Unbundling And Privatization Of The Nigerian Electricity Sector Economics Essay

Electricity is an indispensable characteristic for economic development. The ground for such necessity lies in the fact that Electricity affects every domain of a state ‘s economic system. Bearing this in head, both developed and developing states purpose towards set uping an efficient and effectual electricity sector.

The present disposal of President Umar Yar’Adua has set for the Country the Vision 20:2020, which merely is the mark of being one of the universe ‘s 20 ( 20 ) best economic systems by the twelvemonth 2020.[ 1 ]In order to accomplish this Vision, an efficient and effectual electricity sector is a requirement, as there can be no industrial development without electricity.

Since the first power outage in the sixtiess[ 2 ]until day of the month, the Nigerian electricity sector has been characterized by epileptic and undependable power supply, therefore, making a rough environment for economic development and most particularly, foreign investing. This has led to the witnessing of a figure of reforms by the Nigerian electricity sector.

The purposes of the reforms were to make efficient and effectual electricity which in bend will hike the Nigerian economic system. The recent of these reforms is the unbundling/privatization of the electricity sector.

This paper seeks to discourse the world of this reform. The paper utilizing the electricity reform in England as a guidepost will analyze grounds for the failure of the reform and will province if Nigeria can integrate a thing or two from England ‘s experience.

The Paper finds in its decision that despite the fact the Federal Government of Nigeria had unbundled the so NEPA, the 18 ( 18 ) Companies created are still yet to be privatized, this means that the intended mark of the reform has still non been met. This relevant inquiry is: is it excessively early to do decisions as to the success or failure of this reform? In reply to this inquiry, the Paper finds that four old ages is sufficient clip to find the world, successes or failure of the reform.

The Paper is divided into four Sections. Section 2 gives the background of the Nigerian electricity sector and discusses the present reform. Section 3 looks at England ‘s experience and lessons Nigeria can integrate. Last, Section 4 contains the decision and recommendations ( if any ) .

2. BACKGROUND OF STUDY:

Nigeria ‘s experience with electricity coevals foremost started in 1896 at Igor, Lagos, “ when the British colonial authorities produced the first electrical energy in Nigeria ”[ 3 ]. The undermentioned old ages, ( 1929, 1951, 1962 and 1972 ) severally saw:

“ The Nigerian Electricity Supply Company ( NESCO ) commenced operations as an electric public-service corporation company with the building of a hydro electric power station at Kura, near Jos “ ;[ 4 ]

“ The constitution of the Electricity Corporation of Nigeria ( ECN ) to command the Diesel and coal workss, and besides distribution and sale electricity ” ;[ 5 ]

“ The building of the first 132kv line associating Igor power station to Ibadan power station ” ;[ 6 ]

“ The constitution of the Niger Dams Authority ( NDA ) , with the mandate to develop the hydropower potencies of the Country, the building and care of the dikes and other plants on the River Niger ” ;[ 7 ]

“ The meeting of ECN and NDA to organize the National Electric Power Authority ( NEPA ) which had the authorization to pull off, keep and supervise electricity production in Nigeria ” .[ 8 ]

Decree No. 24, which creates NEPA, gave it the statutory monopoly to bring forth, transmit, distribute and supply electricity throughout the Federation.[ 9 ]“ NEPA ‘s duty cut across the Nigeria territorial boundary lines as it was besides responsible for the supply of electricity in the neighbouring States of Chad and Benin Republic ” .[ 10 ]

NEPA ‘s beginnings of support were the cardinal authorities budgetary allotments through the Energy Ministry and loans from many-sided establishments.[ 11 ]“ The authorities besides controlled all procurances and foreign exchange minutess ” .[ 12 ]

Nigeria ‘s primary fuel beginnings for electricity are chiefly coal, oil, gas and H2O. Nigeria, fortuitously, is rich in these resources, therefore, supplying for their handiness.[ 13 ]NEPA owned and operated a greater portion of the installed capacity, which every bit at 1998 was 6,000MW[ 14 ]. However, much of this capacity is non-operational doing bring forthing capacity scope between 1500MW and 2500MW.[ 15 ]

This immense disparity between installed capacity and bring forthing capacity resulted in the Electricity sector being characterized by recurrent outages and epileptic power supply. Reports show that “ 45 % ( 45 ) of the Nigerian population have entree to electricity, whilst 30 % ( 30 ) of this population have their demand being met. The population in inquiry is those in urban countries. The effect of perennial power outages is that 90 % ( 90 ) of industrial clients and a important figure of residential and other non-residential clients provide their ain power ” .[ 16 ]

A figure of grounds have been given for this inexplicable state of affairs, where a state in malice of its abundant gift with the resources needed to fuel its electricity sector, still can non bring forth sufficient electricity to run into the demand of it public. These grounds are:

“ 36 % ( 36 ) of installed capacity are over 20 old ages old ; 48 % ( 48 ) are over 15 old ages old, and 80 % ( 80 ) are over 10 old ages old. This clearly shows that the machines are disused, in desperate demand of rehabilitation and replacing ” .[ 17 ]

“ In equal support, misdirection of public-service corporation ( deficiency of care and usage of deficient stuffs ) , electricity larceny ( from illegal connexions ) , non-payment of measures by consumers ( the authorities parastatal are ill-famed for this ) , proficient loses ( high energy system losingss to the melody of 30 % – 35 % from coevals to charge )[ 18 ], hooliganism, corruptness, and so ”[ 19 ];

2.1 AN ANALYSIS OF THE NIGERIAN ELECTRICITY SECTOR REFORMS:

Propelled by the deficient electricity supply, relentless power outages, low bring forthing capacity, high proficient losingss and non-technical loses qualifying the electric sector, the Nigerian authorities embarked on a figure of reforms to change by reversal this tendency.

In 1988, the Commercialization and Privatization Decree No 25 came into force. The Decree made commissariats for the Commercialization of Nigerian Public Enterprises, NEPA, inclusive. The Decree provided for both full and partial commercialisation.[ 20 ]NEPA fell under the class of public endeavors to be partly commercialized.

This reform still did non acquire the coveted consequence of bring forthing an efficient Electricity sector. This led to the present reform, which includes Restructuring ( unbundling ) and Privatizing the Electricity sector.

The present Reform started in 2000 with the formation of the Electric Power Implementation Committee ( EPIC ) . This Committee prepared the National Electric Power Policy ( NEPP )[ 21 ]in 2001 and Electric Power Sector Reform Act ( EPSRA ) 2005. The ESPRA is the legal backup for the Reform ; it besides “ removes operational and regulative duties of the electricity sector from the federal authorities ” .[ 22 ]

As stated above, the Reform has two constituents, which are reconstituting and denationalization. This bundle involved “ alteration in the industry construction, with the purpose to excite competition, pick and advance fiscal answerability ; unbundling into constitutional factors ( coevals, distribution and transmittal ) ; set uping commercial trading agreement, and eventually, alteration in control and/or ownership of the Electric Utility ”[ 23 ]

The purpose and aims of the Reform includes:

“ Improvement in the public presentation and the operation of the public-service corporation through increased private sector engagement ”[ 24 ]

“ Private sector investings ”[ 25 ]

“ Meeting current and future demand for electricity ”[ 26 ]

“ Establishing new market structure/rules and trading agreement ”[ 27 ]

“ Puting up an independent regulator to supervise the personal businesss of the sector ”[ 28 ]

“ Promote competition, transparence and efficiency ”[ 29 ]

The reform procedure kicked off in 2005 with the unbundling of NEPA into 11 ( eleven ) distribution companies, 6 ( six ) coevals companies, a individual transmittal company, and the incorporation of an initial keeping company ( Power Holding Company of Nigeria Plc. [ PHCN ] ) .[ 30 ]

The Reform proposes that a individual subordinate will command the transmittal sector go forthing the six bring forthing companies and expected independent power manufacturers to sell electricity to the 11 distribution companies. The distribution companies will in bend, command the supply of electricity within a designated geographical country.[ 31 ]

Fig. 1 shows the expected end of the Reform procedure[ 32 ]

Beginning: Adoghe, A.U. , et Al ( 2009 ) .

2.2 SIGNIFICANT STAKEHOLDERS IN THE REFORM PROCESS

The Federal Government ; Under Para. ( 13 ) & A ; ( 14 ) Part II Second Schedule of the 1999 Constitution of the Federal Republic of Nigeria,[ 33 ]both the Federal Government and the State Government have concurrent legal power with respects to ordinance of the electricity sector. Nevertheless, the State authorities engagement in electricity proviso is limited to “ supplies in the rural countries through the Rural Electrification Board ( REB ) where there is no NEPA ( now PHCN ) supply ” .[ 34 ]

The Federal Government is “ the instigator of the reform procedure ; it has the paramount and supervisory authorization to guarantee that precise Torahs, ordinances and steps are enacted to back up its policies refering to the Electricity sector.

The National Council on Privatization ; Established in 1999 by the Public Enterprises Act of 1999 with the primary intent of oversing and finding the economic, societal, and political aims of the denationalization and commercialisation of Public enterprises. NCP is the lead policy doing organic structure in charge of denationalization and commercialisation in Nigeria. Its supervising maps are exercised through the Bureau of Public Enterprise ( BPE ) .[ 35 ]

The Bureau of Public Enterprise ; Established besides in 1999 by the same Act, BPE was empowered to “ alter accent signifier commercialisation to promoting nucleus investors and advancing foreign investing in the denationalization programme ” .[ 36 ]The function of NCP and BPE in this present reform is to fix the 18 ( 18 ) companies created by the Unbundling for denationalization.

The Ministry of Energy: “ This is the Ministry in charge of the power sector in Nigeria. ”[ 37 ]This antecedently used to be duty of the Ministry of Power and Steel but in the command of making a more efficient power sector, the Ministry of Energy came into being in 2007. “ The Ministry is charged with formulating, monitoring, and rating of energy policy in entirety ” .[ 38 ]

Taking the duty of the Ministry of Power and Steel besides implies that the Minister can publish waies to the Nigerian Electricity Regulatory Commission ( NERC ) on “ affairs associating to the electricity supply procedure, such affairs are non limited to overall system planning and co-ordination. However, such waies must be consistent with the Constitution of the Federal Republic of Nigeria and the Electricity Power Sector Reform Act ( EPSRA ) ” .[ 39 ]

The Nigerian Electricity Regulatory Commission: The regulative supervising of the Electricity sector is divided between the Ministry of Energy and NERC. NERC is established as an independent and self-funding regulator. As provided under the ESPRA, it is the chief regulative organic structure for the Nigerian Electricity sector.[ 40 ]

NERC is vested with the powers to “ advance competition and private sector engagement ; set up or O.K. appropriate operating codifications and safety, dependability and quality criterions ; licence and modulate individuals engaged in the coevals, transmittal, system operation, distribution and trading of electricity, monitor the operation of the electricity market, and so on. ”[ 41 ]

3. CURRENT POSITION IN NIGERIA:

The reform was suspended for two old ages after the present disposal came into power in 2007[ 42 ]. As it stands at present, PHCN has been restructured into the18 ( 18 ) separate companies but these companies are still yet to be privatized. Therefore the companies are still subsumed under PHCN, doing them subordinates. The Yar’Adua disposal when it took over centralised an already decentralized PHCN.[ 43 ]

The reform was intended to be done in stages and different timelines. PHCN was to be a transitional company that will reassign its assets and maps to the 18 replacement companies and so fade out after the incorporation of the 18 ( 18 ) companies ; conveying about a true ownership unbundling.

In kernel, traveling by the definitions given above, the reform that can be said to be in topographic point in the electricity sector is Corporatization/Commercialization and non the intended Privatization/Ownership Unbundling. PHCN remains a vertically incorporate company. So what took topographic point was merely a alteration of name and nil more. The position remains the same ; “ the Nigerian electricity sector still follows the common signifier of organisation referred to as the Sectorial theoretical account ” .[ 44 ]

The Yar’Adua disposal, traveling in line with its “ Seven Point Agenda 2008 – 2011 ” , in 2009 decided to travel in front with the Electricity sector reforms. To confirm its earnestness on the reform, the Federal Government had set “ a mark of bring forthing 6,000MW[ 45 ]operable power coevals capacity by the terminal of December 2009 and besides the mark of 10,000MW operable power coevals capacity by the terminal of 2011 ” .[ 46 ]

The Federal Government hopes to accomplish this mark through rehabilitation/continued rehabilitation of the necessary transmittal and distribution substructure, care of bing power workss and transit substructure, and commissioning of new power Stationss. It is expected that by the first one-fourth of 2010, the first power station will be commissioned.[ 47 ]

In add-on, transitional direction boards are being created for each of the replacement companies. This will let them to transport out their personal businesss, every bit good as budgeting and investing, with no intervention from the PHCN. Furthermore, the BPE anticipates that by the terminal of 2011, it will restart work on the denationalization of the replacement companies[ 48 ]

To this point, the Paper has discussed the current state of affairs in Nigeria as respects the Reform. The following subdivisions will look at England ‘s experience, what Nigeria can integrate from it and besides the world, success or failure of the Reform of the Nigerian electricity sector.

3.1 ENGLAND ‘S EXPERIENCE IN REFORM OF ITS ELECTRICITY SECTOR:[ 49 ]

Before the Paper discusses the above issue, it is pertinent to understand the influence the electricity industry system will hold in a state chief aim in transporting out a reform in the sector.

Chiefly, two classs of electricity industry system exist. The first system is one with sufficient capacity to run into demand, in which instance the reform procedure is intended to make competition between bing installations with the purpose of cut downing monetary value or to minimise monetary value rises, or to present a more efficient engineering. England is an illustration of such system.[ 50 ]

The 2nd system on the other manus, lacks sufficient capacity to run into demand. Therefore, the reform procedure in this system is carried out with the nucleus aim of supplying farther entree to financess for investings. Most underdeveloped states fall into the 2nd class. This means that they can non afford to construct new substructures and are hence are compelled to take on some grade of liberalisation to allow domestic and foreign companies build new workss. Nigeria falls into this class.[ 51 ]

This of course sets the tone in understanding the cardinal nonsubjective behind England ‘s reform procedure.

Prior to 1990, England operated a Sectorial theoretical account in its electricity industry. The Central Electricity Generating Board ( CEGB ) was the public vertical integrated public-service corporation that owned and operated the power Stationss every bit good as the transmittal and distribution of electricity supply. It sold approximately 95 ( 95 ) % of its production to the regional country boards, which in bend distributed and supplied power within their local development Zones.[ 52 ]This was de facto, a vertically incorporate monopoly.[ 53 ]

The Reform procedure began in 1988 with the “ White Paper: ‘Privatizing Electricity ‘ which stipulated the regulation reform. This was backed by the coming into force of the Electricity Act 1989, which on its ain portion “ provided the model on which the industry was privatized ” .[ 54 ]

“ By April 1990, the nationalized monopoly construction ( CEGB ) that had existed for approximately 40 ( 40 ) old ages, was replaced with one that introduced private ownership, competitory markets and independent ordinance. ”[ 55 ]

The CEGB was divided into four different companies. They are:

Transmission was formed into a separate company called the National Grid Company ( NGC ) ; which had the function of puting common conveyance duties for all users of the high-voltage web and was besides in charge of works despatch.[ 56 ]NGC had “ the statutory right to function as the non-profit devising Independent System Operator ( ISO ) . It was the lone public-service corporation licensed to run the national transmittal system ( NTS ) with the 12 RECs functioning as joint proprietors of the Grid ” .[ 57 ]To guarantee independency from the regional distribution and supply companies, NGC in 1995 was sold to the populace.[ 58 ]

Coevals was divided into three companies – National Power ( NP ) , PowerGen ( PG ) , and Nuclear Electric Power ( NEP ) . In 1991, 60 ( 60 ) % of NP and PG were sold to the populace and in 1995, the staying 40 ( 40 ) % was sold. NEP remained in public ownership but in 1996, portion of it was privatized.[ 59 ]

Besides as portion of the reform, the Area Boards were privatized into Regional Electricity Company ( REC ) , presenting competition at the supply terminal. The RECs “ where to hold monopoly command over the wires, but would be capable to increasing competition in retail supply to concluding clients. RECs moreover, had permission to have some of their ain coevals ” .[ 60 ]

The Electricity Act 1989 what ‘s more, established the station of the Director-General of Electricity Supply ( DGES ) with the responsibility to modulate the natural monopoly wire concern of the NGC, the RECs. The Act makes it an offense to bring forth, transmit, or supply electricity without a licence issued by the DGES.[ 61 ]The DGES carries out its maps through the Office of Electricity Regulation ( OFFER )[ 62 ].

A mandatory power pool was established to convey about competition in the Electricity sector. It applied to generators and providers.[ 63 ]“ This system was a mandatory majority electricity topographic point market that determined the virtue order and sweeping monetary value of electricity ” .[ 64 ]

In malice of the fact that it was one of the first organized sweeping electricity markets, the ‘pool ‘ proven unsatisfactory in some facets, taking to its replacing by a new trading mechanism – the New Electricity Trading Arrangement ( NETA ) . “ NETA is a classical bilateral market that utilizes different continuances of Power Purchase Agreements ( PPA ) to sell power wholesale ” .[ 65 ]

A figure of things made the reform a success but there are two outstanding facets, which even led to doing England ‘s experience a templet for liberalising electricity market. They are Regulation and NETA. The Regulator has the primary end to “ protect the involvements of consumers, promote effectual competition ; it has the power to publish licences, modify licences, set monetary value controls in the natural monopoly licensed sectors, investigate and punish licensees who breach their licence ” .[ 66 ]

3.2 WHAT CAN NIGERIA INCOPORATE FROM ENGLAND ‘S REFORM EXPERIENCE?

It can be argued that the Nigerian reform and England ‘s reforms were propelled by different nucleus aims ; however, it does non intend that Nigeria can non integrate a thing or two from England ‘s experience. This stems from the fact that the Nigeria ‘s electricity reform geared along the lines of England ‘s reform: ( ownership ) unbundling/privatization.

One facet Nigeria can integrate is set uping an Independent regulator that is non influenced by authorities ‘s determinations or constabularies as witnessed in England ‘s reform ( that is Ofgem ) . There is no challenging the importance of this to the success of the reform procedure.

At present NERC, which is the chief regulative organic structure, can non be said to be independent, ground been that the Minister of Energy “ can publish waies to it in affairs associating to the electricity supply procedure, and this is non limited to overall system planning and co-ordination ”[ 67 ]. The Ministry of Energy is besides involved in modulating the electricity sector. This does non give NERC the sort of independency it needs to transport out its maps without authorities ‘s influence.

The facet of trading mechanism, that is NETA, can be adopted to advance and ease competition in the electricity market. That is pending when the Reform swings into full gesture.

4. Decision:

The Electricity Sector Reform foremost is non yet a world as soon programs are still being made to implement it. Though constructions have been put in topographic point, for illustration the ESPRA 2005 and NERC the Reform is yet to be a world, as marks have non been achieved.

Lack of political will has been a major job in the execution of policies. There is besides deficiency of policy-continuity as every new disposal comes in with its ain docket and policies. This creates a unstable environment which discourages both domestic and foreign investor engagement in the Reform.

The Yar’Adua disposal has set the mark to get down denationalization of the unbundled replacement companies by the terminal of 2011. The job here is that by 2011, a new disposal should be in topographic point. The important inquiry here is: how certain are prospective investors that history will non reiterate itself? That is, the Reform will non be suspended once more by the new disposal as was done by the Yar’Adua disposal. This is a inquiry that lone clip can give an reply to, which unluckily Investors do non play with and are really witting.

Until the Nigerian authorities gets this facet right, the Reform unluckily might stay a myth.

In decision, in order to do the Reform a success, the following issues need to be addressed: foremost, there should be a “ rehabilitation and overhauling of the coevals, transmittal and distribution webs as a whole. Second, the institutional assignment should be based on standards such as expertness ( managerial and proficient forces ) instead than political favoritism. Third, over-dependence on abroad maker for the supply of power works equipment, installations and trim parts should be reduced and local fabrication promoted ” .[ 68 ]Last, political will is important in order to do the Reform a success.