end. It is a very sympathetic entity in my view because of this budgetary allocation problem. I am urging other market participants like generators and distribution companies that next time that the transmission company goes to the National Assembly to make a budget defense, we should all go there and be in the Amen corner and say please give them the money; because they are the super highway of power. To repeat the transmission company can produce 7,000 megawatts daily and that’s available capacity, but the distribution side can deliver a maximum of 3,000 megawatts resulting in a gap of 4,000 megawatts! TCN does not have the high tension lines to connect that power to the factories and industries that can consume large amount of power.

Do you subscribe to TCN being privatized?

Yes! The transmission can also be privatized, but in Nigeria we don’t have to do it all at once. Leave the

transmission where it belongs to – the government. Leave that one alone. But in cases where people want to construct extensions to factories and others, allow them to intervene in that sector with new transmission lines. Just like you build a power plant and wait for the tariff to be given to you to make your money so too should it be that if you build a transmission line, you also collect your tariff, because you are flowing electricity on those wires. It’s like the highway where you pay your toll. If you travel a distance, you pay per a km/distance. That is called Postage Stamp and Free Wheeling pricing. That revenue now goes to recover the investment. We don’t need only the government to build the transmission. Transmission today around the world is also subject to private investment. We don’t need to worry about privatizing government assets now; just private sector additionalities. With the bottlenecks there, they should open it to commercial entities to build. Transmission in Nigeria can be privatized, but there is no need to force the issue to privatize government-owned a sset-TCN. Instead, government should allow a commercial space for new investors to come and invest and extend/expand the lines to where they are needed.

What’s your take on MYTO?

MYTO stands for Multi Year Tariff Order. I am the architect of this tariff. Before then in 2005, Nigeria, NEPA or PHCN was the one that decided the tariff and so on and so forth. The Multi Year Tariff Oder is the key price signal to add new generation into the country. It was clearly designed to increase power generation. Why? We took a model that if you want to build a 250 megawatts gas plant in Nigeria, how much will it cost you? We calculated everything and we allowed for profit. Actually, a good head room was provided so that investors could see that if they too up power generation in Nigeria, they would be making a profit that was guaranteed. So that was a good price signal to allow for new generation to come in. Because we thought that Nigeria will be generating more with gas than anything else. That’s the main background. It allowed us to look at all of the components that it will take to run a proper industry.

“The reason we chose a MultiYear Tariff Order was that we did not have detailed firm-level or micro-economic information to look at one single company – PHCN”.

You could not do any marginal cost analysis to come up with good and correct tariff. You could not do embedded cost of service analysis, because you didn’t have the information. Therefore, we opted for an efficient technology model for generation, which was the gas power engine. Now, MYTO has developed overtime. They have added new functionalities to create tariff for all the 11 Distribution Companies. In terms of innovation, the regulator has used MYTO to set baselines that says if a company can perform better it gets extra economic rent or profit. The more efficient you are, the more you will recover, because each step, you are allowed a good head room to make a profit. So, MYTO is still a good tool as a signal to how the market should behave if all the actors are on the same page.

What’s the difference between MYTO 1 and MYTO 2?

MYTO 2 has added innovations. When we began, there was only 1 company – PHCN. At that that time it wasn’t privatized. Now you have 11 companies; all have different cost structures. So the tariff can’t be the same. The tariff in Lagos should not be the same with the tariff in Kano or Calabar or Port Harcourt, because the cost now creates an efficient opportunity for companies to maximize their profit. If generators operate better, they get a profit; if DisCos operate better, they get a better profit. So that’s the main use of MYTO as a signal in the market place – how everybody should behave well.

Do you think MYTO has achieved its purpose?

Yes! MYTO has achieved its purpose because before that, there was nothing in place. As a forerunner, it’s a very good tool. However, the law says that the regulator can propose one or more methodologies to determine prices for electricity. So, it is not a forever thing. That’s what the law says. If MYTO is the tariff today, certainly we can look at others; but for now I think it still serves its value and purpose. Gencos and Discos can also propose new tariffs that would be best suited to their assts and convince the regulator for adoption. The burden of proof would lie with them.

Let’s look at initiatives from Western world in the area of power in Africa. How have those initiatives fared locally?

I think one of the significant problems we face in Nigeria in the power space is that we are all thinking in silos. Everybody just looks at their own commercial space without deference to what is happening elsewhere. Generation people are worrying why they are not selling the power, transmission is worrying about money to extend its power lines, and the Distribution companies are in the same quagmire of poor collection thing. Even the donor agencies and internationals don’t look at it as a holistic issue. That is the basic problem. I think for the power problem in Nigeria, its past five years now. We need a true reset. What I mean by reset is that all the actors have to come together – government, National Assembly, Ministry of Finance, Ministry of Power, NERC; the regulator, the bulk trader of electricity and all the intervening actors, including the consumers to say okay , five years had gone bye, let us review where we are and reset the clock. It has to be done holistically. What I mean by that is there is something called a Systemic Risk Problem. In a systemic risk problem, different from a systematic risk problem, one thing that causes a problem but entity cannot cure the problem by itself. If you say the DisCos are the problem, they cannot solve it on their own. It means that the totality of that sector must come together and solve it holistically. So, thinking in silos is keeping us back and so far I think we are singing discordant tunes and talking across each other. We need to come to the table and solve the problem holistically.

Can we say that’s what is hindering agencies or donors from bringing in funds?

It’s not just foreign donors. Nigeria is a great destination for power.

“Nigeria’s problem is not money in the power sector. It is the lack of clarity and exit if Foreign Direct Investment (FDI) should come to Nigeria”.

If they invest in Nigeria, there is no way for them to see returns. This is the problem. And right now, there is no symmetry for information- that is all the trading and poor payment

history from the central bulk trader of Nigeria from 3, or 4 years can be seen on the internet. They can see that generators tender invoices, they are only get paid about 30 per cent, 20 per cent whatever it is. So it means that if you are coming as a generator, from day one if you tender your invoices, you can never be paid in full. And to make matters worse, at the generation side they have said that you can only be paid for energy only and not capacity. Foreign investors will not come to that market; the market is not yet mature for that. It means that if a power plant has like 5 turbines and it is called to generate only two turbines, the other 3 turbines get no capacity charges. It is a liquidity trap. The reason they are doing that is that the Distribution Companies also are not collecting enough money to pay everybody in the value chain, meaning that there is a liquidity problem in the sector.

Why is there too much gap in power generation, transmission and distribution between Nigeria and other African countries?

With a country of about 190 million people, even if on a good day we are getting 3,000 megawatts, it’s not enough. Even if we are getting 7,000 megawatts, you can’t run a 30 watts bulb. So the comparison is not far off. However, Nigeria is a very peculiar country. Nigeria is not South Africa. Nigeria is not Ghana. Nigeria is not Morocco. For whatever reason and I say this without any fear of contradiction, whatever international modules that work, if they come to Nigeria, they fail. I have been in this country since 2005 – that is 14 years and I have not left. Every module you think that will work out there outside of Nigeria, for some reason it does not work very well in Nigeria. It means we have to customize our solutions. Power is a made in Nigeria problem: It needs a made-in-Nigeria solution.

What’s your take on metering and local content?

I think to give the consumer confidence, we need to engage in meter roll out – MAP metering, electronics metering. Unfortunately, there is high incidence of power theft in Nigeria by all classes of customers – from the rich and the poor, we are doing it. So, the power problem is us. We are the man in the mirror. There is high theft of power at meter bypassing by the same people who can afford to pay, they are also

bypassing. So, it is not limited to power theft in poor neighborhoods. Metering is one of the key solutions to our power problem, but we have to be smart about it. So instead of just putting smart meters, we have to move to split meters where the customer cannot tamper with those meters. A simple household meter can cost about N30,000 to N50,000. So it is not cheap. You can see that if you need 2 million meters multiplied by 50,000, you are talking billions. But the consumer who has 1 or 2 light bulbs, if he has to pay for a N30,000 meter, for the next 5-10 years he would be getting free electricity. Electric companies have to divide their customer classes very carefully and do what we call Customer Stratification. Not all customers are the same. Those who can really pay are there, the industrial customers are there, those who less able to pay are different. Electric companies need to have good customer segmentation and plan how to serve and target those customers. Those that have the ability to pay certain tariff, they will pay. Those that have less ability, they have a blended rate. But I must emphasize that electric companies must in all intensity determine their cost of service. From their cost of service, they can now determine their revenue requirements. When they determine their revenue requirement, they can now go to the regulator to approve tariff.

“The industry rule: first, know your cost of service, determine your revenue requirement, how you are going to distribute among your customers, then go and ask for a rate change”.

Don’t always wait for the regulator to tell you what tariff you need, you tell it what you need and back it up.

How does this fit into solving the problem of crazy billing?

When I was in office, I ordered the stoppage of crazy billing. In my home state in Calabar one morning, I saw a news flash on television announcing to some areas that if you don’t come and pay on this day, we are going to do mass disconnection and I said that thing should stop. The issue of crazy billing also has to do with estimated billing. If a customer does not have a meter, the electric company is forced to give him/her an estimate. In other countries where there is summer and winter and data for weather, there is a way to quickly calculate it based

on heating or cooling degree days and other factors. If it’s too hot, you know how much of air conditioner you will be using. If it too cold, you know how much heat you will be using. They use weather data to calculate and get approval. But here in Nigeria we don’t have that information. Therefore, in other not to go sell goods that cannot be collected, electric companies are forced to give estimate billing. The solution to that is to provide meters for everybody.

There seems to be issues with these prepaid meters. First, it is looking like the meters are not there. Second, it’s looking like the electricity companies are not willing to give them out?

No! It is because it is very expensive to buy. It is about N30,000 to N50,000 for 1. Even if you want to do 3,000,000, you still have to pay billions and if your collection rate is not up to 40 per cent or 50 per cent, you cannot collect enough to service the loan. Banks know that so they cannot even give you a loan to buy the meters. So now, there is a Meter Asset Provider (MAP) that the regulator has introduced; whereby the private sector can come in with the meters and they will be guaranteed how to recover their money overtime. I think it’s about 10 years or 15 years. In that case, the banks can give loans for that. I think that overtime, even the old meters need to be swapped out, because they are too old and anachronistic for the times. Once we have good penetration of metering in Nigeria, I think the issue of crazy billing will go away.

This metering thing, don’t you think that Nigerians can produce smart meters?

I think that Nigerians can produce smart meters and they do produce smart meters. There are modern meter producing firms putting with state-of-the-art meters. Some companies are buying and assembling in Nigeria. The Standard Organisation of Nigeria (SON) has approved metering standards. The regulator has also approved standard for meters and meter supply companies. So, the protocol has been established and people have been certified who can actually bring meters in the commercial space. That should not be an issue.

Regarding power theft, what does the law say about those that are caught in the act? Why are we not seeing prosecutions?

There has been minimal prosecution in this area. The problem is the law in Nigeria tends to lack enforcement. There may be laws in the book, but the enforcement is weak. So even if there is a law against power theft, the enforcement may be challenging. They may come up with roving court. When you are caught, you will be prosecuted immediately or may pay on the spot. But again, the legal system is challenging. It’s not the failure of law. It is the failure of enforcement; because the legal system and the enforcement community are not that strong. In addition, judges are also not well informed of electric utility practice and law so interpretation can pose a problem as well.

Considering the plethora of problems in this sector, why is Aiteo venturing into power? What are you doing to salvage the situation?

We believe that electricity and power are the main trajectory to our economic growth. Power has a direct correlation to the GDP growth of the country. Without power, we cannot succeed at industrialization; our medical area, our agriculture, our educational system and our advancement are tied to power supply. So, we see it as a critical backbone to the economy. And that is the commercial space we want to play; because if you do not have adequate power, all the indices including our lifespans are weak. You can see the comparative statistics with other nations with steady power. So we believe strongly that the issue of power must be solved and we have to do it as a country not as individuals with narrow interest. The nation is a single economic module. The electricity flowing to the consumer must be equal to the revenue flowing back to the sector. It is the failure of this equation that we have the problem the revenue flowing back to the producers and the service providers is inadequate to support the power sector as a whole. The DisCos don’t collect enough to keep for themselves. They cannot pay the transmission company. The generators cannot pay the gas producers, then, the system has failed. For you to have equilibrium, electricity production must be equal to the revenue to support the sector. You cannot shy away from it.

So, what role is Aiteo playing now?

Right now, we are playing in the space in two areas. We bid and won some power like the Alaoji power for Aiteo. The power plants won by

other bidders cannot go to financial close for over 5 years now. You heard about the 10 NIPP power plant that were privatized about 5 years ago. Not a single plant has gone to a financial close, because of gas and market liquidity issues. So even though the country jumpstarted the NIPP power plants in 2004 with excess crude funds, up until now, not a single power plant has been sold for a variety of reasons which can’t be adequately addressed here. There are liquidity problems; there are transmission problems; there are generation problems; there are distribution problems. So, all the parts of the power sector are circumspect. So, the only solution is let us all come back as a country and all players to work together to solve it and stop working in silos.

In the next 2 to 3 years, what should we be hoping to hear from Aiteo Power?

Our portfolio is going to be mixed. Not just in gas power, but also in green energy. We are going to move into solar energy and other renewables. In addition to that, we want to also use our own gas in OML 29 to generate electricity directly among other uses, including our own end-use solutions.

How many megawatts are you planning to produce in the next 2 to 5 years from now?

On Aiteo’s gas fields are looking at about 250 to 300 megawatts from associated gas production. From the assets that we have in the privatization of NIPP process, Alaoji power plant alone we can produce up to 1,131 megawatts – in combined cycle.

What megawatts are you producing currently?

We are not producing any power now due to market constraints. But like I said, in our OML 29, we have the gas that we can pipe and l generate power that would bring the factories, commercial and residential users.

This is going to be capital intensive. How do you plan to finance the project? Third party financing?

Third party financing with the appropriate gearing of debt and equity from the open market. Once a project is bankable, money will come. The investor just wants to see, ‘What is my exit if I bring finance?’ Right now, there is opacity in the system and no clarity, money will go elsewhere. We know how to look for big money and are deep and experienced in project finance.