California Energy Markets / Bottom Lines
[August 4, 2017 / No. 1448]
Nigeria's Power Dilemma Highlights U.S. Electric System
Imagine for a moment that California, with a population closing in on 40 million, relied on 6,000 MW of capacity to serve its electricity needs. That would be the equivalent of the Diablo Canyon Power Plant, the San Onofre Nuclear Generating Station, and the Alamitos Generating Station serving the entire state.
It's a far-fetched scenario—at least in the Golden State, which grew its in-state installed electric capacity by more than 22,000 MW, or 42 percent, between 2001 and 2016, and where lengthy outages are investigated and utilities possibly fined for leaving the lights off for too long.
That's why I was fascinated reading guest columnist Phil Jones' account of his recent trip to Nigeria, the seventh-largest country in the world by population, where no power plants have been built since 1990. While Nigeria's population has more than doubled since 1990, to 192 million, the country still subsists on an installed base of 6,000 MW of electric capacity. Nigeria's relatively new independent electricity regulator faces huge challenges, as Phil shows in this worthwhile read, even as it has an opportunity to get it right. -M. S.
After visiting Nigeria in May on behalf of a weeklong training mission of the National Association of Regulatory Utility Commissioners' International Division, sponsored by the U.S. Agency for International Development, I came away excited about the country's potential opportunities, yet depressed and dejected at the same time about the outcomes so far. I learned a great deal about the struggles of developing countries in sub-Saharan Africa, with over half their population lacking access to grid electricity, while also facing huge problems of poverty, a recession due to low crude-oil prices, and the "resource curse" of failing to manage a rich endowment of natural resources for investments in infrastructure, education or social development.
Yet Nigeria also has a large pool of human talent and great economic potential, with a large class of educated officials in electrical engineering, accounting, law and public policy.
Let me start with the enormous scale and nature of the electricity challenges for Nigeria, which competes with South Africa to be the largest economy in Africa. No new generation plants have been built since 1990, and capacity has been stuck at 6,000 MW for a couple of decades.
That's less than the combined capacity of PacifiCorp in its six-state region, or a mid-sized investor-owned utility in our country.
This stalling out has occurred despite some periods of rapid economic growth in the last two decades, and achieving a gross domestic product of about $570 billion for a population of about 190 million.
As with many sub-Saharan countries, Nigeria's per-capita electricity consumption is a meager 160kWh per year. Compare this to the average Avista electric customer's consumption of 950 kWh per month. This is truly electricity poverty, and illustrates the overall failure of the energy system in Nigeria.
We began our mission by visiting each layer of the electricity system—a generation plant (GenCo), transmission operator, and the distribution company (DisCo) with direct customer engagement—along with five new members of the Nigerian Electricity Regulatory Commission (NERC) and other officials.
It was a long and tiring day. In the morning, we boarded a speedboat that traversed the lagoon in Lagos to visit the Egbin power plant, the largest in Nigeria, with an installed capacity of 1,320 MW of single-cycle gas turbines.
We immediately saw that the units were operating way under capacity factor, at just over 40 percent, due to the lack of adequate supply of natural gas and the absence of clear signals from the bulk trader and the grid operator regarding regular dispatch. In addition, we quickly learned about the lack of an adequate compensation system, liquidity problems, and growing liabilities on the plant's balance sheet.
We then visited a substation and control room of the grid operator, where we clearly observed tensions with the DisCos over the allocation of power under an opaque system of daily curtailments—or what it called percentage allocations to the DisCos.
By the end of the day, and many strong and heated arguments, people were tiring and emotions were rising.
Within minutes of reaching the distribution utility late in the afternoon, we witnessed a heated debate in the parking lot among the most senior officials about which side was more to blame for the curtailments and percentage allocation of power.
The DisCos have become the Achilles' heel of the entire system.
As a former Washington regulator, I had to step back and take a deep breath. It was frank, candid and emotional, and I was thinking, "Wow, could we ever have such an exchange of views in the parking lot of Puget Sound Energy or the hearing room of the UTC, with all of our rules, processes, and evidentiary proceedings?" These exchanges were in the open, raw and interesting to observe; but to me, they represented the collective frustration of utility executives and regulators in a system that had broken down and was not serving the people of Nigeria.
For many decades, the state-owned monopoly National Electric Power Authority dominated all aspects of the country's electricity supply chain: generation, transmission and distribution. Management was poor and arrogant, by many accounts; service quality was poor, the federal government did not provide sufficient capital for modernization and upgrades, and corruption and political interference was rife. A path-breaking privatization bill finally passed in November 2005, with the expectation that as more efficiencies were achieved, aggregate losses and poor collections due to theft and corruption would be remedied.
DisCos in particular would improve their financial performance and have access to domestic and international capital markets.
The legislation established Nigeria's electricity regulatory commission (NERC) and privatized the generation sector. The federal government continued to own and operate the transmission operator, given its critical role in dispatching power to the DisCos and the recognition that electricity is an essential service. The transmission operator initially contracted out operations to Manitoba Hydro under a two-year contract, but that proved unsuccessful.
It also created a federal national bulk electricity trader, for the alleged purpose of guaranteeing a certain liquidity in payments to generators and introducing market-based contracts.
Finally, and most importantly, the legislation spun the distribution utilities off into 11geographic distribution companies that were privatized, but subject to full economic regulation by the new NERC, which would have to approve new tariffs and terms of service.
So, what happened, and what went wrong? First,expectations from the 2005 privatization were set far too high at the outset without a full realization of how complex and technically challenging the electricity sector really is.
Second, the DisCos were the key to the success of the entire effort, with the expectation they would have efficient management, engage constructively with consumers, access domestic and foreign capital markets on reasonable terms, and take strong measures to reduce theft and losses. Unfortunately, none of this occurred, and the DisCos have become the Achilles' heel of the entire system, with huge cumulative losses, poor customer service and only modest improvement in theft and technical losses, resulting in an inability to pay their suppliers.
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The move toward natural gas-fired generation, with privately managed companies like Egbin, was perhaps a worthy goal but has been poorly executed. The bulk trader's role of providing liquidity to the generators and an assured payment mechanism has obviously not worked, even to allow the generators to fully operate existing capacity.
The natural gas supply system, from inadequate exploration to a pipeline system plagued by vandalism and poor maintenance, needs more capital investment and a streamlined regulatory process that coordinates better with NERC. If Nigeria wishes to provide incentives and better regulation to generators to build new capacity, this is a bottleneck that needs to be addressed quickly.
The government-owned transmission operator appears to suffer a serious lack of capital and adequate investment, and isstill operating under largely manual dispatch procedures with opaque processes and accountability.
Its relationship with the 11 DisCos over power scheduling appears to be seriously broken and is causing unnecessary tensions and disputes within the overall system. Moreover, there have been serious safety issues with its substations, including recent incidents of deaths by fires and electrocution, as some of these substations are near housing and apartment buildings.
Finally, the DisCos have not lived up to expectations of more efficient management and have not been able to reduce technical and commercial losses to the extent necessary. They are the direct link to the consumers, who are the vital link in the overall system, since ultimately they must be persuaded to give up their backup diesel generators or stop stealing power (more politely said, not paying for the kilowatt-hours they take from the grid) by tampering with on-site meters or simply refusing to pay.
Phil Jones, center, toured Nigeria's Egbin power plant with a group of utility regulatory and U.S. government officials. Photo courtesy Phil Jones
The new NERC commissioners recognize that improving the terms of consumer engagement is vital, and that the DisCos need to develop much better enforcement mechanisms as well as customer outreach on the vital importance of paying for and maintaining a robust distribution grid.
Finally, NERC's experience as the independent regulator with a chair, six additional commissioners and a staff of about 150 has been mixed. It has not yet provided the regulatory certainty that can both stabilize the huge liabilities in the system and provide incentives for new generation and better management by the DisCos.
We have witnessed three rounds of commissioners under different chairs, and most recently, no commissioners in place for a period of over 12 months. NERC staff is very competent, professional and hard- working, but should ideally be accountable to a body of collegial, hard-working commissioners who are ultimately accountable to the Nigerian Legislature and the executive branch. The independence of the commission from executive-branch and legislative interference has not been firmly established yet.
Meanwhile, both the federal government and international institutions recognize that this is a crisis and that electricity is an essential service for the people and economy of Nigeria. The Central Bank also is cognizant that the Nigerian banking system holds a large amount of outstanding debt from the DisCos and other companies in the energy system post-privatization. The federal government, through the Central Bank, therefore has stepped in to provide a $1.9 billion bridging loan to the bulk trader in order to provide some payments to the GenCos, the natural gas suppliers, and the banks with outstanding loans.
In addition, the World Bank is considering interventions totaling over $5 billion. While these injections of capital may be helpful in the short term, they do create the dilemma of moral hazard for the longer term.
Despite these enormous challenges and accumulating financial liabilities, there are some grounds for hope.
Perhaps the biggest asset is the human capital in Nigeria, with new commissioners and many utility people who are highly trained in electrical engineering, law, accounting, finance and public policy—and dedicated to Nigeria. They want to get it right and not repeat the mistakes of the past.
While the new NERC chair has not been confirmed and we did not have the chance to meet him (he was a professor at Howard University), the six new commissioners are capable, well trained, and are quickly learning on the job.
They are asserting their independence, knowing that they must remedy the situation of the DisCos and other parts of the electricity supply chain. Andthey know they have an enormous job to do in restoring credibility and trust with the Nigerian public and the consumers of electricity who ultimately will provide the cash to the system.
I came away from the trip with a cautious sense of optimism, but fully cognizant of the enormous task at hand for the new commissioners and the utility officials.
'I have a renewed appreciation for things like integrated resource planning and the importance of independent regulators.'
Moreover, I returned with a renewed sense of appreciation for what has been called by our engineers "one of the greatest engineering marvels in the 20th century"—the North American electricity grid. Yes, we have our challenges and problems; and believe me, as a commissioner for 12 years and president of NARUC, I spent many hours at conferences listening to people criticize our utilities, government policy, and our outdated, inefficient system of regulation, both at FERC and at state levels. But after observing first-hand what can go wrong, I have a renewed appreciation for things like integrated resource planning and the importance of independent regulators, and for the role of due process and rule of law.
Each of us sometimes needs to step back from the daily controversies, challenges and, yes, even litigation, and offer some thanks for the system we have.
Yes, we do need more investment in our energy infrastructure and a more modern grid, however one defines it; and we do need to develop new regulatory mechanisms to deal with the emerging innovative technologies and environmental constraints on our system.
But let's offer a word of thanks to the existing system as well from time to time, and to the line workers, the contractors who build our substations and plants, the professionals in the control room who dispatch electric power reliably 24 hours a day, and all the others involved in keeping our lights on.
Who knows, you might even want to thank a utility official, and a state or federal regulatory commissioner, for helping manage this miraculous electric grid. Just think about Nigeria and the electricity poverty in sub-Saharan Africa at the same time.
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