This year has been about increasing energy in Nigeria. We have witnessed successful acquisition of Federal Government of Nigeria PHCN assets and are waiting for the official handover of the assets to the new owners. The next power privatization tranche is on its way with the NIPP assets and the huge numbers of pre-qualified bidders reveals the growing excitement in owning power assets. And we must not forget the greenfield plants coming up. Whilst all these happen, we cannot help to think of the regulators who must have begun working overtime- from the NERC to the gas regulators. Their laws are being tested, grey areas are being revealed and their enforcement approach is being discovered.
One issue that has been sticky and may remain so, is the price for power. NERC has established and modified the MYTO (Multi Year Tariff Order) to regulate the power price. So for the next few years, power will be sold down the chain at the regulated price until competition in the market takes over. The MYTO and MYTO 2 clarify the benchmark used by the NERC in fixing the price at which power will be sold wholesale by the generators to the Nigerian Bulk Trader (NBET) and by the distributors. MYTO 2 modifies the original MYTO benchmarks to provide for gaps discovered. MYTO 2 has provided for wholesale prices for power plants with fuel like coal, renewable not just gas, hydro under MYTO. MYTO 2 has also altered the benchmarks used in MYTO to accommodate more costs that may be borne by the generating companies in construction. The MYTOs, generally, lend transparency to the NERC’s price regulating.
Whilst the NCDMB works at mitigating the challenges, we must all be aware of the benefits to be derived from the Act. The Act provides that Nigerian Independent Operators be given first consideration in all projects for which contracts are to be awarded in the oil and gas industry. The NCDMB reviews contract awards to determine compliance with this provision and expects to see that a Nigerian Independent Operator is awarded the contract even where its bid was not the lowest bid, as long as its bid was not more than 20% of the bid of the lowest bidder.
How will the NERC ensure the Gencos keep their prices within the MYTO wholesale price to ensure the end tariffs do not “consume” consumers? MYTO provides for permissible variations of +/-5% prior to the 5 years major review- considering the plant owners have to recover their costs and earn some return - to what extent will the NERC be able to refuse variations or even bring forward the major review’s time? NERC intends to inspect EPC processes to ensure prudence in preferring EPC contractors- how much pressure can the NERC put on a plant owner if he selects an EPC contractor with the most expensive bid but highest qualification, just because the capital cost may be above the MYTO benchmark? What of construction approvals? There are existing laws that provide for approvals to be obtained from various authorities pre-construction. The NERC also has its standards that the power producers and distributors must comply with during constructions. We should thus expect multiple regulating of construction sites by various authorities and the attendant bureaucratic delays. Will the NERC succeed in having a law passed that ensures it “covers the field” for regulating power plant construction to simplify the construction approval process?
These are just some potential issues that may arise in implementing power price regulation. Let us keep watching and believing the successes so far herald even more success.