Rumundaka Wonodi is the pioneer Managing Director/Chief Executive Officer of the Nigerian Bulk Electricity Trading Plc (also known as Bulk Trader) He was former Technical Adviser and Head, Regulatory and Transaction Team of the Presidential Task Force on Power set up by President Goodluck Jonathan. Bulk Trader, whose board is chaired by Finance Minister and Coordinator Minister of the Economy, Dr. Ngozi Okonjo-Iweala, has the mandate of purchasing and reselling power to consumers of electricity and recoup the cost of investment in power generation. In an interview with EMEKA ANUFORO, Wonodi spoke on how Bulk Trader would ignite interest in the power sector.
Background to the establishing of Bulk Trader
I was appointed by the President as the pioneer MD/CEO of the Bulk Trader while working at the Presidential Task Force on Power where I led the regulatory and transaction monitoring team. Among other things, the team was responsible for the midwifery of Bulk Trader in conjunction with the Bureau of Public Enterprises (BPE). Bulk Trader was established, specifically, to drive the private sector investment in power generation. Expectantly, when there is adequate and sustainable generation, the distribution companies can flourish because they will have more electricity to send to customers.
When it comes to generation, transmission might cause a bottleneck in the short-term. But for a country that is looking to power its economy and provide high quality of life for its citizenry, I don’t think the government will sit idle and not tackle the issue of transmission constraints. So, being a catalyst for the private sector investment in generation, we believe that the industry as a whole would benefit from improvements in transmission.
How will NBET catalyse private investments in power?
We do so by guaranteeing those who invest in generation that when they produce, or have the capacity to produce, they will be paid. This prevent situation where distribution companies are not able to make payments for power purchased from the generation companies. Also, we share pro rata (by percentage allocation) power that we purchase from generation companies, to the distribution companies. That guarantees investors guaranteed that they would have some predictable measure of supply, which they can distribute among their customers.
Take Egbin Power Plant, for instance. If Ikeja Distribution Company is guaranteed around 13 per cent, any given day Egbin Power Plant is producing, you can expect 13 per cent of its output. The same goes for output from Geregu, Kainji Dam, Shiroro, Afam Power Plant or any other power plant that enters into Power Purchase Agreement with Bulk Trader. That means distribution companies can plan while generation companies can have confidence.
What went wrong in the past that the Power Purchase Agreements (PPAs) sought to address?
Like you know, the PPAs have two parties: the supplier of power and the buyer. The buyer in this case is Bulk Trader, and the buyer’s obligations include making payments for power that it receives at the agreed price. The seller, which is the supplier, is either constructing (if it is a new power plant) or maintaining a power plant and making sure that it is able to produce and supply power whenever it is required. The seller has obligations, and for each obligation it meets, it receives a reward, which is payment. The buyer, who is the Bulk Trader, also has obligation to make payment tied to its reward, which is getting power delivered to it. However, in the PPAs are different levels of risk allocation where you allocate responsibilities within the contract to each party. And each party tries to meet the responsibilities and where they do not, there are penalties and clauses that provide incentives for people to do what they need to do.
For instance, if we say within the PPA that a power plant needs to be maintained regularly and kept at a level of performance, and for any reason that does not happen, the system will address the issue. For example, instead of generating 100MWs as agreed, it generates 90MWs, there is a penalty to the supplier or the operator of the power plant to motivate the seller to do what needs to be done to get back to 100MW. On the other hand, if, for any reason, the buyer takes less than the amount of power that it is supposed to absorb, there are provisions in the contract that say the buyer should rectify the situation as soon as possible. Without going into the technical details, that is how PPA works.
What have you done so far and what should the country expect?
There are two major pathways through which we act as a catalyst for private sector’s entrance into the electricity industry. Through privatisation, investors come in and take over government assets in distribution and generation. The second way is what we call Greenfield investments, which are primarily new investments in generation.
Since we were set up, we have been working in these two paths. In the privatisation, we provided the PPA, which would be inherited by successful bidders of the generation companies. We also provided vesting contracts, which allow us to sell power that we buy through the PPA to distribution companies. These agreements have now been executed. They were executed on February 21 so that when the buyers have made all their payments, and taken over all the relevant agreements, they will have a PPA that they can use to sell power to us and vesting contracts through which they can receive power from Bulk Trader.
We have to complete the documentation when they come in to incorporate their unique nature, especially if they have to raise funds. There will now be supplementary parts of those agreements to accommodate their lenders, or their unique structure.
On the Greenfield path, we have been talking with a number of IPPs and we have now executed the first model PPA. It has taken this long because the first of this contract type will be the leader, the model for all the other projects coming. So we needed to be sure that we got it right. We have enjoyed support from the United States Agency for International Development (USAID) in developing that agreement. They provided us with some technical consultants. We have also enjoyed support from the UK Department for International Development (DFID), and have enjoyed support from our external counsels, a local and a Washington based firm. We are still in negotiations with about 3 more critical projects.
One other thing, to give details about our guarantee, the Power Purchase Agreements are expected to be backed by some credit enhancement instruments from the Federal Government through the Ministry of Finance. We started the negotiation on a letter of support to back our PPA in case of termination but now we have moved to a Option Agreement that does the same thing but makes it clear that upon termination the federal government will take over the plant at a price that depends on the reason for termination The whole idea is to give lenders the comfort that their funds can always recovered from a project if there is a need to terminate a Power Purchase Agreement, and the Bulk Trader is required to make a payment that might be beyond its balance sheet, the Federal Government is expected to step to make that payment and take over the asset.
A PPA terminate due to either the buyer is at fault or the seller defaults; maybe the seller is unable to maintain the power plant as he should and is unable to supply the power, the Federal Government or the Bulk Trader could say, you know what, I think it is time for you to get out of this power plant, I will buy it as scrap value. So the shareholders loose all their investments in that and government buys it as a cheaper value. To make that payment, if the Bulk Trader does not have the ability, the Federal Government will support it. If it were the fault of the buyer, which means that the Bulk Trader probably is not making payment or there are some other conditions beyond us, could be unexpected gas transportation or transmission constraint, and government is not able to put back the transmission, under these far-fetched situations, or for any reason, it is the fault of the buyer, government will still come in on behalf of the Bulk Trader and maybe pay and take over the asset so that investors can have assurance that the investment is not in vain.
Where would your funding come from?
Because we are still starting up, the Federal Ministry of Power budgets for us under appropriation for some of our capital support for operations. We are also a market participant as such we receive proceeds from the market. The ultimate goal would be for the Bulk Trader, just like the Nigerian Electricity Regulatory Commission (NERC), The System Operator (SO), and the Market Operator (MO), to be funded through the market without recourse to the government. We are all working towards ensuring that the reform would result in a viable sector that would pay for all its associated costs. But in the short term we will continue to receive support through appropriation for our operations.
The larger question is funding support for our trading business. The Federal Government through capital supplementation has been building the Bulk Trader’s working capital. Last year, we had a release of about N9billion and this year N14 billion was included in the budget.
If that is released by the end of the year, this would put us at about N23 billion from capital supplementation. But the more important thing is that the Federal Government, realizes that the amount of power that is going to come very soon would require much higher capital for stabilizing the market and building some investments critical infrastructure and is therefore, raising Euro Bonds, to the tune of $1 billion of which about 400 million would go towards supporting our working capital and capitalisation.
However, I believe that it is more important for journalists to focus on what NERC has done to introduce a cost reflective tariff within the market and more importantly, the response by investors who promised to reduce the loses below what NERC used for the tariff. We expect that as the collections by the distribution companies improve, the cost reflective tariff will pay for everything. It will pay for the power that they receive from Bulk Trader. It will pay for the transmission of power from generation point to distribution point. Once the distribution companies pay for power, Bulk Trader can pay for the Integrated Power Projects (IPPs). IPPs, based on that payment, will be able to pay for gas contracts at the upstream. But currently, there is a shortfall in the market. And when they think about Bulk Trader’s capital, they think as if the capital will come and make up for the shortfall. No!
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