Power Sector Liberalization and Capacity Shortage

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By FELIX AYANRUOH
Introduction: Nigerian has one of the most problematic electricity sectors in the world, with an estimated installed electricity generation capacity of 8,644 MW, and available capacity of only approximately 3,200 MW, to cater for the needs of a population of about160 million. By comparison, South Africa, with a population of just 50 million, has an installed electricity generation capacity of over 52,000 MW.
The historic gap between the demand for electricity and the available capacity has led to the current widespread power shortage and inefficiency and, consequently, self-generation of power by both industrial and residential consumers. It is self-evident that the poor performance of the electricity power sector in Nigeria has been a significant barrier to private investment in the country and to overall development and economic growth. The sector’s market structure, like most economies of the developing world, is dominated by the state-owned power entity – National Electric Power Authority (“NEPA”) – in a monopolistic, vertically integrated business model.
The dissatisfaction with the performance of NEPA – symptomized by its low capacity generation; high costs; inadequate distribution of electric power; inability to finance new or expanded infrastructure; and inadequate machinery for effective billing and collection of bills – fueled the debate on the theoretical and empirical justification for its involvement in Nigeria’s electricity power sector, and became the driving force behind liberalization.
Heuristic analyses, by experts in the field such as Robert Bacon, and John Besant-Jones of the World Bank, conclude that the process of reform and liberalization of a capacity-deficient electricity power sector such as Nigeria’s, should include the introduction of competition, unbundling of services, development of independent economic regulation and operating according to commercial principles.
History of Reforms
Beginning in 1896 when electricity was first produced in Lagos and continuing to the establishment of Bureau of Public Enterprise (BPE), efforts have been continually made to increase capacity output through reformative legislation. But despite modifications to the statutory framework, the Nigerian electricity power sector continued to experience low electricity supply. In response, the Federal Government adopted the National Electric Power Policy (NEPP) in March 2001, with the principal objectives of attracting private investment and the establishment of an independent regulatory agency.
The Electric Power Sector Reform Act of 2005 (EPSR) codified those objectives, creating a new legal and regulatory framework for the sector, including the elimination of NEPA and privatization of its successor companies; establishment of the Nigeria Electricity Regulatory Commission (NERC) and the Rural Electrification Agency; and a Consumer assistance fund to bridge the funding gaps for low income earners.
The Failure of Reforms
After five years of implementation of the 2005 Reform Act, the liberalization process is mired in intractable challenges. Power shortages, poor operational performance, a lack of foreign investment, the absence of a sustained and deliberately deployed long term power development strategy, under-exploitation of the nation’s abundant energy endowments and the inadequate implementation of reforms, were readily conceded by Government in the Presidential Road Map of 2010. In a nutshell, liberalization has not enjoyed the predicted success.
The challenges facing liberalization can be summed up as both institutional and regulatory. In order for liberalization to attain its objectives, the government must have political will to allow for a captive-free regulation regime.
Like many countries, Nigeria provides subsidies (explicitly or implicitly) to producers and consumers of electricity. Justifications vary from social welfare protection, job creation, the encouragement of new sources of energy supply, and economic development to energy security. Consequently, the government is faced with the dichotomous dilemma of formulating a tariff structure to incentivize power generation and distribution, on the one hand; – and social engineering of the market through subsidies for the benefit of the economically disadvantaged, on the other.
It is axiomatic (and supported by the empirical evidence) that corruption discourages private investment, retards growth and inhibits poverty reduction efforts. In the energy sector for example, the delivery of energy moves from generation to transmission, to wholesale distribution and finally to retail distribution. Corruption can occur anywhere along the line. In generation, for example, it can occur in the licensing stage – where government officials might be tempted to ask for kickbacks in the issuance and renewal of generation licenses.
Furthermore, because management of public finance is crucial to the sector’s performance, the corrupt practices of exploiting vulnerabilities on both the expenditure and revenue sides of public finance, have been deleterious factors in the cycle of failure, inefficiencies and capacity shortage in the power sector. The creation of the Economic and the Financial Crimes Commission (“EFCC”) and the Independent Corrupt Practices and Other Related Offences Commission (“ICPC”) are testaments to the endemic nature of this vice. The recent investigations by the Nigeria legislature into the abrogation of the oil subsidy and the privatization of state-owned entities have further exposed graft by both government officials and private participants in the petroleum industry. Clearly, therefore, mitigating the influence of corruption is sine qua non for the success of liberalization and capacity growth.
A peaceful end to the violent struggle for resource control in the Niger Delta region can also be a catalyst to capacity increase in the electricity power sector. The incessant and pervasive acts of sabotage on crude and condensate evacuation pipeline system which caused serious and protracted interruptions to the gas supply to power plant are obviously significant contributors to the power shortages.
Conclusion
The liberalization of an electricity power sector can be a cumbersome process whose impact is best assessed both short-term as well as long-term. At the same time, the success or failure can only be measured by past mistakes and corrective measures. The concerns about the liberalization process in capacity-short countries have centered on the process followed, the transition management and the final destination of the reform process.
As will be readily apparent from the foregoing discussions, a tremendous amount of effort and resources – both institutional and regulatory – have been brought to bear to adopt Bacon and Besant-Jones’s prescriptions on liberalization as a panacea for a capacity deficient electricity power sector. Yet, the problems persist. The question, then, is why? It is the author’s opinion that at every stage of the liberalization process a constant theme is the issue of corruption. Clearly, the leadership and the very entities charged with policy implementation have collectively failed to recognize – or just as likely, abdicated responsibility for – this endemic and corrosive social problem.
To advance the liberalization process towards its laudable objectives, I offer the following recommendations:
– A robust and radical reform to improve and strengthen both the regulatory and institutional framework, to enhance accountability and minimize corruption;
– For private investors, fiscal incentives and a climate of predictability through consistency in formulation and execution of policy;
– Resolution of the conflict in the Niger Delta region;
– Establishment of a permanent, special unit of the EFCC – dedicated to the Petroleum and Electricity Power sector, with independent powers of investigation, arrest, and prosecution – without recourse to the Ministry of Justice; and with powers of referral vested in the NERC.
Such a draconian approach is justified: this sector, after all, is the lifeblood of the nation.
Felix Ayanruoh is a US energy attorney licensed in the state of New York State and District of Columbia

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