POWER IN NIGERIA PART 1: IPP's, PPA's

Preamble:
I was at the power conference, which took place in Lagos in August 2010. Prof Barth Nnaji and some very bright young Nigerians were invited as special guests. It was there that I learned of some of the concepts and tools, which would guide the “ROADMAP FOR POWER SECTOR REFORM”. The most fascinating was the power purchase agreement (PPA) and my initial reaction upon hearing this concept was a deep sigh. I felt and still feel it is a good idea but barring any open /formal forum to share my ideas, I decided to clarify my thoughts first to myself, and to others who might be interested.

Let me start by asking: What is a power purchase agreement (PPA)?

A Power Purchase Agreement (PPA) is a legal contract between an electricity generator (provider) and a power purchaser (buyer). Contractual terms may last anywhere between 15 and 20 years, and during this time the power purchaser buys energy, and sometimes also capacity and/or ancillary services, from the electricity generator. Such agreements play a key role in the financing of independently owned (i.e. not owned by a utility) electricity generating assets. The seller under the PPA is typically an independent power producer, or "IPP." Energy sales by regulated utilities are typically highly regulated by local or state government, so that no PPA is required or appropriate. Commercial PPA providers can enable businesses, schools, governments, and utilities to benefit from predictable, renewable energy. (Online encyclopedia)

The need for a PPA in Nigeria today is explained on page 6 of the “Roadmap for power sector reform”. It is a federal government scheme to enhance credit….

In entering into a power purchase agreement (PPA), independent power producers (IPP’s) will also require that there is a creditworthy counterparty at the other side of the table. However, it could take up to four years before some of the distribution companies become commercially viable and are fully credit-worthy entities. Therefore, in order to accelerate private sector investments in power generation, the Ministry of Finance is reviewing a set of options through which the Federal Government may provide credit enhancement to the bulk purchaser that will enter into PPA’s with the successor generation companies and IPP’s.

I now try to analyze initial discomfort with the PPA:

First of all, while it seems like a great idea, it seems better suited for establishing a basis for incentivizing power from alternative power sources such as wind and solar power generators. This does not mean it cannot be applied to our gas powered turbines. I just wanted to make that point.

The problem is will it work in Nigeria? Considering that the amount of power generated by the IPP’s will very easily surpass that generated by the so-called power utilities, it is necessary to revisit the risks and consequences of enacted PPA’s, working against the spirit and goals of proposed power sector reforms.

The reality on the ground is this: Nigerians have suffered CHRONICALLY and continue to suffer ACUTELY from the ravages of power blackout. Our lives have been completely blighted by NEPA – so much that it will not surprise many if with 24 hr electricity available in Nigeria, families chose to observe certain days when all electricity is voluntarily switched off.

People want power desperately, therefore let the Power purchase agreement be directly between the IPP’s and Power consumer cooperatives. If the federal government wants to enhance credit, banks should move in and not the Ministry of finance or any other group whose responsibilities or interests in ensuring the flow of power from the IPP’s to the consumer is not directly apparent. What are we going to do when ‘Mr. Unpatriotic Citizen’ or a group like him learns to ‘work’ the PPA in such a way that neither the interests of the IPPs or customers are served?

Banks are in the best position to provide finance and deal with issues of tariff collection based on agreements with electricity consumer cooperatives. Government lawyers could frame the framework for such consumer cooperatives – and this should be government’s only involvement.

We should look into the possibility of using banks as the basis of any PPA’s - this will be organic – more naturally aligned to the natural instincts and competencies of banking – with government playing its natural watchdog role that of ensuring that service levels between IPP's and their customers are met.

Additionally we will be offering banks a new mission in the aftermath of the financial Tsunami, which brought down many over the last twenty-four months. Hopefully they can create new wealth for themselves and new value for the country.

We have a model, which has worked – the telecoms model that gave us the GSM. Is there a PPA between the Phone service providers and the phone service users? Just asking.

The similarities between NITEL and NEPA are startling!

We saw Nitel expand and upgrade its telephone exchanges – (digital) but never giving a thought to expanding the number of lines to its customers or providing fixed wireless access. The situation with IPP’s is exactly the same. We all now blame transmission lines for the ‘stranded power’ phenomenon - as though they features on our landscape created by nature and not men… We can always learn fro nature – in this case, Nature has a good reason for replicating things – we should therefore do the same – in this instance by making the power sector reforms as similar to the successful GSM model and as simple as possible. Simplicity in design should be our watchword (some of the most successful products over the last 10 years have been delivered by companies which understand the importance of simplicity in design – notably APPLE)

In concluding, I will like these simple facts to NOT be forgotten:

• People need power desperately.
• Power is big business.
• Business needs return on its investments.
• Investing in power plants (IPP’s) needs a stable investment climate.

• Government did provide a stable simple straightforward investment climate for GSM companies. It needs to do the same for power companies.

I therefore implore Dr Sam Amadi, Prof Nnaji and others involved in the power reform simplify things as much as they can – solutions grown in other places usually are usually tailored to the cultural DNA of those places.

For instance Management by Objective (MBO) which originated in America and works well in societies which small power distances, fails in even advanced technological nations which have large power distances (where subordinated expect the boss to tell them what to do)

The logic is simple:
• Nigerians have an overriding interest in getting electricity to their homes, and collectively spend over one trillion naira annually to provide for themselves an average of less than 8 hours of electricity daily over the course of one year!

• Banks have a vested interest in making money through the purchase and sale of electricity,

• IPP’s have a vested interest in selling every KW-Hr of electricity they generate.

• PPA’s should be between Banks and IPP’s.

So let us keep it as simple as we can.
Conclusion: PPA’s should be between Banks and IPP’s. No government bureaucrats. thank you very much!

Obi Akaraiwe MBA, PMP is an Engineer, gas and power consultant. [email protected]