Nigeria to make International History if Generation Supply grows to 10GW (100% growth) by 2014

Nigerian to make International History if its generation supply grows to 10GW (100% growth) by 2014

Chinedu Nebo, Nigeria’s minister of power has promised Nigerians 10GWs of power supply by December 2014. Currently, Nigeria sits at about 3GW to 4GW for its normal operations. The country peaked its generation supply at 4.5GW in December 2012 and has not achieved that peak since then. 

If Nigeria were to attain the 10GW target by 2014, it would mean an annual growth in the sector of over 100%. This would make it the fastest observed growth in generation supply in the international community. Currently China holds this title with India as the runner up.  From 2000 to 2009, China’s generating capacity grew at an annual growth rate of 11.8% [worldbank.org/ppp]. India in the last decade grew at an annual rate of 6.5% and plans to grow in the next 5 years by 8.5% which is still short of the capacity it requires for stable electricity. Given the growth in generation capacity is directly proportional to the GW supply, these rates can be applied to the growth rates in the GW supplied.

The ministry of power is proposing annual growth rates that are about 10 times the current rates seen in power sectors of the fastest growing economies in the world.  

A growth in the generation supply to 10GW would also correspond to a growth in your transmission and distribution networks to accommodate the increased supply.  With TCN insolvent and not able to service its current costs, how is the transmission network’s capacity expected to grow by over 100% without proper funding.  The government expects this growth to happen magically without adequately funding to meet this optimistic target. To achieve growths of this historical magnitude, TCN should be given a blank check to support its optimistic growth. The company should not be left to source for investors in a sector that is insolvent and cannot currently pay all of its costs. Even with a blank check, these timelines are very optimistic considering the numerous studies to be executed, the complexity in engineering, the lead times of major equipment, the acquisition of proper right of ways for transmission lines and substation and most of all the coordination between all relevant contractors.

 Nigeria needs to set more realistic goals that can be achieved.  Even with the planned goal of achieving 40GWs by 2020, we are still looking at an annual growth rate of 37% which is still multiples above the observed growth rates in the fastest growing economies of the world. Re-building and growing a sector that has been neglected for many years is not an easy task and takes time. This is understood.  More realistic predictions should be made by the sector and then communicated to the Nigerian people.  Like the Don Priestman, the CEO of Manitoba said in an interview with the Gaurdian,” There is no Magic wand with TCN”.  This statement should not only be applied to TCN but to the whole Nigerian power sector.

No Profits for TCN until 15GW of Power is transmitted through its Network

Transmission company Nigeria’s (TCN’s) sole source of revenue is from the tariffs it charges for transmitting power from the generation facilities to distribution companies. This Tariff is also called its Transmission Use of System (TUOS). TCN’s TUOS is set by the Nigerian Electric Regulatory Commission (NERC) and is the same rate everywhere in Nigeria.  For 2013, the TUOS rate is currently set at $7.4/MWhr (N1200/MWhr). It is very clear that TCN’s revenue is directly proportional to how much MWhr power is measured from transmission operations.

Nigeria reached a record generation peak of 4.5GW in December 2012 (Nigerian System Operator report). However, on average this year, GW transmission is much less than the 4.5GW achieved in 2012. However, let’s assume that an average of 4.5GW is transmitted through Nigeria’s transmission network this year. Transmitting 4.5GW for 365days would correspond to earned revenues of $291 million based on a TUOS rate of $7.4/MWhr. From popular news sources, TCN requires revenue estimated at $1 billion (N162 billion) to stay afloat. This revenue is used to cover its operational and maintenance activities, salary payments, repayment of interest and debt from financed projects. Given that TCN will make only approx. $291 million (N47 billion) from its TUOS charges, it will incur a projected loss of over $709 million (N115 billion) for this year based on transmitting only 4.5GW of power through its network. From the TUOS method that TCN uses to generates its revenue, it is clear from the above that the company would have to transmit significantly more GWs through its network to increase its revenues. To do this, it will need to spend billions of dollars to expand its transmission facilities. Also, its revenue creation is also linked to how much power is generated by the generation companies and transmitted through its network.

The ministry of power has forecasted that Nigeria will generate and transmit 10GW of power by 2014. This would mean growing from supplying a peak of 4.5GW to steady supply of about 10GW of power. This corresponds to an annual growth of over 100% in the Nigerian Power Sector. This is a very optimistic goal and if achieved, an annual growth of this magnitude would be the first for a developing country in international history.  Nevertheless, even if the 10GW is achieved by 2014 and transmitted through TCN’s network, this would only equate to revenues of approx. $648 million (N105 billion) but still a loss of about $352 million (N57 billion) and hence does not solve the problem.  As was reported in the news, TCN also owes about $1billion in unpaid taxes and debt. The company’s liabilities will only continue to increase until its revenue can grow to a point where it can cover its operations as well as service its large outstanding liabilities and debts. At a certain point, it would be almost impossible to attract reasonable investments to continue to grow TCN if liabilities keep growing and the company continues for face challenges with generating enough revenue to manage its operations and servicing its debts. If TCN is unattractive to private investors and banks, it will make it close to impossible to successfully raise the planned budget of over $3 billion annually until the country reaches its year 2020 target of 40GW without adequate funding from the government.

 One of Manitoba Hydro International’s goals during its 3 year management term of TCN is to make TCN a profitable enterprise by 2015. Unless other avenues of revenue generation are explored, TCN cannot begin to see any profits until it starts to steadily transmit approximately 15GW of power through its network. How can TCN expand its transmission facilities and network from currently transmitting 4.5GW to reliably transmitting 15GW given the company does not currently generate enough revenue to cover its existing cost and does not get adequate funding from the government? How can they pursue financing for future projects to achieve 10GWs or 15GW when they have challenges generating enough revenue to pay their current debt? How can we expect significant expansion from a company that is destined generate billions of naira in losses annually from its current operations? It should be noted that it is no fault of TCN that they cannot generate sufficient revenue as they do not control the GW generated and supplied to the network. Also, the limited capacity on the transmission network in the country is as a result of neglect in this sector for many years. Don Priestman, TCN’s current CEO under MHI’s management stated the following in an interview:

“..So for many years, TCH has been living a sort or hand to mouth situation, if you like, with minimal operating cost, with only enough money to pay the salaries, but not enough money to pay for the costs. In effect, if now TCN, by strict definition of the word, is insolvent what that means is that we are not getting enough revenue to cover all of our costs.” [Nigerian Guardian]

An option to solve this insolvent state of TCN could be for NERC to revisit TCN’s $7.4/MWhr TUOS rate. However, this would mean an increase of the TUOS rate by about 3 times the current rate to allow the company generate the required revenue to cover all its cost. However, this cost would have to be passed down to electricity consumers. A rate increase of this magnitude will not be welcomed by Nigerians. In other words, TCN still requires funding from FGN until generation companies starts to supply enough power in GWs and the expansion of transmission facilities are funded to a capacity where TCN can generate sufficient revenue from its TUOS tariff to cover all its cost. These costs also include its repayment of interest and debt from financing the expansion of the transmission system.

Note: The writer is not affiliated with either MHI or TCN. The contents of this post and blog are just comments based on news and trends in the Nigerian Power Sector.

Popular Misconceptions about Manitoba Hydro's Role in Transmission Company Nigeria (TCN)

In July 2012, Manitoba Hydro International was awarded a 3 year management contract worth approximately $24 million to take over the management and operations of the Transmission Company Nigeria (TCN).  Although it has been a year now, there are still some misconceptions about the role that MHI is currently playing in the transmission system in Nigeria. Below are six popular misconceptions that are very common in Nigeria and also abroad about the TCN-Manitoba Hydro contract.

   1)      In 2012, Transmission Company Nigeria (TCN) was sold to Manitoba Hydro and MHI now owns all of TCN assets and operations – This is the most popular misconception about the TCN-MHI contract. TCN was never sold to MHI. Nothing was bought by MHI as part of the transaction and MHI did not provide any funds to procure any transmission assets from TCN. The fact is that MHI was paid $24 million dollars for their services and expertise to take over only the management of the operations of TCN for a 3 year period as well as provide training to TCN staff during this time period. After the 3 year period, the contract will expire and MHI will transfer management and control back to TCN staff.

   2)      TCN was sold for approx. $24 million dollars – As mentioned above, TCN was not sold to MHI last year. TCN is currently not on the list for privatization. However, both generation and distribution companies are planned to be privatized.

   3)      TCN is now privatized and MHI is investing funds in TCN for construction of new transmission lines, high voltage substations and replacements of High Voltage asset. MHI hopes to make a profit as part of this investment – TCN is not privatized and private sector investments are not part of the TCN-MHI contract. Any assets added to Nigeria’s transmission network by TCN would be at the expense of Nigerians and not investments from MHI or any other private company.

   4)      MHI will manage TCN on a long term or until we reach our 40GW of Generation supply planned for 2020 – MHI is only managing TCN operations for 3 years and would be facilitating the restructuring of TCN to allow for the separation of the company into a Market Operator (MO) and System Operator (SO). Once the 3 year time period is completed, management of the operations would be transferred back to TCN staff unless this contract is extended.

   5)      MHI arrived in Nigeria with an army of people to tackle challenges in TCN – MHI arrived at TCN with 8 full time staff. This includes the appointed CEO for the three year term Don Priestman, a specialist in Engineering and system operations, Market operations, human resources, IT & communication, Finance, and administrative matter. This very slim core team is supposed to be our hope to turn TCN around to a profitable enterprise in the remaining two years.    

   6)      Nigerians will have a reliable power system now that MHI is running TCN – The MHI contract is not tied to fulfilling any reliability targets as part of the completion of the contract. Nigeria has a very unreliable power supply as a result of obsolete assets, depreciated assets still in operation, lack of adequate redundancy on the transmission system,  inadequate capacity on the network to mention a few. These inadequacies result in frequent interruptions and long outage durations. Though MHI will be managing the operations of TCN for the next 2 years, they would still require to get funding form the government for replacement and capital projects.  Nigeria is over a decade away from achieving world class reliability statistics on their transmission and distribution networks. 

Note: The writer is not affiliated with either MHI or TCN. The contents of this post and blog are just comments based on news and trends in the Nigerian Power Sector.