0% found this document useful (0 votes)

292 views

Power Sector IN DEPTH Report Part1 PDF

The document provides an overview and recommendations on Nigerian stocks and bonds for 2014. It summarizes that valuations in the stock market are high but risks may not be as significant as they appear. It recommends continuing to invest in risk assets for long term gains. Specifically, it recommends buying stocks in Dangote Cement, UBA bank, Diamond Bank, GSK Nigeria, Flour Mills of Nigeria, and Honeywell Flour Mills due to their growth potential. In the oil and gas sector, it recommends Heritage Oil, Eland Oil & Gas, Afren, Lekoil, and Oryx Petroleum. It also predicts the Nigerian naira will remain stable but become more volatile in 2014.

Uploaded by

cyrinus

We take content rights seriously. If you suspect this is your content, claim it here.

Available Formats

Download as PDF, TXT or read online on Scribd

0% found this document useful (0 votes)

292 views

Power Sector IN DEPTH Report Part1 PDF

Uploaded by

cyrinus

We take content rights seriously. If you suspect this is your content, claim it here.

Available Formats

Download as PDF, TXT or read online on Scribd

You are on page 1/ 100

Nigerian Power Sector

Nigeria | Infrastructure | Electrical Power 5th August 2014

NIGERIA YEAR AHEAD 2014

Value Investment Opportunity or Value Trap?
Nigeria 24 January 2014

Market Update
1 year 31 Dec 2013 1 day
• Recommendations on 25 industrial companies and banks NSE - Index* 31,583.49 41,329.19 41,957.50
naira / US$ 157.02 160.30 106.14
• Recommendations on eight oil & gas E&P companies Brent, US$/bbl 105.94 110.80 107.58
MPR % 12.00 12.00 12.00
• Strategy, economics and fixed income for 2014 Source: Nigerian Stock Exchange, Central Bank of
Nigeria, Bloomberg. *Nigerian Stock Exchange All-
Share Index.
Valuations high but risks not as elevated as bare facts suggest
Contact information
We begin 2014 after a two-year bull run in equities (+100.7% in US$), when it
was possible to obtain a risk-free naira fixed income return of 13.0% pa, and the Head of Research: Guy Czartoryski
naira remained firm. Going into 2014 and 2015, can we realistically expect a
+234 (0)1 448 5436 ext.4515
further re-pricing of assets and such currency stability? Genuinely long-term
investors will continue to buy risk assets: our concern in this report is with the [email protected]
one-to-two year investment outlook for equities and fixed income. Economist: Alan Cameron

The equity market largely has priced in progress made in the banking sector and +44 (0) 20 7290 6854
structural reforms (eg fuel price reform and power sector privatisation) in our [email protected]
view. Valuations of the principal consumer-facing industrial stocks are high while Oil & Gas: David Stedman
their near-term growth prospects are poor. The market has already begun to
+44 (0) 20 7290 6848
mark down some stocks for failing to deliver growth, like Guinness Nigeria, Sell,
and we believe it will continue to do so with Unilever Nigeria, Sell, for example. [email protected]
Banks: Gloria Obayagbo
Profitability at the major banks is being tested, mid-cycle, and though valuations
are not stretched there are no obvious catalysts for a further re-rate. In fact, as +234 (0)1 448 5436 ext.4516
we go to press the Central Bank of Nigeria has cut the earning assets of banks [email protected]
by increasing reserve ratios on public sector deposits from 50% to 75%. Brewers& Flour Millers: Adedayo Ayeni
Nevertheless we believe the market has yet to recognise the mid-term earnings
+234 (0)1 448 5436 ext.4511
potential of UBA, Buy, and Diamond Bank, Buy.
[email protected]
Re-inflation of bank balance sheets brings other investment opportunities. The Consumer: Tayo Oyegunle
aggregate loan books of the top ten banks we cover grew at an average 16.6%
+234 (0)1 448 5436 ext.4505
2010-13e, 18.1% in 2013e alone and, we believe will grow 16.9% in 2014e. And,
since loan growth includes lending to construction, we continue to favour the [email protected]
rapidly-growing cement sector, in particular, Dangote Cement, Buy. Sales: Temi Popoola, CFA

Among the second-tier stocks, and assuming continued macro-economic and +234 (0)1 783 5436
political stability (the risks may be over-stated on both fronts) we believe that [email protected]
opportunities lie with the best managed of the second-tier consumer-facing Trading : John Gannon
industrials and food companies, notably GSK Nigeria, Buy; Flour Mills of
+44 (0) 20 7290 6849
Nigeria, Buy; Honeywell Flour Mills, Buy; and UACN, Buy.
[email protected]
In the oil & gas sector, companies are increasing output. Among the large caps
Trading : Kenneth Kanebi
we favour Heritage Oil, Buy, and among the small caps Eland Oil & Gas, Buy.
We also like Afren, Buy; Lekoil, Buy; and Oryx Petroleum, Buy. +234 (0)1 448 5420 ext.4520
[email protected]
After a year of exceptional stability in 2013, the naira is likely to be more volatile
Research Team: [email protected]
in 2014, and with this will come talk of a devaluation. Yet more often than not
Alowiba David-West
over the past five years, it has paid to bet against this. We think this year will be
Sales Team:[email protected]
[email protected]
no different in that the CBN still has both the resources and the incentives to
defend the naira. The carry trade into short-dated T-bills remains attractive.

CSL
CSLStockbrokers
Stockbrokers is
is aa division ofFCMB
division of FCMB(UK)
(UK)Limited
Limited which
which is authorised
is authorised by Prudential
by the the Prudential Regulation
Regulation Authority (PRA) and regulated
Authority
by(PRA) and regulated
the Financial Conductby the Financial
Authority Conduct
(FCA) andAuthority (FCA) and
the Prudential the Prudential
Regulation Regulation
Authority (PRA) Authority (PRA)
in the United in
Kingdom.
the United Kingdom.”
Nigerian Power Sector Infrastructure

Cover Picture: The Earth at night as viewed from NASA and NOAA’s
Suomi NPP Satellite. Image acquired between April 18 and October 23,
2012.

Note that the majority of the lights visible in Nigeria (outlined in white) are
in the Niger Delta region. Most of these lights are from gas flares and not
electrical lights. See images below.

Source: NASA Earth Observatory

The Niger Delta Region of Nigeria. Image Captured 18 December 2013

“The image illustrates two facts from a U.S. Energy Information Administration assessment: Nigeria contains more gas flares than
any other country except Russia, and Nigeria has one of the lowest per capita electricity generation rates in the world.
While some city lights are visible, they are concentrated in small clusters in population centres. There are no sprawling cities and no
networks of well-lit roads.” — NASA Earth Observatory

Contact Information

Head of Research: Guy Czartoryski Economist: Alan Cameron Sales: Temi Popoola, CFA
+234 (0)1 448 5436 +44 (0)20 7290 6854 / 7220 1041 +234 (0)1 738 4176
[email protected] [email protected] [email protected]

Lagos: +234 (0)1 448 5436 London: +44 (0)20 7290 6854 / 7220 1041 [email protected]
+44 (0)20 7290 6848 / 7220 1043 [email protected]

The privatised state-run generation and distribution

Executive Summary companies were formed after NEPA (National Electric
The Nigerian electricity industry has undergone long- Power Authority) was unbundled and reincorporated as
overdue reform and has been privatised, raising the Power Holding Company of Nigeria (PHCN). But
US$3.1 billion for the Federal Government. New for limited, non-participatory stakes and as grantor of
institutions and regulations are in place, all to be the hydroelectric plant concessions, the Federal
overseen by an independent regulator, the Nigerian Government of Nigeria (FGN) is effectively out of the
Electricity Regulatory Commission (NERC). NERC is electricity generation and distribution business. It still
charged with shepherding the industry to its ultimate controls transmission through the Transmission
structure – a multi-operator, competitive, open-traded Company of Nigeria (TCN) and it is also responsible
electricity market. In November 2013, the 6 former for what is to be an electricity bulk-trading regime,
state-owned PHCN generation companies (Successor through the newly-created Nigerian Bulk Electricity
GenCos) and 11 distribution companies (Successor Trading Company (NBET).
DisCos) that were bid for came under the control of
The FGN is now in the middle of privatising the power
private investors. We are now at the point where the
companies formed under the 2005 National Integrated
Successor Companies will be looking to raise further
Power Project (NIPP). This was launched as a power
capital to rehabilitate acquired assets and to invest for
generation initiative independent of NEPA/PHCN, to
the future. Furthermore, Independent Power Producers
increase the nation’s generation capacity whilst
(IPPs) are looking to consolidate their positions in the
NEPA/PHCN was being restructured and prepared for
new post-reform market.
privatisation.
In view of this, our objective is to evaluate the
investment case for the Nigerian power sector in
light of developments in the operation of the new The Impetus for Reform
regime and core issues that have unfolded since
the private investors took over. Chief among these Conservatively, we estimate that over US$60 billion
relates to the Multi-Year Tariff Order (MYTO II), has been invested in the Nigerian electricity sector
which our analysis shows results in a tariff since 1960, the year of independence, however there
structure that is not commercially sustainable as it is very little to show for it. Nigeria with a population of
currently stands. Other crippling issues concern about 170 million has just 10,400 MW of installed
the delay in the declaration of the Transitional generating capacity, with capacity available for
Electricity Market (TEM) and by the unexpected generation of 4,300 MW. This compares to other
instatement, in December 2013, of an indefinite developing countries such as South Africa with 31,880
Interim Rules Period. MW available capacity for a population of 52 million. In
fact the current amount of generated electricity
Figure E1: The Privatised Nigerian Electricity Market
supplied to the national grid to power the entire nation
Successor is equivalent to that supplied to Liverpool and
NIPPs IPPs IPP
GenCos Manchester combined. These two UK cities have just
Distribution
1% of Nigeria’s population. As to the origins of the
Licence
Holder electric power trouble, we posit that it is not one of
TCN NBET underinvestment per se but one of mismanagement
and ineffective execution.
Embedded
Generation

Successor DisCos
Timing of Reforms
Despite the inadequate state of Nigeria’s infrastructure,
GDP has grown by 5-7% over the last three years.
th
Nigeria is the world’s 12 highest producer of oil at 2
th
million barrels of oil per day; and it has the world’s 9
Private Private Private
Generators Generators Generators largest proven reserves of natural gas at 182 TCF.
Source: CSL Research While oil is the largest single contributor to government
coffers, contrary to widespread belief, agriculture is the

largest contributor to GDP at 22% and employs 40% of Why Privatise?

the population. Oil prices have been robust but
government expenditure has been ahead of earnings Turning to the private sector for the solution when the
from the oil sector. The poverty gap has been widening industry was in such a dire state amounts to a tacit
and the middle class have also been feeling the effect admission that various administrations in Nigeria have
of the nation’s uncompetitive business environment in not met, and are not likely to meet, a core obligation to
their pockets. its people, as would be expected of a government.

The FGN considered a number of models to reform the

It is virtually impossible to identify a sector where the
electric power sector but it quickly became apparent
availability of power is not a major determinant of
that the private sector would have to be involved. The
output. A country like Nigeria with a young vibrant
sector required at least US$70bn of investment to
population has been able to amble along for decades
bring it up to a barely adequate level of generating
without properly addressing its power supply problem.
capacity and the FGN did not have the will, means or
However the debilitating effects of the lack of electrical
the financial flexibility to do so on its own with the
power in a dynamic global competitive environment is
existing (pre-reform) institutions.
holding back Nigeria’s economic progression to the
next stage of an industrial economy.

We have evaluated the cost of the power supply gap to

the economy based on the cost of unserved energy
The Investment Case
(CUE) as compared to an equivalent economy. Our
analysis shows that the most sanguine assessment Pitfalls and Opportunities
indicates that the lack of adequate power generation is
losing Nigeria US$80 billion per annum in GDP, The supply/demand gap for power in the largest
assuming optimal power generation (full power) of 1
economy in Africa , with a population of about 170
c.13,000 MW. However on a more realistic assumption million, generating less than 4,000 MW of
of full power at 40-45,000 MW, the cost is closer to electricity, presents a prima facie investment
US$250 billion per annum. The bottom line is that if opportunity. At this juncture, it is moot whether
Nigeria does not get on top of its power trouble, 2
‘full power’ for Nigeria is 20,000 MW, 40,000 MW or
the economy will continue to lag its peers and exist 165,000 MW. How the theory (of the new regime)
on a sub-par level. works in practice is the crux of the investment
case for the Nigerian power sector.
Chart E1: GDP Contribution by Sector, 2013t
Such a major overhaul of an industry cannot
realistically be expected to progress entirely smoothly
Agriculture - 21.7%
Trade - 16.5%
so it would only be reasonable for stakeholders
Crude Oil & Natural Gas* - 14.7% (investors, customers etc) and other commentators to
Telecoms & IT - 8.6%
Agriculture - 21.7% have this in mind. This is not a Nigeria phenomenon
Real Estate - 7.9%
Manufacturing Other - 6.5% but is to be expected in the implementation of
- 6.3% Manufacturing - 6.3%
corporate or industry-wide strategy the world over. The
Public Admin - 3.6%
Trade - 16.5%
Finance & Insurance - 3.3% concern and hope is that these bumps amount to
Business & Other Services - 3.2% minor, surmountable hiccoughs.
Building & Construction - 3.1%
Media & Arts - 2.3%
Telecoms & Crude Oil & Natural Transportation & Storage - 1.2%
Identifying where the equity is in the new sector and
IT - 8.6% Gas* - 14.7% Utilities Supply & Services - 1.2% assessing how much funding is available to make the
required investments involves an initial evaluation of
the main risks. We have classified these under
Source: CSL Research Financial, Systemic and Structural Risks. We analyse
*Includes Oil refining
these in detail in the main report but summarise them
below.

1
2013 GDP US$507 billion.
2
The industry standard for a developed economy estimates 1,000
MW is required for every million people.

Financial Risks
Figure E2: MYTO II Methodology
We address two core financial risks:

Inputs to the Tariffs

Risk Allocation Skewed Against the DisCos
Load Forecasts Fuel Costs Generation Capacity
Invested Capital Return on Capital Economic Data
The majority of the costs of getting the electricity Level of Technical & Operating & Other Technical Data
generated from the GenCos to the end customer are Non-Technical losses Maintenance Costs Customer Numbers End-User
Tariff per
borne by the DisCos. All these costs are ultimately DisCo
Zone
passed on to the end customer. However from a cash
management and capital structure perspective, the Generation Transmission Distribution &
balance of risk has a bearing on the cost of capital and Costs Tariff Retail Tariff

returns profiles of these businesses.

The MYTO II Powder Keg Source: CSL Research

Our analysis of the tariff models for generation,

transmission and distribution indicates that while the
methodology used is theoretically sound and has Systemic Risks
precedents in other developed electricity markets, the
financial model does not stand up to scrutiny as far as The main systemic risk relates to the delay in the start
its underlying assumptions go. The result is a tariff plan of TEM and in the operation of the IRP. We also note
that is currently not cost-reflective and is not that given the current dearth of power supply, the load
commercially sustainable. The components of the gun allocation criteria that are the basis for sharing the little
powder we have identified and discuss in detail are: power available among the DisCos is not sufficiently
objective, in our view.
A. Generation Technical Assumptions
Lastly, it has transpired that on taking over the assets,
 Available Capacity Factor assumptions for the power the new investors have found the reality of the
plants need to be more conservative; moribund PHCN system to be worse than anticipated.
 Construction period for Large Hydro plants is too This is despite NERC’s efforts to establish the status
ambitious; quo ahead of privatising the PHCN companies, and
 Plant Availability baseline needs to be lowered; despite pragmatic adjustments being made by NERC
 Gas price assumptions are too low. and investors to the data provided by PHCN at the
B. There is a miscalculation of Wholesale Prices time of bid submissions.
which leaves GenCos short.
C. Transmission Capex is insufficient for actual Interim Rules Period – A No-Man’s Land
requirements.
The IRP has different rules and operating procedures
D. Distribution ATC&C Losses assumptions are too for the electricity market from those investors
low. anticipated. Given the critical issues relating to the
state of acquired assets and the application of new
Multi-Year Tariff Order (MYTO II), the IRP was
arguably necessary to allow NERC and ultimately the
FGN to rectify the underlying issues. However it is an
indisputable fact that the no-man’s land that is the IRP
has profound implications for the cash flows expected
from the acquired businesses.

international demand for gas is robust, thus gas

August Repayment Anniversary Issue suppliers do not struggle to find willing buyers.
The anniversary of the August 2013 tranche of
On 2 August 2014, the Ministries of Petroleum and
financing extended to fund winning bids approaches.
Power and NERC announced a revision in the DSO
At this time initial repayments were expected to be
gas-to-power price for 2014 to US$2.50 from US$2.00
made. The new investors and local banking institutions
per Mcf as part of measures to bridge this pricing
that extended financing to bidders in 2013 proceeded
issue. This brings the DSO price closer to, but still well
on the understanding that TEM would have been
short of the market spot price of US$3.80-4.00 per Mcf.
declared by January 2014. By August 2014, the
Also announced was that in conjunction with the
business operations will have commenced in-line with
Central Bank of Nigeria (CBN), they would be setting
signed Industry Agreements.
up a facility to settle outstanding gas-to-power debts
The loans were given in furtherance of the business owed to the gas suppliers, estimated at ₦25 billion
plans and financial projections of bidders, thus there (US$156.3 million). These developments are certainly
was a reasonable expectation of the viability of welcome; however it is very early days. Moreover, the
projected cash management cycles of the Successor precise mechanism for managing this process is yet to
Companies. The extent and duration of the problems be finalised as the CBN plans to engage the banking
faced by the new investors in their newly-acquired sector in the bid to settle these accounts.
businesses are not ordinary commercial risks in
Figure E3: Gas to Power Cash Flows
implementing strategic plans and running these sorts
of businesses. Thus we would struggle to get behind Gas Gas
Supply
the notion put forward by some state officials that Producers / Bill
GenCos Transmission
Transporters
investors and financiers ought to have foreseen these
risks and ought to have taken action to mitigate any Gas
Payment
TUOS
Payment
Transmission
Bill

adverse effects.
PPA

To date, local banking institutions have committed a PPA

DisCos
Bulk Payment
total of c.US$5 billion to the sector (privatisation, Trader
rehabilitation, other power-related assets, etc). Bill Bills
Payment

The Gas Supply Red Herring

Power generation declined at the beginning of the year Customers

to c.2,000 MW from a pre-handover average of about Source: CSL Research

3,500 MW and output continues to be anaemic. Much TUOS – Transmission Use of System charge
of the blame has been ascribed to an inadequate
supply of gas to power the plants due to the poor gas
transportation infrastructure. The current gas
transportation and electricity transmission FGN Sureties Are Only Effective During TEM
infrastructure can support generation of 5-6,000 MW
Another concern raised by the delay of TEM is that it
without requiring a Herculean effort (beyond that is a
is only once TEM has begun that key FGN-backed
different matter). Hence it stands to reason that the
credit enhancements that were put in place to
generation shortfall is attributable to other factors.
attract private capital (e.g. Partial Risk Guarantees)
While it is true that the gas infrastructure is in a and other salient provisions of the industry
poor state, the prime reason for the attenuation of agreements entered into by investors become
gas supply to the power plants is due to the operational. Without effective and bankable industry
suffocation of cash flow under the IRP. If the gas agreements, the Successor Companies cannot raise
producers are not going to be paid as expected under the project or corporate finance to fund capital
their Gas Supply Agreements, it would be little wonder expenditure and their operations.
they turn their supply taps off. Domestic and

Structural Risks represents the another opportunity to invest in

(newer) generation plants, which also have control
over transmission and distribution in their locale
The FGN’s Control of Transmission and some associated gas supply infrastructure.

TCN is in charge of transmission – wheeling power  Investing in IPPs – the industry’s risk allocation
around the grid and installing transmission lines. It appears more favourable to GenCos. These could
remains in government hands for the foreseeable be IPPs that supply the national grid or
future. One of the main reasons the FGN privatised the embedded/on-site generators with separate
sector was because NEPA/PHCN had not kept up with distribution and transmission from the grid.
investing in the electricity transmission infrastructure – Embedded GenCos can sell excess power to the
the critical link between generating and supplying grid.
electricity to the end-user. Our concern here is that the  Independent distribution networks
NEPA/PHCN pattern of non-performance will continue.
 Small hydro-electric plants – over 300 5-60 MW
projects have been identified and feasibility studies
Gas Infrastructure, Supply and Price carried out for 12 dams. The FGN is open to
Successor GenCos were sold with Gas Supply private investors’ submissions of expressions of
Agreements (GSAs) already in place for the available interest.
capacity at the time of sale. The NIPPs will be sold
with GSAs but it is unclear if this will cover all their Indirect Investments
generation. NIPPs and Successor GenCos will take 2-
3 years to reach optimum capacity and hence peak In the immediate post-handover environment, indirect
fuel demand. Meanwhile the IPPs being constructed exposure might better suit investors with lower risk
will also be competing for gas. We believe that this appetite than that required for the power sector as it
increase in competition will invariably have the effect of currently stands.
raising gas prices as demand outstrips supply and the
We believe investors looking to get indirect exposure
DSO price reaches market parity.
to power should look to companies that have close-
ended, piece-meal interactions with the power sector,
providing products and services. The main areas we
Gaining Exposure to the Sector would point to are in:
 Power transmission infrastructure
The issues that persist in the Nigerian power  Gas transportation infrastructure
sector are not without precedents in other markets
undergoing such radical reform and are not  Technology and engineering, including metering
insurmountable. Thus provided there are clear  Technical capacity and knowledge services
indications that all the current stakeholders are
working together to get the schedule back on
track, and allowances are made for shortfalls
suffered so far, the sector demand story and macro Outlook for the Nigerian Power Sector
opportunity can be fully realised.

Direct Investments Credit Where and When Due

Other than extending debt-financing to the Successor In our view it is already an achievement that long-held
Companies or taking equity stakes (should and when vaulted plans to privatise the PHCN GenCos and
the latter becomes an option) direct exposure can be DisCos per se have been seen through. In any context
gained by: privatising a state utility is no small feat. Irrespective of
the motives behind ‘allowing’ this attempt at reform (for
 The privatisation of the 10 NIPP plants – this is there have been many) to get as far as it has, it is a
already at an advanced stage, however this sine qua non that realism and pragmatism enabled the

FGN to see the raiment-less emperor NEPA in the Chart E2: Nigeria’s Generation Capacity Projections (GW)
bare state it was. It is only from such a point that a
workable plan could be devised.
28
25
23
The Regulatory Framework and NERC 21

One factor that bodes well for the new regulatory 16

framework is that it has been drafted in such a way 10
12

that allows the (comprehensive and detailed) rules and 9

operating codes to be amended to meet market

realities without going through superfluous levels of
bureaucracy. However the real threat of political 2013 2014 2015 2016 2017 2018 2019 2020
interference and vested interests remains a palpable
problem. Source: Presidential Task Force on Power, CSL Research

We have been encouraged to note that the working

relationship between NERC, the DisCos and GenCos
has been collaborative. Even in the wake of the MYTO Tariffs
major problems that have emerged post handover
of the Successor Companies, NERC has been It is an unequivocal fact that MYTO tariffs were not
viewed favourably. It is considered to understand set at the right level to begin with: they were set
the requirements of the stakeholders in the market too low. Even after the adjustments made in the Minor
and what is necessary to make the NESI work. It Review which took effect on 1 Jun 2014, they are still
has also flexed its muscles as the regulator of the too low.
industry to take to task entrenched interests of the
The inaccurate underlying technical assumptions have
old guard at PHCN.
been compounded by the generation capacity being off
target. Current generation capacity is (3,400 MW
TCN and Transmission
versus the 9,000 MW MYTO projected):
The current network, were it in optimal condition, is 1. Tariffs must increase so that they are cost-
capable of transmitting 6,000 MW of power, reflective and meet the Revenue Requirement of
practically twice as much electricity currently being the industry. Otherwise the NESI is not
supplied. Getting to 6,000 MW wheeling capability is sustainable and will not be investable.
the low-hanging fruit for TCN, the easy win. This would
make a noticeable difference to the end user. 2. The FGN is likely very sensitive to adverse
Experiencing such an improvement in electricity supply reception by the electorate to increasing tariffs. In
would give confidence in the system and make further view of this it might be reluctant to raise tariffs to
tariff increases, which are invariably necessary, much the cost-reflective level the industry requires. The
easier for the end customer to stomach. solution, therefore, would be for the FGN to
accept that it will need to make up the
The FGN shrewdly decided to appoint a management difference by funding deeper tariff subsidies
contractor, Manitoba Hydro International, to take over for longer than the two to three years it initially
operations of TCN and investments in the electricity anticipated.
transmission network. However the old guard of the
PHCN’s System and Market Operator have resisted It is worth reiterating that the understatement of
relinquishing power. MHI needs to be allowed to carry the Revenue Requirement in MYTO II, which
out its contractual duties to the full extent without translates into uncommercial tariffs, is a significant
political interference. If not, and transmission targets threat to the success of the NESI.
are not met, we believe it would be difficult for NERC
or TCN’s own supervisory board to be able to hold MHI Lending banks will need to see that the businesses
to task for any non-performance. are viable. They are not viable if the tariffs do not
cover the Revenue Requirement.

A Phased Transition to TEM?

Chart E3: Nigeria’s Power Generation Capacity Projections

100%
One of the factors holding up TEM is that some DisCos
Successor
90% Thermal GenCos
clearly require more time than others to get the houses
80% Successor they were sold in sufficient order for the starting line.
Hydro GenCos
70%
We believe a solution to prevent further delay to TEM
60% NIPP GenCos could be to institute a 2-phased entry to the new
50% IPP-A regime. The bulk of DisCos and GenCos can begin
40% under the full operation of the TEM regime, while the
IPP-B second group will be introduced within a strictly-
30%
20% defined time period. We believe that this could
10% IOCs necessitate the FGN providing specific financial
0% Other support for the second group during their transition and
2013 2014 2015 2016 2017 2018 2019 2020
qualifications of some of the bilateral obligations of
Source: Presidential Task Force on Power, CSL Research
TEM as they apply to the second group.
IPP-A - Existing (non-IOC) Independent Power Producers; IPP-B - confirmed
future IPP projects; IOC - International Oil Company power plants

TEM Must Be Declared Anon Investment Conclusion

The current no-man’s land of the Interim Rules Period
needs to be wound up. TEM is too long overdue. The Irrespective of the rhetoric, given what has transpired
uncertainty that currently exists will put off further over the last nine months and noting more recent
investment in the sector, in our view. The full operation public pronouncements by governing bodies, we would
of NBET, credit enhancements such as the PRG and advise caution with respects to investing in the
the other laudable aspects of the reformed system do Nigerian power sector for the time being. For us to
not come into force until TEM. So at the moment there have a more bullish view on investing in the
is little change from the old NEPA/PHCN regime other Nigerian Electricity Supply Industry we would
than the fact that private investors have now need:
committed to the sector.
1. To see the MYTO model adjusted to take
into account the reality of the Successor
No Hiding for the FGN
DisCos and GenCos; we believe this will
The FGN cannot contend that as control of electricity invariably mean that the Revenue
generation and supply to the end-user now lies in Requirement will increase.
private hands, the onus of performance is on the new
owners. For good public policy reasons of universal 2. Higher Revenue Requirement would mean
access, the FGN still regulates tariffs for now. In higher tariffs. Given the likely wide disparity
addition, the state of the industry necessitated that it between current tariffs and where they need to
retains control and responsibility for transmission be (the commercial level), we would not expect
infrastructure. Thus investors have their hands tied vis- a rebalancing in one salvo. However what we
à-vis the commercial flexes they might otherwise have would need to see is a clear schedule
had to compensate for unexpected shortfalls, for showing commitment to get the tariffs to
example. the required level and/or FGN commitment
to subsidies to make up the gap in the
For the time being the FGN is somewhat cushioned interim.
from public backlash over the lack of power. As far as
the public is concerned, the industry has been 3. TEM needs to start and we need to see
privatised so the blame lies with the new owners. NBET and TCN demonstrating they are
However, the laudable increase in transparency and capable of operating as they are set out to.
information flow in the sector means that there is only We are pragmatic and appreciate that there
so long this perception will persist before the spotlight will be minor teething problems. This to be
shifts to also encompass the FGN once more. expected under the circumstances.

A 2-Tier Competitive Electricity Market? The FGN is the driver and overseer of the new
market. Thus it behoves the FGN to ensure that the
In the long run, we believe that while the Nigerian NESI works in practice as the paper says it says it
electricity supply market could become an open-traded should and would. At this stage the onus of
market as planned, the market could likely end up with management of the execution risk of the system
a two-tier structure. One would have customers relying lies with the FGN.
on power from the national grid and the other with
customers in an IPP/embedded generator framework. There is no going back for the FGN at this point.
What the former lacks in reliability would be off-set by The main unknown thrown up by the issues in
lower tariffs than those of the IPP/embedded generation, transmission and distribution that we
framework. The IPP/embedded framework would have highlighted is the pace of progress. This in
exhibit high reliability of service in exchange for higher turn has a bearing on the optimisation of returns within
tariffs than the grid-connected system. an acceptable timeframe for investors and banks
operating in a developing market
There are numerous paths to improving the generation
and delivery of power in the Nigerian Electricity Supply == + ==
Industry. It matters little to the end customer, be they
households or industry, whether their electricity comes
from the national grid or from embedded generator
IPPs. The system has to deliver what it has been set
up to deliver. This will involve all stakeholders in and
connected to the industry delivering on their declared
obligations in time and within reasonable financial
parameters.

Table E1: Purchasers of Successor DisCos

Bid Stake Distribution

Successor DisCo Purchaser (US$ mn) Acquired (GWh)
Abuja Electricity DisCo KANN Consortium Utility Co. Ltd. 164.0 60% 1,802
Benin Electricity DisCo Vigeo Power Consortium 129.0 60% 1,855
Eko Electricity DisCo West Power & Gas Consortium 135.0 60% 1,440
Enugu Electricity DisCo Interstate Electric Consortium 126.0 60% 1,920
Ibadan Electricity DisCo Integrated Energy Distribution & Marketing 169.0 60% 1,989
Ikeja Electricity DisCo NEDC/KEPCO Consortium 131.0 60% 2,077
Jos Electricity DisCo Aura Energy Ltd 82.0 60% 714
Kaduna Electricity DisCo Northwest Power Ltd. 201.0 60% 1,233
Kano Electricity DisCo Sahelian Power SPV Consortium 137.0 60% 788
Port Harcourt Electricity DisCo 4Power Consortium 124.2 60% 1,164
Yola Electricity DisCo Integrated Energy Distribution & Marketing 59.3 60% 265
Source: BPE

Table E2: Purchasers of Successor GenCos

Bid Stake Installed

Successor GenCo Purchaser (US$ mn) Acquired Capacity (MW)

Afam Power Taleveras Energy Group 260.1 60% 776

Egbin Power NEDC/KEPCO Consortium 407.3 70% 1,320

Geregu Power Amperion Power Distribution Co. Ltd 132.0 51% 414
A 15-yr concession with a
Kainji Hydro Electric Mainstream Energy Solutions Ltd. 237.9 varied fee structure^. 760

Sapele Power CMEC/EURAFIC Energy Consortium 201.0 100% 1,020

A 15-yr concession with a
Shiroro Hydro Electric North South Power Consortium 111.7 varied fee structure^. 600

Ugheli Power Transcorp Consortium 300.0 100% 942

Source: BPE
^ Kainji and Shiroro Concession Fee Structure: (1) Commencement fee (the bid price); (2) Yr1-Yr5 – a royalty payment of 5% of annual revenues; (3) Yr6-Yr16 –
a fixed annual fee of US$50.8m for Kainji and US$23.6m for Shiroro.

Key Dates Table

Date Event

Electricity (Amendment) Decree 1998

Amended the 1990 Electricity Act and the 1990 NEPA Act to allow private sector participation in
1998
power sector generation (through IPPs).
NEPA (Amendment) Decree 1998
April 2001 National Electric Power Policy adopted
Pre-TEM Started
January 2005 Distribution zones and PHCN GenCos as the participants, buying and selling electricity at Transfer
Prices.
Electric Power Sector Reform Act passed
Unbundled NEPA: Holding company PHCN created consisting of 6 GenCos, 11 DisCos and 1
March 2005
transmission company.
NERC established as the independent regulator.
2005 NEPA unbundled
November 2005 Successor PHCN companies incorporated
2009 Market Rules approved
2010 NBET incorporated
August 2010 Roadmap for Power Sector Reform launched
July 2010 NBET incorporated
National Council on Privatisation (NCP) advertises for Expressions of Interest (EOIs) for the PHCN
December 2010
GenCos and DisCos.
March 2011 Deadline for submission of EOIs for PHCN Companies
RFP and Information Memorandum documents issued
September 2011
Access to Virtual Data Room
October 2011 Access to Physical Data Rooms
November 2011 -
Bidders' site visits
January 2012
April 2012 Manitoba Hydro International wins management contract for TCN.
BPE receives 54 technical and financial proposals from pre-qualified bidders.
July 2012 32 bids submitted by 20 bidders scored the minimum 75% on full technical evaluation to move onto
next stage.
October 2012 14 Preferred and Reserved bidders approved.
BPE and Preferred bidders sign Industry Agreements.
February 2013 Industry Agreements include Share Sale Agreements, Concession Agreements and other agreements
that provide the overall framework for the privatised power sector.
Preferred bidders pay initial deposit, 25% of the bid price
March 2013
The balance, 75% of the bid price, is due within 6 months i.e. end of August.
June 2013 NIPP roadshow
July 2013 Deadline for submission of EOIs for NIPP Companies

- TABLE CONTINUES ON NEXT PAGE -

KEY DATES TABLE CONTINUED…

Date Event

August 2013 Pre-qualified bidders for NIPP Companies announced

September 2013 Share certificates and licences handed over to purchasers of PHCN GenCos and DisCos
27 September Deadline for NIPPs pre-qualified bidders to submit comments on Industry and Transaction Agreements
2013 and the RFP.
Original date planned for the declaration of TEM
Some stipulated conditions-precedent to declaration of TEM still outstanding. So as not to stall the
[1 October 2013] handover of the successor companies to the new owners on November 1, NERC develops a set of
Interim Rules to govern the market in the Pre-TEM-Post handover market. Commitment that the
Interim Rules Period shall not last longer than 3 months.
Successor GenCos and DisCos handed over to/taken over by purchasers.
1 November 2013 4 month shadow management period begins. New owners to use this time to assess core aspects of
their operations, identifying any problems that need to be resolved
Start of INTERIM RULES PERIOD
1 November 2013
Interim Rules Order issued by NERC in December 2013, with retroactive to 1 November 2013.
11 November 2013 Public opening of NIPP bid proposals
IRP expected to have ended and TEM declared.

31 January 2014 Newly privatised market operators now working under Interim Rules after taking control, raise
significant concerns which could negatively impact the sustainability of the new market. It becomes
evident that 3-month IRP before TEM does not give enough time to resolve issues.
NERC issues Amendment to IRO removing limitation on duration of IRP
28 February 2014 IRP is now scheduled to end "on the first day of the calendar month following the declaration by the
Minister of Power that [TEM] is operational".
Extended IRP expected to have ended and TEM declared
[1 March 2014] Issues still persist. NERC and industry participants work to resolve issues but TEM is delayed even
further.
4 March 2014 42 technically qualified bidders for NIPP GenCos announced
7 March 2014 NIPP financial bid opening
Federal High Court issues an interim order which enjoins BPE from proceeding with privatisation of Alaoji,
Omoku and Gbarain GenCos.
Ethiope Energy Ltd challenged its disqualification as a bidder for failing some aspects of the due
17 March 2014 diligence process and requirement. In its Statement of Claim, EE accused the BPE of bias, prejudice,
conflict of interests and manipulation of the technical bid evaluation due diligence process.
Out-of-court settlement talks collapsed in May. At a subsequent hearing in July, the sitting judge
adjourned the case to October 7 for ruling.
Approval of Preferred and Reserved bidders of 7 of the 10 NIPPs
21 March 2014 US$4.3 billion bid by the 7 preferred bidders. Alaoji, Omoku and Gbarain GenCos temporarily
suspended pending ruling on Ethiope Energy's case in the Federal High Court.
Deadline for Preferred and Reserved bidders to pay bank guarantee of 15% of the amount bid
The bank guarantee can be reimbursed if a bidder does not (a) accept terms of the final drafts of the
14 April 2014 Share Sale Agreement or Shareholders' Agreement (b) on signing the SSA and SA pay the initial
deposit which is 25% of the bid price for NIPPs that have reached full commissioning stage on the
date of signing or 10% of the bid price for NIPPs that are not at full commissioning stage at the date of
signing.
May 2014 TEM is likely to be delayed further
Source: CSL Research

Table of Contents
Executive Summary .............................................................................................................................................. 3
Key Dates Table .................................................................................................................................................. 12
Glossary .............................................................................................................................................................. 18
Chapter 1: Introduction ......................................................................................................................... 21
Introducing Change ............................................................................................................................................ 22
Objective of this Report...................................................................................................................................... 24
Roadmap to Evaluating the Investment Case .................................................................................................... 24

PART I – The Big Picture

Chapter 2: Crouching Lion or White Elephant? ....................................................................................... 28
Infrastructure – the Nation’s Achilles Heel ........................................................................................................ 30
Macro Opportunity – Far from a Dead Man’s Path............................................................................................ 32
Nigeria’s Reformability ....................................................................................................................................... 33
Chapter 3: The Trouble with Nigeria & Electric Power ............................................................................ 36
The Progression of Economic Value ................................................................................................................... 36
The Cost of Unserved Energy ............................................................................................................................. 38
Quantifying Nigeria’s Cost of Unserved Energy ................................................................................................. 39
What is Considered ‘Full Power’ In Nigeria? ...................................................................................................... 43

PART II: Evolution of Power – Hopes and Impediments

Chapter 4: The Power Sector Reform Programme .................................................................................. 46
No Longer At Ease – the Impetus for Reform..................................................................................................... 46
Shotgun Privatisation ......................................................................................................................................... 47
Nigeria’s Electricity Market Reform Model ........................................................................................................ 49
The Roadmap to Power Sector Reform .............................................................................................................. 51
Other Enhancements to Attract Private Capital ................................................................................................. 53
1. NELMCO.......................................................................................................................................................... 53
2. Resolving Labour Issues .................................................................................................................................. 53
3. Capital Incentives ........................................................................................................................................... 55
4. Put-Call Option Agreements with Investors in GenCos .................................................................................. 55
5. Credit Surety – World Bank & African Development Bank Partial Risk Guarantees ...................................... 56
6. A New Cost-Reflective Tariff Plan (MYTO)...................................................................................................... 61
Chapter 5: MYTO – Nigeria’s Multi-Year Tariff Plan ................................................................................ 63
MYTO I ................................................................................................................................................................ 63
MYTO II ............................................................................................................................................................... 63
Underlying Principles & Methodology for MYTO II ............................................................................................ 65
MYTO and Embedded Generation ..................................................................................................................... 66
Generation Prices ............................................................................................................................................... 67
Transmission Prices ............................................................................................................................................ 68
Distribution Prices .............................................................................................................................................. 69
Customer Willingness to Pay Higher Tariffs ....................................................................................................... 73

Chapter 6: NIPPs in the Reforms: Additional Power as PHCN is Unbundled ............................................ 75

NIPPs Generation Report Card ........................................................................................................................... 76
NIPPs Transmission Report Card......................................................................................................................... 76
NIPPs Distribution Report Card........................................................................................................................... 76
Chapter 7: Independent Power Plants ................................................................................................... 77
Credit Enhancements to Attract New IPP Investors ........................................................................................... 77
 Put-Call Option Agreements for New IPPs..................................................................................................... 77
 World Bank Partial Risk Guarantee................................................................................................................ 77
Chapter 8: Electricity Trading & Transmission ........................................................................................ 82
NBET and Cash Management of the System ...................................................................................................... 83
 Duties of NBET ............................................................................................................................................... 83
 NBET’s Funding & Credit Surety .................................................................................................................... 84
TCN and the National Grid .................................................................................................................................. 87
 Transmission Infrastructure ........................................................................................................................... 88
 Structure of TCN ............................................................................................................................................ 88
 Management of TCN by Manitoba Hydro International ............................................................................... 89
 Transmission Targets ..................................................................................................................................... 90
 TCN Funding ................................................................................................................................................... 91
 Controversies ................................................................................................................................................. 92
Chapter 9: Gas Supply – Fuel-to-Power .................................................................................................. 96
Nigeria is About Gas, Not Oil .............................................................................................................................. 96
Gas Pipeline Network.......................................................................................................................................... 98
Gas Supply Requirements for Power .................................................................................................................. 99
The Nigerian Gas Master Plan........................................................................................................................... 100
 Domestic Supply Obligation and Gas Pricing Policy..................................................................................... 101
 Gas Aggregation Company........................................................................................................................... 103
Gas Flaring – Financial Waste & Environmental Scourge ................................................................................. 104
Pragmatism on Green Electricity and the Environment ................................................................................... 106
Chapter 10: The Privatised Power Sector ............................................................................................... 108
Credit Where and When Due............................................................................................................................ 108
Leadership and Intellectual Capital Responsibility ........................................................................................... 109
The Privatisation Process – What, When & How? ............................................................................................ 109
 Purchasers of Successor GenCos and DisCos ............................................................................................... 109
Industry Agreements ........................................................................................................................................ 111
Future Performance Evaluation and Monitoring .............................................................................................. 111
 Performance Obligations Under the PA ...................................................................................................... 112
Current Market Stage – Interim Rules Period................................................................................................... 116

PART III – The Investment Case

Chapter 11: Pitfalls and Opportunities ................................................................................................... 120
Chapter 12: Financial Risks .................................................................................................................... 121
Network Risk Allocation Skewed Against Discos .............................................................................................. 121
 GenCos Not Let Off in Entirety .................................................................................................................... 122
The MYTO II Powder Keg .................................................................................................................................. 122
 MYTO II Generation Technical Assumptions ............................................................................................... 123
 Miscalculation of Wholesale Prices Leaves GenCos Short .......................................................................... 126
 Allocation for Ancillary Services is Grossly Inadequate............................................................................... 127
 Transmission Capex Insufficient for Actual Requirements ......................................................................... 127
 Distribution ATC&C Losses Assumptions Too Low ...................................................................................... 128
Chapter 13: Systemic Risks .................................................................................................................... 129
Load Allocation Mechanism ............................................................................................................................. 129
IRP and Delay in Declaration of TEM ................................................................................................................ 130
 No-Man’s Land Suffocates Cash Flow Management................................................................................... 131
 Power Shortfall – the Gas Supply Red Herring ............................................................................................ 132
 When Is A Contract Not A Contract....? ....................................................................................................... 133
Reality of Acquired Assets Worse Than Expected ............................................................................................ 134
Chapter 14: Structural Risks .................................................................................................................. 138
Transmission – GenCos & DisCos at the Mercy of the FGN ............................................................................. 138
 Wide Impact of Harvesting Low-Hanging Fruit ........................................................................................... 138
 Financing TCN .............................................................................................................................................. 139
 Man Management – The Old Guard’s Last Stand?...................................................................................... 141
Gas Supply and Transportation ........................................................................................................................ 142
 Additional GSA Will Be Required ................................................................................................................. 142
 Gas Supply Contracts Set On Take-Or-Pay Basis ......................................................................................... 143
 Gas Transportation Infrastructure Adequacy is of Concern........................................................................ 143
 3-year Countdown to Gas Supply Crisis Started Yesterday ......................................................................... 144
Cash Effect of the Infrastructure Gap............................................................................................................... 144
Chapter 15: Financing the Power Sector................................................................................................. 145
Bank Exposure in Acquisition of Successor Companies ................................................................................... 145
How Big is the Pool of Finance Available for the Sector? ................................................................................. 146
 Financing and Risk Matrix for Nigerian Power ............................................................................................ 147
Characteristics of Power Sector Financing ....................................................................................................... 148
Key Documents in Nigeria Power Sector Financing.......................................................................................... 149
Cost of Capital in the Power Sector – MYTO II ................................................................................................. 150
Power Sector Risk Relative to the Nigerian Equity Market .............................................................................. 150
Has the BPE Declared Nigeria Closed For Business? ........................................................................................ 152
 Local Banks and the Stress of the August Anniversary ............................................................................... 152
 Long Reach of the BPE’s Summary Dismissal of Concerns .......................................................................... 154

Chapter 16: Investment Opportunities in the Sector .............................................................................. 155

Direct Investments ............................................................................................................................................ 155
Indirect Investments – A Piece Meal Approach ................................................................................................ 157

PART IV – Privatisation of NIPPs

Chapter 17: The NIPP Investor: Second-Mover Advantage?.................................................................... 160
The Status Quo.................................................................................................................................................. 161
The Bidding and Selection Processes ................................................................................................................ 162
NIPPs Privatisation Package .............................................................................................................................. 163
Government Involvement in NIPPs Post-Privatisation ..................................................................................... 164
Other Salient Terms .......................................................................................................................................... 165
 Foreign Exchange Risk and Debt Financing ................................................................................................. 165
 Credit Enhancements to the Transaction .................................................................................................... 165
Committed to the Process – In for a Penny, In for a Pound ............................................................................. 166

PART V - Conclusions
Chapter 18: Outlook for the Nigerian Power Sector ............................................................................... 170
Venerunt, Viderunt, Noluerunt Vincere. .......................................................................................................... 170
Execution Risk Amplified by Inertia and Interference ...................................................................................... 171
Surmountable Issues but Action Required Anon .............................................................................................. 173
Market Idiosyncrasies and the Future of the NESI ........................................................................................... 176
 Frontier Market with Potential for Sizeable Returns, But... ........................................................................ 176
 Winners and Losers...................................................................................................................................... 177
 Cautionary Tale ............................................................................................................................................ 177
Investment Conclusion ..................................................................................................................................... 178

APPENDICES
Appendix 1: Winning Bidders of Successor (PHCN) DisCos and GenCos ......................................................... 180
Appendix 2: Key Regulatory Institutions .......................................................................................................... 183
Appendix 3: Australia’s Tariff Methodology ..................................................................................................... 186
Appendix 4: MYTO II Methodology in Detail .................................................................................................... 187
MYTO II Electricity Generation Prices ............................................................................................................... 187
MYTO II Transmission Prices ............................................................................................................................. 188
MYTO II Distribution Prices ............................................................................................................................... 189
Appendix 5: OCGT and CCGT Power Plants ...................................................................................................... 190
Appendix 6: Other Electricity Sector Licensees ................................................................................................ 192
Appendix 7: Official Press Releases .................................................................................................................. 195

Glossary
₦ Naira IOC International Oil Company
₦/kWh Naira per Kilo Watt Hour IPP
Independent Power Producer /
Independent Power Project
AfDB African Development Bank
IR Interim Rules
ARR Annual Revenue Requirement
IRO Interim Rules Order
Aggregate Technical, Commercial and
ATC&C Loss IRP Interim Rules Period
Collection Loss
Build Own Operate Transfer KW Kilowatt
BOO
(Project Structure) kWh Kilo Watt hour
BOOT Build Own Operate (Project Structure) L/C Letter of Credit
BOT Build Operate Transfer (Project Structure) LDC Local (Gas) Distribution Company
BPE Bureau of Public Enterprises LNG Liquefied Natural Gas
BPP Bureau of Public Procurement LPG Liquefied Petroleum Gas
Btu British thermal unit LRMC Long Run Marginal Cost
CA Concession Agreement MAR Maximum Allowable Revenue
Capex Capital expenditure Mcf Thousand cubic feet
CAPM Capital Asset Pricing Model MHI Manitoba Hydro International
CBN Central Bank of Nigeria MLF Marginal Loss Factor
CCGT Combined Cycle Gas Turbine MMBtu Millions of British Thermal Units
CGPF Central Gas Processing Facility MMcf Million cubic feet
CPI Consumer Price Index MMscfd Million Standard Cubic Feet per Day
DFI Development Finance Institution MMscfd Million standard cubic feet per day
DFID Department for International Development MO Market Operator
DisCo Distribution/Retail company Mscfd Thousand standard cubic feet per day
DPO Development Policy Operation MW Megawatt
DSO Domestic Supply Obligation MWh Megawatt hour
DUOS Distribution Use of Service MYTO Multi Year Tariff Order
EC Eligible Customers MYTO II /
Multi-Year Tariff Order 2
ECN Energy Commission of Nigeria MYTO 2
EIA/US EIA US Energy Information Administration NAPTIN National Power Training Institute of Nigeria
EPC Engineering, Procurement and Construction NBET Nigerian Bulk Electricity Trading Company
Economic and Power Sector Reform NDPHC Niger Delta Power Holding Company
EPSRP
Program NEB Network Expansion Blueprint
EPSRA Electric Power Sector Reform Act 2005 Nigerian Electricity Liability Management
NELMCO
F&A Finance and Administration Company
FDI Foreign Direct Investment NEPA National Electric Power Authority
FGN Federal Government of Nigeria NEPP National Electric Power Policy
GACN Gas Aggregation Company of Nigeria NERC Nigerian Electricity Regulatory Commission
GBI Gas-Based Industries NESI Nigerian Electricity Supply Industry
GBP Pound Sterling NGC Nigerian Gas Company
GDP Gross Domestic Product NGL Natural Gas Liquids
GenCo Generation Company NIPP National Integrated Power Projects
GSA Gas Supply Agreement NNPC Nigerian National Petroleum Corporation
GSAA Gas Supply and Aggregation Agreement NPDC Nigerian Petroleum Development Company
GTA Gas Transportation Agreement NPL Non-performing Loan
GWh Gigawatt hour NSE Nigerian Stock Exchange
IFC International Finance Corporation NUT National Uniform Tariff
IMF International Monetary Fund O&M Operations & Maintenance

Glossary (continued)

OCGT Open Cycle Gas Turbine SPE Special Purpose Entity

ODRC Optimised Depreciated Replacement Cost SPV Special Purpose Vehicle
Opex Operating expenditure SSA Share Sale Agreement
PA Performance Agreement TCN Transmission Company of Nigeria
PACP Presidential Action Committee on Power TEM Transitional Electricity Market
PHCN Power Holding Company of Nigeria TP Transfer Pricing
PPA Power Purchase Agreement TSO Transmission System Operation
PPP Public-Private Partnership TSP Transmission Service Provider
PRG Partial Risk Guarantee TUOS Transmission Use of System
PTFP Presidential Task Force on Power US$ US Dollar
RAB Regulatory Asset Base VC Vesting Contract
ROE Return on Equity WACC Weighted Average Cost of Capital
ROT Rehabilitate, Operate, and Transfer WAGP West African Gas Pipeline
SHA Shareholders' Agreement WB World Bank
SO System Operator

Chapter 1:
Introduction
Few would counter a declaration that Nigeria’s power sector is broken.
Consider the Nigerian electric power sector and some of the other
adjectives and phrases that spring to mind in seamless word-association
include “decaying infrastructure”, “”poor performance”, “supply/demand
imbalance”, “inadequate and unfit for purpose”, “neglected”, and of recent,
the visually-illustrative “epileptic”. It is unfortunate that all of these
descriptions are accurate.
As to the pathogenesis of the electric power trouble, we posit that it is not
one of underinvestment per se but one of mismanagement and ineffective
execution. Conservatively, we estimate that over US$60 billion has been
‘invested’ in the sector since 1960, the year of independence, however
there is very little to show for it. Nigeria with a population of approximately
170 million has installed generating capacity of 10,400 MW, of which 4,300
MW is available for generation. This compares to other developing
countries such as South Africa with 31,880 MW available capacity for a
population of 52 million. To put in further context, the current amount of
generated electricity supplied to the national grid to power the entire nation
is equivalent to that supplied to Liverpool and Manchester combined. These
two UK cities have just 1% of Nigeria’s population.

Chart 1: Generation Capacity per Capita, 2010

250% 250%

200% 200%

150% 150%

100% 100%
Full Power Level - 1,000MW per 1 million population

50% 50%
Nigeria

0% 0%
Congo, Rep.

Kosovo

Estonia
DR Congo

Cameroon
Nigeria
Tanzania

Indonesia

Chile
Turkmenistan

Belgium
Ecuador
Bangladesh

Tunisia

Croatia

Slovakia

Trinidad & Tobg.

Russia
Vietnam

Singapore
Colombia
Sri Lanka

Bosnia & Herz.

Botswana

Poland
Morocco

Greece
Eritrea

Zimbabwe
Namibia

Montenegro
Bolivia

Algeria

Austria
Libya
Mongolia
Zambia

Panama

Canada
Kyrgyztan

Australia
Albania
Jamaica

Mexico
Syria

US
UK
Ireland

Sweden
Azerbaijan

Latvia
Sth. Korea

Venezuela

Serbia

Paraguay
Haiti

Italy
Uzbekistan

New Zealand
Oman

Japan
Benin

Israel
Belarus
Yemen

Brazil

Iran

Source: US Energy Information Administration, CSL Research

After many false starts and unfulfilled promises by successive Federal

Government administrations, at the end of the 1990s Nigeria found itself in
position where it would take an estimated US$70 billion to raise electricity
generation to the equivalent level of South Africa and Brazil. Official figures
estimated that an average of US$2 billion per year had been invested in the
power sector between 1990 and 2005 yet power generation had declined
over that period. In 2010 the Presidential Task Force on Power estimated
that lack of investment in and reform of the power sector would result in a
loss to the Nigerian economy of about US$130 billion per year by 2020. As
electricity generation has changed little in the 4 years since, in the current
global economic climate we estimate that the loss to the Nigerian economy
is now well in excess of US$130 billion per year; GDP in 2013 was US$
507 billion.

At the beginning of the 1990s another truth became apparent: this was that
even if the will to reform the sector was there, the public sector could not
deliver what would be required to catch up, to bridge the gap. The existing
structure of the industry and the mechanisms of the public sector machine
controlling it had simply run out of time. Nigeria’s vertically-integrated
electricity market model and its acquired torpid business processes could
not meet, let alone keep up with the pace of the dynamic, more globalised
st
and commercial economic environment of the 21 century. It was broken
and without adequate foundations to progress further.

The public policy imperative of universal access to electricity that shapes

each country’s electrical infrastructure, not to mention the particularities and
peculiarities of Nigeria itself, meant starting from scratch was not an option
to reform the sector. Privatisation of what was in situ was the next step.
This choice was in part borne out of necessity but also, in principle, out of
chronological design. There was no other logical option. Before the industry
could be privatised, one fact was clear: a new paradigm had to be
established to stand a chance of transitioning the industry into private
hands.

Introducing Change
Electricity transmission and distribution remained in state hands, however
private sector participation in electricity generation was permitted from 1998
by which time electricity generation had troughed at a paltry 1,700 MW for a
3
population of 118 million . Despite the desperate state of the industry, there
was little momentum on sector reform in the ensuing years. Organisational
inertia, lack of transparency and lack of accountability remained the
prevailing culture within the public electricity sector. The government
eventually drew a line in the sand and in 2001 drafted the National Electric
Power Policy, which was later enacted in the Electric Power Sector Reform
Act (EPSRA) 2005. Its central objective was as follows:

3
The industry standard for a developed economy estimates 1,000 MW is required for every
million people.

“Establish a long term electricity market structure in Nigeria in

which multiple operators provide services on a competitive basis to
the broadest range of customers. Under such a regime,
competitive market forces would be the best determinant of the
appropriate and sustainable levels of prices charged by various
carriers for their services”.

In 2005 the state-run National Electric Power Authority (NEPA), now

renamed to the Power Holding Company of Nigeria (PHCN) was broken up
into 17 distribution, generation and transmission companies with a view to
their sale to the private sector. An independent regulator was established
that same year and the Roadmap for Power Sector Reform was drawn up
in 2010 with a subsequent Revision I in 2013 (The Roadmap). The
implementation of this comprehensive plan culminated in the privatisation
of the successor distribution and generation companies (Successor
Companies) in 2013. The privatised assets were handed over to the new
owners at the end of that year.

In June 2013, the Bureau of Public Enterprise (BPE) began the process of
privatising the gas-fired power plants that constituted the National
Integrated Power Project (NIPP) which was launched in 2005. These plants
were to be separate from NEPA and were to be managed and funded
under a parallel newly-incorporated holding company, the Niger Delta
Power Holding Company (NDPHC). NDPHC’s management team was
charged with increasing the nation’s generation capacity by 5,000 MW over
three years. This strategy was considered expedient as during this period
NEPA’s focus would be on unbundling its vertically-integrated structure into
constituent institutions and their subsequent sale to the private sector.

Figure 1: Households Connected to Mains Electricity (%), 2009

Source: Nigerian National Bureau of Statistics

Objective of this Report

We are now at the point where the newly-privatised ex-NEPA
distribution and generation companies will be looking to raise further
capital to rehabilitate acquired assets and to invest for the future.
Furthermore, another set of publicly-owned assets (the NIPP plants)
have been put up for sale and Independent Power Producers (IPP) are
looking to consolidate their positions in the new market. In view of
this, our objective is to evaluate the investment case for the Nigerian
electrical power sector.

The paragraphs in the preceding section represent a précis of the

background to the current electrical power sector in Nigeria. In our view
such a whistle-stop review at the start is a necessary precursor to the in-
depth analysis we will undertake in the rest of this report. Given the
salience of a nation’s electrical power and the specifics of Nigeria’s model,
getting the ‘power issue’ right is critical to the country’s economic
development.

As previously mentioned, a pure greenfield approach was not a practical

option thus the Federal Government of Nigeria (FGN) had to graft the new
paradigm onto a brownfield system. As Nigeria’s brownfield system was
broken and inherently unsuitable, grafting the new onto the old has led to a
regime that exhibits the best and worst characteristics of both greenfield
and brownfield systems. Out of political and commercial necessity, in the
space of a few short years the government has instituted regulations and
structures that should have evolved and been refined over five decades.
Hence it is not surprising that the result is a complex, detailed, confusing
and sometimes contradictory framework that makes assessing the
industry’s investment case less straightforward than we would expect in the
privatisation of a country’s public utility company.

Roadmap to Evaluating the Investment Case

In Part I we take a top-down look at Nigeria beginning with its macro-
economic and socio-political fundamentals – the big picture. We move on to
discuss infrastructure in general and then take a more detailed look at the
country’s electrical power infrastructure.

Understanding the current electrical power system requires a

comprehensive assessment of the reforms. With this in mind, in Part II we
take a detailed look at the 2010 Roadmap for Power Sector Reform – the
flagship operating manual of Nigeria’s current power sector reform
programme. We will begin from its inception in 2008 and conclude the
section at the market today.

In Part III, we go on to evaluate the investment case for the Nigerian

electric power sector in detail. We assess the effectiveness of the new
paradigm (how well the theory applies to the stakeholders’ reality) as well
as set out the risks and opportunities as we see them. Furthermore we will

analyse the revenue and investment return profiles of the constituent

entities of the electricity supply chain.

Figure 2: Roadmap for this Report

PART III PART IV PART V

Nigeria’s
Electrical Power
Market Today Assessment of the Outlook for the
Background to Privatisation of the
Investment Case for the Sector and
the Market NIPP Companies Investment View
Sector

PART II

PART I

Year 0 - n Year 0 Year 0 + n

Source: CSL Research

We have reserved Part IV for the NIPP generation companies. The NIPPs’
privatisation is far from complete, though the process is well underway.
They will be plugging into the new framework of the electrical power sector
which has the Successor Companies as the pioneer GenCos and DisCos.
In our opinion, the success of the new operational and regulatory regime
evinced since the handover of the ex-NEPA companies to the new owners
in November 2013 will have a direct bearing on the prospects for the NIPP
companies currently in the middle of being privatised.

The final part of the main body of the report, Part V, will touch on how the
IPPs and other new entrants operate under the new schedule.

We end the report with a review of our findings and set out our conclusions
on the central issue we have sought to address: whether there is a viable
investment case for the Nigerian electrical power sector as it currently
stands and in light of future prospects.

PART I – The Big Picture

Location of Nigeria (dark blue)

– In Africa (light blue & dark grey)
– In the African Union (light blue)

Chapter 2:
Crouching Lion or White Elephant?
A preliminary glance at Nigeria’s report card reveals several attractive
attributes and statistics. To begin with it has a diverse and fertile
topography that ranges from the Atlantic coast in the south, to tropical rain
forest, to savannah, through to the Sahara Desert in the far north. Its 170
million-strong population is youthful; the land is fertile and well-suited to the
cultivation of cash crops; it has a bustling, industrious informal sector which
putatively indicates a GDP per capita far in excess of the official figure of
th
c.US$3,000. Nigeria is the world’s 12 highest producer of oil at 2 million
th
barrels of oil per day; it has the world’s 9 largest proven reserves of
4
natural gas at 182 TCF with a potential to develop its gas reserves to 600
th
TCF thereby elevating it to 4 place... Alas therein lays the central issue,
the crux of the ‘investing in Nigeria’ dialectic – the potential of market.

On one hand there are those who believe Nigeria’s potential make it a
5
crouching lion of an economy. On the other are those that consider it to be
more of a white elephant in its prospects. Those of the former persuasion
point to the country’s considerable natural resource and human capital.
Those of the latter persuasion while not denying these inherent attributes,
contend that things fall apart on closer reflection. They argue that
capitalising effectively on the latent potential requires deliberate,
considered and well-executed development-advancement plans. And this
is where Nigeria too often falls well short of the mark.

Table 1: Nigeria – Economic Indicators, Demographic Info

Area 923,7700 sq.km

Population 168,833,776
Population growth rate 2.4%
Urbanisation 50.3%
GDP (2013) US$507.1bn
GDP per Capita US$3,004
GDP Growth (2012/13) 12.6%
Total Energy Consumption 1,259 TWh per annum
Total Electricity Production 19.8 TWh per annum
Electricity Consumption per Capita 120 kWh
Access to Electricity 51%
Access to Electricity - Urban 80%
Access to Electricity - Rural 20%
Source: World Factbook, EIA, National Bureau of Statistics

4
Trillion Cubic Feet
5
Ecological adaptation of an extract from a poem by 4th century Chinese poet Xu Yin.

Chart 2: World’s Top Oil Producers and Their Proven Reserves, 2012

14,000 300

11,726
12,000 11,110 250
10,397
Thousand Barrels per Day

10,000
200

Billion Barrels
8,000
150
6,000
4,372
3,856 3,589 100
4,000 3,213 2,987 2,936
2,797 2,652 2,524

2,000 50

- -
Canada

Nigeria
Saudi Arabia

Kuwait
China

Brazil
US

UAE

Mexico
Iran

Iraq
Russia

Oil Production (L. Axis) Proven Oil Reserves (R. Axis)

Source: US Energy Information Administration, CSL Research

Chart 3: World’s Top Gas Producers and Their Proven Reserves, 2012

1,800 1,680 35,000

1,600
30,000
1,400
25,000
Trillion Cubic Feet, TCF

Billion Cubic Feet, BCF

1,168
1,200

1,000 20,000
890

800 15,000

600
10,000
400 334
284 265
215 195 180 159 141 5,000
200 112

0 0
Nigeria

Indonesia
Venezuela
Turkmenistan
Saudi Arabia

Algeria
Qatar

UAE
Russia

Iran

Iraq

Gas Reserves (L. Axis) Gas Production (R. Axis)

Source: US Energy Information Administration, CSL Research

Infrastructure – the Nation’s Achilles Heel

The dire state of Nigeria’s civil infrastructure is the embodiment of the

Table 2: General Household
Survey 2010/11 country’s wasted potential and its economic mismanagement. Chart 4
illustrates the degree of inadequacy of Nigeria’s rail, road, electricity, airport
and telephonic communication infrastructure. Infrastructure inadequacy
Electricity in dwelling 55.9% is the central reason why over 80% of the country’s agricultural
Hours of electricity per week 35 hrs produce spoils before it gets to market.
Mean cost spent on
electricity per month ₦23,696 Only 50% of the population has access to electricity (compared to 77% in
South Africa) and the vast majority are in urban areas (the degree of
Reason Why Household Has No urbanisation is 50%). Rural electrification has changed little from 10% over
Access to Electricity:
the last decade despite the creation of the Rural Electrification Agency and
Unaffordable connection fee 57.5%
the establishment of the Rural Electrification Fund in 2005.
Service is too unreliable 8.5%
No need for electricity 6.6% Blackouts are commonplace and Nigerians are forced to rely on biomass
Dwelling inappropriate for fuel and petrol or diesel generators to make up for the unreliable power
connection 4.9% supply from the national grid. The 2011/12 General Household Survey
Application pending 4.5% indicated that just 56% of dwellings have electricity. Moreover the national
Other 18.0% average for electricity supply is just 35 hours a week. Nigerian
Source: Nigerian National Bureau of Statistics households spend almost four times as much on fuel/electricity as
they do on healthcare and only half as much of their fuel/electricity
expenditure on education.

Chart 4: Infrastructure Comparisons

7.4 9.0 1.8 Russia

South
5.3 7.5 1.4
Africa

2.6 7.9 1.2 Brazil

2.7 4.7 0.8 Turkey

Electricity Generation
4.0 3.0 0.8 China
Airports
0.2 3.6 0.7 Road Kenya

Rail
0.7 2.0 1.1 Indonesia
Fixed Telecom Lines

0.1 1.1 0.6 Mobile Telecom Subscribers Nigeria

0 5 10 15 20 25

Source: The World Factbook, CSL Research

Electricity Generation – billion kWh per million capita Road – thousand km per million capita Fixed Telecom Lines – per capita
Airports – no. with paved runways per million capita Rail – thousand km per million capita Mobile Telecom Subscribers – per capita

Mismanagement and graft are often cited as reasons the country fails to
deliver on (usually) well-laid civil engineering plans. These negative factors
are not limited to poorly executed government projects, they also extend to
mar social enterprise and create inefficiencies in the commercial sector.
The net result contributes to disempowerment and disillusionment of the
workforce and citizens, widening income disparity and rising poverty; all of
which could ultimately pose a real threat to civil peace.

Summary of Reasons for Nigeria’s Electrical Power Inadequacy

 Insufficient power generation;

 Minimal co-ordination between the departments responsible for

transmission, generation and distribution and with the Nigerian Gas
Company, which is the transporter of gas to the PHCN GenCos;

 Lack of investment in the power infrastructure despite an annual

Federal budgetary allocation of over US$1bn per annum, compounded
by little accountability. NEPA/PHCN has failed consistently to prepare
current audited accounts.

 Lack of maintenance of the infrastructure equipment often resulting in

the loss of part or all of the entire network system and/or shortfalls in
fuel supply to the power plants;

 Inadequate to non-existent Spinning Reserve (the on-line but unloaded

capacity of generating units that is used to power-up the system in the
event of a system failure).

 Vandalism and theft of power cables and equipment.

Figure 3: 6 Electricity Generation and Transmission

Power Plant
Step-Up Transformer Transmission Sub-Station

Residential Step-Down
Transformers

Distribution Sub-Station

Commercial

Industrial

.Source: CSL Research

Macro Opportunity – Far from a Dead Man’s Path

Despite the inadequate state of its infrastructure, Nigeria’s GDP has grown
at a compound annual rate of at least 6% over the last five years – a period
during which a global recession existed. We consider this fact a stark
indication of the pent-up potential of the Nigerian economy and the
resilience of its working population. However it would be irresponsible for
the government to use this as an excuse to rest on its laurels and shirk
from seeing through the radical reforms required in key sectors of the
economy. With effective investment in infrastructure, it is reasonable to
6
assume that GDP growth could be in the double-digits . Furthermore,
Nigeria has also benefited from a confluence of a number of external
catalysts that have contributed to greater investment flows to the African
continent.

Oil is the largest single contributor to government coffers, accounting for

about 70% of government receipts. However, contrary to widespread
perception, the oil sector only accounts for less than 15% of GDP.
Agriculture is the largest contributor at 22% and employs 40% of the
population (Chart 5). As the oil sector is currently the sector best supplied
with electricity, we believe the agricultural sector is most likely to get the
largest fillip from any improvements in the supply of electricity. Given the
size of its proportional contribution to GDP, the amelioration of GDP growth
from improvements productivity in the agricultural sector can scarcely be
overlooked by the government and investors alike.

Chart 5: GDP Contribution by Sector, 2013

Agriculture - 21.7%
Trade - 16.5%
Crude Oil & Natural Gas* - 14.7%
Telecoms & IT - 8.6%
Agriculture - 21.7%
Real Estate - 7.9%
Manufacturing Other - 6.5%
- 6.3% Manufacturing - 6.3%
Public Admin - 3.6%
Trade - 16.5%
Finance & Insurance - 3.3%
Business & Other Services - 3.2%
Building & Construction - 3.1%
Media & Arts - 2.3%
Telecoms & Crude Oil & Natural Transportation & Storage - 1.2%
IT - 8.6% Gas* - 14.7% Utilities Supply & Services - 1.2%

Source: Nigerian National Bureau of Statistics, CSL Research

* Includes Oil Refining

6
In the next chapter we shall go into detail about the requirements for economic progression
and also quantify the degree to which Nigeria’s growth is being held back by the dearth of
electric power.

Between 2000 and 2009, GDP grew at an average 6.3% per year. The
main driver of this was the expansion of the non-oil sector of the economy
which grew at over 8% over that period. It then accelerated to an average
of 7% per year thereafter, once again driven by the non-oil economy
growing at over 8%. Much of the non-oil growth came from increased
investment in and expansion of agriculture and reform of the
communications sector leading to the rapid take-up of mobile telephony.
The improvement in telecommunication brought by mobile telephony has
had significant benefits to the well-being of individuals and has improved
the efficiency of businesses. Nigeria has also had notable success in
restructuring the construction sector and sanitising the banking and finance
sectors.

Chart 6: GDP Growth Driven by Non-Oil Sector

9% 8.5%
8.2%
7.7%
8%
7%
2010 Constant
1990 Constant

6% 5.4%
5%
4%
3.2% 7.3%
6.3% 6.7%
3%
4.7%
2%
1% 2.5%

0%
1990-99 2000-09 2011 2012 2013

Non-oil GDP GDP

Source: World Development Indicators, Nigerian National Bureau of Statistics, CSL Research

Nigeria’s Reformability
Fortunately the challenges arising from Nigeria’s malaise are not
insurmountable. In the last 10 years the FGN and a number of state
governments, notably those of Lagos, Edo, Niger and Delta States, have
made concerted efforts to reform a number of industries. The
telecommunications and finance/banking industries have received much
acclaim and have seen a significant increase in domestic and foreign direct
investment. In the case of the mobile telecommunications sector the
federal government had the advantage of being able to start from scratch
with a clean slate. It prudently opened the market to private investors from
the start.

The hurdle faced within the finance and banking sector in the wake of the
2008 global financial crisis was far greater. Choosing the wrong approach
could have resulted in a catastrophic outcome for the economy. Fortunately
the Central Bank, with the support of the FGN, took the bold steps required

to reform the finance industry. Pragmatism prevailed with

acknowledgement that it was inevitable that some aspects of such a drastic
reform programme would not go to plan, as would be the case in any other
country embarking on such an exercise. However a key to success in the
finance and telecoms sectors was appointing the right individuals with the
requisite skills to lead the process.

Key appointments were made at the financial regulator and the Central
Bank, including the (now former) Governor of the latter Lamido Sanusi.
Historical interference by the Executive branch of government was
curtailed as the FGN prudently (by-and-large) stepped out of the way of
these two institutions and they were re-empowered to do the job for which
they were created and designed. The result was a cleaned up banking
system and increase in investor confidence in the finance sector.

We have seen from other industries that successful reforms and

proper management of privatised industries is possible in Nigeria.
The central question now is whether or not and how far the FGN and
its agencies will allow reforms in the power sector to take hold.

It would be disingenuous, in the face of empirical evidence, not to

acknowledge that this salvo has progressed further than previous attempts
to reform the power sector. Notwithstanding, it is still valid to ask why this
time things will be ultimately different. What makes this effort at power
sector reform any different from numerous initiatives that have started and
stopped at varying stages of completion over the last 50 years?

The utilitarian view would be that the FGN, politicians and other influential
powers that be have seen the light (pardon the pun) and now want to
change things for the benefit of the nation. The more cynical view is that
the dire state of electricity supply has now become of such magnitude that
historical efforts to compensate (e.g. self generation) are no longer
adequate and cannot be made to be so either. Furthermore, it has dawned
on these individuals that the way to ensure continued prosperity is by
improving large-scale/nationwide power supply. In other words, they have
come to realise that it is in their rational self-interest to make this work.

The reason or motivation of the drivers of Nigeria’s power sector reforms is

of little to no consequence to the man on the street in Gakori or Kafanchan.
In most cases around the world, the greatest chance of success in such
matters is when the self-interest of those that hold power and influence
coincides with the public interest. However, as Adam Smith said in The
Theory of Moral Sentiments, despite the congruence of the end goals of
public and self interests, it is essential to have laws, checks and balances.
Thus the role of the Nigerian Electricity Regulatory Commission (NERC),
its independence and its ability to use its regulatory powers effectively is
crucial to the successful and profitable future of the Nigerian electrical
power industry.

Figure 4: Current Structure of the Nigerian Electricity Market

Purchase and Sale of Electricity

Successor GenCos Wheeling of Electricity

Successor DisCos

NBET

Eligible Customers
NIPP GenCos e.g. Large manuf acturing
and industrial f acilities

TCN

IPPs Export

Source: CSL Research

Chapter 3:
The Trouble with Nigeria & Electric Power
Electric power impacts every facet of a nation’s economy. It is virtually
impossible to identify a sector where the availability of power is not a
major determinant of output. In statecraft, power (energy) is the most
important input. This might be a bold statement especially considering the
game-changing socio-economic transformations that mobile
telecommunication has wrought across the African continent. But this
assertion might not sound controversial given that neither the mobile nor
fixed line telecommunication industry can operate without electrical power
(cf. chargers, broadband modems, etc). Thus reliable electrical power
supply is the bedrock required if a country is to have any hope of
developing its economy.

Figure 5: The Nigerian Electricity Market

Successor
NIPPs IPPs
GenCos IPP

Distribution
Licence Holder

TCN NBET

Embedded
Generation

Successor DisCos

Private Private Private

Generators Generators Generators

Source: CSL Research

The Progression of Economic Value

7
Countries go through what Pine and Gilmore call the progression of
economic value – from a commodities-based/agrarian economy ultimately
to a transformation economy. As a country’s economy moves up the
economic value chain, its competitive position, influence and wealth
increases as does the welfare of its citizens. The first transition is to a

7
Pine, J. and Gilmore, J. (1999) The Experience Economy, Harvard Business School Press,
Boston, 1999

manufacturing/industrial economy, followed by a move to a service

economy. Pine and Gilmore call the last two stages an experience
economy and a transformation economy. We have adapted their original
chart of the stages to illustrate other characteristics of the progression in
Figure 6.

Figure 6: The Progression of Economic Value

Strong Self–
Determined
Guide Transformation TRANSFORMATION ECONOMY

Determine & Guide

COMPETITIVE POSITION

Stage Experiences EXPERIENCE ECONOMY

/ ECONOMIC POWER

Depict & Stage

MARGINS
Deliver Services SERVICE ECONOMY
Devise & Deliver

Make Goods INDUSTRIAL ECONOMY

Develop & Make

Extract Commodities AGRARIAN ECONOMY

Discover & Extract Market–
Weak Determined
PRICING
Market Premium

Source: CSL Research adapted from Pine & Gilmore, Harvard Business Press

Transition of an economy from one stage to the next involves an increasing

degree of customisation, more differentiation and more value-added
elements. In order to achieve such value-enhancements to the inputs, the
country must have the required infrastructure. Manufacturing industries
cannot operate without electricity to run machinery, for transportation
systems and for communications for logistics, etc.

Thus the bottom line is simple: if Nigeria does not get on top of its
power trouble, the economy will continue to lag its peers and exist on
a sub-par level. It will not be able to move decisively into an industrial
economy. Furthermore, as individuals with adequate financial resources
have the means to access auxiliary power, the poverty gap will widen
further and the socio-political hazards that go hand-in-hand with that will
become increasingly apparent.

Chart 7: Distribution of Countries by GDP per Capita to Energy Consumption, 2011

Source: The World Factbook, CSL Research

The Cost of Unserved Energy

The cost of power outages to the end-user varies depending on the type of
user. The residential or domestic end-user experiences the effects of the
Table 3: Residential loss and unreliability of the supply electricity differently from the small to
Electricity Use per Capita medium size enterprise (SME) and from the industrial user. Other factors
(kWh/yr), 2010 such as the frequency of the power outages and the duration of each
Canada 4,741 outage also have a varied impact on the residential, SME and industrial
US 4,517 customer. Direct costs for residential customers might include costs of
France 2,883 additional lighting such as candles, torches or a back-up generator.
Australia 2,691 Commercial customers losses include production shortfalls from equipment
Japan 2,241 damage, inability to fulfil orders, spoiling of raw materials and the extra cost
UK 1,985 of back-up electrical power generation.
Germany 1,731
Spain 1,530 Indirect costs that emanate from interruptions to and the unreliability of
8
Italy 1,157 power supply are less straightforward to identify . Indirect costs range from
Russia 930 the inconvenience of having to reschedule activities to the injurious effect
South Africa 844 to health and welfare from fumes of kerosene stoves and kerosene
WORLD 731 lanterns. There are also environmental costs such as the destruction of the
Brazil 548 habitat and air pollution from cutting down trees to use the wood for fuel.
Mexico 449
China 433 At the national level, having a figure for the cost of unserved energy (CUE)
India 131 is critical when it comes to setting (or re-setting) public policy to determine
Nigeria 74 the amount of investment in power generation that is needed. This is
especially so in a case like in Nigeria where major reform is now mandated
Source: World Energy Council

8
Concept Economics, December 2008. CAENZ – New Zealand Centre for Advanced
Engineering.

because the government has failed in its obligation to keep infrastructure

investments in line with national requirements.

Quantifying Nigeria’s Cost of Unserved Energy

There are three broad categories of methods we could use to measure how
much the electrical power deficit costs the Nigerian economy per year:

 A proxy or production function method which uses macroeconomic

data or actual expenditures as a proxy for the willingness to pay for
adequate electricity supplies;

 Market-based methods based on expenditure to ensure reliable

electricity supply;

 Empirical methods such as surveys of customers to ascertain their

preference for supply reliability.

CUE based on GDP and Electricity Consumption

For our purposes in this report we are going to use a proxy function based
on a ratio of GDP to annual energy consumption. We acknowledge,
however, that a drawback of this method is that it is likely to understate
Nigeria’s cost of unserved energy as it does not capture the indirect costs
we noted above.

In order to estimate the loss to the economy of a country, the starting point
is to select a second country whose GDP is at a level the subject country
can reasonably be expected to achieve within the next 10 years provided it
had sufficient supply of electricity. The ratio of the second country’s GDP to
energy consumption is used as a factor which when multiplied against the
electricity deficit in the selected country, gives a figure for the annual cost
or ‘lost’ GDP per annum to the selected country.

South Africa would seem the most obvious benchmark to use for Nigeria.
Its generation capacity is circa 40 GW. Following the rebasing of Nigeria’s
GDP in April 2014 it surpassed South Africa as Africa’s largest economy.
Nevertheless as a starting point we can evaluate the relative level of
productivity of the two nations and posit what could have been possible in
Nigeria on an equivalent level of power generation.

Running the numbers we arrive at a CUE of US$1.29 per kWh for South
Africa. See Table 4 below.

To arrive at the cost to Nigeria in terms of lost GDP due to the generation
deficit, certain key assumptions are made:

1. Nigeria’s on-grid generation and transmission capacity remains at

the 4,000 MW level it has been for the last two decades (though
note current generation ranges between 3,000-3,400 MW)

2. Self-generation in Nigeria increases to 13,000 MW from 7,000 MW.

We believe the current industry estimate of 6,500-7,000 MW for
diesel and petrol self-generation/off-grid power generation is
conservative.
3. The cost of self-generation remains at ₦60 per kWh (US$0.40).
This arguably worst case scenario, at a CUE of US$1.29 per kWh,
translates to a lost GDP of US$130 billion per year (net present value). In
other words Nigeria’s rebased-GDP would have been over 30% higher.

Table 4: Nigeria's Cost of Unserved Energy Benchmarked on South Africa

Available Annual GDP to Nigeria's Cost of

Generation Electricity Electricity relative Unserved NPV of
Population 2012 GDP Capacity^ Consumption* Consumption capacity gap Energy CUE
Country (mn) (bn US$) (MW) (bn kWh) (US$ per kWh) (MW) (bn US$/yr) (bn US$/yr)

Nigeria 170.5 450 4,000 35 - -

South Africa 51.2 307 40,000 237 1.29 23,000 260.5 132.4
Source: CSL Research
^ Approximate
* Supply
South Africa’s figures for 2004
were: Agriculture 3%; Industry
12%; Manufacturing 19%; and
Services, etc 66%.
Chart 8: Sector Value Added to GDP (%), 2012 – Nigeria vs South Africa

Agriculture
3%
Agriculture Industry*
22% 16%

Services, etc Manufacturing

NIGERIA SOUTH AFRICA 12%
51%

Industry*
20% Services, etc
69%

Manufacturing
7%

Source: World Bank National Accounts Data, and OECD National Accounts Data Files, CSL Research
* Mining, Construction, Electricity, Water and Gas.

Other CUE
One question that could be raised is whether or not South Africa is the right
benchmark to use for Nigeria’s CUE given the different structures of their
economies, even if we go back 10-years (Chart 8 above). However this
aspect of the calculations is not precise. We could look at a country like
Turkey. It has just under half the population of Nigeria and 45,000 MW
generation capacity. The structure of Turkey’s economy is a little closer to
Nigeria’s than South Africa’s as agriculture makes a higher contribution to
GDP than it does in South Africa.

In order for Turkey to be a credible benchmark for Nigeria’s generation

capacity with a view to estimating CUE, Turkey’s GDP must reasonably be
attainable within 10 years. Turkey’s GDP in 2003 at US$235 billion was
less than Nigeria’s in 2012 (US$450 billion). From 2002 the Turkish
government embarked on a series of economic stimulus programmes
encouraging a rise in domestic consumption as well as direct investment in
the local economy. Within 10 years, by 2012, it was able to grow its
economy by almost fourfold to US$795 billion.

It is evident that Nigeria can get to Turkey’s GDP within 10 years. However
we would be amiss not to take into account the prevailing exceptional
global factors at the time of Turkey’s rapid growth. The most notable
catalyst to inflows of foreign direct investment (FDI) into the Turkish
economy was the flight of capital from developed markets in the wake of
the 2009 global financial crisis. Notwithstanding, even if we were to
discounting the fillip from the global economic crisis it would not be a wild
conjecture to posit that a doubling of GDP is possible in the current socio-
economic climate provided the right infrastructure is in place. Turkey’s GDP
9
by 2006 (pre- financial crisis) was US$530 billion , about 20% higher than
Nigeria’s 2012 GDP and generation capacity was 41,000 MW.

Using the same methodology and assumptions for Nigeria as before, the
CUE to the Nigerian economy works out at US$252 billion loss of GDP
per year (Table 5). Interestingly, the GDP loss figure works out to be of a
similar order if we use a CUE based on Indonesia’s economy and
generation capacity.

9
Installed generation was 41,000 MW

Table 5: Nigeria's Cost of Unserved Energy Benchmarked on Turkey and Indonesia

Available Annual GDP to Nigeria's Cost of

Nigeria 170.5 450 4,000 35 - -

Turkey 80.7 795 45,000 394 2.02 28,000 494.7 251.5
Indonesia 251.0 878 40,000 350 2.51 23,000 504.9 256.6
Source: CSL Research
^ Approximate
* Supply

Chart 9: Sector Value Added to GDP (%), 2012 – Nigeria, Turkey vs Indonesia

Agriculture
Agriculture
9%
Agriculture 14%
22% Industry*
9%
Services, etc
39%

Services, etc NIGERIA TURKEY Industry*

INDONESIA
51% Manufacturing 23%
18%
Industry* Services, etc
20% 64%

Manufacturing Manufacturing
7% 24%

Source: World Bank National Accounts Data, and OECD National Accounts Data Files, CSL Research
* Mining, Construction, Electricity, Water and Gas.

What is Considered ‘Full Power’ In Nigeria?

The rule of thumb is that an industrial nation requires 1,000 MW per
million inhabitants. This would imply that Nigeria requires 170,000 MW
for full power, which is some distance away from the Vision 2020 target of
20,000 MW. Thus Nigeria would need to add on average 1,700 MW of new
capacity per year, growing its installed capacity by 17-20% per year over
the next 6 years. It takes 2-3 years to build and commission a gas
turbine power plant and the typical output is 600-700 MW. A
hydroelectric plant takes 6-8 years and typically has nameplate
generating capacity of 900-1,300 MW. So Nigeria’s 2020 target would
appear to be somewhat ambitious if not overly so.

Chart 10: Generation Capacity per Capita, 2010

250% 250%

200% 200%

150% 150%

100% 100%
Full Power Level - 1,000MW per 1 million population

50% 50%
Nigeria

0% 0%
Congo, Rep.

Kosovo

Estonia
DR Congo

Cameroon
Nigeria
Tanzania

Indonesia

Chile
Turkmenistan

Belgium
Ecuador
Bangladesh

Tunisia

Croatia

Slovakia

Trinidad & Tobg.

Russia
Vietnam

Singapore
Colombia
Sri Lanka

Bosnia & Herz.

Botswana

Poland
Morocco

Greece
Eritrea

Zimbabwe
Namibia

Montenegro
Bolivia

Algeria

Austria
Libya
Mongolia
Zambia

Panama

Canada
Kyrgyztan

Australia
Albania
Jamaica

Mexico
Syria

US
UK
Ireland

Sweden
Azerbaijan

Latvia
Sth. Korea

Venezuela

Serbia

Paraguay
Haiti

Italy
Uzbekistan

New Zealand
Oman

Japan
Benin

Israel
Belarus
Yemen

Brazil

Iran

Source: US Energy Information Administration, CSL Research

As a nation’s power supply should grow in line with demand, some might
argue that the medium term definition of full power for Nigeria is reflected in
the peak load demand of the network. The Ministry of Power reported that
the peak load demand of 12,800 MW compared to maximum generation of
3,400 MW. Thus the supply/demand gap is 73%.

In terms of CUE, we could assume that full power for Nigeria is equivalent
to the reported peak load demand of 12,800 MW. The basis of this premise

would be that the unique characteristics of the structure of Nigeria’s

economy and the productivity of its economically active population were
such that it only required c.13,000 MW to deliver the same GDP as Turkey
does using 45,000 MW. At this level the generating capacity shortfall would
still cost Nigeria in the region of US$80 billion loss to GDP per year over
the next ten years.

The reality, however, is that Nigeria’s reported peak load demand

understates the actual demand for electricity. This is because the 7,000
MW of self generation reflects what those who can afford to invest in
supplementary generation. Access to electricity at the national level is 51%,
which is heavily weighted towards urban areas as rural access to electricity
is under 20%.

The most sanguine assessment indicates that the lack of adequate

power generation is losing Nigeria US$80 billion per annum in GDP,
assuming optimal power generation (Full Power) of c.13,000 MW.
However on a more realistic target of 40-45,000 MW within 10 years,
the cost is closer to US$250 billion per annum.

PART II: Evolution of Power –

Hopes and Impediments

Chapter 4:
The Power Sector Reform Programme
There have been several false dawns on reforming the electrical power
sector in Nigeria. The earliest comprehensive national programmes date
back to the late 1960s. The FGN has been able to let inefficiency and lack
of accountability define the industry for the last 50 years because there was
no real pressure to do things differently. After all, the country was awash
with ‘easy’ oil money.

Buying-in off-grid electricity was not commercially prohibitive due to the

margins that big industry could achieve from their operations. However the
growth of SMEs was stunted as they operate on much tighter margins.
Individuals also learned to make do: those who could afford to bought
petrol and diesel generators and those that could not relied on heavily
subsidised kerosene and biomass fuel. But all this was at a significant cost.
A number of studies estimated that Nigerians spend 5 to 10 times as much
on self-generated light and power as they do on power from the national
10
grid . It has reached a point where Nigerian households spend almost 4
times as much on fuel/electricity as they do on healthcare and spend only
half of what they spend on fuel/electricity on education.

No Longer At Ease – the Impetus for Reform

During the 50 years of vacillation and procrastination on power reform since
independence in 1960, demands on and for basic infrastructure and
necessities grew rapidly. The population grew by 253% to over 168 million
by 2010. It is expected to grow at a rate of 2.4% a year, passing the 215
million mark by 2025. Social dislocation has become more pronounced as
the level of poverty has risen consistently year-on-year. Today 70% of the
Nigerian population live below the poverty level of US$2 per day.

Globalisation has made the world smaller and more

competitive. Oil prices have been rising but government
expenditure has been ahead of earnings from the oil sector.
Furthermore, structural and infrastructure inadequacy has
created inflationary pressure due to higher production cost but
real wages have not kept pace with inflation so Nigerians do
not feel the benefit in their pockets.

The slow growth in the availability of bank credit for private

enterprise has contributed to the retardation of development of
the non-oil sector, which is the country’s main employer.
Unemployment has increased and if there is no change in the
status quo, it is only set to get worse as more of Nigeria’s young population
moves into the economically active labour force. Thus we believe that the
demographic dividend that Nigeria ought to benefit from by having over
10
Roadmap for Power Sector Reform 2010, Studies by the Manufacturers Association of
Nigeria, the World Bank, Development Finance Institutions and independent power producers.

60% of its population under 25 years old (20% are aged 15-24 years) is
likely to be elusive. We would go as far as to contend that what should be
an opportunity could actually turn on its head and become a potential threat
to the country’s fiscal and social stability.

Capitulation – No More Throwing Good Money After Bad

Over US$2 billion per year has been invested in the national power
company, the National Electric Power Authority (NEPA), since the end of
the 1980s but generation capacity has been stagnant. The transmission
and distribution infrastructure has been deteriorating to the
point where actual power generation, the amount of
electricity supplied to the grid, hit a low of 1,700 MW in 1998
despite installed (nameplate) capacity of 6,000 MW and
demand of 7,000 MW. In 1998 the government partially
deregulated the power sector allowing a limited amount of
11
private participation in electricity generation . There was an
increase in generation capacity by the private sector
however it was business as usual at NEPA. By 2012/13
NEPA’s generation capacity had fallen below 4,000 MW,
which was about half the amount of self-generated electricity
from petrol and diesel generators.

As we illustrated on in the previous chapter, the inadequacy of power was

costing the economy as much as US$250 billion in lost GDP annually. By
2000 things had come to a head and the FGN drew a line in the sand.
Investment was needed in all parts of the electricity supply value chain –
generation, transmission, distribution and fuel-to-power. The vertically
integrated model of NEPA had not worked and there were no reasonable
grounds to assume it could be resurrected with more money invested in it.
At a cost of at least US$10 billion per annum to get to 20,000 MW by
2020, of which US$3.5 billion per annum would be in generation
capacity, the FGN could not afford the level of investment in a single
sector. It had run out of time. The only viable option was to invite
private capital to move the industry forward.

Shotgun Privatisation
Privatisation of Nigeria’s electricity industry was a forced sale as the
government had lost the privilege of driving its own ship in this matter. That
said, it would be churlish not to give credit to the previous and current
governing administrations for beginning the reform journey and getting the
sector as far as it has. The problems did not just materialise at the turn of
the century; the situation has been compounded over the last five decades
by the inaction of several administrations: Venerunt, viderunt, noluerunt
12
vincere.

11
Effected through the amendment of the Electricity Act 1990 by the Electricity (Amendment)
Decree 1998 and amendment of the NEPA Act 1990 by the NEPA (Amendment) Decree 1998.
12
They came, they saw, they refused to conquer.

In order to get here, the FGN first had to acknowledge publicly that the
proverbial Emperor (NEPA) had no clothes on. Turning to the private sector
for the solution when the industry was in such a dire state amounts to a
tacit admission that various administrations in Nigeria have not met, and
are not likely to meet, a core obligation to its people, as would be expected
of a national government.

There is a reason why national governments build large public utilities like
power, road infrastructure, the postal system, etc. First, left to market forces
alone, certain less profitable parts of the country or less profitable customer
groups will not get developed and/or receive these vital services. Thus the
ideal time to privatise these businesses is when they are up and running
and already profitable.

Second, from a financial management perspective, the considerable

amount of capital involved is more suited to a country’s balance sheet as a
national government can amortise the invested capital over 50, 60, 70
years if it wishes given that a nation’s licence does not have an expiry date.
The private investor, on the other hand, is restricted to a maximum
amortisation period of the length of the licence depending on the asset
concerned. As a result, private investors typically require higher returns to
make up for the higher cost of capital. The bottom line is that the
development of Nigeria’s electricity market in the private sector from
today’s starting point is financially inefficient. It will be at a
significantly higher cost to the tax payer than it would have been had
it been incubated to commercial viability under government
ownership prior to privatisation.

Chart 11: Household by Source of Electricity Supply – Chart 12: Household by Source of Electricity Supply –
PHCN (NEPA) Only (%), 2010 Private Generator (%), 2010

Source: Nigerian National Bureau of Statistics Source: Nigerian National Bureau of Statistics

Nigeria’s Electricity Market Reform Model

Private sector IPPs, including those of International Oil Companies (IOCs),
proved to be the only viable route by which generating capacity increased
between 2000 and 2010. From a standing start in 2000, IPPs are now
responsible for over 40% of the country’s generating capacity and provide a
more reliable service than that supplied by the national grid. It therefore
made a lot of sense to give more encouragement to IPPs and do whatever
possible to move the existing state-owned institutions and operating model
closer to those of the private sector.

Following extensive consultations, the FGN decided the main

characteristics of the new liberalised electric power industry would be:

- Vertically unbundled by the functional separation of generation,

transmission and distribution/marketing. Horizontally unbundled
with independent PHCN Successor Companies;

- Competitive in the wholesale and retail markets in the long

term;

- Comprised of multiple buyers of generated electricity;

- Structured to be cost-reflective;

- Anchored by System and Market Operators which jointly serve

as the link in the system. The Market Operator (MO) would
oversee the market and commercial arrangements. The System
Operator (SO) would oversee dispatch of electricity and grid
control.

The National Electric Power Policy & Electric Power Sector Reform Act
From inception the Federal Government has been responsible for policy
formation, oversight, operations and investments in the electricity sector in
Nigeria. Having decided to completely re-write the manual, the FGN took
the opportunity to instil best practice in a new electricity industry by taking
advantage of lessons from its own past and from other regions. In 2001 the
FGN adopted the National Electric Power Policy which set out the following
key objectives:

 To ensure a system of generation, transmission, distribution and

marketing that is efficient, safe, affordable and cost-reflective
throughout the country;

 To ensure that the power sector attracts private investment both

from Nigeria and from overseas;

 To develop a transparent and effective regulatory framework for the

power sector;

 To develop and enhance indigenous capacity in electric power

sector technology;

 To establish targets for the rural electrification programme;

 To ensure that subsidies are properly targeted;

 To participate effectively in international power sector activities in

order to promote electric power development in Nigeria, meet the
country’s international obligations and derive maximum benefit from
international co-operation in these areas;

 To ensure that the government divests its interest in the state-

owned entities and entrenches the key principles of restructuring
and privatisation in the electric power sector;

 To promote competition to meet growing demand through the full

liberalisation of the electricity market; and

 To review and update electricity laws in conformity with the need to

introduce private sector operation and competition into the sector.

These objectives were enacted in the 2005 Electric Power Sector Reform
(EPSR) Act, which is the headline statute governing the sector.

Over the ensuing 18 months, a number of key steps were taken on the road
to privatisation including:

1. The creation of the Power Holding Company of Nigeria (PHCN) to

assume the assets, liabilities and employees of NEPA;

2. Subsequently, the unbundling of PHCN into 18 separate entities and

the partial transfer of pertaining assets, liabilities and employees to the
newly-created companies consisting of:

- 6 generation companies (GenCos);

- 11 distribution companies (DisCos);

- A bulk-buyer (and re-seller) of electricity the Nigerian Bulk

Electricity Trading Company PLC (NBET). It is semi-autonomous
but ultimately owned by the FGN;

- A transmission company, the Transmission Company of Nigeria

(TCN), which was also to remain government-owned, to manage
market and system operations;

- The creation of an independent regulator the Nigerian Electricity

Regulatory Commission (NERC), which is also charged with
increasing consumer protection.

Figure 7: Evolution of Nigeria's Electricity Supply Industry

PHCN

11 DisCos 11 DisCos

Electricity Corp. of Nigeria 6 GenCos

Power

incor por ated

Diesel & coal-fired power generation National Gas-fired and 6 GenCos
and distribution Holding Hydroelectric
Electric Power
Company of
mer ged

Authority
Nigeria
(NEPA) Management
(PHCN)
Vertically- contract TCN
Niger Dams Authority integrated Vertically- TCN awarded to managed by
integrated Manitoba MHI
Hydroelectric power generation Hydro Intl.
Unbundled

1950s-60s 1972 2005 Nov. 2005 2011 2012 Feb. 2013

2010 NBET

1998 IPPs

2004 NIPP

Mar. 2005 NERC

Source: CSL Research

The Roadmap to Power Sector Reform

In 2010 the President of Nigeria, Goodluck Jonathan, established the
Presidential Action Committee on Power (PACP). This committee is chaired
by the President and is charged with driving forward the electric power
sector reform programme. The Presidential Task Force on Power (PTFP) is
the implementation and monitoring arm of the PACP. In 2010 it published
the Roadmap to Power Sector Reform which set out to emulate the
successful approach taken in reforming the telecommunications sector.
There was notable progress in implementing the 2010 Roadmap to start
with, however government bureaucracy resulted in delays and missed
targets. It also became evident that some of the assumptions in the 2010
plan had been too optimistic. In 2013 the PTFP published a revised plan
with a new set of assumptions. The 2020 generation target was changed to
20 GW from 40 GW. The Roadmap for Power Sector Reform – Revision I
(The Roadmap) is the current operating manual for the sector.

There are currently 23 grid-connected generating plants, with a total

installed capacity of 10,396 MW and available capacity of 6,056 MW.

Table 6: PTFP Installed Generation Capacity Projections (MW)

2013 2014 2015 2016 2017 2018 2019 2020

Successor Thermal GenCos 2,525 2,815 3,591 3,591 3,591 3,591 3,591 3,591

Successor Hydro GenCos 1,270 1,300 1,520 1,610 1,610 1,960 3,610 4,910

NIPP GenCos 2,909 4,259 4,771 4,771 4,771 4,771 4,771 4,771

IPP-A 429 529 529 529 529 529 529 529

IPP-B 361 361 455 2,870 7,246 8,970 8,970 8,970

IOC 1,130 1,130 1,130 2,155 3,380 3,380 3,380 3,380

Other 40 60 110 110 110 110 110 2,110

Annual MW Additions 1,790 1,652 3,530 5,601 2,074 1,650 3,300

Total Annual Capacity 8,664 10,454 12,106 15,636 21,237 23,311 24,961 28,261

Source: The Roadmap to Power Sector Reform – Revision I, August 2013, Presidential Task Force on Power (PTFP).
NIPP - National Integrated Power Project; IPP-A – Existing (non-IOC) Independent Power Producers; IPP-B – Identified IPP generation projects
coming on stream; IOC – International Oil Company power plants; Other – small hydro, renewables and coal.
2019/2020 increase in generating capacity by 2,000 MW is from Coal (1 GW) and Renewables (1 GW). In our view this might be unrealistic given
technological outlook, construction and operating requirements for wind, solar and biomass power generation.

Chart 13: FGN’s Installed Generation Capacity Projections by Type of GenCo

100%
Successor
90% Thermal GenCos

80% Successor Hydro

GenCos
70%

60% NIPP GenCos

50% IPP-A

40%
IPP-B
30%

20%

10% IOCs

0% Other
2013 2014 2015 2016 2017 2018 2019 2020

Source: The Roadmap to Power Sector Reform – Revision I, August 2013, CSL Research
NIPP - National Integrated Power Project; IPP-A – Existing (non-IOC) Independent Power Producers;
IPP-B – Identified IPP generation projects coming on stream; IOC – International Oil Company power
plants; Other – small hydro, renewables and coal.

Other Enhancements to Attract Private Capital

Most privatisations of state utilities are preceded by a beauty parade of the
assets to attract investors and maximise the purchase price. When it came
to NEPA’s turn, it was anything but pretty. The architecture of the industry
as a whole was not going to win any prizes either. It was clear that to attract
private investment financial enhancements to the operation of the new
regime would need to be present: The enhancements to attract private
participation in the sector included:

1. NELMCO to assume the liabilities of PHCN companies

2. The resolution of labour issues

3. Capital incentives

4. Put-Call Option Agreements with investors in GenCos

5. The provision of FGN credit surety backed by World Bank and

Africa Development Bank Partial Risk Guarantees

6. The creation of a cost-reflective tariff plan – MYTO

1. NELMCO
The Nigerian Electricity Liability Management Company was incorporated
in 2010 to take on the liabilities of the PHCN Successor Companies.
Private investors would have been unwilling to take on the PHCN GenCos
and DisCos if their balance sheets were laden with debt. This was not least
because of the considerable amount of investment that was going to be
needed to make these businesses more efficient and profitable once
acquired. PHCN was indebted to the tune of about ₦757 billion (US$4.7
billion).

In February 2013, the PHCN GenCos and DisCos were sold to private
investors with clean balance sheets. However, as part of the arrangement
there was an agreement that should the new owners discover other
outstanding liabilities post-handover, these too will also be transferred to
NELMCO.

2. Resolving Labour Issues

NEPA/PHCN had a bloated workforce of about 47,000. At 50% of operating
expenses its labour costs were four times what would be expected from its
peer group. Lax practices had also extended to NEPA/PHCN’s handing of
employee emoluments. There were outstanding arrears of salaries, pension
contributions, retirement savings plans, severance pay and other ancillary

benefits. Handing over the companies to new management with clean

employee rosters was as important as a transfer with clean balance sheets.

The process was not without some controversy, however. Nevertheless by

October 2014, just before the handover of the newly privatised assets (on
November 1), all arrears had been settled using ₦360 billion (US$2.25
billion) remitted by the FGN. Furthermore, the FGN set aside 2% of its
shares in the privatised DisCos and GenCos to be allocated to the workers.

Table 7: Selected Power Sector Indicators of Performance for Nigeria and Africa, (2004-05)

Africa Average
Low Middle
Income Income
Nigeria Countries Countries
Technical Efficiency
Installed generation capacity (MW) 5,898 918 13,651
MW per million population 42 32 404
MW in operation condition as % of installed capacity 61 84 97
Per capita (kWh/cap) 173 141 1912
Self-generated as % of electricity generated 52 10 0.7
Effective residential tariff (US cents/kWh) 4.1 12 32
Quality
Number of unplanned outages per year 1059 3082 39
Efficiency
Labour efficiency (annual labour costs as % of operating
expenses) 48 29 11
Average revenue (US cents/kWh) 2.8 14 15
Efficiency ratios (%)
Technical & Distribution losses 30 25 13
Cost recovery (based on effective tariff) 36 64 56
Implicit collection (based on effective tariff) 52 83 95
Total hidden costs of inefficiencies
as % of GDP 1.4 2.0 0.6
as % of utility revenue 229 125 13
Source: Derived from Eberhard, A., V. Foster, C. Briceno-Garmendia, F. Ouedraogo, D. Camos and M. Schar atan (2008).
“Underpowered: The State of the Power Sector in Sub-Saharan Africa”, Annex 2: Country Tables. World Bank African
Infrastructure Diagnostic Study.

3. Capital Incentives
 3-5-year tax holiday. The current rate of corporate tax for all industries
other than petroleum is 30%.
 The tax holiday is 7 years if the business is located in an economically-
disadvantaged part of the country. There is an additional 5% capital
depreciation allowance over and above the initial capital depreciation
allowance.
 IPPs running on gas, coal or renewable energy are also granted
Pioneer Industry Status. The profits saved are expected to be ploughed
back into growing the businesses.
 20% of the cost of providing electricity infrastructure to greenfield
locations is tax deductable.
 Duty exemption on expansion and rehabilitation equipment for GenCos
and DisCos networks.

4. Put-Call Option Agreements with Investors in GenCos

The PCOAs are one of the main requirements lenders have stipulated for
Figure 8: PCOA – Bilateral Obligations
their direct involvement in the sector at this stage. The FGN does not
anticipate that these agreements will exist in perpetuity. They are in place
until NBET has built up a track record of making payments. At which time
the FGN believes lenders will no longer require this type of a surety.
Buyer Bilateral GenCo
Put-Call Option Agreements (PCOAs) are in place for the privatised PHCN (FGN) Obligations (Investor)
GenCos. They will be also in place for the privatised NIPP GenCos and for
new Independent Power Projects (IPPs). The parties to the privatised
PHCN GenCo and NIPP PCOAs will be the GenCo investor, NBET and
either the Bureau of Public Enterprises (for the PHCN GenCos) or the Niger Source: CSL Research
Delta Power Holding Company (for the NIPP GenCos). The parties to the
new IPPs PCOAs will be the IPP investor and NBET alone.

The PCOAs allows the government entity privy to the agreement to

Figure 9: Investor Put Option
repurchase the investor’s shares in the GenCo company thereby protecting
the investor and lenders in the event of buyer default. In the case of the DEFAULT /
EXTENDED FORCE
PCOA with new IPPs, NBET can either buy shares or assets of the IPP. MAJEURE
The buy-out price of the shares (or assets in the case of new IPPs) will be
determined post-arbitration. The shares/assets thus bought will be
transferred back to the relevant government entity.
Buyer GenCo
(FGN) (Investor)
The Put-Call Option operates in 3 ways: Put $ = Debt outstanding +
Investment + ROE
1. Investor Put Option: In the event of Buyer (FGN entity) default or
an extended Local Political Force Majeure, the buy-out price covers Source: CSL Research

the amount of debt outstanding and the investor’s investment

outstanding plus an agreed return on equity.

2. FGN Entity Call Option: In the event of Seller (GenCo/IPP)

Figure 10: FGN Call Option default, the buy-out price is a reasonable estimate of the fair market
value of the plant for a number of years but shall not be less than
the amount of debt outstanding assumed from a 70:30 debt to
Call $ = FMV equity split net of liabilities.
(but ≮ Debt outstanding)
Buyer GenCo 3. Investor Put Option: In the event of Seller (GenCo/IPP) default,
(FGN) (Investor) the buy-out price will be the fair market value which may be less
DEFAULT than the amount of debt outstanding net of liabilities.

Source: CSL Research

5. Credit Surety – World Bank & African Development
Bank Partial Risk Guarantees

Partial Risk Guarantees are financial products that are provided by

Figure 11: Investor (Default) Put Option
institutions like the International Development Agency (IDA), the
International Bank for Reconstruction and Development (IBRD) and the
African Development Bank (AfDB). They protect private lenders and
institutions against non-fulfilment of a contract by a government institution
Buyer DEFAULT GenCo or agency.
(FGN) (Investor)
Put $ = FMV PRGs are structured to provide the minimum level of support to attract
(which may ≤ Debt outstanding)
private capital into a particular sector. They have been widely used to
encourage private sector investment in large infrastructure projects in
Source: CSL Research developing countries. They cover any form of private commercial debt or
shareholder load and can cover the investor’s foreign currency obligations.
At the request of the FGN, the World Bank has approved a US$1 billion
13
PRG in support of the Nigerian power sector privatisation programme .
14
The AfDB has approved a PRG for US$184 million . The World Bank
anticipates that in the long to medium term, as more power companies
qualify, the level of PRG support needed could double.

Why a PRG is Essential to the FGN’s Power Reform Plans

The private sector has been involved in greenfield electricity power
generation in Nigeria so there is comfort in the familiar. Taking on
brownfield generation assets and for the first time being given the
opportunity to own distribution assets was a completely different proposition
and risk profile. From an investor’s perspective it is often easier (and
sometimes more profitable) to start from scratch. This way best practice –
quality of equipment, operating and management standards – can be
instilled ab initio.
The amount of investment required (a minimum US$70 billion), the duration
of the investment, the radical and untested new regime in the power

13
The World Bank Nigeria Power Sectors Guarantees Project [P120207] is a US$1 billion
PRG for “infrastructure services for private sector development” split between the power (90%)
and oil & gas (10%) sectors.
14
At the time of the announcement of its PRG in December 2013, the AfDB also announced it
had provided a loan of US$3.1 million for “capacity building” in the power sector.

industry and Nigeria’s track record made investors reluctant to take on

more (different type of) risk in the sector. Top of the list is payment risk
under the Power Purchase Agreements (PPA) between the GenCos and
NBET. There is no track record on NBET’s payment reliability, nor track
record of the government’s commitment to providing subsidies and its
commitment to tariff increases.

FGN-owned NBET is expected to continue buying power on behalf of the

DisCos until the industry develops the revenue streams and systems for
adequate settlement, accounting, management and governance to support
system-wide direct bi-lateral contracts between IPPs and DisCos. During
the transition period, the revenue from the DisCos is likely to fall short of
NBET’s total cost of supply. Thus NBET having a payment guarantee
backed by the FGN would enhance its creditworthiness vis-à-vis its
payment obligations under the PPAs.

Scope of the PRG

There are two components to the PRG. Their application is summarised in
Table 8 below.

Table 8: Components and Scope of the World Bank Partial Risk Guarantee

Component Institution Scope PRG Structures

A IPPs
Greenfield 1) Liquidity Support to cover up to 12 months of (i) Liquidity guarantee, with
transactions NBET's periodic obligation under the PPA's with or without a Letter of
IPPs. Credit;
2) Termination Guarantee to cover certain events (ii) Termination guarantee; or
of default by NBET that will lead to the
termination of the PPA. (iii) A combination of both
liquidity and termination
guarantee.
B Successor (ex. PHCN) DisCos and GenCos
B-1 Successor Similar to those for greenfield IPPs Similar to those for greenfield
GenCos IPPs
B-2 Successor These PRGs have a regulatory role and cover a (i) Letter of Credit structure;
DisCos period of 5 years:
1) Backstop the regulatory risk associated with the (ii) Termination support
implementation of the MYTO II tariff plan; because investors in the
successor DisCos also
2) FGN's agreement to provide subsidies for the invest in the expansion of
low-income customers (R1 and R2). the asset base.
It covers only the retail portion of the tariff, after
deducting bulk tariff and transmission costs i.e. the
gap will be subject to the difference between the
actual level of revenues at any point in time and the
revenues that DisCos are legally obliged to
generate. Hence this structure ensures that the
PRG only covers the regulatory risks and not
commercial risk which the private investor is
expected to manage.
Source: CSL Research, World Bank

Qualifying for the PRG Cover

Power companies are not automatically covered by the PRG but have to be
assessed by the PRG-issuing institution and meet certain requirements to
qualify. To qualify, the applying company must have incorporated
internationally-acceptable technical, operational and financial benchmarks
such that they “limit the burden of private generation on the sector to a
sustainable level”. In essence, to ensure that their business and strategic
plans are based on sound assumptions and are suitably resourced given
the Nigerian market in which they operate. The World Bank PRG also
requires applying companies to submit environmental and social impact
appraisals that meet World Bank safeguard policies.

Figure 12: PRG Qualification Process

Nigerian Ministry of Finance nominates project for

World Bank PRG support

World Bank conducts due diligence on selected GenCo

or DisCo and on proposed risk allocations
in Project Agreements

World Bank negotiates PRG documentation with the

commercial bank issuing the Letter of Credit and the
GenCos/DisCo

World Bank board gives approval to issue a PRG

World Bank, Nigerian Ministry of Finance close the

PRG Indemnity Agreement

World Bank issues the PRG

Source: CSL Research

The PRG Draw-Down Process

In the history of the World Bank issuing PRGs there has only been one
incidence where a draw-down of funds has occurred. It is very much
structured to be a facility of last resort. This is because should it be
engaged by a qualifying company, the costs to the overseeing government
are very high. So it is in the interest of the government to settle its account
with the company before it calls on the PRG. The World Bank takes an
active role in the management of the PRG system. It is hands-on in efforts
to help the parties resolve the non-payment issue between them before an
actual default.

Figure 13: Merit Order for NBET’s Utilization of Funds for Payments

First Out
Monthly Payment Receipts from Discos
#1

DisCo’s Letter of Credit or

Bank Guarantees #2

Capital Appropriation and Eurobond

Final
World Bank or AfDB PRG
Recourse
#4

Source: CSL Research, NBET

Figure 14: Operation and Draw-Down Process of the PRG

World Bank /
FGN PRG Indemnity
Agreement African
(Nigerian Ministry of Finance)
Development Bank

L/C Guarantee
Government Agreement
Undertakings NBET L/C opened for the
L/C benefit of the
PPA Reimbursement & GenCos/DisCo
Credit Agreement

GenCos VC
[Power Purchase Agreement]

Letter of Credit Bank

(Commercial Bank)
DisCos Upon non-payment by the
[Vesting Contract] Standby L/C government (e.g. non-
payment of periodic
payments to GenCo under
the PPA or a Regulatory
Event non-payment to the
DisCo) the GenCo/DisCo
draws funds directly from the
L/C Bank’s Standby Facility.

Project
Agreement

Agreements covered by PRG

Agreements / Contractual Instruments

Payment flows in the event of a breach of the PPA or VC

Source: CSL Research

The PRG can also be structured with a Deemed Loan. The amount not paid
by the government is deemed to be a loan from the GenCo/DisCo to the
government. Repayment of the deemed loan will be covered by the PRG.
Under this structure the DisCo/GenCo’s investors/lenders will indirectly
benefit from the provision of the PRG.

6. A New Cost-Reflective Tariff Plan (MYTO)

One of the glaring problems with NEPA/PHCN’s business model was its
uncommercial tariff plan. There appears to have been no correlation
between the cost of producing and supplying electricity and the tariff
charged to the customer. It is an infamous tale that when the new
professional managers at the regulator, the Nigerian Electricity Regulatory
Commission (NERC) embarked on an assessment of the existing tariff
structure and methodology, they were told that there was no strict or
consistent methodology behind how NEPA’s tariffs were set.

To compound the matter, billing and cash collection was grossly inefficient.
Between 30-40% of power supplied was not even billed. By 2012 PHCN’s
average monthly revenue was ₦22 billion (US$138 million) which we
estimate is approximately a collection rate of less than 40% for all electricity
supplied. The federal government had to inject ₦1.5 billion (US$9.5 million)
per month just to cover PHCN’s basic obligations.

Subsidies resulted in Nigeria having some of the lowest end-user tariffs

amongst West African countries. To put Nigeria’s tariffs in context, they
were even lower than those in the most efficient fully-powered markets
such as the US and Germany. In 2009/10, the average tariff was ₦8.50 per
kWh. From what we can glean, this included a subsidy of between ₦2.50 to
₦4 per kWh (Table 9).

The net effects of the uncommercial tariff structure were profound for
NEPA/PHCN. The most notable were:

- The shortfall in capital curtailed NEPA/PHCN’s ability to make further

investments across the entire electricity supply chain.
15
- At less than 35% the Availability Factor of Nigeria’s power plants are
among the lowest of middle-income countries. Most gas turbine thermal
power plants have availability factors ranging from 80% to 99%.

- An uncommercial business model based on tariffs that are not cost-

reflective tariffs made it impossible to attract private investment.
Returns on investment would be non-existent at best and, more likely,
at worst negative.

- Cash management was abysmal. At 15 months, Nigeria has one of the

longest average accounts receivable in Africa.

Despite these shortfalls, there was little incentive for NEPA to change
because the federal government always plugged any gaps, reacting with a
degree of censure that amounted to little more than a rap on the knuckles.

15
Power Plant Installed (Nameplate) Capacity × Availability Factor = Available Capacity.
The Availability Factor of a plant would fall without a consistent and regular preventative
maintenance schedule. Enhancements with developments in technology and design are also a
crucial part of good power plant management.

Following consultation with various stakeholders in the industry, NERC

came up with the first Multi-Year Tariff Order (MYTO) in 2008. It was an
incentive-based tariff plan designed to help DisCos and GenCos improve
plant availability, improve collections and cut operating costs. We will
discuss MYTO in the next chapter.

Table 9: Comparison of Tariffs in Selected African Countries

Domestic Usage Commercial Usage

(6kW at 600 kWh per month) (15kW at 1800 kWh per month)

Price in Price in
US Cents Naira US Cents Naira
Country /kWh /kWh Country /kWh /kWh
LIBERIA 34.00 51.00 LIBERIA 34.00 51.00
MALI 29.57 44.36 MALI 30.57 45.86
BURKINA FASO 25.48 38.22 BURKINA FASO 25.48 38.22
SENEGAL 17.74 26.61 SENEGAL 24.91 37.37
GAMBIA 16.68 25.02 GAMBIA 24.17 36.26
COTE D’IVOIRE 16.51 24.77 COTE D’IVOIRE 19.10 28.65
MEDIAN 16.43 24.64 MEDIAN 18.73 28.10
BENIN 16.34 24.64 TOGO 18.36 27.54
TOGO 15.55 23.33 BENIN 16.00 24.00
NIGER 11.23 16.85 GHANA 14.61 21.92
GHANA 10.32 15.48 NIGER 13.54 20.31
GUINEA 8.70 13.05 GUINEA 12.40 18.60
NIGERIA 6.45 9.68 NIGERIA 6.44 9.66

Source: “Comparative Study of electricity tariffs used in Africa- December 2009”, conducted by the
General Secretariat of UPDEA (Union of Producers, Transporters and Distributors of Electric Power in
Africa).
Tariff Comparison Criteria
Including taxes
Full time tariffs or equivalent tariffs, for utilities applying tariffs with time of use
Calculation of an average for utilities applying seasonal tariffs
Medium usage for utilities applying tariffs with usage duration
Not including meter hiring fees

Chapter 5:
MYTO – Nigeria’s Multi-Year Tariff Plan
The Multi-Year Tariff Order (MYTO) was intended to set electricity tariffs for
consumers over a 15-year period, from 2008 to 2023. There were to be
minor reviews of the industry’s pricing structure twice a year (announced on
1 December and 1 June) and major reviews every five years.

Minor reviews can only consider 4 variables namely: the rate of inflation,
gas prices, foreign exchange rates and actual daily generation capacity.
Major reviews can re-assess the methodology and make further inputs to
the existing tariff model. In order to smooth the transition to a cost-reflective
tariff plan, the federal government was going to need to maintain subsidies.

MYTO I
When MYTO I came into force in July 2008, the average cost of supply
was estimated to be ₦10 per kWh compared to the “NERC determined
tariff” of ₦6.00 per kWh. At the time it was anticipated that the tariffs would
gradually reach a cost-reflective level by July 2011.

Table 10: MYTO I – Average Cost of Supply, FGN Subsidy and Effective
Average Tariff (₦/kWh)

Year starting 1 July 2008 2009 2010 2011 2012

Estimated cost of supply 11.20 10.64 9.49 10.00 10.00
Less subsidy 5.20 3.64 0.99 0 0
NERC determined tariff 6.00 7.00 8.50 10.00 10.00
Source: NERC, Multi-Year Tariff Order (MYTO), For the Period 1 July 2008 to 30 June 2013

MYTO II
A new tariff structure was introduced in June 2012 the main effect of which
was to increase tariffs. This was due to the fact that a number of key
assumptions that underlay the 2008 MYTO had not been met and others
did not reflect the actual operating environment. Thus the tariff schedule
was not cost-reflective, which is a prohibitive condition to new investors.
NERC concluded that the tariffs in MYTO I covered about 50% of the
revenue required to achieve a viable and growing electricity industry. It
surmised that the tariffs could barely cover basic operating expenditure
much less the capital investment required for growth. The MYTO I
assumptions that subsequently went under major review included:

 MYTO I projected that by 2011 Nigeria would be generating 16,000

MW of electricity. At this time it was expected that the Revenue
16
Requirement of the industry would be met.

 It was also assumed that the PHCN DisCos and GenCos would
have been privatised by 2009.

 Its one-size-fits-all tariffs across the country were not conducive to

attracting new investors. It made no distinction between the return
requirements of a new entrant investor and an investor in the
successor power companies, for example. Neither did it take into
account the different operating cost profiles and capital expenditure
requirements of companies in different regions of the country, nor
those for GenCos using other sources of fuel such as coal and
renewable.

Once again wary of a ‘rate shock’ on consumers from a marked step-up in

prices, the FGN committed to maintaining subsidies for two more years, i.e.
until June 2014.

MYTO II.i
On 26 May 2014 NERC announced that following a minor review of tariffs,
tariffs would increase from 1 June. The reason cited for the review was a
greater than 5% change in some of the four variables assessed in minor
reviews i.e. rate of inflation, gas prices, foreign exchange rates and actual
daily generation capacity.

We believe this review was something of a stop-gap and possibly also part
of the management of public expectations ahead of further tariff increases
to come. In later chapters we go into detail about some of the issues the
new investors have discovered post handover of the Successor Companies
and reasons why current power generation of 4,300 MW falls far short of
the 9,000 MW the MYTO model projected.

In our view, even if NERC effectively decides to reset the clock by 2 years
17
ahead of the declaration of the Transitional Electricity Market (TEM) to
reflect current levels of generation, tariffs will still need to be increased.
This is because the true costs and the Revenue Requirement of the
industry will need to be adjusted once the underlying assumptions of the
MYTO model are adjusted to reflect the reality on the ground as found by
the new owners of the Successor Companies.

16
Revenue Requirement is the amount of revenue that would be sufficient to cover the costs
associated with supply plus an allowable rate a return on capital.
17
We are currently in the Interim Market, between the Pre-Transitional Electricity Market (Pre-
TEM) and TEM.

Underlying Principles & Methodology for MYTO II

The MYTO methodology consists of a formula to

Principles Underlying MYTO II
arrive at a tariff that will cover the long run
marginal cost of generation, transmission and  Allow for recovery of appropriate reasonable return on
capital invested, depreciation (and replacement) of capital,
distribution. and recovery of fuel, operation, maintenance and overhead
costs;
The NERC tariffs govern payments of the successor  Provide an incentive for new investment in capital
GenCos and DisCos. NBET’s Power Purchase equipment;
Agreements (PPAs) with successor GenCos use the  Provide incentives for reducing technical and commercial
MYTO tariffs. The electricity purchased is then sold to losses;
18
the DisCos through Vesting Contracts .  Provide viable and transparent tariff methodology that will
allow NESI’s [Nigerian Electricity Supply Industry] progress
Further down the road once NERC determines, after towards a reformed and market-oriented system in which
consultation with relevant stakeholders, that the generation and retail activities are not subject to price
regulation while the monopoly activities of transmission and
DisCo has become financially viable, the DisCo will distribution continue to be under price regulation; and
be able to contract directly with GenCos for additional  Finally, ensure that the benefits of a reformed NESI are
capacity and will also novate the applicable existing passed through to consumers in the form of reliable
PPA NBET had with the GenCo. electricity supply at the lowest possible price consistent with
the above objectives.
– NERC

Figure 15: MYTO II Methodology

Inputs to the Tariffs

Load Forecasts Fuel Costs Generation Capacity
Invested Capital Return on Capital Economic Data
Level of Technical & Operating & Other Technical Data
Non-Technical losses Maintenance Costs Customer Numbers End-User
Tariff per
DisCo
Zone

Generation Transmission Distribution &

Costs Tariff Retail Tariff

Source: CSL Research

18
See 135 where we examine contracts in closer detail.

MYTO and Embedded Generation

19
Embedded generation describes a power generator that is directly linked
to a distribution network operated by a distribution licensee i.e. it by-passes
the national grid. It has lower capital costs, shorter construction times and
modular architecture. Transmission and network losses are lower due to
the shorter distances from generator to the load centre.

NERC regulates various aspects of embedded generation including

distribution planning, connection requirements and commissioning
procedure. It has also determined that the MYTO methodology is to be the
basis for calculating the tariffs for embedded generators. This does not
mean that NERC regulates the ultimate tariff between the power generator
and the distribution licensee. MYTO merely offers a benchmark for
establishing costs; the actual wholesale tariff between the DisCo and
embedded GenCo (IPP) is left to be agreed on commercial terms between
the two parties. However once the tariffs are agreed, they will need to be
approved by NERC in its capacity, inter alia, to ensure consumer rights are
not being overlooked and to prevent excessive and/or non-applicable costs
being passed on to consumers.

Figure 16: Embedded and On-Grid Generation

Embedded Generation

Distribution Network Distribution Network

Grid Supply Points

On-Grid Generation

Direct Supply Direct Supply

Customer Customer

NATIONAL GRID
Residential

Distribution Network
Distribution Network

Commercial
Industrial

Source: CSL Research

19
Also known as Distributed Generation, Decentralised Generation or On-site Generation.

Generation Prices
Generation (wholesale) electricity prices are those at which the generators
Chart 14: Projected Generation Capacity (GW)
sell electricity to the bulk trader NBET or directly to DisCos.

NERC uses the Long Run Marginal Cost (LRMC) method to estimate the 28
Revenue Requirement for generation from which generation prices are set. 23
25

This method looks at the full life cycle costs of the lowest (cost) efficient 21

new entrant generator. In setting the wholesale contract price, NERC is 16

determining a proxy for the market price of generation and not a regulated 12
10
price. This proxy price is the price that will be set in the Power Purchase 9
Agreements (PPA).

This approach has been taken because there is no free market in which
2013 2014 2015 2016 2017 2018 2019 2020
commercial operators that can set the wholesale electricity price. So NERC
uses the LMRC method to arrive at a price determined to be the lowest Source: The Roadmap, CSL Research
price required to attract a new entrant generator (taking into account life
cycle costs, weighted average cost of capital, etc). As it is not a regulated
price, when the market evolves to a commercial bulk electricity
procurement framework, the market will set the wholesale generation price
via a bid process, albeit benchmarked against NERC’s MYTO LMRC
prices.

Figure 17: MYTO II Generation Tariff

WHOLESALE
(GENERATION)
TARIFF

Fixed O&M Cost

CAPACITY
Capital Cost CHARGE
(₦ per MW)

/ of Tax Cost

Variable O&M Cost

Fuel Cost
ENERGY
CHARGE
(₦ per MWh)
/ of Tax Cost

Transmission Loss
Cost

Source: CSL Research

Transmission Prices
There are three categories of payments made by users of transmissions
services:

1. Connection charge for new generators and load customers;

2. Transmission Use of System charge (TUOS) paid by

distributors/retailers;

3. Transmission loss factor applied to generation so generators cover

costs associated with transmission losses. (Generators pass this cost
on as it is included in the generation tariff).

Chart 15: TCN Tariff Split NERC uses the Building Blocks method for transmission prices to
estimate the Revenue Requirement for network transmission services from
which transmission prices are set. This method consists of: a “fair (market
12.8% 3.4% based)” return on capital employed; depreciation of actual capital invested
2.5%
in the transmission network over the useful life of the assets; and operating
1.4%
costs.

The Connection Charge is a one-off charge TCN charges when a new

GenCo connects to the national grid. It covers all the costs associated with
80%
connecting the GenCo to its nearest network node. This charge, which is
calculated by TCN, varies depending on where the GenCo is located in
System Operator Market Operator relation to the network. However the GenCo is not restricted to using TCN
Ancillary Services Regulatory Charge for the connection. GenCos may engage an independent firm to connect it
TSP Charges to the national grid (and not pay TCN the connection fee) if it has secured
better contractual terms. However the firm will need to be approved by
Source: NERC, CSL Research
* TSP – Transmission Service Provider
NERC to ensure that its network standards are met.

The TUOS or Availability Charge is a uniform fixed charge across the

country based on the amount of energy (in ₦ per MWh) that is wheel
(delivered) to DisCos at their injection point. It covers the bulk of the fixed
costs of the transmission network (capex, depreciation, fixed operating
expenditure).

The TUOS charge is paid by the DisCos and retailers (when retailers
eventually emerge in a more mature market) as the GenCos only pay for
transmission up to their bulk supply points on the grid. Thus DisCos and
retailers cover the costs of the delivery system of the power they receive.
Transmission losses are factored into the GenCo tariffs, so these are
passed on to the DisCos (and subsequently the end user).

Figure 18: MYTO II Transmission Tariff

TCN CHARGES

CONNECTION
CHARGE
Operating REGULATORY
Expenses CHARGE

CAPACITY
MO Charges CHARGE
(₦ per MWh)

20%
SO Charges TUOS CHARGE Transmission
Charges
80%

Historic & Future

Depreciation
Capex ENERGY
CHARGE
(₦ per MWh)
Return on Capital ANCILLARY
SERVICE CHARGE

MO – Market Operator
SO – System Operator
TUOS – Transmission Use of Service

Source: CSL Research

Distribution Prices
Distribution is the last mile in the supply chain to the end-user thus
distribution tariffs are structured so that the costs of the power supply value
chain are captured. Therefore the Revenue Requirement for distribution is
reflected by the costs of generation, transmission, retail distribution,
marketing, metering and billing.

We have covered the generation and transmission cost components in the

preceding sections. The costs relating to the distribution system are
estimated using the Building Blocks approach, similar to how
transmission costs are computed. The analogous allowances are made in
the way of distribution network operation and maintenance costs,
depreciation and return on invested capital (capex). Also included are
aggregate losses across the distribution networks, the cost of additional
meters and improvements in metering, billing and revenue collection and
return on working capital.

Each DisCo has its own revenue requirements hence MYTO II sets out
end-user tariffs for each DisCo reflecting NERC’s projections of the cost
profile of an efficient operator in their particular operating environment.

Return on Working Capital

20
DisCos are allowed a return on working capital based on a percentage of
their total operating expenses. This is to allow them to have sufficient cash
to continue operations and service their borrowings as they become due.

Technical and Non-technical Losses

The allowance for technical and non-technical losses of 36% reflects the
challenging state of the entire electricity value chain. There are 3 types of
losses factored into the MYTO model:

1. Technical losses – those attributable to the physical properties of

energy moving through the network. They cannot be eliminated but can
be reduced by having a well designed and well managed transmission
and distribution networks.
2. Commercial (non-technical) losses – consist of stolen electricity and
electricity that is not metered and is unpaid.
3. Collection (non-technical) losses – sales that have been billed but not
collected.

NERC was unable to get actual figures for the technical and non-technical
losses of the system. The figures NERC uses in the model are estimates,
however over time NERC says it expects actual figures to be reported back
from the DisCos and it will then adjust them accordingly. The Successor
DisCos are currently evaluating their businesses in order to provide NERC
with the accurate figures, ahead of the declaration of TEM.

NERC believes that the opportunity for DisCos to boost their margins and
profitability by improving (reducing) these losses is a key incentive for the
DisCos to invest in and better manage their networks. The inference is that
the MYTO II assumptions for losses are sufficiently conservative leaving
adequate opportunity for DisCos to benefit from any haircut beyond the
levels set in MYTO II going straight to profits.

Load Allocation
Another incentive for DisCos NERC has incorporated into MYTO II is
indexing the allocation of net daily generation capacity in excess of 3,200
MW to the achievement of minimum customer service performance
standards and NESI Key Performance Indicators (KPIs). These KPIs are
21
set out in the Performance Agreements executed with the privatised
DisCos. The criteria used are:

1. Attainment of metering targets.

2. Reduction of losses.
3. Customer service ratings based on biannual customer surveys.

20
NERC uses the Weighted Average Cost of Capital (WACC) computed for DisCos for the
allowable rate of return on working capital.
21
See page 112 for further detail on the Industry Agreements.

4. Achievement of distribution network expansion targets.

5. Distribution capacity.

In the first instance, load allocation of the first 3,200 MW among the 11
DisCos is based on a number of factors including projected demand. The
limited amount of generating capacity, compounded by energy being
stranded for lack of evacuation capacity, means that the System Operator
has to closely ration the little power that is available.

The estimated allocation between the DisCos is unchanged for the first 5
years of MYTO II (2012-2016) and is shown in Chart 16 below. These
percentages are used in the Vesting Contracts between NBET and the
DisCos. They are expected to remain unchanged until the amount of
energy delivered daily to DisCos consistently surpasses the 3,200 MW
mark.

Chart 16: MYTO II Load Allocation to Distribution Companies, 2012-2016

100% Yola 3.5%

Port Harcourt 6.5%

Ikeja 15.0%

Eko 11.0%

Kano 8.0%

8.0% Kaduna
50%
5.5% Jos

13.0% Ibadan

9.0% Enugu

9.0% Benin

11.5% Abuja
0%
1 2 3 4 5 6 7 8 9 10 11

Source: NERC, CSL Research

End-User Tariff – Fixed Charge and Energy Charge

MYTO II consolidated the number of consumer classes to 14 from 19 in
MYTO I. The categories are residential, commercial, industrial and street
lighting. The electricity charge to consumers consists of a single monthly
fixed charge and a variable energy charge based on the amount of
electricity consumed.
22
The fixed charge component is widely used across the world . It is meant
to go towards recovering the some of the capital costs of producing and
supplying electricity. Under MYTO II all but the lowest classification of
customers (Residential R1) pay a fixed charge. Fixed charges paid by all
residential customers (R2-4) are subsidised.

Table 11: MYTO II Customer Classification

Customer Classification Description

RESIDENTIAL
A consumer who uses his/her premises
R1, R2, R3 & R4 exclusively as a residence - a house, flat or
multi-storied house.

COMMERCIAL
A consumer who uses his/her premises for any
C1, C2 & C3 purpose other than exclusively as a residence
or as a factory for manufacturing goods.

INDUSTRIAL
A consumer who uses his/her premises for
D1, D2 & D3 manufacturing goods including welding and
ironmongery.

SPECIAL
Customers such as agriculture and agro-allied
industries, water boards, religious houses,
A1, A2 & A3 government and teaching hospitals,
government research institutes and
educational establishments.

STREET LIGHTING
S1
Source: NERC

22
See Appendix 3: Australia’s Tariff Methodology, page 183.

Figure 19: MYTO II Distribution Tariff

DISTRIBUTION REVENUE
REQUIREMENT (TARIFF)

WHOLESALE TARIFF
[Energy & Capacity Charges]
MO Charge
Institutional
Charges  TUOS CHARGE
SO Charge &
Ancillary Services FIXED
REGULATORY
CHARGE
CHARGES (₦)

BULK TRADER
(MARKET ADMIN)
Capex CHARGES

Source: CSL Research

Customer Willingness to Pay Higher Tariffs

The price levied on customers consists of a fixed charge which they pay
whether or not they get electricity, and a tariff based on electricity used. In
Nigeria, telling customers they are going to have to pay more for an
unreliable (practically non-existent in some quarters) service was met with
public outcry. Customers were and are willing to pay provided the service is
delivered. It was an early misconception, soon dispelled, that customers
were protesting because they were looking for a free ride.

Electricity from the grid is actually much less expensive than the
alternatives being used to supplement the inadequate supply from the grid
thus far, so more supply from the grid should be welcome. This would hold
true even if the average tariff is not the MYTO-determined ₦10 per kWh but

₦22 per kWh, which the Presidential Task Force on Power (PTFP) in
23

2010 indicated was a more realistic minimum average cost-reflective tariff

for grid electricity. The PTFP indicated that:

 The poor pay more than ₦80 per kWh burning candles and
kerosene;

 Manufacturers pay in excess of ₦60 per kWh on diesel or Low Pour

Fuel Oil (LPFO) generation;

 Everyone else pays between ₦50-70 per kWh on petrol or diesel

self-generation.

Figure 20: The MYTO II Model

Control
[ NERC ]

Data/Assumptions
Generation, Transmission & Distribution
Load Forecasts

Load Calculations

Generation Transmission Distribution

- New Entrant Model - - Costs - - Costs -

Investor Investor
Transmission Distribution
Module Module
- Depreciation - - Depreciation -
[ IPP ] [ DisCo ]

Generation Transmission Distribution

- Wholesale Prices - - Tariffs - - Tariffs -

Regulatory Fee Regulatory Fee Regulatory Fee

Bulk Trader Charges

Tariffs
[ End-User Tariff ]

Source: CSL Research, NERC

23
The PTFP is the implementation and monitoring arm of the Presidential Action Committee
on Power (PACP) set up by President Goodluck Jonathan in 2010. Chaired by the President,
the PACP was charged with the responsibility to kick-start and oversee the implementation of
hitherto stalled transformations of the power sector. The action plan was set out in the
Roadmap to Power Sector Reform published in 2010.

Chapter 6:
NIPPs in the Reforms:
Additional Power as PHCN is Unbundled
Once the decision was made to unbundle and then privatise NEPA, with
the adoption of the National Electric Power Policy in 2001, the sole focus of
the FGN was readying NEPA for the private sector. No investment in
additional capacity was going to be made via the NEPA/PHCN companies
but the need for more power was ever-present. The government’s solution
was to embark on a programme of investment in new power generation,
transmission and distribution called the National Integrated Power Project
(NIPP). Pursuant to this a separate holding company, the Niger Delta
Power Holding Company (NDPHC), was incorporated in 2005 to manage
the US$8.4 billion investment in NIPP assets (NIPPs).

The NIPPs consist of ten power plants as well as the necessary gas supply,
transmission and distribution infrastructure. About US$6 billion has been
invested so far and they currently supply about 1,000 MW to the grid. The
BPE is currently in the middle of privatising. This process is completely
separate from that of the PHCN companies. Thus we will be discussing the
details of the NIPPs privatisation separately in Part IV.
The NIPP GenCos were projected to increase the nation’s generation
capacity by 5,153 MW over 3 years and to expand the transmission and
gas networks. This has been delayed but they are all expected to have
been commissioned by the middle of 2014, before they are handed over to
their new private owners.

Figure 21: NIPP Assets Being Privatised

NIPPs ASSETS

10 power plants and associated gas projects.

5 main gas pipeline projects.
(The small gas pipelines of less than 2km may be
included with the associated NIPP GenCo.)
102 transmission projects
297 distribution projects

Source: CSL Research, PTFP

Table 12: National Integrated Power Project Assets

No. of Turbines
Installed
Type of Capacity Commission
Company Name Plant Name Location Plant Gas Steam (MW)* Date
Alaoji GenCo Alaoji Abia State CCGT 4 2 831 May-2014^
Benin GenCo Ihovbor Edo State OCGT[+] 4 0 508 Aug-2013
Calabar GenCo Calabar Cross River State OCGT[+] 5 0 635 May-2014
Egbema GenCo Egbema Imo State OCGT[+] 3 0 381 Dec-2013
Gbarain GenCo Gbarain Bayelsa State OCGT[+] 2 0 254 Nov-2013
Geregu GenCo Geregu II Kogi State OCGT[+] 3 0 506 Jun-2013
Ogorode GenCo Sapele II Delta State OCGT 4 0 508 Feb-2012
Olorunsogo GenCo Olorunsogo II Ogun State CCGT 4 2 754 May-2012
Omoku GenCo Omoku II Rivers State OCGT[+] 2 0 265 Dec-2013
Omotosho GenCo Omotosho II Ondo State OCGT[+] 4 0 513 May-2012
35 4 5,153
Source: BPE, CSL
* Designed capacity. Some NIPPs might not have been completed at time of publication. Totals rounded to nearest integer.
CCGT: Combined Cycle Gas Turbine; OCGT: Open Cycle Gas Turbine. See Appendix on page 190 for descriptions.
OCGT[+]: OCGT with possibility of conversion to CCGT.
^ Gas turbines commissioned December 2013. First steam turbine by May 2014; second steam turbine to be completed after handover date
scheduled for mid 2014.

NIPPs Generation Report Card

History seemed to repeat itself as by the end of 2012, 7 years post-launch,
only 28% of the target capacity (1,350 MW) had been completed, though
the vast majority had not been commissioned i.e. operational, connected to
the grid and supplying electricity to the grid. An additional 660 MW was
added by the end of June 2013.

NIPPs Transmission Report Card

The expectation was for an additional 6,190 MVA (4,952 MW) of
transmission capacity in 3 years. The result was 2,220 MVA (1,776 MW) by
the end of 2012 (36% completion). By the end of June 2013, another 660
MVA (2,304 MW), giving a performance of 46.5%.

NIPPs Distribution Report Card

The story was much the same on distribution. By the end of 2012 the
performance was just 12% representing 270 MW (337.5 MVA) of the
expected total of 2,204 MW (2,755 MVA). At the end of June 2013 the
performance figure was just under 24%.

Chapter 7:
Independent Power Plants
24
The law was changed in 1998 to allow for independent power generation.
This heralded the entrance into power generation of independent power
plants (IPPs), which have been responsible for the lion share of the
increase in generating capacity since the law changed. These consist of
GenCos that supply the national grid as well as embedded GenCos that are
dedicated to (usually) manufacturing companies that rely on a constant and
reliable supply of power and have opted to install more efficient gas-fired
power plants rather than rely on diesel generators.

There are currently three private IPPs supplying power to the national grid.
They consist of those by set up by international oil companies (IOC) Shell
and Agip and one run by AES Corporation, a global power generation and
distribution company listed on the New York Stock Exchange. From a
standing start in 2000, IPPs are now responsible for over 40% of the
country’s generating capacity. They have also proved to be the most
reliable supplier of electricity to the national grid.

Three others are often also deemed IPPs as they are not funded by the
FGN however it is arguable that they are not independent in the true sense
because they are funded by state governments. Details of all 6 (non-FGN)
GenCos are shown in the tables at the end of this chapter (on pages 79-
80).

Credit Enhancements to Attract New IPP Investors

Put-Call Option Agreements for New IPPs

New IPPs will enter PCOAs with NBET. NBET is able to buy (and hold)
shares or assets and these PCOAs allow for this. Thus NBET can
repurchase the IPP investor’s shares or the GenCo assets, thereby
protecting the investor and lenders in the event of buyer default. The buy-
out price will be determined post-arbitration.

Operation of the new IPP Put-Call Option is analogous to those of the

25
privatised PHCN GenCos and NIPPs .

World Bank Partial Risk Guarantee

A number of IPPs are due to reach commercial operation within the next
three to four years. 14 of them are at advanced stages of planning and
development and they have been put forward to the World Bank by the
FGN, for consideration to participate in the World Bank’s partial PRG

24
Private sector participation in power sector generation was permitted by the amendment of
the Electricity Act 1990 via the Electricity (Amendment) Decree 1998, and amendment of the
NEPA Act 1990 via the NEPA (Amendment) Decree 1998.
25
See page 37 for the operation of the PCOAs.

facility. They consist of 13 gas-fired generating plants and 1 hydroelectric

plant rehabilitation being developed by IOCs, international developers and
local Nigerians. The total planned capacity of these plants is 5,000 MW.
The 14 companies are:

1. AES Africa Power Company B.V.

2. AGIP
3. Azura Power West Africa Limited
4. Chevron Nigeria Limited
5. Energy Company of Nigeria PLC
6. Geometric Aba Power Limited
7. Hudson Power Limited
8. Mabon Limited
9. MBH Power
10. Mobil Producing Nigeria Limited
11. Notore Power Limited
12. Supertek Nigeria Limited
13. Total E&P Nigeria Limited
14. Western Products Company Nigeria Limited

The 2010 Roadmap envisioned a doubling of power production from IPPs

by 2020. Over the next 5 years, IPPs are expected to be the main
contributors of additional capacity rather than additional capacity being
brought on stream through the rehabilitation of the successor GenCos to
increase their available capacity closer to installed capacity. Successor
GenCos’ available capacity is currently less than 60% of installed capacity.

Details of other power generation licensees can be found in the Appendix

on page 192.

Table 13: International Oil Company IPPs Under Construction

Commissioning
IOC Capacity Location Fuel Supplier Est. Cost Year/Online
Exxon 500MW Qua Iboe, Akwa Ibom State NA NA Est. 2014-15
Total 417MW Obite, Rivers State NA NA Est. 2014-15
Chevron 720MW Agura, Lagos State Nigeria Gas Co. US$700 million 300 MW 2016
Source: CSL Research

Table 14: International Oil Company IPPs

AES
Ownership 95% AES, 5% Yinka Folawiyo Power
- Gas-fired Open Cycle Gas Turbine (OCGT) [Barge]
Plant Type
- Build Own Operate (BOO)
Fuel Natural gas provided by PHCN (contracted from Nigerian Gas Co.)
License 13.25 yrs, extended to 2025
Security against PHCN default, etc Sovereign guarantee
Commissioning Year/Online 2001
Installed Capacity 270 MW
Available Capacity 225 MW
Approx. Cost US$240 million
Agip/Okpai
Ownership 20% Agip, 60% NNPC, 20% Phillips Oil Co.

Plant Type - 300MW OCGT upgraded with 150MW Combined Cycle Gas Turbine (CCGT).
- BOO
Fuel Natural gas provided by Agip
License 20 yrs, US$-based PPA
- Backed by NNPC subsidiary, NPDC (Nigerian Petroleum Dvlpmt Corp.)
- 80% min. capacity. Take-or-Pay.
- PPA based on Final Investment Cost (FIC) of US$312m + approx. Flat capacity
Security against PHCN default, etc charge.
- 5-yr amortisation estimated.
- Final costs increased by US$150m due to vandalism and underestimation of
cost to fix transmission infrastructure.
Commissioning Year/Online 2005
Installed Capacity 450 MW
Available Capacity 272 MW
Approx. Cost US$460 million
Shell/Afam VI
Ownership NNPC 55%, Shell 30%, Elf(Total) 10%, Agip 5%
- CCGT
- Brownfield 270MW Afam V (Acquire Operate Own, AOO) + Greenfield 624MW
Plant Type
Afam VI under BOO. Original project was Restore Own Transfer (ROT), of Afam
I-IV and Lease Own Transfer (LOT) of Afam V.
Fuel Natural gas provided by Shell
License 20 yrs, US$-based PPA
- 80% min. capacity. Take-or-Pay.
- PPA based on FIC of US$540m
Security against PHCN default, etc
- L/C from Federal Ministry of Finance. (In June 2006 Nigeria received BB- credit
rating thus it no longer needed to use oil or income from oil as security.)
Commissioning Year/Online 2008
Installed Capacity 650 MW
Available Capacity NA
Approx. Cost US$540 million
Source: CSL Research

Table 15: State Government-Owned IPPs

Akwa Ibom State/Ibom Power

Ownership Private limited liability company owned by the Rivers State government.
- OCGT
Plant Type
- Greenfield BOO
Natural gas provided by Septa Energy, a wholly-owned subsidiary of Seven
Fuel
Energy.
License 10 yrs to 2018
Security against PHCN default, etc Sovereign guarantee
Commissioning Year/Online 2009
Installed Capacity 155 MW
Available Capacity 60 MW
Approx. Cost US$140 million
Rivers State/Trans Amadi
Ownership Private limited liability company owned by the Akwa Ibom State government.
OCGT
Plant Type
Greenfield
Fuel Natural gas provided by Agip
License 10 yrs to 2023
Security against PHCN default, etc Sovereign guarantee
Commissioning Year/Online 2006
Installed Capacity 100 MW
Available Capacity 24 MW
Approx. Cost US$80 million
Rivers State/Omoku
Ownership Private limited liability company owned by the Akwa Ibom State government.
- OCGT
Plant Type - Greenfield, operation and maintenance by NG Power Ltd., an affiliate of KERL
(Sahara Energy + KEPCO)
Fuel Natural gas provided by AGIP
License 10 yrs to 2023
Security against PHCN default, etc Sovereign guarantee
Commissioning Year/Online 2005
Installed Capacity 150 MW
Available Capacity 30 MW
Approx. Cost US$132 million
Source: CSL Research

CSL Stockbrokers is a division of FCMB (UK) Limited which is authorised by the Prudential Regulation Authority
(PRA) and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) in the Page 80
United Kingdom
Energy Nigerian Electricity Ministry of Nigerian Inland
Ministry of
Commission of Regulatory Commission Water Waterways
Power
Nigeria [ NERC ] Resources Authority

Source: CSL Research

- Licensing - Market Rules - Water Licences and Permits -
- Codes - Regulations

United Kingdom
Gas Aggregation Nigerian Bulk Electricity Transmission Nigeria Electricity Liability Bureau of Public Niger Delta Power
Company of Nigeria Trading Company Company of Nigeria Management Company Enterprises Holding Company
[ GACN ] [ NBET ] [ TCN ] [ NELMCO ] [ BPE ] [ NDPHC ]
Nigerian Power Sector

MO
NGC

SO
IOCs

TSP

Transfer Agreement
- Share Sale Agreement

Vesting Contract
- Deed of Assignment of
Performance Agreement

- Pre-Completion Liabilities
- Shareholders’ Agreement

Power Purchase Agreement

Pre-Completion Receivables

- Grid Connection Agreement

- Ancillary Services Agreement

Gas Sale & Aggregation Agreement

Transmission Use of Service Agreement
Figure 22: Regulatory and Contractual Relationships in the Privatisation of the NESI

Independent Power Independent

Successor GenCos Successor DisCos NIPPs
Producers Electricity DisCos

Off-Grid On-Grid Embedded FGN Plants

Investor in
Successor GenCo

CSL Stockbrokers is a division of FCMB (UK) Limited which is authorised by the Prudential Regulation Authority
(PRA) and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) in the
NGC – Nigerian Gas Company MO – Market Operator TSP – Transmission Service Provider
IOCs – International Oil Companies SO – System Operator NIPPs – National Integrated Power Projects
Infrastructure

Page 81
Nigerian Power Sector Infrastructure

Chapter 8:
Electricity Trading & Transmission
The two other entities that were created from the PHCN were the electricity
bulk buyer, Nigerian Bulk Electricity Trading Plc (NBET) and the
Transmission Company of Nigeria (TCN). They are the two entities in the
electricity value chain that remain entirely in government hands. NBET is
jointly owned by the Bureau of Public Enterprises (BPE), which has an 80%
stake and the Ministry of Finance which holds the balance, 20%. TCN is
wholly-owned by the Federal Government.

These two institutions only become fully-operational once the Transitional

Electricity Market (TEM) is declared. We are currently in the Interim Rules
Period (Interim Market), between the Pre-Transitional Electricity Market
(Pre-TEM) and TEM. Until TEM is officially declared, the industry
operates under a shadow trading arrangement. This is something of a
hybrid akin to having the old unbundled system with the PHCN
transmission company at its centre and the privatised DisCos and GenCos
being run by their new owners. We describe the characteristics of the
various market stages in detail in Figure 34 on page 116.

NBET and TCN are to remain under FGN control and ownership for the
foreseeable future. Hence although the power sector has gone through
radical change since the Successor GenCos and DisCos were sold, much
remains as it ever was; for good or for ill. Through retaining control of
NBET and TCN, the FGN remains the critical link at the heart of the
system. It is still responsible for the network build-out and the
stability of power infrastructure after privatisation.

Figure 23: NESI* – Currently In the Interim Rules Period Market Stage

Interim Transitional Medium Long

Pre-TEM
Rules Electricity Term Term
Stage
Period Market Market Market

Source: CSL Research

* Nigerian Electricity Supply Industry
TEM – Transitional Electricity Market

NBET and Cash Management of the System

NBET was incorporated in 2010 with a mandate to operate as the trading
licensee holding a bulk purchase and resale licence. It is responsible for
buying and reselling electrical power and ancillary services from IPPs and
from the Successor GenCos. It is not intended to exist in perpetuity in its
current incarnation. Rather its role is to act as a broker between power
producers and the DisCos until the market is mature enough to support
commercial bi-lateral trading. In other words, once the DisCos become
creditworthy NBET will be phased out and cease to exist as it currently
stands.

NBET has a 9-member board is chaired by the Minister of Finance, with

other statutory members including the Minister of Power and the Director
General of the BPE. All NBET’s statutory members are also members of
the National Council on Privatisation.

Duties of NBET
1. Sign power purchase agreements (PPAs) with generation companies
(Successor GenCos and IPPs):

 In doing so NBET aims to allocate risk fairly between GenCos and

NBET (and by extension DisCos and end customers);

 Ensure that the PPAs cohere with other agreements such as those
covering gas supply, connection and transportation, as well as the
power plant’s EPC (Engineering, Procurement and Construction)
contract;

 In line with the NESI, it is to ensure that returns to the GenCos are
fair and at a level sufficient to incentivise investment but are not so
skewed as to threaten the even development of the market.

2. Resell power via Vesting Contracts signed with distribution companies:

 In doing so each DisCo is guaranteed a share of power supply;

 It also enforces revenue performance by DisCos.

3. Assume PHCN obligations in existing PPAs with IPPs and International

Customers;

4. Negotiate and enter into new PPAs with greenfield IPPs and state
government-owned power plants;

5. Act as the FGN’s implementing institution for guarantees provided by

the World Bank PRG in support of Gas Supply Agreements and PPAs.
In other words, NBET assumes sovereign risks when guaranteeing
payments to GenCos.

Figure 24: Transitional Electricity Market (TEM) Trading Arrangement

Successor Successor Successor Existing New Successor Successor Successor

GenCo 1 GenCo 2 GenCo 3 IPPs IPPs GenCo 4 GenCo 5 GenCo 6

PPAs
PPAs PPAs

Nigerian Bulk Electricity Trading Plc

(NBET)
PPAs

Eligible
Customers Vesting Contracts

Successor Successor Successor Successor Successor Successor Successor Successor Successor Successor Successor
DisCo 1 DisCo 2 DisCo 3 DisCo 4 DisCo 5 DisCo 6 DisCo 7 DisCo 8 DisCo 9 DisCo 10 DisCo 11

PPA – Power Purchase Agreements

GenCos – Generation Companies
DisCos – Distribution Companies
IPPs – Independent Power Producer

Source: NBET, CSL Research

NBET’s Funding & Credit Surety

NBET is structured to be a revenue-neutral institution. It serves as the
middle-man, the intermediary between GenCos on one side and DisCos
26
and eligible customers who buy directly from NBET, on the other.
Payments are made into its market clearing accounts from DisCos and
eligible customers for power supplied (under price and load volume terms
incorporated in vesting contracts and PPAs). These payments are then
transferred to GenCos and service providers.

NBET is not a risk-free institution as some have suggested. In fact it is quite

the contrary because as a market-building institution it bears off-taker,
market and payment default risks. It may also be required to take on certain
risks that are under the control of the FGN or state-owned entities. As
recourse is to the FGN, it operates the electricity market under sovereign
guarantees. Thus any contingent liabilities that occur are crystallised in
NBET and not at the FGN. This distinction is important vis-à-vis the
operation of credit enhancements such as the World Bank PRG with
27
respect to payments under PPAs .

26
The precise criteria for granting eligible customer status is yet to be announced but is likely
to include stipulations as to amount of off-take.
27
See page 39 for details on the operation of the Partial Risk Guarantee.

Table 16: Industry Risk Allocation Matrix

Risk Nature of the Risk Entity Assuming the Risk

Development, Financing and Including site security and suitability, Investors take these risks but will seek
Construction increase in construction costs, equipment contractual protections from EPC Contractor for
availability and import risk, schedule and certain aspects.
plant performance, interest rate risk, FX
convertibility risk.
Operations Including equipment failure, Investors take on these risks on a 'pay for
environmental risks, fuel price performance' basis but will seek limited
fluctuations, unavailability of labour, contractual protection from an O&M contractor.
consumables, supplies and parts or low On occasion investors will seek insurance for
availability or efficiency below equipment failure.
guaranteed level.
Market and Revenue - 1 These are cost increases above those Investors take on these risks but have limited
allowed (accounted for) in MYTO. protection through an agreed escalation in the
tariff with NERC.
Market and Revenue - 2 Off-taker and payment default risk, NBET takes on these risks as buyer/reseller
collection risk with a measure of protection through vesting
contracts with the DisCos, which will include
payment security.

Gas Transportation Default Failure of the Nigerian Gas Company NBET with FGN support takes the risk with
transportation minimum performance standards from NGC.

Electricity Transmission Failure of TCN grid transmission NBET with FGN support takes the risk with
minimum performance standards from TCN.
Political Risk - 1 Local political Force Majeure, change of NBET takes these risks as buyer with FGN
law, change of tax, change of support.
expropriation stipulations, etc occurring
in Nigeria.

Political Risk - 2 Local political Force Majeure, change of Investors take on these risks but may seek
law, change of tax, change of limited protections from international insurance
expropriation stipulations, etc occurring institutions.
outside Nigeria.

Natural Force Majeure Investors take on these risks when it affects

their facilities but may obtain limited protection
through insurance.
Investors may be relieved from their PPA
obligations to deliver capacity and energy due
to natural force majeure. As this would result in
a loss of expected benefits to NBET, theses
risks are in part shared by NBET.

Source: CSL Research, NBET

Liquidity Gap?
NBET’s liquidity position is central to the cash management cycle of the
power value chain. The FGN has assured the industry that NBET will have
a capitalisation fund of about US$800 million. This is mainly composed of:

 US$80 million allocation from the federal budget;

 US$350 million from the proceeds of the US$1 billion FGN

Eurobond issued in 2013;

 ₦50 billion (US$312 million) of the proceeds from the privatisation

of the PHCN DisCos and GenCos held in escrow.

The DisCos are also expected to submit a letter of credit that covers 3
months of payments to the GenCos.

These funding facilities assure wholesale PPA payments for about 6 to 8

months. While this would appear to be an adequate buffer under normal
circumstances, from what we have discovered post-privatisation we believe
that it is more likely than not that the FGN will need to inject more liquidity
into the sector than it anticipated. At the moment it is not clear whether or
not NBET has been afforded its full financial facilities as expected for TEM
to be declared.

Figure 25: Merit Order for NBET’s Utilization of Funds for Payments

First Out
Monthly Payment Receipts from Discos
#1

DisCo’s Letter of Credit or

Bank Guarantees #2

Capital Appropriation and Eurobond

Final
World Bank or AfDB PRG
Recourse
#4

Source: CSL Research, NBET

TCN and the National Grid

It goes without saying that transmission is a critical aspect of the power
value chain. The newly-privatised GenCos and the IPPs can ramp up
available capacity closer to installed capacity; the DisCos can improve their
distribution networks, optimise metering and improve collections efficiency;
and gas supply and the gas transportation pipeline network can be made fit
for (domestic) purpose. But, if it is not possible to transmit the electricity
produced by the GenCos to the DisCos consistently and effectively, the
entire system collapses figuratively and physically. Electricity cannot be
stored so that which is not transmitted will be stranded due to lack of
evacuation capacity.

Figure 26: Nigeria’s Electricity Transmission Network – Current & Planned

Source: African Development Bank

Transmission Infrastructure
Nigeria’s electricity transmission infrastructure has also suffered from lack
of investment over the last five decades. Less than 40% of the country is
connected to the National Grid and it is estimated that between 20 to 30%
of generated electricity is lost due to the poor transmission network alone. It
is estimated that US$1.5 billion per year over the next five years needs to
be invested in the transmission infrastructure in order to make the system
more reliable and stable. As far as transmission capacity is concerned, the
current network, were it in optimal condition, is capable of
transmitting 6,000 MW of power, practically twice as much electricity
currently being supplied.

Structure of TCN
TCN is composed of 2 departments:

1. The Transmission Service Provider (TSP): This constructs and

develops the country’s transmission grid and maintains the
infrastructure.

2. The Market Operator (MO): This is also known as the Operator of

the Nigerian Electricity Market (ONEM). The MO is the
administrator of the Nigerian Electricity Supply Industry under the
Market Rules. In addition, the MO handles administrative charge
payments to the different service providers like MO, SO, NBET,
TSP and NERC. During Pre-TEM, the MO handles both payment
and settlement. Once TEM starts, the payments function will be
taken over by NBET but settlements will continue to be
administered by the MO.

3. The System Operator (SO): This co-ordinates the flow of electrical

power in the entire system, from GenCos to DisCos. It determines:

(a) Which power station comes on stream (to supply the national
grid);

(b) When power plants supplying the grid come on stream;

(c) How much power each on-grid GenCo supplies;

(d) Determines which transmission line or transmission station is

28
to be supplied with electricity, i.e. load shedding procedures
and principles as embodied in the Distribution Code.

(e) Enforces grid discipline in accordance with the Grid Code.

28
Load shedding is the term used to describe the deliberate switching off of electrical supply to
parts of the electricity network, and hence to the customers in the affected areas. It is
manifested as electricity supply blackouts.

Management of TCN by Manitoba Hydro International

The FGN opted to outsource management of TCN to private sector
operators rather than risk a reversion to/continuation of the inadequate
management of the grid of yesteryear. In our view this was a decisive and
shrewd move by the FGN however it has not been without controversy.

In April 2012 Manitoba Hydro International (MHI) won the contract to

29
manage and operate TCN. It was meant to have assumed operational
control in June of the same year however ‘bureaucratic issues’ stalled the
handover until March 2013. MHI is a subsidiary of one of Canada’s leading
energy utility companies Manitoba Hydro which is involved in electricity
generation and distribution and gas distribution. MHI provides business and
technical expertise in the electricity utility industry. It has offered technical
support, management, consulting, training and auditing services to various
electricity industry institutions around the world since 1986.

MHI’s management contract is for US$23.7 million over 3 years with a

possible extension for a further 2 years. MHI will not be injecting any capital
into TCN for the build out of the transmission network. MHI’s contract is
purely a management contract. Its remit includes management of all
aspects of TCN’s responsibilities with respect to system operations, market
operations, the Transmission Service Provider (TSP), the National Control
Centre, information technology and staffing of TCN. MHI’s 9-man
management team is to work alongside and train local staff so that the
latter can eventually take over the running of TCN.

Over the term of its contract, MHI’s main aim is to re-organise TCN to
ensure that TSP operates as an independent entity from the System
Operator (SO) and the Market Operator (MO). In so doing TCN would have
a structure more suitable for eventual privatisation, which is the FGN’s
ultimate goal.

29
The FGN began the process to select and appoint an operation and maintenance contractor
for the electricity transmission network in 2006. A shortlist of 8 companies was compiled from
submitted expressions of interest (EOIs) in 2007. The shortlisted firms were Power Grid
Corporation of India Ltd; ESB International (Ireland); Terna Rete Elettrica Nazionale (Italy);
Alpha Consortium Nigeria Ltd; ABB ELS (acquired by Shoreline Power Nigeria); Gungor
Elektrik (Turkey); Nsquare Integrated Electric (Greece); and Manitoba Hydro International. In
2007, before the final contract could be awarded, former President Umaru Yar’Adua
suspended the privatisation of the power sector. When President Jonathan took over in 2010
and launched The Roadmap, he instructed the BPE to take-up the selection process from
where it had been suspended rather than start again.

Figure 27: Electricity Distribution Zones

I KEJA
D I S T R IBU T ION
ZONE

Source: CPCS Transcom

Transmission Targets
Table 17 shows the capacity targets for TCN from 2013 to 2017.

Table 17: Transmission Hurdles

Capacity Balance in MW 2013-2017

Estimated YE
Installed
Generation
Capacity Estimated YE Surplus/(Deficit)
Available for Transmission Transmission
Year End Transmission Capacity Capacity
2013 8,000 4,800 (3,200)
2014 8,800 10,000 1,200
2015 9,600 12,000 2,400
2016 11,200 14,000 2,800
2017 12,800 16,000 3,200
Source: TCN
Published 20-Sept-2013

TCN Funding
An intensive investment programme in the transmission network of the next
few years is a sine qua non of the fruition of The Roadmap’s electricity
supply targets. The estimated US$1.5 billion annual investment over the
next five years needs to be raised but servicing this level of financing by
TCN itself is not a viable option. TCN is not a commercial operation and the
Transmission Use of Service (TUOS) charge under MYTO II is not
sufficient to give a level of returns to attract private investors to invest in
TCN. In theory the TUOS charge is meant to be fully cost-reflective and
include a suitable return on investment. However in the setting of charges,
NERC is also minded of the level of affordability to customers. The financial
consequence of making up for years of underinvestment makes it
impracticable to fully reflect even just the cost of investment in the end-user
tariff. Hence FGN subsidies are required. The net result is that the FGN
needs to raise the funding required on its own books.

The FGN has funded TCN under its annual federal budgetary allocations
and we do not see any change to such FGN intervention. In the 2014
round, the FGN has allocated ₦25 billion (US$156 million) to TCN, 40% of
its total allocation to the power sector. We anticipate this level of FGN
funding to continue, even and especially if foreign donor agencies become
involved. FGN direct funding is something of a curate’s egg because while
it signals the FGN’s commitment – that it has ‘skin in the game’ – it leaves
TCN vulnerable to FGN interference.

Chart 17: TCN Capital Requirement and Sources of Funds (US$ mn)

6000

783 Deficit
5000

4000

3000 Possible non-

Total Funding Requirement
US$ m FGN sources

2000
690

1000 244 387

1,300 1,370
809 666 FGN
264 625
0 61
2013 2014 2015 2016 2017 2013-17
-802 Total
Surplus
-1000

Source: TCN (Published 20 September 2013), CSL Research

The Roadmap set out external funding sources for TCN in the short to
medium term (2013-2017), details of which are in Table 18 below. In
February 2014, TCN announced it had received US$665 million of funding.
It also announced that it had begun 165 projects and plans to double its
wheeling capacity from 5,000 MW to 10,000 MW.

Table 18: External Sources of Funds for TCN, 2013-2017

Amount
Source (US$ mn) Details
Africa Development Bank 150 FGN Loan
Agence Française de Développement^ 170 FGN Loan
China Exim Bank* 500 Contractor financing facility via Xian Electric Co. Ltd.
FGN 2013 US$1bn Eurobond Issue 135 Amount earmarked for transmission infrastructure
Islamic Development Bank 150 FGN Loan
Japan International Co-operation Agency” 200 FGN Loan
Amount earmarked for transmission infrastructure from
NDPHC transaction investment 1,600 proceeds of privatisation of NIPP plants planned for 2014.
World Bank 700 FGN Loan
Total 3,605

Source: The Roadmap, CSL Research

^ France's overseas development agency.
* Part of the trio of Chinese state finance institutions designed to promote state policies in foreign trade, industry, diplomacy and economy, and promote
Chinese products and services. Of the trio (China Development Bank, Exim and Sinosure), Exim is the sole provider of Chinese government concessional
loans.
“ Japan’s overseas development agency.
NDPHC – Niger Delta Power Holding Company, the parent company of the NIPP power plants.

Controversies
Appointment Hokey Cokey – MHI In... MHI Out... MHI In...
MHI has been involved in the Nigerian power sector for a number of years
providing various consulting and project-related services covering areas
including metering, distribution and transmission. In 2006/7 it was
shortlisted to take over the management and operation of TCN when this
option was put in play as part the privatisation process under the then
outgoing President Olusegun Obasanjo. The process as suspended by the
incoming President Umaru Yar’Adua in 2007, only to be revived by current
President Goodluck Jonathan in 2010. As stated previously, MHI eventually
won the contract in April 2012.

MHI was to assume full control of TCN at the beginning of September

2012. However by November, despite TCN having its 8/9 member
management team in place, it had yet to be given a schedule of delegated
authority which is required for it to take up its full contractual duties. In
effect it was notionally in charge of TCN but faced with the old management
team’s reluctance to cede control, MHI did not have the official authority to
compel it to do so.

There was more drama afoot in November: in a move that stunned the
international market and cried of the practices presumed to be of old, the
newspapers announced that President Jonathan had cancelled the MHI
contract. This was purportedly on account of irregularities in the contracting
process which had been overseen by the BPE since 2006. That process
was now called into question by the Bureau of Public Procurement (BPP), a
body which few participants in the power privatisation process had come
across before this intervention. Despite the cancellation of MHI’s contract
having been widely reported in the media, and an official announcement
from the Presidency was said to be imminent, MHI reported that it had only
learnt of the cancellation from the media and had not received official
notification of it.

The unexpected development created much unrest amongst interested

parties in the privatisation of the power industry as it introduced uncertainty
about the FGN’s commitment to the process. As a result questions were
raised by international financial institutions such as the World Bank which
was to provide the credit surety of a PRG, vital to attracting private
investors to the sector.

By late December, the FGN appeared to be back on track, MHI was (still)
under contract and President Jonathan announced the constitution of the
inaugural supervisory board of directors of TCN.

Composition of TCN’s Board of Directors

The inaugural management and supervisory board of directors of TCN
consisted of nine members: a Chairman, a Vice Chairman and
representatives from: the BPE; the Ministries of Finance and Power; NERC;
the Manufactures’ Association of Nigeria (MAN); GenCos and DisCos.
Even though this board was announced in December 2012, it was not
confirmed until March 2013.

Alas, the supervisory board confirmed in March 2013 was quite different to
the one announced in December 2012. The March board had seven
members. Certain members of the December board were dropped, while
two others were added. The CEO of MHI was brought in as the only
executive member of the board. The BPE, the Ministries of Finance and
Power and NERC retained their seats. However NERC asked to be
excluded so that its independence as the regulator of the entire sector is
not just assured but is also seen to be assured.

MAN, along with the GenCos and DisCos, no longer had representatives.
Instead there was now a “representative of the private sector and the
industry generally” who was meant to be independent. Notwithstanding, in
our view the holder of this seat is essentially a political appointment, as
filling the position is in the gift of the ruling party.

There was further upheaval with certain purported political interests looking
to change key provisions of the management contract including removing
management of the MO from MHI’s remit. Had this succeeded it would
have made nonsense of the purpose of outsourcing the management of

TCN in the first place. Some raised concerns about MHI having sole control
of TCN’s bank accounts and the day-to-day running of the operations.
Meanwhile five months on the supervisory board seemed to be in limbo and
inactive, having not yet called its first board meeting.

In August 2013 the supervisory board was reconstituted once again. This
time it was remarkable in both the number of members and in the diversity
of their provenance. In addition to the Chairman and Vice Chairman, the
17-member board also had representatives from the Attorney General of
the Federation; the Ministries of Power, Petroleum and Finance; two
representatives of state governors and representatives of the
Manufactures’ Association of Nigeria, GenCos and DisCos. The Managing
Director of TCN and the Executive Director of System Operations also had
seats of the board. The balance consisted of other appointees.

January 2014, enter the fourth supervisory board, this time with a new
Chairman.

In the midst of this turmoil, we wondered what an effective governance

structure for TCN would look like. As it happens, the structure that was
recommended by external consultants engaged by the FGN to advise on
reforming and privatising the industry consisted of an eight-member
supervisory board. (Figure 28)

Figure 28: Governance Structure of TCN Recommended by the FGN’s External Advisors on Power Sector Reforms

Independent Functions Company Secretary

Public Relations Supervisory Board
Audit 5 Non-Executive Members
Legal 3 Executive Members
Regulation + Management Contractor (by invitation)
Contract Management Specialist Advisors

Management Contractor

Transmission
Finance & Admin Market Operator System Operator
Service Provider

 Settlements (energy and  Efficient scheduling and  Design, specification,

cash balancing) dispatch commissioning,
construction of assets
 Payments (collections  Demand forecasting,
from DisCos, payment to system and operational  Inspection, preventive
GenCos) planning) and planned maintenance

 Bulk metering  Grid Code compliance  Connections

 Fault management and  Field workforce
restoration
 Project management

Source: CSL Research, BPE

Hands Tied Tight?

The various machinations in the appointment of MHI, the prevarication over
handing over the requisite powers, not to mention the apparent degree of
political interference in the establishment of TCN’s management board
casts an unfortunate shadow over the sector. Hence we have concerns
about whether MHI is going to be afforded the latitude to do the job has
been contracted to do. Both sceptics and pragmatic supporters of the
FGN’s efforts to successfully oversee a well-functioning privatised
electricity industry will point to this as a red flag from the onset.

‘The hand that rocks the cradle is the hand that rules the world’. The cradle
in this context is the cache of funds put at TCN’s disposal to invest in the
network. It might be a moot point whether or not this saying applies here,
however what is clear from the preamble is that TCN, specifically its Market
Operator responsibilities – the administrator of the entire electricity market
– is a very influential (and covetable) one. It exerts a great amount of
influence and control and by necessity it is afforded considerable financial
muscle to invest in the transmission infrastructure.

Chapter 9:
Gas Supply – Fuel-to-Power
One cannot talk about electric power generation and reform in Nigeria
without mentioning gas supply in the same breath. Thermal power from gas
and steam turbines accounts for 80% of Nigeria’s power generation. The
current fuel-to-power plan anticipates greater power generation from hydro
and coal in the future, however gas thermal power is still expected to
account for 75% of grid power by 2020.

Chart 18: Use of Domestic Gas

1% 5%

14% Power

Manuf acturing

Gas-based
Industries

West Af rica Gas

Pipeline

80%

Source: GACN, CSL Research

Nigeria is About Gas, Not Oil

The Nigerian thermal electric power generation industry is in an enviable
position because Nigeria’s gas reserves are vast and natural gas is readily
available upstream. It has over 180 TCF of proven gas reserves which
accounts for 2.6% of the world’s proven reserves and ranks ninth in the
world. Its proven reserves represent 33.1% of Africa’s proven reserves and
it ranks first in Africa.

It is widely accepted in the industry that Nigeria has greater potential for
gas than it has for oil. First, this is due to the estimated extent of its natural
gas reserves. Second, there is the growing global sentiment in favour of
using gas rather than crude oil as a source of energy due to gas being less
polluting than oil. Moreover, the quality of Nigeria’s gas is classified as high

grade as it has minimal levels of sulphur and is rich in natural gas liquids.
The gas industry estimates that Nigeria’s proven gas reserves could be as
high as 600 TCF (which would make it the world’s fourth largest) if more
concerted investment and focus were dedicated specifically towards gas
exploration. At the moment all of Nigeria’s known/proven reserves are
associated with oil exploration.

Chart 19: The World’s Largest Gas Reserves by Country

1,800 1,680 35,000

1,600
30,000
1,400
25,000
Trillion Cubic Feet, TCF

Billion Cubic Feet, BCF

1,168
1,200

1,000 20,000
890

800 15,000

600
10,000
400 334
284 265
215 195 180 159 141 5,000
200 112

0 0
Nigeria

Indonesia
Venezuela
Turkmenistan
Saudi Arabia

Algeria
Qatar

UAE
Russia

Iran

Iraq

Gas Reserves (L. Axis) Gas Production (R. Axis)

Source: US EIA, CSL Research

Chart 20: Share of Africa’s Gas Reserves

Other
12%
Angola
2%
Nigeria
33%
Libya
10%

Egypt
14%

Algeria
29%
Source: US EIA, CSL Research

Gas Pipeline Network

All of Nigeria’s proven commercial gas reserves are located in the south
east and delta of the Niger river in the south of the country The Nigerian
Gas Company (NGC), a subsidiary of Nigerian National Petroleum
Corporation (NNPC), is responsible for transporting gas from the gas
processing facilities to commercial centres around the country. It does so
through two main networks:

1. Western Network: Escravos-Lagos Pipeline System (ELPS) and

the Oben-Ajaokuta Pipeline System.

2. Eastern Network: Obigbo North-Alscon Pipeline System and Imo

River-Alaoji Pipeline System.

Currently under construction are:

i. South-North gas transportation line – from Akwa Ibom to Ajaokuta,

Abuja, Kano and Katsina. The line will also connect Abia, Imo,
Anambra, Enugu and Ebonyi States

ii. An interconnector to link the Eastern gas reserve centre with the
Western Network and the new South-North line.

iii. Expansion of the ELPS.

Figure 29: Nigeria’s Gas Transmission Network – Current and Planned

Source: African Development Bank

Gas Supply Requirements for Power

Table 19 below shows the PTFP’s projections for gas requirement of the
power sector and it indicates that under current projections, there should be
enough gas produced to meet power generation targets. The harsh reality
is that Nigeria has no excuse for not using its gas supplies more
efficiently. To put it in context, Bangladesh, a country of about 155 million
people, has natural gas reserves of about 6.5 TCF but generates twice as
much power as Nigeria. It would be a case of going from the sublime to the
ridiculous if we were to make adjustments for the difference in GDP of both
countries.

Upstream availability of gas has never been an issue. The problem is

that the gas transportation pipeline infrastructure is inadequate to get
the gas to where it is needed, be it for industry, power generation or for
export. It is estimated that between US$1.5-2 billion needs to be invested in
the gas infrastructure over the next five years to get the infrastructure to a
suitable standard and to keep pace with power generation plans. According
to the President and CEO of General Electric (GE) Nigeria, the country
needs 10,000km of gas pipelines to meet its power requirements, which is
a long way off from the 1,000km of gas pipelines currently installed.

Vandalisation of oil/gas pipelines has been a perennial problem and this is

used often as the official reason for the inadequacy of gas supply to where
it is needed. However this amounts to a red herring in our view. Yes,
vandalisation of pipelines for political and/or economic ends is a feature of
the industry and numerically-speaking the occurrences outstrip incidents
30
due to infrastructure deterioration . But in terms of degree of impact,
cost of repair and financial loss, vandalism has not been a material
contributor to the bottle neck between gas supply and demand over
the last few years.

30
According to NNPC, pipeline vandalism decreased by 19% year-on-year in 2012. A total of
2,256 pipeline breaks were reported of which 2,230 were as a result of vandalism. There were
26 pipeline breaks were due to system deterioration resulting in a loss of 181.7mt of petroleum
products worth about ₦21.5 billion. There were also 34 cases of fire incidents during that year.

Table 19: Fuel-to-Power, Gas Production (Million standard cubic feet per day, MMscfd)

2013 2014 2015 2016 2017 2018 2019 2020

Western Gas 1,286 1,530 1,780 2,005 2,005 2,155 2,040 2,040
Eastern Gas 350 805 925 925 925 1,625 1,925 1,925
Direct Gas 357 480 530 530 530 530 530 530
Total Gas Production 1,993 2,815 3,235 3,460 3,460 4,310 4,495 4,495

GPO Issued/Requested 1,536 1,647 2,074 2,522 2,657 2,657 2,694 2,694
Non-commitment 457 1,168 1,161 938 803 1,653 1,801 1,801
% Non-commitment 23% 41% 36% 27% 23% 38% 40% 40%

Total Gas for Power 1,473 1,905 2,426 2,595 2,595 3,233 3,371 3,371
Source: The Roadmap, August 2013 – Presidential Task Force on Power, CSL research.
GPO - Gas Purchasing Order.

The Nigerian Gas Master Plan

The Nigerian Gas Master Plan (GMP) was launched in 2008 to ensure that
the country’s gas production is optimised and flaring of gas is reduced.
Central to the plan is to ensure that sufficient gas is made available for
certain deemed ‘Strategic Sectors’ that can provide significant benefit to the
economy of which the power sector is one. The strategic intent in pricing is
to facilitate the supply to and access of these sectors to low cost gas in
order to catalyse rapid economic growth. The FGN’s Vision 2020 plans for
power generation expects the large majority of power generation to come
from gas-fired power plants. This is the main driver of the forecasted
increase in demand for natural gas of 11.4% per annum between 2012 and
2025.

The GMP consists of three main sections:

1. Gas Pricing Policy which provides a framework for establishing

minimum prices gas buyers can be charged gas. This is because
the key domestic sectors that demand gas e.g. power, methanol,
fertilizer industries, etc, have varying capacities to bear increases in
gas prices;

2. Domestic Gas Supply Obligation (DSO) which stipulates that

every gas producer must allocate a certain proportion of their
output to supply the domestic market.

3. Gas Infrastructure Blueprint which outlines the process for

establishing three gas gathering and processing facilities and a gas
transportation pipeline network to enhance the supply of gas.

TAES SOLAR Business Plan
100% (2)
TAES SOLAR Business Plan
41 pages
Afrinvest 2009 Nigeria Banking Report - Disclosure Is The New Valuation Benchmark
No ratings yet
Afrinvest 2009 Nigeria Banking Report - Disclosure Is The New Valuation Benchmark
68 pages
RMBNS Research Nigeria 2020 Market Outlook Some Growth But Not Enough 14012020
No ratings yet
RMBNS Research Nigeria 2020 Market Outlook Some Growth But Not Enough 14012020
95 pages
New Tariff Rate BEDC
No ratings yet
New Tariff Rate BEDC
12 pages
Effective Regulation - Issues and Challenges For The Nigerian Electricity Regulatory Commission
No ratings yet
Effective Regulation - Issues and Challenges For The Nigerian Electricity Regulatory Commission
20 pages
Roadmap For Power Sector Reform Full Version
No ratings yet
Roadmap For Power Sector Reform Full Version
149 pages
Nigeria Oil Gas Sector Report A PDF
100% (1)
Nigeria Oil Gas Sector Report A PDF
50 pages
Sell, Sell, Sell: Market Panic in Nigeria
No ratings yet
Sell, Sell, Sell: Market Panic in Nigeria
1 page
EY Nigeria Country Report PDF
No ratings yet
EY Nigeria Country Report PDF
12 pages
Brighter Prospects For Nigeria's Banking Sector in 2014 Will Depend On Political and Regulatory Stability
No ratings yet
Brighter Prospects For Nigeria's Banking Sector in 2014 Will Depend On Political and Regulatory Stability
11 pages
CBO Oil and Gas White Paper - The Billion US$ Oil Business + 2013 Marginal Fields Sale Special Report + Full Oil Sector Valuation
100% (1)
CBO Oil and Gas White Paper - The Billion US$ Oil Business + 2013 Marginal Fields Sale Special Report + Full Oil Sector Valuation
96 pages
Panafrican Daily Market Report 27-June-2014)
No ratings yet
Panafrican Daily Market Report 27-June-2014)
1 page
Westhouse FCMB Conference Sept 2011 Final
No ratings yet
Westhouse FCMB Conference Sept 2011 Final
26 pages
Panafrican Daily Market Report 13-June-2014)
No ratings yet
Panafrican Daily Market Report 13-June-2014)
1 page
Panafrican Daily Market Report 20-June-2014)
No ratings yet
Panafrican Daily Market Report 20-June-2014)
1 page
Vetiva Research - Stress-Testing Nigerian Corporates To Naira Uncertainty
No ratings yet
Vetiva Research - Stress-Testing Nigerian Corporates To Naira Uncertainty
5 pages
Panafrican Daily Market Report (04-September-2014)
No ratings yet
Panafrican Daily Market Report (04-September-2014)
1 page
Afrinvest 2008 Nigerian Market Outlook
No ratings yet
Afrinvest 2008 Nigerian Market Outlook
34 pages
Nigeria Ratings Affirmed Outlook Negative On Increasing Political, Institutional, and Fiscal Risks
No ratings yet
Nigeria Ratings Affirmed Outlook Negative On Increasing Political, Institutional, and Fiscal Risks
8 pages
Panafrican Daily Market Report 26-June-2014)
No ratings yet
Panafrican Daily Market Report 26-June-2014)
1 page
Panafrican Daily Market Report (02-July-2014)
No ratings yet
Panafrican Daily Market Report (02-July-2014)
1 page
Why Is This The Perfect Time To Identify Great Stocks
No ratings yet
Why Is This The Perfect Time To Identify Great Stocks
8 pages
Powering Nigeria For The Future
No ratings yet
Powering Nigeria For The Future
36 pages
Panafrican Daily Market Report 24-June-2014)
No ratings yet
Panafrican Daily Market Report 24-June-2014)
1 page
Financial Sector Liberalization and Challenges To Real Sector Financing
No ratings yet
Financial Sector Liberalization and Challenges To Real Sector Financing
30 pages
CSL Nigeria Daily 07 October 2022 - Refineries
No ratings yet
CSL Nigeria Daily 07 October 2022 - Refineries
5 pages
As a manager at-WPS Office
No ratings yet
As a manager at-WPS Office
11 pages
Economic Review 2014 and Outlook 2015
No ratings yet
Economic Review 2014 and Outlook 2015
36 pages
Panafrican Daily Market Report 23-June-2014)
No ratings yet
Panafrican Daily Market Report 23-June-2014)
1 page
Nov 2021 Presentation - IIF Final
No ratings yet
Nov 2021 Presentation - IIF Final
21 pages
Nigeria Economic Update 20241025
No ratings yet
Nigeria Economic Update 20241025
4 pages
Investing in Africa
No ratings yet
Investing in Africa
4 pages
Nigerian Real Estate in 2018: Five Reasons To Be Bullish On
No ratings yet
Nigerian Real Estate in 2018: Five Reasons To Be Bullish On
4 pages
First City Monument Bank PLC.: Investor/Analyst Presentation Review of H1 2008/9 Results
No ratings yet
First City Monument Bank PLC.: Investor/Analyst Presentation Review of H1 2008/9 Results
31 pages
SWOT ANALYSIS - Compressed
No ratings yet
SWOT ANALYSIS - Compressed
34 pages
The Nigerian Capital Market
No ratings yet
The Nigerian Capital Market
13 pages
10 fastest growing Nigerian firms in Africa 2024 | Pulse Nigeria
No ratings yet
10 fastest growing Nigerian firms in Africa 2024 | Pulse Nigeria
15 pages
SCM Capital Daily Market Recap 12-06-2018
No ratings yet
SCM Capital Daily Market Recap 12-06-2018
2 pages
Economic Outlook and Review 02022016
No ratings yet
Economic Outlook and Review 02022016
41 pages
Target Technical Review For The Week Ended 2 2014-NO. 0011/2014
No ratings yet
Target Technical Review For The Week Ended 2 2014-NO. 0011/2014
3 pages
SCM Capital Daily Market Recap 11-06-2018
No ratings yet
SCM Capital Daily Market Recap 11-06-2018
2 pages
2022 Nigeria Real Estate Market Outlook (Compressed)
No ratings yet
2022 Nigeria Real Estate Market Outlook (Compressed)
60 pages
2023 Nigeria Real Estate Market Outlook - CDR (Northcourt)
No ratings yet
2023 Nigeria Real Estate Market Outlook - CDR (Northcourt)
78 pages
Invest in Nigeria - Country Report - July18
No ratings yet
Invest in Nigeria - Country Report - July18
44 pages
Panafrican Daily Market Report (03-July-2014)
No ratings yet
Panafrican Daily Market Report (03-July-2014)
1 page
The Nigeria Eurobond - An Appraisal by Eghes EYIEYIEN 240111
No ratings yet
The Nigeria Eurobond - An Appraisal by Eghes EYIEYIEN 240111
3 pages
Investing Vantage
No ratings yet
Investing Vantage
25 pages
Panafrican Daily Market Report 30-June-2014)
No ratings yet
Panafrican Daily Market Report 30-June-2014)
1 page
RMB Cement Initiation
No ratings yet
RMB Cement Initiation
76 pages
NE24 WhyNigeriaReport
No ratings yet
NE24 WhyNigeriaReport
9 pages
Nigeria Economic Update 20240823
No ratings yet
Nigeria Economic Update 20240823
4 pages
Property Market Report
100% (1)
Property Market Report
7 pages
September NigeriaNational EconomicFactSheet
No ratings yet
September NigeriaNational EconomicFactSheet
2 pages
Ratings On Nigeria Affirmed at 'BB-/B' Outlook Stable: Research Update
No ratings yet
Ratings On Nigeria Affirmed at 'BB-/B' Outlook Stable: Research Update
7 pages
2afc4686-6c01-43fe-b447-517103cdf436
No ratings yet
2afc4686-6c01-43fe-b447-517103cdf436
69 pages
Obayemi Emmanuel Ayomide 20222928 26 April, 2023
No ratings yet
Obayemi Emmanuel Ayomide 20222928 26 April, 2023
6 pages
Nigeria Real Estate Development and Financing ASO
No ratings yet
Nigeria Real Estate Development and Financing ASO
37 pages
Nigeria: A Dynamic and Diversifying Economy
No ratings yet
Nigeria: A Dynamic and Diversifying Economy
2 pages
Nigerian Banks: Resilience Built in
No ratings yet
Nigerian Banks: Resilience Built in
52 pages
Macro Economy Update
No ratings yet
Macro Economy Update
7 pages
Strategies For Putting Money To Work in A Fast-Growing Continent
No ratings yet
Strategies For Putting Money To Work in A Fast-Growing Continent
2 pages
Nigeria's
No ratings yet
Nigeria's
3 pages
The Prudent Speculator Stock Picks: 2013 and Beyond
From Everand
The Prudent Speculator Stock Picks: 2013 and Beyond
John Buckingham
No ratings yet
How to Identify and Invest in Underperforming Blue Chip Companies
From Everand
How to Identify and Invest in Underperforming Blue Chip Companies
Sachin Naha
No ratings yet
Nigeria Ict Innovation and Entrepreneurship Vision (Niiev) : National Information Technology Development Agency (Nitda)
No ratings yet
Nigeria Ict Innovation and Entrepreneurship Vision (Niiev) : National Information Technology Development Agency (Nitda)
24 pages
2015-06 - NESP - Energy Sector Study of Nigeria - 2nd Edition
No ratings yet
2015-06 - NESP - Energy Sector Study of Nigeria - 2nd Edition
152 pages
Federal Republic of Nigeria Official Gazette: Extraordinary
No ratings yet
Federal Republic of Nigeria Official Gazette: Extraordinary
15 pages
Review of Nerc's Consumer Protection Regulations 2023
No ratings yet
Review of Nerc's Consumer Protection Regulations 2023
5 pages
Notice of Minor and Extraordinary Review of Tariffs for Electricity Transmission and Distribution Companies
No ratings yet
Notice of Minor and Extraordinary Review of Tariffs for Electricity Transmission and Distribution Companies
1 page
Roadmap For Power Sector Reform Full Version
No ratings yet
Roadmap For Power Sector Reform Full Version
150 pages
Renewable Energy Masterplan
No ratings yet
Renewable Energy Masterplan
60 pages
Nerc+quarterly+report +Q2+2021
No ratings yet
Nerc+quarterly+report +Q2+2021
79 pages
Be My Student in EEE433
No ratings yet
Be My Student in EEE433
14 pages
NERC Mini Grid Regulation
No ratings yet
NERC Mini Grid Regulation
139 pages
NE22 Digital Show Catalogue - Cleaned
No ratings yet
NE22 Digital Show Catalogue - Cleaned
49 pages
NERC Order On 2016 - 2018 Minor Review of MYTO 2015 & Min Remmittance For PH DisCo
No ratings yet
NERC Order On 2016 - 2018 Minor Review of MYTO 2015 & Min Remmittance For PH DisCo
9 pages
AEDC-MYTO-ORDER-MAY-2024 (1)
No ratings yet
AEDC-MYTO-ORDER-MAY-2024 (1)
39 pages
Tariff Calculation Tool For Mini-Grids
No ratings yet
Tariff Calculation Tool For Mini-Grids
25 pages
Nigerian Energy Sector - Legal and Regulatory Overview - 2015
100% (1)
Nigerian Energy Sector - Legal and Regulatory Overview - 2015
17 pages
NEMSA Mandate and Enforcement Powers
No ratings yet
NEMSA Mandate and Enforcement Powers
23 pages
Update On Activities in The Nigerian Power Sector
No ratings yet
Update On Activities in The Nigerian Power Sector
28 pages
The Powers of The Nigerian Electricity Regulatory Commission (NERC) To Regulate Electricity Consumers' Rights
No ratings yet
The Powers of The Nigerian Electricity Regulatory Commission (NERC) To Regulate Electricity Consumers' Rights
26 pages
30075-Article Text-56418-2-10-20190313
No ratings yet
30075-Article Text-56418-2-10-20190313
10 pages
AEF 2018 - Speaker List
No ratings yet
AEF 2018 - Speaker List
8 pages
Effective Compliance and Enforcement of Market Rules and Regulations by Dr. Sam Amadi
No ratings yet
Effective Compliance and Enforcement of Market Rules and Regulations by Dr. Sam Amadi
43 pages
Power Sector IN DEPTH Report Part1 PDF
No ratings yet
Power Sector IN DEPTH Report Part1 PDF
100 pages
Roadmap For Power Sector Reform - Nigeria
No ratings yet
Roadmap For Power Sector Reform - Nigeria
56 pages
Investment Opportunities in The Nigerian Power Sector
No ratings yet
Investment Opportunities in The Nigerian Power Sector
39 pages
Nigeria Energy 2023 Leadership Summit Post Conference Proceedings
No ratings yet
Nigeria Energy 2023 Leadership Summit Post Conference Proceedings
14 pages
2012 - Multiyear Tariff Order Distribution Retail - Nerc
No ratings yet
2012 - Multiyear Tariff Order Distribution Retail - Nerc
73 pages