Reform in the Energy Sector: Realising the Benefits

Transcription

1 Reform in the Energy Sector: Realising the Benefits Presented to 43 rd Annual Accountants Conference At the International Conference Centre and Sheraton Hotel & Towers, Abuja, Nigeria. by Engr. Beks Dagogo-Jack FNSE Chairman, Wednesday 09 October, 2013

2 Outline Reform: Nigeria s Power Reform The desired transformation The Power Sector Reform Roadmap Progress milestones Power Reform in Other African Countries PTFP Revised Power Delivery Projections Investment: Estimated Investment Requirements to match demand with supply including sustained system reliability Indicative Additional Annual Investment Profile Benefits & Opportunities: Dimensioning the potentials of the Nigerian Electricity Market and the Investment Opportunities Additional Technical Manpower Gains/benefits from Power Reform Threats & Mitigations: Major issues which can pose significant risks to full Reform Success 2

3 REFORM 3

4 REFORM: THE DESIRED TRANSFORMATION Before: Vertically integrated government-owned monopoly entities in the power value chain. Growing inefficiencies and leakages; annual capital drain from the Federal Budget Uncoordinated investments in generation, transmission and distribution. Misalignment of capacity reduced impact Huge widening gaps between demand & supply ; massive industry flight leading to worsening unemployment. High suppressed demand throughout Nigeria After: Multiple private-sector participants each with expertise in their area of the value chain; Sector less reliant on Federal Budget; Federal Budget focused on other social needs; Investments coordinated by market needs efficient resource allocation based upon contractual obligations; Multiplier effect on economy and increase in employment across multiple sectors and industries Suppressed demand met, and industrial and manufacturing sectors attracted (back) to Nigeria 4

5 REFORM: THE POWER SECTOR REFORM ROADMAP PROGRESS MILESTONES Timeline of Reform Milestones Establishment of NELMCO Jan2010 Implemention of Costreflective Tariff for Gas Sep2010 Reconstitution of NERC Oct2010 Establishment and Operationalisation of NBET Aug2011 Operationalisation of NELMCO Feb2011 Procurement of TCN Management Contractor Jun2012 Completion of Industry Agreements Feb2013 Execution of NEGIP/PRG Apr2013 Implemention of Costreflective Tariff for Power Jul2012 Establishment of Mid-term Transmission Funding Plan May2013 Presentation of TCN Network Expansion Blueprint Aug2013 Resolution of Labour Settlement Oct2013 Announcement of TEM Mar Aug2010 Launch of Roadmap for Power Sector Reform Jun2012 Execution of MoU for 30,000 MW Apr2013 Presidential Power Retreat Transaction Signing Summit 5

6 REFORM: POWER REFORM IN OTHER AFRICAN COUNTRIES Many countries in Africa have planned and embarked on a set of power sector reforms. Although each country has its own set of policy drivers primarily driven by performance concern at the commercial, technical, and financial levels and the need to attract new sources of finance to the industry. Despite this commitment to reform, progress has been generally slow and patchy. Few countries have moved beyond the establishment of new regulatory institutions, tariff reform, and in some cases, the implementation of IPPs and management contracts. There has been little effective utility unbundling or privatisation, and competition has not featuredbeyondafewcasesoftenderingfortherighttobuildnewcapacity. Nigeria s recent privatisation has been the most ambitious of all reform programs in Africa. Howeverwecanlookatsomeexamplesofothersjourneystoseewhatmaybeinstorefor our own. 6

7 Reform: Power Reform in other countries Country Ghana Total Power on grid (Installed Capacity) MW 2,270 Population (Million) as at Access to Electricity (% of Population) 60.5 GDP ($ Billion) as at Electricity Tariff($/kWh) 0.02 (Hydro) 0.05 (Thermal) Post Power Sector Reform Impact - Establishment of Regulatory Institutions, PURC in Fully cost-reflective prices and a lifeline tariff ameliorates the impact of tariff increases on the poor. - Improvements in service delivery however electricity customers continue to experience power outages and voltage dips. - Fee-for-service arrangements for off-grid systems are slowly being introduced due to the inability of rural communities to pay for appliances or service consumed. - Lack of tariff incentives for distributors to engage in rural electrification has kept investors from entering market. - Social services: students performance was largely correlated with the availability of power at home and school. - Economic activities: ongoing electrification programs in Ghana, have stimulated poor people s ability to start small businesses and generate income and have somewhat stemmed rural-urban migration patterns. - Public Finance: The Volta River Authority (VRA) in Ghana has never paid taxes on its power operations to the government, but rather reinvests any excess revenues it would otherwise have distributed as dividendsand providingsovereign guarantees after privatization. - Provisionof renewable energy alternatives in urban areas and deployment of solar system to non-grid connected communities. Also, there is a widespread perception that off-grid systems are inferior to grid systems in quality and performance, which serves as a barrier to attracting and maintaining customers. 7

8 REFORM: POWER REFORM IN OTHER COUNTRIES Country Mali Total Power on grid (Installed Capacity) MW 375 Population (Million) as at Access to Electricity (% of Population) 30 GDP ($ Billion) as at Electricity Tariff($/kWh) 0.33 Post Power Sector Reform Impact - Establishment of Regulatory Institutions CREE in Tariff:Governed by the concession contract awarded in 2001 for EDM SA. Mali s is among the most expensive electricity tariffs in West Africa. - Quality and Reliability of Supply: Public and private investment in new capacity in Mali have brought about significant improvements in the quality and reliability of electricity supply, and new service standards have been introduced. - The standard of the electricity service has improved, limited fuel switching has been recordedand Fee-for-service arrangements for off-grid systems are slowly being introduced. - Social Services:School and clinic electrification has been achieved with both grid and off-grid.in most instances, grid services have been offered by public utilities and off-grid services are being installed and managed by private sector operators. Most times, subsidies are required to enable sustained service. - Economic Activity: Grid electricity access has created opportunity for new businesses in ice making, soft drink and ice cream sales, battery charging, welding, and bread making. Off-grid solar projects have assisted the development of retail shops, taverns, hairdressing salons, truck parks, and market points where solar street lighting has been installed. - Tariff increasehas brought suffering to small-business operators from increased electricity costs and have not been able to expand their business by increasing the number of people they employ. - InMali, electrification programs are said to have somewhat stemmed rural-urban migration patterns. 8

9 REFORM: POWER REFORM IN OTHER COUNTRIES Country South Africa Total Power on grid (Installed Capacity) MW Population (Million) as at Access to Electricity (% of Population) 75 GDP ($ Billion) as at Electricity Tariff($/kWh) 0.04 Post Power Sector Reform Impact - Establishment of Regulatory Institutions NER in Tariff: Wholesale electricity prices in South Africa have declined considerably over the past decade, driven by the financial effects of overinvestment in the 1980s. As Eskom has reduced its debt burden, as the depreciation of older plants has eroded with inflation, and as demand growth has taken up the surplus capacity, so the unit cost of power from Eskom has declined notably. - Quality and Reliability of Supply: The distribution industries remain fragmented and have yet to be restructured, quality and reliability of supply vary regionally and significantly. - Social Services: School and clinic electrification has been achieved with both grid and off- grid electricity. In most instances, grid services have been offered by public utilities and off-grid services are being installed and managed by private sector operators. Most times, subsidies are required to enable sustained service. - Economic Activity: Tariff increase has brought suffering to small-business operators from increased electricity costsandhavenotbeenabletoexpandtheirbusinessbyincreasingthenumberofpeopletheyemploy. - Public Finance: Eskom in South Africa was corporatized in 2001, but in each subsequent year, the government has agreed to substantial deferment of taxes and their dividend policy is flexible; the government often accedes to Eskom s requests for financing non-electricity-related activities. 9

10 REFORM: POWER REFORM IN OTHER COUNTRIES Despite concessioning or handover of assets, Reform is an on-going process. Significant investments will be required to maintain and grow network going forward the private sector will cherry-pick. Progress appears urban-based. Significant focus needs to be paid to creating viable power solutions for rural communities: ability to pay and remoteness of locations does not attract investors. If power is for all, then increased deliberation will be required to bring solutions here. Continued Government support in various forms is required especially for rural power, including: Financial/ capital investment in non-commercial projects; Fiscal incentives to promote re-investment; Direct market support and subsidy. 10

11 REFORM: PTFP REVISED POWER DELIVER PROJECTIONS PTFP has conducted a revision ( Revision 1 ) of the original Roadmap. Above are the current projections for Available Generation Capacity. For this level of power to be developed and delivered depends on various factors, most notably: Development and expansion of the transmission grid; Contractual agreements for gas supply to initiate gas-field development; Human capacity development; Availability of funding. 100 MW of Generation implies approx. US$ Million of investment across the fuel to distribution value chain. 11

12 INVESTMENT 12

13 INVESTMENT: INDICATIVE ANNUAL INVESTMENT PROFILE Gas Pipeline Infrastructure approx. 4.5 BN USDuntil 2017 Gas Processing for power and industry c. 400 M USD/annum Generation Forecast of 2.5GW/annum across all fuel types till 2020 > 3BN USD/annum Transmission BN USD/ annum to 2016; 1.5 BnUSD/annumtill 2020 with Transmission funding structures concluded. Distribution Will be determined by new private sector owners Capacity growth forecast for private sector estimated at MVa/annum Manufacturing Local manufacture of power equipment supported by proposed Local Content legislation. Growth in manufacturing capacity with power improvement. Capacity Development Current (2017) forecast shortfall * of 17,441technical staff based on completion of NIPP and FG projects. Does not include new owners requirements * NAPTIN 2012 Human Capacity Report 13

14 INVESTMENT: INDICATIVE ANNUAL INVESTMENT PROFILE # Segment Description Projected Investment USD bn 1 Gas Fuel for OC /CC GT plants Infrastructure: Main lines CAP/ AKK/ OB3/ ELPS2 =4.2 BnUSD Minor lines and interests ~ BN USD Processing: M USD / 100 MMscfpd 2 Generation Generating Plants & Facilities Current Projections: (All fuel sources) 2.5 GW/Annum (All Sources) ~3BN USD/Annum 3 Transmission Bulk Power Wheeling BN USD/ Annum( ) Infrastructure BN USD/ Annum(after) 4 Distribution Retail Power Wheeling infrastructure 5 Local Manufacturing 6 Human Capacity Building Of accessories /import substitution Across the market & the regulatory requirements Capacity Projections: 3,500 4,000 MVA/ annum until 2020 for all DX regions 2.0 BN USD/ Annum Estimates will depend on actual data from returned industrial demand. (See following chart) 14

15 THE BENEFITS 15

16 BENEFIT: DIMENSIONING THE INVESTMENT OPPORTUNITIES Large and growing population: Over 160 million population in over 23 million households. Annual population growth of 2.3%/ annum. Not just a ready electricity market but a huge general consumer market for the spin-offs of improved electricity. Large deficit in access of electricity supply: Current supply penetrationof less than 40% urban and under 25% rural. This is against the background that gross rural population far outstrip urban population by not less than 2.5 times. Low current installed and available generation capacity: Current total installed generation capacity is under 10,000MW (including the NIPP assets in view) currently operating a pre-reform level of under 50% efficiency whilst aggregate demand including returning suppressed / migrated industrial demand lie in the region of 18,000MW with a minimum annual demand growth rate of 15%. A huge market waiting to be tapped. Diverse Energy mix available: Nigeria is richly blessed with abundant alternative fuel sources natural gas, coal, small and large hydro, solar and wind. It possess the best mix for any long-term investor seeking to make the best out of these fuels sources. Huge multiplier effects on the economy: Nigeria possesses the best African potential for translating electricity expansion into a very diversified economic base for sustained GDP growth from manufacturing, mineral mining and agriculture with significant returns to investors and improvement in standard of living indices for the citizens employment, wage increases, lifestyle &health benefits, etc 16

17 BENEFIT: ADDITIONAL TECHNICAL MANPOWER ADDITIONAL TECHNICAL MANPOWER REQUIRED FOR DISTRIBUTION, TRANSMISSION & GENERATION AT PRESENT AND IN NEXT 5 YEARS BASED ON EXPECTED EXPANSION IN THE SYSTEM 17

18 BENEFIT: GAINS/BENEFITS FROM POWER REFORM Power Reform is a major plank of the Transformation Agenda of this administration and will impact the Power Sector and the National Economy. Increase in power sector generation levels Post-handover capacity projections are expected to step up nation s power generation with a growth rate of 20% per annum to the end of the decade. Opportunities: ancillary industries required. Increase in power sector employment Shortfall of over 17,000 technical personnel at current capacities. Increase in capacity caused by new investment will add to this shortfall. Opportunities: private-sector training operators. Increase in power sector investment The reform and privatisation processes will bring enormous investment creating a self-reinforcing and virtuous cycle of growth and investment in sector and economy. Opportunities: financial sector growth Improvement in business conditions: Expected power improvements will attract more investors in other economic sectors, prompting presently unemployed Nigerians into full or partial employment. Opportunities: economic sectors developed. Development of new goods and services As sector improves and develops business opportunities will arise: from equipment manufacture and maintenance to collection and marketing companies. The construction industry will benefit from the significant engineering works due to sector expansion. Opportunities: spin-off industries. 18

19 THE THREATS 19

20 THREATS & MITIGATIONS: MAJOR ISSUES & RISKS TO REFORM SUCCESS To successfully achieve these benefits it is necessary to identify the risks and issues to the ongoing reform and mitigate against these. With any market-based approach, a hands-off attitude is usually associated with its success; however this more appropriate to mature markets. With a nascent market, such as ours, the emphasis should be on guiding and guarding the market to stability and self-reliance. The Government is conscious of this and will through its supervising Ministry provide close monitoring during the infant stages of this market. At this stage of development the overriding primary risk is a drop in market confidence resulting in a drop in market investment which could reverse the self-reinforcing cycle of increasing growth and investment in the market. 20

21 THREATS & MITIGATIONS: IMMEDIATE ISSUES & RISKS TO REFORM SUCCESS GAS SUPPLY DISRUPTION Increasing cases of pipeline vandalism disrupting gas supply to power plants PRESIDENTIAL-LEVEL SECURITY REVIEW UNDERWAY TRANSMISSION FUNDING A clear & reliable medium-long term transmission funding & management system must be in place to underpin the projected sector growth MID TERM FUNDING PLAN DEVELOPED 2013/Q2. TCN EXPANSION PLAN AUG-2013 EFFECTIVE REGULATION A proactive, deliberately market nurturing disposition with readiness to apply timely statutory regulatory instruments for market stabilisation whilst ensuring the customer remains in focus at all times. NERC RAMPING UP HUMAN CAPACITY. SIGNIFICANT EMPLOYMENT DRIVE LABOUR Post-Handover: Labour scontinued patriotism key to successful conclusion of the reform PRIVATE SECTOR-LED MARKET MORE RESPONSIVE TO EMPLOYEES. DISTRIBUTION LOSSES A robust downstream loss reduction implementation and monitoring program is critical to sustenance of market liquidity. POST-HANDOVER, NEW OWNERS TO IMPLEMENT LOSS PROGRAM AS SET OUT IN TRANSACTION DOCUMENTS. THE TECHNICAL SKILLS GAP Current (2017) forecast has a shortfall * of 17,441 technical staff based on completion of NIPP and FG projects. Does not include new owners requirements Labour should partner with Government to take full advantage of the opportunities here. FMOP & NAPTIN TRAINING ENGINEERS, PRIVATE SECTOR OPPORTUNITIES ABOUND * NAPTIN 2012 Human Capacity Report 21

22 THREATS & MITIGATIONS: LONG-TERM ISSUES & RISKS TO REFORM SUCCESS RURAL POWER POLICY Crafting a viable solution for private sector involvement in rural power is critical to solve the power issue on a national level. NATIONAL PLANNING Power is a critical but only one component of national development. Having a credible National Development is key to having a credible Power Sector Development plan and maintaining sector confidence and investment. FUNDING & INVESTMENT Current projections require multibillion dollar investments over the coming years. Development of local banking and capital markets to support sector is critical. * NAPTIN 2012 Human Capacity Report 22

23 PARTING COMMENTS: By general observation I would like to use this opportunity to comment on 2 key areas where your noble institution can make significant contribution to our national development efforts. First is the pro-active engagement with the statutory institutions managing our monetary policy with your positions made known for public consumption. The second is through pro-active initiatives to promote new laws. This is because within the current globalisation context, every nation shall be as progressive and as competitive as its laws allow. I strongly believe that your noble institution should be at the forefront of law-making in the areas of your expertise. We certainly cannot resign our nation s law-making to a handful of people. 23

24 Thank You 24