NERC, NBET’s 5000mw Deal with Gencos, Discos, TCN, Gas Suppliers Fails

The hope of an improved power supply in Nigeria may have dwindled following the failure of the anticipated minimum 5000 megawatts (mw) Power Purchase Agreement (PPA) activated by market participants in the second quarter of 2022 under the coordination of the Nigerian Electricity Regulatory Commission (NERC) and the Nigerian Bulk Electricity Trading Company (NBET).

NERC had on June 15, 2022, announced in Lagos, that market participants including Gencos, distribution companies (Discos), Transmission Company of Nigeria (TCN), gas suppliers and NBET had signed a contract that would ensure that at least 5000mw of power was generated, paid for 100 per cent and successfully delivered to consumers on a daily basis with effect from July 1, 2022.

But Gencos have now finally broken their silence on the failure of the deal, attributing the collapse of the PPA activation to the imposition of the contract and its terms on them, as well as the lack of key contractual details in the agreement document handed to them by the regulator.

The Executive Secretary, Association of Power Generation Companies (APGC), an umbrella body of the Gencos, Dr. Joy Ogaji, made the disclosure and claims during an exclusive chat with THISDAY.

Ogaji in a response to THISDAY’s inquiry on the matter, which she titled, “Why the PPA Activation Did Not Work: Gencos’ Perspective,” also described current power industry solutions as knee jerked, shortsighted and not sustainable.

Nigeria’s power sector has continued to underperform and has defied a lot of policy measures aimed to move the needle in power supply to homes and businesses through the national grid, despite the privatisation of the generation and distribution chains of the power industry in 2013.

With approximately 13,000mw installed generation capacity, actual power supply to Nigerians continue to hobble below 5000mw post-privatisation.

The nation’s power sector has been enmeshed with horrible stories of endless crashing of the national grid, otherwise known as system collapse, perennial stranded power, load rejection by Discos and their rascality in the issuance of outrageous bills that are not commensurate with energy consumed.

With the collapse of the PPA activation, which NERC had assured Nigerians would lead to a marked improvement in power supply starting from July 1, 2022, by consolidating a minimum 5000mw daily supply with potential to ramp up to 7000mw, it does appear that Nigerians will have to wait longer before experiencing a leap in power supply.

According to Ogaji, “The Gencos have been inundated with negative comments on the subject matter and it is imperative that we put the records straight. Contrary to malicious gossips making the round that the Gencos’ inability to make available their inflated capacity is the reason why the subject matter failed, the following are some of the reasons why the PPA activation plan failed.”

She explained that Nigeria being Africa’s largest economy and most populous country, with a population estimated at over 216 million people and the world’s 27th largest economy by Gross Domestic Product (GDP) was endowed with both natural and human resources, and has continued to attract strategic Foreign Direct Investment (FDI).

As a result of Nigeria’s unique nature, Ogaji maintained that there was a need for prospective investors to completely understand the business environment, particularly the legal, regulatory, and contractual framework for operating within the country.

Noting that contract facilitates forward planning of a transaction as well as makes provision for future contingencies, she argued that the PPA partial activation arrangement did not take this into cognisance as the designers ignored all Gencos interrelated agreements which were midwifed in the PPA with standing obligations.

According to her, Gencos have existing binding bilateral contracts which cannot be amended unilaterally.

Ogaji said, “Designers focused on just activating part of the PPA without a plan on how to bring parties in the interrelated agreements to the table or design a framework to partially activate those agreements instead of exposing Gencos to those huge risks.

“There was no handshake between the contracts therefore inhibiting the process. The process can only work when fuel supply, generation, transmission, system operation and distribution are strategically, technically, commercially and financially in alignment.

“No adequate and robust end to end plan in place: Because these contracts are complex and capital intensive, the greater the need for planning and more detailed, the provisions that are likely to be made in the said contract.”

The APGC Executive Secretary further claimed that the PPA activation was a mere four-page document forced on Gencos with careless abandon on how they meet their obligations in the interrelated agreements such as the Gas Supply Agreement (GSA), Gas Transportation Agreement (GTA) among others, adding that, “since Gencos are not magicians, it failed.”

In addition to the lack of visibility to the plans, Ogaji stated that the four-pager document raised more questions than answers.

“All our questions were not responded to. We were mocked for asking questions. Because contract establishes the obligations and responsibilities of parties and the standard of performance to be expected of them, we expected to know clearly for instance, how Gencos will be paid 100 per cent for their capacity and energy as the partial activation arrangement made no concrete plan for payment of Gencos invoices.

“No risks matrix designed for the process. A contract allows the parties to examine the economic risks involved in the transaction and allow allocation of the risks in advance. This was not done. It was like a box ticking exercise.

“No securitisation arrangement for the plan. Typically, a contract provides for what is to happen if things go wrong, or a default is committed by a party. Gencos were not provided any form of guarantee in form of letters of credit to provide a buffer,” she said.

Furthermore, she contended that contrary to common utility practice, historical Gencos’ stranded capacities, which they invested to recover, were never taken into cognisance to be compensated.

While forcefully making Gencos to sign the PPA activation, Ogaji pointed out that there was no audit of physical interfaces along the electricity value chain to ensure that, starting from the gas supply requirements, 5,500mw could be viably produced, transported and distributed to consumers and paid for.

She stated that another reason why the partial activation did not work was because there was absence of a take or pay obligations on Discos for energy supplied.

She also said there was no assessment and solution provided for the gas supply arrangements – GSAs and GTAs, contracts and guarantees underpinning the commercial relationships.

Ogaji added that the PPA activation also failed because the document did not mention verified infrastructure improvement or implementation plan by TCN to support the programme.

As highlighted above, she argued that just throwing figures on what could be activated did not make it automatically paid for or transmitted.

On the whole, however, Ogaji described current solutions in the Nigerian Electricity Supply Industry (NESI) as knee-jerked, shortsighted and not sustainable.

She claimed that Gencos had been severally deceived since their take over in 2013.

She explained, “In our view as Gencos, current industry ‘solutions’ are knee jerked and shortsighted, hence not sustainable. Gencos have been deceived severally.

“First, they were promised 100 per cent payment if they can generate, that promise failed notwithstanding that they took acquisition loans at 157 naira to the dollars in 2013.

“Then in 2015, they were told that with TEM – Transitional Electricity Market introduced on 1st February, contracts will be effective with full payments, that failed too as Gencos are still not made whole.

“In 2016 April, Gencos were given firm promises with a fake security trust deed that was not cash backed for the first PPA Activation. That failed too. All these monumental failures have put Gencos into deeper debts, hence we wrote to the designers but our reasons were thrown into the bin.”

Proffering solutions on success of PPA activations, she stressed the need for an understanding that contract between the interrelated parties was a critical part and government and its agencies must come to the realisation that contract plays a pivotal role in making the sector viable and sustainable.

Ogaji pointed out that if Nigeria must see the gains of privatisation, the citizens must reorient themselves and understand that today, sanctity of contract has become more compelling due to the emergence of private sector participation in the provision of some of these infrastructural services which now has more far-reaching effect.

She concluded, “Identify the various distinct issues of each of the four other sub-sectors listed above, distill condition precedent (CPs) to the establishment of a viable sector, get the industry behind dealing with them all together by various industry working groups to attain these CPs.

“Until this is done in good faith, no progress. The reality here is that the range of issues for each sub-sector cuts across some that are common and some that are specific; some that are urgent and must-do and others that are not critical and can wait. All must be identified and categorised appropriately.

“It is a principle of contract that a party that has met its end of the bargain on the expectation that the other will reciprocate should be protected. Gencos have performed. Thus, Gencos should not be pressured to make concessions if they met their obligations.”