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Analysing the Siemens Electricity Roadmap Proposal, By Odion Omonfoman

by Premium Times
August 13, 2019
8 min read
0

…the Siemens Roadmap proposal is a good deal for the Nigerian power sector if it sails through the commercial and contractual negotiation stages. The benefits to Nigeria and Nigerians far outweigh the proposed anticipated costs. However, there are several weak points that need to be anticipated during the implementation of the Letter of Agreement.


On July 22, the Federal Government and Siemens signed a Letter of Agreement for the financing and implementation of several projects in the Nigerian power sector value chain, under a programme tagged the Nigeria Electrification Roadmap (NER).

The signing ceremony between Nigeria and Siemens is the culmination of over three years of hard work, engagements with multiple stakeholders in the sector, and sheer persistence by the Siemens team, led by its dynamic country managing director, Mrs. Onyeche Tifashe. President Muhammadu Buhari and the Nigerian government team, who were part of the process, deserve commendation for the execution of the Agreement. It shows the resolve and commitment of this administration to address the power issues and challenges.

At this juncture, it is important to clarify that the NER is not a new policy document by the Federal Government, but only a technical proposal by Siemens to the Nigerian government. It is also important to clarify that what was signed with Siemens is not the actual definitive contract for the financing, implementation and execution of the proposed projects under the NER. The Letter of Agreement is, at best, an understanding between Nigeria and Siemens, spelling out the roles, obligations, conditions and framework under which the NER may be implemented by the Parties. At some time (hopefully sooner than later), the definitive contracts for the financing and execution of identified project(s) under the Roadmap would be signed between Siemens and the respective stakeholders in the power sector (namely participating power distribution companies – DisCos, the Transmission Company of Nigeria – TCN, Federal Ministry of Finance, Ministry of Power, Bureau of Public Enterprises – BPE, the Nigerian National Petroleum Corporation – NNPC, etc) and perhaps the foreign financial institutions that may participate in the NER.

Siemens Competency

Siemens is no stranger to the Nigerian power sector and is a key player in both the energy sector and Nigeria’s economy. Siemens is well known for building and commissioning the 414MW Geregu Power Plant (1) acquired by Femi Otedola’s Amperion Energy, and the 434MW Geregu Power Plant (2) owned by the Niger Delta Power Holding Company Limited (NDPHC). The Geregu Power Plant (2) was built and completed within record time under the Nigerian National Integrated Power Project (NIPP) programme. Siemens has a full team in Nigeria, operating primarily in the power sector, the oil and gas sector and the telecommunications sector. Beyond its solutions, Siemens is known for its very strong project management and project delivery capabilities. Its strong project management capabilities, coupled with world class solutions, are what sets the company apart from its competitors.

Scope of the Siemens Deal

The Nigeria Electrification Roadmap proposal by Siemens covers a number of projects across the entire power sector value chain (distribution, transmission and generation), as well as gas production. According to the Siemens proposal, the “Roadmap is structured in three Phases, with Phase 1 focusing on essential and “quick-win” measures to increase the system’s end-to-end operational capacity to 7 GW, Phase 2 targeting remaining network bottlenecks to enable full use of existing generation and “last mile” distribution capacities, bringing the system’s operational capacity to 11 GW, and finally Phase 3 developing the system up to 25 GW capacity in the long term, with appropriate upgrades and expansions in both generation, transmission and distribution”.

Phase 1 of the proposed roadmap will focus on identifying and de-bottling constraints at the TCN/DisCo interface and within DisCo networks, with a view to increasing the amount of energy delivered to, and distributed by DisCos by an additional 2GW, significantly reducing ATC&C losses and achieving improved grid stability and reliability.

The proposed projects under Phase 1 include the upgradation of existing injection substations, construction of new 33kV and 11kV feeders, uprating of existing injection and distribution sub-station transformers, and procurement of additional transformers, Ring Main Units, and other network equipment. The proposed projects to be executed under Phase 1 will cut across the eleven DisCos and the TCN. Contrary to several public perceptions, no new additional generation capacity is planned in Phase 1. The 2GW is the estimated amount of stranded generation capacity that would now be available for transmission and distribution to customers.

Siemens also proposes to rehabilitate and implement a national Supervisory Control and Data Acquisition (SCADA)/Energy Management System (EMS) and associated telecommunicated infrastructure for the TCN under Phase 1 of the Roadmap. The implementation of the SCADA system will provide the TCN (the system operator) with real time visibility, monitoring and dispatching of the transmission grid.

Phase 2 of the Roadmap proposes to increase the transmission grid capacity from 7GW achieved under Phase 1 to 11GW. Phase 2 will focus on the continuation of transmission and distribution asset upgradation and expansion, introduction of SCADA for DisCos for network automation, execution of embedded power generation projects and the implementation of gas processing projects that would utilise and gather flare gas for power generation. Overall, Phase 2 will build on the achievements of Phase 1.

Considering that the NER is ultimately a loan by the Federal Government to DisCos and the TCN, DisCos have to ensure that the Multi-Year Tariff Order (MYTO) can accommodate the recovery of the capital expenditure and other financing terms under the NER. In this regard, a tariff review by Nigerian Electricity Regulatory Commission (NERC) would be required…


Phase 3 of the Roadmap is perhaps the most ambitious of the phases and proposes to increase the transmission grid capacity from 11GW to 25GW, in addition to adding new generation capacities from large scale power projects to be executed by Siemens.

President Buhari is very clear on what he wants out of the deal. The president wants Siemens and the Nigerian stakeholders “to first focus on fixing the transmission and distribution infrastructure, especially around economic centres where jobs are created”. That shows the likely preference of the Federal Government for the implementation of Phase 1 and 2 of the Roadmap.

Cost of the Deal

Several cost estimates have been provided in the Roadmap proposal by Siemens. Subject to more detailed studies of the proposed projects, the implementation of Phase 1 is estimated to cost at least €1 billion (one billion euros). Given the state of the transmission and distribution infrastructure and the financial losses therefrom, this amount seems a modest sum.

Deal Issues

We outline a number of deal issues we think are critical to understanding the deal and which may affect the implementation of the Roadmap.

1. Participation of TCN and DisCos in the Proposed Roadmap

The participation of TCN and Discos is most critical to achieving the objectives of Phase 1 of the roadmap. Both TCN and DisCos would need to provide relevant data and/or access to their networks that would be crucial to the detailed planning and successful implementation of the NER. In a nutshell, the co-operation of DisCos and TCN cannot be over-emphasised in the execution of the Roadmap.

2. Financing the Roadmap

Financing is another critical element of the Roadmap. We anticipate that financing for the proposed Roadmap (specifically Phase 1) would be provided by several German development and export credit finance institutions such as Hermes, KfW, and perhaps other European development and commercial financial institutions. It is almost certain that the Federal Government may issue direct sovereign guarantee(s) to Siemens that would underpin the financing. The Federal Government may need to also provide counterpart funding as well.

President Buhari mentioned that the Siemens transaction is proposed as a government-to-government (G2G) arrangement. Thus the National Assembly may need to approve the financing arrangements with Siemens/German government for the NER as it is a Federal Government borrowing.

3. Negotiating the Financing Terms Between DisCos and the Federal Government

The financing and contractual terms between DisCos and the Federal Government may determine the willingness of DisCos to participate in the implementation of the Roadmap. It is important to state that any financing arrangements between the Federal Government and Siemens would ultimately become financial obligations/liabilities on the respective balance sheets of DisCos and the TCN. Thus DisCos will need to first accept any proposed financing and contractual terms by the Federal Government to them.

4. Tariff Review to Accommodate the NER

Considering that the NER is ultimately a loan by the Federal Government to DisCos and the TCN, DisCos have to ensure that the Multi-Year Tariff Order (MYTO) can accommodate the recovery of the capital expenditure and other financing terms under the NER. In this regard, a tariff review by Nigerian Electricity Regulatory Commission (NERC) would be required as one of the conditions precedent to the implementation of the Roadmap. NERC and DisCos have an uphill task ahead in reviewing and setting the MYTO that would accommodate the cost of implementing the Roadmap.

The weakest points would be in the extensive negotiations of the commercial and contracting terms between the Federal Government, Siemens (including the German financial institutions to be involved in providing the financing), and the DisCos. Consequently, all parties must work towards reaching acceptable commercial and contractual deal terms.


5. Procurement Issues

Nigeria has public procurement laws in line with global best practices. The Siemens Roadmap is a compendium of world class solutions and equipment offered by Siemens in the power, oil and gas and telecoms sectors. The Roadmap and possible financing terms are hinged on Siemens providing and implementing its solutions, and thus anticipates that Siemens would handle the procurement for the projects under a sole sourcing procurement arrangement. Sole source procurement for such a large scale, multi-dimensional and integrated projects is a concern, but should not constitute a problem. There is established precedence with the sole source procurement for the Chinese railway construction projects in Nigeria. However, the main issue for the Nigerian government and the TCN/DisCos (as the ultimate obligors and beneficiaries) is how to ensure that the NER procurement process is competitive in terms of solution costs and actual needs. We advise that a well-defined procurement process/methodology to ensure transparency, price competitiveness and value-for-money, be developed as part of the contractual framework. There should also be significant local content as well under the NER procurement.

6. Fitting the Roadmap into the PSRP and Existing Policies

How does the Siemens Roadmap fit into the Power Sector Recovery Plan (PSRP), existing NERC regulations and recent policy directives by the Ministry of Works, Power and Housing (MoWPH) to the sector?

At first glance, the Siemen’s roadmap fits into the PSRP. However, the PSRP is more holistic than simply addressing the technical bottlenecks at the transmission and distribution segments of the power sector value chain. In addition to the PSRP, there are also new policy directives by the MoWPH to NERC and other sector participants, issued in line with the MoWPH’s role under the Electric Power Sector Reform Act (EPSRA). In our opinion, some of these policy directives may conflict with certain aspects of the proposed Roadmap. In a nutshell, the Roadmap needs to fit into the PSRP and policy directives from the MoWPH to ensure that the planned implementation of the Roadmap is not derailed by non-alignment of the roadmap with planned policies and regulations by the Federal Government.

Conclusion

In general, the Siemens Roadmap is ambitious, but a well thought out proposal to the Nigerian Government. Siemens’ world class project execution and delivery capabilities and utilisation of Siemens’ solutions, provide comfort that the Nigeria Electrification Roadmap proposal is achievable.

In our opinion, the Siemens Roadmap proposal is a good deal for the Nigerian power sector if it sails through the commercial and contractual negotiation stages. The benefits to Nigeria and Nigerians far outweigh the proposed anticipated costs. However, there are several weak points that need to be anticipated during the implementation of the Letter of Agreement.

The weakest point in our view, is not the technical capabilities of Siemens to execute and deliver the projects. Far from it. The weakest points would be in the extensive negotiations of the commercial and contracting terms between the Federal Government, Siemens (including the German financial institutions to be involved in providing the financing), and the DisCos. Consequently, all parties must work towards reaching acceptable commercial and contractual deal terms.

The Nigerian government must also be mindful of entering into an Agreement that it may not be able to fulfil the conditions precedent and/or conditions subsequent for whatever reason. We recall the on-going arbitration proceedings between Nigeria and a British company, Process & Industrial Development Limited (P&ID), wherein P&ID was awarded $6.59 billion in arbitration award against Nigeria, on account of a proposed power project in Nigeria, which P&ID claim Nigeria failed to fulfil its obligations and the conditions precedent listed in the Agreement, which then led to the “failure” of the project.

Despite the obvious benefits of the proposed Roadmap, Nigeria must be careful not to enter into another P&ID situation where the NER is not implemented, due to non-fulfilment of terms by the Federal Government and /or DisCos, leading to another arbitration proceeding against Nigeria.

Lastly, Nigerians are very optimistic people, and many have already expressed optimism that the NER would solve our power problems. However, the NER is just part of the solutions to addressing the problems in the power sector. To quote President Buhari, “this (NER) project will not be the solution to ALL our problems in the power sector. However, I am confident that it has the potential to address a significant amount of the challenges we have faced for decades’.

Odion Omonfoman is an energy consultant and the CEO of New Hampshire Capital Ltd. He can be reached on orionomon@outlook.com

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