federal republic of nigeria power sector recovery

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FEDERALREPUBLICOFNIGERIA

POWERSECTORRECOVERYPROGRAMME:2017–2021

JANUARY2018

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TABLEOFCONTENTSABBREVIATIONSANDACRONYMS.........................................................................................................4

1.EXECUTIVESUMMARY.......................................................................................................................6

1.1.INTRODUCTION..........................................................................................................................6

1.3.WHATISTHEPSRP?....................................................................................................................7

1.4.PSRP’sOBJECTIVESANDCOMPONENTS....................................................................................8

2.THENIGERIANPOWERSECTORREFORM:BACKGROUND...............................................................11

2.1.a.LEGALFRAMEWORK.............................................................................................................11

2.1.b.POWERSECTORTIMELINE....................................................................................................11

2.2.THE2010ROADMAPFORPOWERSECTORREFORM(THEROADMAP)..................................11

2.3.PRIVATISATIONANDPOSTPRIVATISATION............................................................................12

3.POWERSECTORCHALLENGES.........................................................................................................14

3.1.INFRASTRUCTURECONSTRAINTS.............................................................................................14

3.1.1. GASSUPPLYCONSTRAINTSFORPOWERGENERATION:............................................14

3.1.2.GENERATIONCONSTRAINTS.............................................................................................15

3.1.3.TRANSMISSIONCONSTRAINTSANDGRIDSTABILITY.......................................................15

3.1.4.DISTRIBUTIONCONSTRAINTS...........................................................................................16

3.2.APPROPRIATEANDSUSTAINABLETARIFF...............................................................................16

3.3.SECTORLIQUIDITY....................................................................................................................17

3.4.DISCOMANAGEMENTANDPERFORMANCE...........................................................................17

3.5.GOVERNMENTMINISTRIES,DEPARTMENTSANDAGENCIES(MDA)ELECTRICITYDEBTS.....18

3.6.SECTORGOVERNANCE.............................................................................................................18

4.POWERSECTORRECOVERYPROGRAMME.....................................................................................20

4.1.THEPSRPPRINCIPLES...............................................................................................................20

4.2.THEPSRP’sOBJECTIVES............................................................................................................20

4.3.SUMMARYOFINTERVENTIONSOFTHEPSRP.........................................................................20

5.DETAILEDCOMPONENTS–FINANCIALINTERVENTIONS................................................................22

5.1.ESTABLISHSUSTAINABLEANDAPPROPRIATEELECTRICITYTARIFFS......................................22

5.2.DIMENSIONANDCOMMITTOFULLYFUNDFUTURESECTORDEFICITSFROM2017TO2021.........................................................................................................................................................23

5.3.CLEARHISTORICALSECTORDEFICITSDUETOTARIFFSHORTFALL.........................................24

5.4.SECUREFINANCINGSOURCES..................................................................................................25

5.4.1.SUMMARYOFFINANCINGPLAN.......................................................................................26

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5.5.CLEARHISTORICALMDADEBTSANDAUTOMATEFUTUREPAYMENTS.................................27

5.6.WORLDBANKFINANCIALSUPPORT........................................................................................28

6.DETAILEDCOMPONENTS:OPERATIONAL/TECHNICALINTERVENTIONS........................................30

6.1.BASELINEPOWERGENERATION,TRANSMISSIONANDDISTRIBUTION..................................30

6.2.IMPROVEDISCOPERFORMANCE.............................................................................................31

6.3.ADEQUATEGASSUPPLYFORPOWERGENERATION...............................................................32

7.DETAILEDCOMPONENTS:GOVERNANCEINTERVENTIONS.............................................................34

7.1.RESTOREPROPERSECTORGOVERNANCE...............................................................................34

7.2.IMPROVINGSECTORTRANSPARENCY.....................................................................................35

7.3.MAKECONTRACTSFULLYEFFECTIVE.......................................................................................36

7.4.CLEARCOMMUNICATIONOFPSRP..........................................................................................38

7.5.PSRPIMPLEMENTATIONMONITORINGTEAM........................................................................39

8.DETAILEDCOMPONENTS:POLICYINTERVENTIONS.........................................................................41

8.1.FISCALANDMONETARYPOLICIESTOENCOURAGEPRIVATESECTORINVESTMENTS...........41

8.2.INCREASEELECTRICITYACCESS................................................................................................41

8.4.ECONOMICPROCUREMENTOFPOWER..................................................................................43

9.ACTIONPLANANDTIMELINES.........................................................................................................46

9.1.ACTIONPLAN–PSRPTASKSFORNEXT12MONTHS...............................................................46

APPENDIX1......................................................................................................................................50

LISTOFFIGURESANDTABLES

Figure1:TheNigerianPowerSectorTimeline(2005–2016)..............................................................11Figure2:TheOperationalCapacityinNigeria......................................................................................14Table1:September2017VerifiedTransmissionStatistics..................................................................15Table2:December2016TransformerLoadingStatistics.....................................................................16Table3:DisCocollectionsvs.paymenttoNBET&MO........................................................................17Table4:ProjectedFundingRequirements2017-2021byUseofFunds..............................................26Table5:ProjectedFinancing2017-2021bySource............................................................................26Table6:TheWorldBankpotentialsupport.........................................................................................28Table7:ProjectedFiscalExpendituresandGrossFinancingRequirements2017-2021.....................50

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ABBREVIATIONSANDACRONYMS

AfDBATC&CBPEBCR

AfricanDevelopmentBankAggregateTechnicalCommercialandCollectionBureauofPublicEnterprisesBusinessContinuityRegulations

CBNCBM

CentralBankofNigeriaContractBasedMarket

DFI DevelopmentFinanceInstitutionDisCoDMOELPSEMSEMTEPSRAERGP

PowerDistributionCompanyDebtManagementOfficeEscravosLagosPipelineSystemElectricityMarketSupportEconomicManagementTeamElectricPowerSectorReformActof2005EconomicRecoveryandGrowthPlan

FGN FederalGovernmentofNigeriaFMoBP FederalMinistryofBudgetandPlanningFMoForMOFFMoFIorMOFIFMoPWH

FederalMinistryofFinanceFederalMinistryofFinanceIncorporatedFederalMinistryofPower,WorksandHousing

FMoPRForexFSP

FederalMinistryofPetroleumResourcesForeignExchangeFiscalStrategyPaper

GenCo PowerGenerationCompanyGSA GasSupplyAgreementGSAAIBRDIPPLCDPLCPIP

GasSupplyandAggregationAgreementInternationalBankforReconstructionandDevelopmentIndependentPowerProducerLeastCostDevelopmentPlanLeaseCostPowerInvestmentPlan

LCPGPMD

LeastCostPowerGenerationPlanMaximumDemand

MDA Ministries,Departments,andAgenciesMO MarketOperationsMTEFMYTOMYTO2MYTO2.1MYTO2015NGNNAPTIN

MediumTermExpenditureFrameworkMulti-YearTariffOrderMulti-YearTariffOrderissuedJune2012Multi-YearTariffOrderissuedJanuary2015Multi-YearTariffOrderissuedFebruary2016NairaNationalPowerTrainingInstituteofNigeria

NBETNCC

NigerianBulkElectricityTradingPlc.NationalControlCentre

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NDPHC NigerDeltaPowerHoldingCompanyNELMCONEMSA

NigerianElectricityLiabilityManagementCompanyNigerianElectricityManagementServicesAgency

NEMSF NigerianElectricityMarketStabilisationFacilityNERC NigerianElectricityRegulatoryCommissionNESI NigerianElectricitySupplyIndustryNIPPNNPCOB-OB

NationalIntegratedPowerProjectNigerianNationalPetroleumCorporationObiafu–Obrikompipeline

PPAPSRPortheProgrammeREASCADA

PowerPurchaseAgreementPowerSectorRecoveryProgrammeRuralElectrificationAgencySupervisoryControlandDataAcquisition

SO SystemOperationsTCNUS$

TransmissionCompanyofNigeriaPlc.UnitedStatesDollar

WeightsandMeasures:

1gigawatthour(GWh) = 1millionkilowatthour1kilowatthour(kWh) = 1,000wattshour

1megawatt(MW)1gigawatt(GW)

1megawatt

===

1,000kilowatts1,000megawatts3.7MMscf

1Mscf1MMscf

==

1,000squarecubicfeet1,000,000squarecubicfeet

1Mscf1MMBtu

==

1,030,000Btu1,000,000Btu

Currency:

1US$ = 305Naira(MTEFspecifiedrate)

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1. EXECUTIVESUMMARY

1.1.INTRODUCTIONThe Federal Government’s Economic Recovery andGrowth Plan 2017-2020 (“ERGP”) sets out themedium-term structural reforms to diversify Nigeria’s economy, with a top priority of expandingpower sector infrastructure. The ERGP recognises the fundamental role of power to thedevelopmentofallsectorsoftheeconomy.

In the long term, theERGPaims to increasepower generationby improvingoperational capacity,encouraging small-scale renewable projects and building additional generation capacity. Mediumterm, the ERGP aims to ensure the delivery of at least 10,000 MW (on-grid and off-grid) ofoperational capacityby2020byoptimising theexisting installed capacityavailable forgeneration,addressinggas supply issues includingvandalismandcompletingmajorgas infrastructure lines forpower. In addition, as part of the ERGP, the FGN aims to improve the financial capacity of theNigerian Bulk Electricity Trading Plc. (“NBET”) to support the electricity market, strengthengovernance and institutional capacity of sector agencies, and improve the commercial viability ofGenerationCompanies(“GenCos”)andDistributionCompanies(“DisCos”).ItisontheabovepremisethatthePowerSectorRecoveryProgramme(“PSRP”,or,the“Programme”)wasdesignedtoaddresschallengesinpowersectorreform.

TheFederalGovernmentofNigerialaunchedafar-reachingsetofpowersectorreformsin2001thatled to the unbundling and subsequent privatisation of electricity generation and distributioncompaniesin2013.Thedesignofthepowersectorreformsenvisagedfourstagesofevolutionthatwouldculminateintoacompetitive,efficientandprivatesector-ledelectricitymarketregulatedbythe Nigerian Electricity Regulatory Commission (“NERC”), with the Ministry of Power providinggeneralpolicyoversight.Thefourstagesareenvisagedasfollows:(a) 1st stage - The Pre-transitional Period began with the unbundling of the Power Holding

Company of Nigeria (PHCN) in 2005. During this period, privatisation of the DistributionCompanies (DisCos) and Generation Companies (GenCos) occurred and was concluded inNovember 2013. The Interim period also commenced in November 2013 and wascharacterisedbytheallocationofsectorcashdeficitsacrossallmarketparticipantsduetotheabsenceofcommercialtradingstructurespriortoexpectedtariffreviews;

(b) 2ndstage-TheContractBasedMarket(“CBM”),alsoreferredtoastheTransitionalElectricityMarket (TEM), involves active trading of bulk power by NBET, as a buyer of power fromGenCosandIPPsandasellerofpurchasedpowertoDisCos;

(c) 3rdstage-TheMedium-TermElectricityMarketrequiresthecessationofNBETandnovationofcontractsbetweenNBETandGenCos/IndependentPowerProducers(IPP)totheDisCos.Inthisstage,theDisCoswillcommencedirectpurchaseofpowerfromtheGenCos/IPPsforonwardsaletoconsumers;and

(d) 4th stage - The Long-Term Market will be characterised by bilateral contracts betweenelectricity buyers and sellers at all levels and a central balancing mechanism through thecreationofaspotelectricitymarket.

Althoughonthe1stofFebruary2015,the2ndstage(i.e.thecontract-basedmarket)wasdeclaredby an order of NERC, not all the prerequisites were in place; thus, the reform has not advancedbeyond

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the 1st stage. Three (3) years after privatisation, the sector faces infrastructure, liquidity andgovernance challenges that require specific, strategic interventionsby FGNandNERC to reset themarket.

1.2.CURRENTPOWERSECTORCHALLENGES

ThefollowingchallengeshavecreatedtheneedforamarketRESET:

1. Infrastructureconstraints:Nigeriahas13,400MWof installedpowergenerationcapacityofwhichonaverageabout7,000MWismechanicallyavailable1.Onaverage,lessthan4,000MWwasdispatchedtosupplyconsumersbetween2015and2017duetoconstraintsingassupply,electricitytransmission,anddistribution.Asaresult,thelackofconstantelectricitysupplyhasnegatively impactedpaymentbyconsumers, contributing to revenuecollectionshortfallandconsequentaccruedsectorcashdeficit.

2. Insufficient end user tariffs: An essential element of privatisation was a multi-year tariffregimebasedonasetofassumptionsonenergygenerationanditscosts,efficiencyindicators(incentiveregulationregime)andanappropriateandsustainabletarifftrajectorywithperiodicadjustmenttoreflectvariationsingenerationcosts,foreignexchangeandinflation.Benefitsofefficiency gains during the first regulatory multi-year period accrued to each DisCo, withefficiency gains being shared with the end customers over subsequent periods. However,rising costs due to unexpected infrastructure constraints, inflation and currencydevaluationwerenotaccompaniedbytimelyadjustmentstothetariff.

3. Sector cash shortfalls:Due toenduser tariffsonly reachinga cost recovery level forabriefperiod since June 2012, significant cash deficits have accumulated across the sector valuechain. Between February 2015 and December 2016, themarket shortfall (amount owed byDisCostotherestofthemarket)isestimatedatNGN476billion,ofwhichthetariffshortfall(deficitscausedbytariffslowerthancostofservicedelivery)isestimatedatNGN420billion.

4. SlowpaceoflossreductionbyDisCos:ThedesignofthepowersectorreformmakesviabilityofDisCoscriticaltothelong-termsustainabilityofthepowersector.NERC’skeyperformanceindicatorsshowDisCoperformancedecliningbetween2014and2016.Lackof investment innetwork rehabilitation (in part because of low tariffs) andmetering has seen losses remainpersistentlyhighandservicetocustomerslittleimproved.

5. Ministries, Departments, and Agencies (MDA) debts: The MDAs on aggregate owe theelectricityindustryanestimatedNGN26billionasattheendof2016,contributingasignificantportionoftheaccumulatedcashdeficitinthesector.

6. Sector governance: Although the design of Nigeria’s electricity industry and its regulatorybasis is sound, inconsistent enforcement of rules and policies has reinforced the challengesabove.

1.3.WHATISTHEPSRP?The Power Sector Recovery Programme (PSRP) is a series of carefully thought out policy actions,regulatory, operational, governanceand financial interventions tobe implementedby the FederalGovernment of Nigeria (“FGN”) over the next five (5) years to restore the financial viability ofNigeria’s power sector, improve transparency and service delivery, resolve consumer complaints,reducelossesandenergytheft,andRESETtheNigerianElectricitySupplyIndustry(“NESI”)forfuturegrowth.The“RESET”willentail the implementationoftheresultsofthenextmajorMYTOreview,1Availablecapacityisthetotalcapacitygeneratingplantscanproducewithoutconstraints.

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the re-calibration of efficiency levels based on DisCo committed investments and the updatedperformanceagreementsbecomingeffective.

TheProgrammewasdevelopedwiththesupportoftheWorldBankGroup(WBG).

AnalysisundertakenindevelopingtheProgrammeincluded:

1. Macroeconomicandfiscalanalysis;

2. Financialanalysisofpowersectorparticipants;

3. Electricitysectorlegalreview;

4. Developmentofasectorfinancialmodel;and

5. Transmissionandgasinfrastructuregapanalysis.

1.4.PSRP’sOBJECTIVESANDCOMPONENTS

TheobjectivesoftheProgrammeareto:

1. Restorethesector'sfinancialviability;

2. Improvepowersupplyreliabilitytomeetgrowingdemand;

3. Strengthenthesector'sinstitutionalframeworkandincreasetransparency;

4. Implementclearpoliciesthatpromoteandencourageinvestorconfidenceinthesector;and

5. Establishacontract-basedelectricitymarket.

Atitscore,theProgrammeiscomprisedofthefollowingareasofinterventions:

I. Financialinterventionstofullyfundhistoricalandfuturesectordeficits:

1. Establishsustainableandappropriateelectricitytariffs:Defineatariffadjustmenttrajectory,sothattariffscovertherevenuerequirementofefficientserviceprovisionby2021.Establishthe revenue requirement of DisCos and transmission (TCN), and consistently apply tariffadjustmentsaccording to thedefined tariff trajectorywithautomaticadjustmentsas servicedeliveryimproves.

2. Dimension and commit to fully-fund projected sector deficits due to tariff shortfall from2017until2021:DevelopaFinancingPlantofully-fundtheshortfall (thedifferencebetweensector’s revenue requirement and revenue under effective tariffs based on a defined tarifftrajectory)untiltariffsattaincostrecoverylevels,andsupportsectorliquidity.

3. Clear historical deficits due to tariff shortfall as part of the Financing Plan: Include in theFinancingPlanthefundingofhistoricaldeficitduetotariffshortfall(NGN420billionshortfallfromJanuary2015toDecember2016).

4. Secure financing sources: Identify and secure domestic and external financing sources tocoverthetotalfundingrequirementsintheFinancingPlanupto2021.

5. ClearhistoricalMDAdebtsandautomatefuturepayments:EnsureMDAhistoricaldebtsarepaidandimplementapaymentmechanismforfutureelectricitybills.

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6. WorldBankfunding:TheWorldBankGrouphasexpresseditswillingnesstoassisttheFGNinpreparing and supporting thePSRP. TheWorldBankhas indicatedpotential support for theProgrammetotallinguptoUS$2.6billon.

II. Operational/Technicalinterventions:

1. Baselinepowergeneration, transmissionanddistribution:Ensureminimumbaselinepowersupplyof4,500MWh/Hourtothenationalgridisdistributeddailyfrom2018toachievegridstabilityandphaseoutoperationalshortages.

2. ImproveDisCoperformance:ImproveDisCoperformancebyemployingabalancedapproachofincentiveregulation,monitoringandenforcement,aimedatensuringaggressiveATC&Clossreduction (e.g. through a metering programme, upgrade of distribution and transmissioninterface networks) and improving operational efficiency. Develop, and implement whennecessary,credibleBusinessContinuityPlans.

3. Adequategassupplyforpowergeneration:Addressmajorissuesconstraininggasavailabilityto the power sector, notably pipeline vandalism, arrears due to gas suppliers and lack ofpaymentsecurityforgasdeliveries.

III. Governanceinterventions:

1. Restore sector governance: Appointment of qualified persons to the Boards of governmentagenciesandDisCosBoardstorepresentgovernmentinterest.

2. Improve sector transparency: Assessment and regular publication of key operational andfinancialindicatorsofmarketparticipants(GenCos,TCNandDisCos)andthesector.

3. Makecontractsfullyeffective:Promoteandencourageashift towardsaneffectivecontractbasedmarketwhichpromotescompetitionandperformance.

4. Clear communication of PSRP: Develop and implement a comprehensive communicationstrategy for thePSRPwithbespokeoutreachtothevariousgroupsofstakeholders includingindustry,lawmakersandcitizens.

5. PSRP ImplementationMonitoring Team (PSRP IMT):A dedicated team has been set up tocoordinateandmonitortheimplementationofthePSRP.ThisteamreportstoHisExcellency,the Vice President. The team will monitor and evaluate implementation and results of thePSRP,toaddressunexpecteddevelopmentsordelays,andinformthepublicingeneral.Inter-agencyworkinggroupswillsupporttheteamininterventionsthatrequirecoordinatedactionsandinputsfromseveralagencies,includinginter-agencyteamsforthereviewoftheFinancingPlanandthedevelopmentandimplementationofaLeastCostDevelopmentPlan(LCDP).

IV. Policyinterventions:

1. Fiscal and monetary policies aimed at encouraging private sector investments: Increaseawarenessoffiscalandmonetarypoliciespertainingtothepowersectorsuchasdutywaivers,andpioneerstatus.

2. Increaseelectricityaccess: Implementoff-gridandrenewableenergysolutions,andcreationofaframeworkforoff-griddevelopmentplanincludingmini-gridsandsolarhomesystems.

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3. Economicprocurementofpower: Inorder thatadditionalgenerationcapacity requirementsare assessed and phased-in carefully, institutionalize the LCDP by designating aMinistry/agencywith the responsibility forLCDPpreparationand regularupdates,aswellasenforce governancearrangements thatdefine roles and responsibilitiesof relevant agenciesforensuringthatfutureinvestmentsaremadeconsistentwiththeLCDP.

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2.THENIGERIANPOWERSECTORREFORM:BACKGROUND

The reformprogramme seeks to radically shift the ownership andmanagement of theNigerianpowersectorfrompublictoprivatehands.

2.1.a.LEGALFRAMEWORK

ThepowersectorreformstartedwiththepublicationoftheNationalElectricPowerPolicyin2001,followed by the landmark legislation - the Electric Power Sector Reform Act (“EPSRA”) in 2005 -which resulted in the unbundling of the PHCN, creating eighteen (18) new companies/corporateentities (“Successor Companies”): six (6) GenCos, eleven (11) DisCos and TCN. NERC was alsoestablishedtoregulatethepowersector.

AturningpointfortheNigerianpowersectorreformwastheset-upofthePresidentialTaskForceon Power (“PTFP”) in June 2010, and the subsequent launch of the Roadmap for Power SectorReform(the“Roadmap”)inAugust2010.Thesetwoactionsfacilitatedtheaccelerationofthepowersector reform agenda by providing the government, investors, and Nigerians with a widelyacceptablestrategyforachievingsteadyandreliablepowersupplyforeveryNigerianoveraten(10)yearperiod.

2.1.b.POWERSECTORTIMELINE

Thetablebelowdescribesthesequencingofkeyactivitiesthatoccurredbetween2005and2016

Figure 1: The Nigerian Power Sector Timeline (2005 – 2016)

2.2.THE2010ROADMAPFORPOWERSECTORREFORM(THEROADMAP)

TheRoadmapwasaclearandconcisestrategydocumenttoacceleratetheexistingreformprocessinthesector.

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TheRoadmapoutlinedplanstoacceleratethepaceofactivitiesinthepowersectorreformalreadymandatedundertheElectricPowerSectorReformAct(“EPSRA”)and,atthesametimeareneweddrivetoimproveintheshorttermelectricityservicedelivery.

It aimed to leverage on early milestones of the EPSRA, especially the unbundling of the PowerHolding Company of Nigeria (“PHCN”) by facilitating the corporatisation, commercialisation, andeventual privatisation of the successor companies. It was designed to attract significant privatesector investment through the creation of privately owned power generation and distributioncompaniesthatwouldresultinacompetitiveelectricitymarket.

ThekeyprinciplesoftheRoadmapwereasfollows:

1. Remove obstacles to private sector investment: This includes various actions aimed atensuringthefinancialviabilityofthesectorsuchasaddressingissuesofpricing,sectorcreditstatus,existingsectorliabilityetc.

2. Clarifyingthegovernment’sstrategyonthedivestitureofthePHCNsuccessorcompanies:Whilst FGN was committed to resolving each of the specific obstacles to private sectorinvestment, it was also conscious that potential investors in the sector would seek clearindications of the government’s overall strategy in respect to the divestiture of the 18successor companies. Accordingly, the Roadmap summarised this as: (a) privatisation orconcession of government owned generation and distribution infrastructure; and (b)concession of power sector infrastructure suited to natural monopolies, such astransmission.

3. Reformof the gas-to-power sector:The reformwas anchoredon gas as the primary fuelsourceforthesector.ThiswasbasedontheprincipleofleveragingNigeria’svastresourcesofnaturalgas.AspartoftheRoadmap,theFederalGovernmentwasexpectedtoimplementcomplementary reforms in the gas industry, and provide incentives to attract additionalinvestmentinNigeriangasdevelopment.

However,severallingeringissuesstalleditsprogress,inparticularaddressinglegacyliabilitiesowedby the successor companies and developing mechanisms for addressing the non-existent credithistoryofdistributioncompanies.TheseissuesweresubsequentlyresolvedwiththecreationoftheNigerianElectricityLiabilityManagementCompany(“NELMCO”),whichassumedallhistoricalsectorliabilities,andthecreationoftheNigerianBulkElectricityTradingPlc.(“NBET”)in2010toactasthebulkelectricitytraderfortheindustry.

The preceding activities combined with the implementation of a comprehensive regulatoryframework (such asmulti-year tariff order, procedures and requirement for the operation of thegrid,responsibilitiesofDisCosasdistributioninvestorsandoperators,etc.)andthepreparationsforthe System Operator and the Market Operator to implement the operational and technicalframework,enabledprivatisation.

2.3.PRIVATISATIONANDPOSTPRIVATISATION

Themajoroutcomesof theRoadmapwere theprivatisationof theDisCos andGenCos, attractingoverUS$5billionpredominantlydrivenbyconfidenceintheRoadmap.Uniquetotheprivatisationexercisewasthefactthatparticipationwasmostlybylocalsponsorsfinancedbylocalbanks.

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TCNremainedundertheownershipofFGNandinitiallyoperatedunderamanagementcontractthatexpiredinJuly2016.

Thekeyactivitiespostprivatisationwere:

1. NERCandtheDisCosworkedtoestablishthebaselineATC&Closses.2. Tariffswereadjusted inJanuary2015toaccountfortherevisedbaselineforATC&Closses

andforenergyprojections.3. The Nigerian Electricity Market Stabilisation Facility (“NEMSF”) was established in 2015

intended to fund thedeficit thathadarisen fromNovember2013 toDecember2014asaresultoftariffshortfall.

4. NERCdeclaredinFebruary2015thestartofthecontract-basedmarket.

InMarch 2015, NERC announced a reduction in tariffs by eliminating collection losses previouslyincludedinATC&Clossestransferredtotariffs.Thisreductioncausedasignificantcashdeficit,whichwas reversed inFebruary2016whencollection losseswere re-added to the tariff. Since then, thetariffshavenotbeenadjustedtoallowforpass-throughofforeignexchange(forex)variationsandother automatic adjustments in the tariff methodology to recover costs outside the control ofDisCos.

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3.POWERSECTORCHALLENGES

3.1.INFRASTRUCTURECONSTRAINTS

Nigeria has 13,400 MW of installed power generation capacity of which about 7,000 MW ismechanicallyavailable.Lessthan4,000MWwasdispatchedonaverageoverthelast2yearsduetoconstraints in gas supply, electricity transmission and distribution. The lack of constant electricitysupply has negatively impacted payments, driven industries to pursue off-grid alternatives andcontributedtotheaccruedsectorcashdeficit.

Figure 2: The Operational Capacity in Nigeria

Between January 2015 and March 2017, average generation capacity available for dispatch was3,308MW,which is less than 30% of Nigeria’s installed capacity. Apart from liquidity issues, theinfrastructureconstraintsthataffectdispatchablegenerationandthesupplytoconsumersare(i)gasconstraints (low gas production and deficient gas transportation infrastructure); (ii) generationunavailability;(iii)transmissionconstraints;and(iv)distributionconstraints.

3.1.1. GASSUPPLYCONSTRAINTSFORPOWERGENERATION:Gas is the predominant fuel for thermal power generation in the Nigerian power sector with aninstalledcapacityof12,000MWgasfiredpowerplantsandmechanicallyavailablecapacityof7,000MW(asofDecember2016).

Amajor threat to gas supply is pipeline vandalism,but there are also several other industry-wideissues, notably arrears to gas suppliers, inactive gas supply agreements (GSAs) with generationcompanies(noneofthe24gassupplycontractsiseffective),anddeficientgasinfrastructure.

1. Inadequate gas pipeline infrastructure: The capacity of the gas pipeline infrastructure isinsufficienttomeetthegasdemandsoftheexistingpowerplantsoperatingatfullinstalledcapacity.Althoughtrunklinecapacityisnominallysufficient,thereisaneedforinvestmenttoreinforcethenetworkandovercomelocalbottlenecks.

2. Gassupplyconstraintsandvandalism:Gassupplytothesectorhasbeenlargelyinadequateasmostofthegassuppliedtothepowerplantsisona“bestendeavour”basis.ThishasbeenfurthercompoundedbyGenCoslargepaymentarrearstothegassuppliers(totalgassupplyindebtednessofpowerplantsfromJanuary2015toDecember2016isNGN155billion).Asa

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result,gassupplyhasbeenunreliable,resulting insomecases in1,400MWofconstrainedgeneration.Vandalismofoilandgasdeliveryinfrastructureoccasionallysignificantlyreducesgas production (resulting in additional 2,900 MW of constrained generation for lengthyperiodsduring2016).

3.1.2.GENERATIONCONSTRAINTSSomegeneratingunitsareoutofservicependingrelativelyminorrepairs.GenCoshavebeenunabletoundertake these repairs and/or requiredmaintenancedue to lackof funding.Addressing theseconstraintscanunlockupto1,700MWofexistinginstalledgenerationcapacityfordispatch.

3.1.3.TRANSMISSIONCONSTRAINTSANDGRIDSTABILITYThetransmissionsystemwasdesignedtodeliverhydrogenerationfromthenorthtoLagosandtobringgasfiredgenerationfromthesoutheasttoLagos.BarringtheOshogbo-Benin-Lagosring2,the330kVsystemwaspartially radialandthe132kVsystemwascompletely radial (usuallywithsinglecircuits).

TheNIPPtransmissionprojectscommissionedbetween2014and2016createdaring-basedsystemat330kV:

• Lagos(primaryload):Oshogbo-Benin-Egbin-IkejaWest

• West(hydro):Oshogbo-Benin-Abuja-Shiroro-Jebba

• Southeast(gas):Onitsha-Alaoji-Afam-IkotEkpene-Enugu

• East:Shiroro-Abuja-Benin-Onitsha-Enugu-Makurdi-Jos-Kaduna

However,thetransmissionsystemneedsinvestmentattransformationfrom330/132kVand132/33kV.Althoughtheaggregatetransformerloadingappearsadequate,manyindividualtransformersarefullyloadedandothers,lightlyloaded(c.f.Table2below).

Table1:September2017VerifiedTransmissionStatistics

PeakGenerationtoDate 5,075MW

InstalledCapacityinOperation 7,223MW

MaximumDailyEnergyGenerated 109,372MWh

InstalledCapacity330/132KV 11,712MVA

InServiceCapacity 9,794MVA

InstalledCapacity132/33Kv 13,402MVA

InServiceCapacity 12,192MVA

Numberof330kvSubstations 31

Numberof132KVSubstations 130

2TheringconsistsofadoublecircuitfromOshogbotoIkejaWest(oneviaAyede,deliveringhydrogeneration),adoublecircuitfromBenintoIkejaWest(deliveringgasgeneration)andasinglecircuitcross-linkfromOshogbotoBenin.

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Table2:December2016TransformerLoadingStatistics

Voltage InstalledMVA Number InServiceMVA Number I-SMW LoadMW Load%

330/132kV 11712 78 9794 65 7835 4481 57%

132/33kV 13402 309 12192 280 9754 6041 62%

Voltage MaxLoad% Min% Over80% %ofI-S Under20%

Average

330/132kV 100% 10.0% 21 32% 6

60%

132/33kV 114% 0.3% 82 29% 10

64%

While the transmission system managed to evacuate a record peak capacity of 5,074 MW onFebruary2,2016,thesystemisoperatingwellbelowinternationalreliabilityandsecuritystandards.There were 22 full collapses and 9 partial system collapses in 2016. Frequency and voltagerecordings often exceed established norms. System collapses are caused (besides gas pipelinevandalism)byinadequatereservesandmaintenance,andthelackofacomprehensiveandmodernSupervisory Control andDataAcquisition (“SCADA”) system required for real timedata to controlandkeepthebalanceinthepowersystem.

3.1.4.DISTRIBUTIONCONSTRAINTS

DisCoscurrentlyfaceconstraintsatthetransmission interfacesandatvariousotherpoints intheirdistributionsystem.

Generally, there has been little or no investment to alleviate congestion at the transmission anddistribution interfaces. The distribution network downstream of interfaces with transmissionrequiressignificantinvestmenttoenableoperationalflexibilityandreliabilityandimproveaccess.

OperationaldatareleasedbyTCNSystemOperatordemonstratesapatternofloadrejection(upto2,000MW)byDisCosoncegenerationlevelsreach4,500MW.

3.2.APPROPRIATEANDSUSTAINABLETARIFF

Forthesectortobefinanciallyviable,theend-usertariffmustbesustainable(i.e.atariffthatfullycoverstheefficientcostofprovidingelectricitytoendusersincludinganadequatereturnoncapitalinvested). Although the existing tariff regime is based on such principles, historically, there havebeendelays in implementationthatcontributedtogrowingsectordeficits.Withouta tariff settingregime that supports the financial viability of the sector, it will remain difficult to attract furthercredible private investment into the sector. Payment discipline should improve throughout thesupply chain toensure that sector companieshave sufficient cash flow. TheDisCosmust improveperformanceinrevenuecollectionsothatsufficientcashcanflowandattractinvestmenttorelatedupstreamsectorstoremediateexistingbottlenecks.Beforetariffsaremadetoreflectcostofservicedelivery,theGovernment’sobjectiveistoensurethattheservicedeliverytoconsumersimproves.

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3.3.SECTORLIQUIDITY

Due to end user tariffs only reaching sustainable levels between February and March 2015,significantcashdeficitshaveaccumulatedacrossthesectorvaluechain.Lackofadequatepoweriscausingthenationaleconomytolosesignificantrevenue(estimatedlosstoGDPinexcessofUS$25billion)annually.

SectorcashdeficitsofapproximatelyNGN213billionwereaccumulatedbetweenNovember2013and January 2015 and this has beenmanaged throughNEMSFover a 10-year period through thetariff.AnalysisnowshowsthattheaccumulatedtariffshortfallfromJanuary2015toDecember2016amountstoapproximatelyNGN420billion.

3.4.DISCOMANAGEMENTANDPERFORMANCE

TheviabilityoftheDisCosiskeytothelong-termsustainabilityofthepowersector.Theoperationalandcommercialperformanceof theDisCossinceprivatisationhasbeenpoorandhasaffectedthefinancialviabilityoftheentirevaluechain.

Lowcashremittance:Areviewof2015–2016dataoncashremittancefromDisCostoNBETshowsthat:(i)DisCoshavenotmadefullpaymentforenergyreceivedsincethetransferofmanagementin2013;and(ii)DisCoshaveretainedmoreofcollectedrevenuesthanallocatedunderMYTO.

Asshowninthetable3below,DisCos increasinglyretaineda largershareofcollectedrevenues in2016comparedto2015.In2016,DisCosachievedacollectionrateof57%fromtheircustomersandonaverageandsettledonly29%ofinvoicesissuedbyNBET.

Table3:DisCocollectionsvs.paymenttoNBET&MO

DisCos DisCocollectionrate DisCoinvoicesettlementrate

2015 2016 2015 2016

Abuja 64% 67% 53% 29%

Benin 67% 53% 56% 31%

Eko 73% 74% 83% 52%

Enugu 62% 59% 47% 26%

Ibadan 63% 62% 69% 34%

Ikeja 69% 69% 54% 38%

Jos 41% 37% 35% 19%

Kaduna 41% 39% 25% 17%

Kano 54% 51% 38% 17%

PH 53% 44% 44% 15%

Yola 57% 51% 30% 19%

Total 61% 57% 53% 29%

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LowATC&Clossreduction:DisCoshavenotshownanysignificantreductionsinATC&Closses,asaweightedaverageATC&Clossfor2016is54.3%versus32.1%inMYTOprojections.However,NERC’sdelayinimplementingtariffreviewshasimpactedDisCoperformance.

Loadrejection:ThelevelofATC&ClossesduetothepoorstateoftheDisCos’networkhasresultedin the under-utilisation of load by the DisCos. Resolving this issue will require sector disciplineincludingbettercoordinationbetweenTCNSystemOperatorandDisCos,andeachDiscosubmittingload forecasts at each substation/connection to TCN grid for SystemOperator operationplanninganddispatch.

Investments:TheaverageannualcapitalexpenditureforallDisCosover3years(2014-16)amountedto US$ 104 million compared to US$ 301 million expected in MYTO determination, resulting inaverageUS$198millionunderspenteachyear.TheDisCosfaceseveralchallengesandconstraintsintermsofaccessingcapexfunding,including:

• High leverage including acquisition debt – The commercial banks are reluctant to extendfurthercredittothepowersectorduetohighexposuretotheacquisitioncompaniesduringthe2013privatisation.

• Lackofconfidence–ThereisalackofconfidenceintheNigerianpowersectorbylocalandinternational lenders and investors who see the sector as nascent, lacking the requisitemitigationarrangementsrequiredtomeettheirriskacceptancecriteria.

DisCosfinancialstatus:ThefinancialperformanceoftheDisCoshasbeenpoor.IntheeventthatMOor NBET were to call for full payment of their unpaid invoices, most DisCos would be forced todeclarebankruptcyunlesssignificantcash injectionsaremadebytheirshareholders.Consolidatingthe acquisition debt to the operating company level will result in most DisCos having negativeequity.

3.5.GOVERNMENTMINISTRIES,DEPARTMENTSANDAGENCIES(MDA)ELECTRICITYDEBTS

MDA electricity bills are a source of cash shortfall in the sector that needs to be addressed. TheGovernmentwillinstituterigorousdisciplineinthepaymentofitselectricitybills.FGNhasresolvedtosettlealloutstandingarrearsfromMDAs.

3.6.SECTORGOVERNANCE

Lackofeffectivegovernancehasresultedinlimitedenforcementofrules,regulationsandpolicy.TheregulatoryframeworkinNigeriaiscomprehensiveandinlinewithinternationalbestpracticebuthasbeen poorly implemented and enforced. The content of regulations (in particular, the Grid Code,Distribution Code and the Market Rules) include mechanisms to improve performance. Lack ofpaymentdisciplinehas stalled implementationof contractual arrangements (thatare contained investing contracts between DisCos and NBET) that would ensure payment and improve theperformance of the distribution subsector. Enforcement of rules and regulations is critical for thesectortofunctionasdesignedandtobefinanciallysustainableinthelongterm.

There is need for the Government to act as an informed and active owner of state-ownedinstitutions.Itwillactasactiveco-ownerofstateinvestedenterprises(suchastheDisCos)toensurethat these are managed in a transparent and accountable manner with a high degree ofprofessionalism,effectivenessandautonomywithoutpoliticalinterference.

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FGNthereforeneedsto:

RegardingDisCos:

1. ExerciseitsownershiprightsaccordingtothelegalstructureoftheDisCos.

2. Ensureproperrepresentationatgeneralmeetingsandeffectivelyexerciseitsvotingrights.

3. ParticipatefullyinthenominationofBoardMembersandBoardCommitteesbyensuringthatawell-structured,transparentandmeritbasedboardnominationprocessisinplace.

RegardingMDAsandcorporategovernance:

4. Create an effective monitoring and reporting system to monitor, audit and assess thecorporategovernanceperformanceofMDAsandDisCos.

5. Implementaccountabilitystructuresthatprovideinformationtotherelevantstakeholders.

6. ComplywiththeprovisionsandspiritoftheFreedomofInformationAct.

7. SubjectannualfinancialstatementsofMDAstoindependentexternalaudit.

Equally important,thereisaneedforNERCtodrivePSRPimplementationbyeffectivelyregulatingthesectorby:

1. Enforcing performance standards for each DisCo and for TCN establishing monitoringsystems including data provision and reporting requirements by utilities, validating andassessingcompliance,

2. Public and online disclosure or reporting of financial and operational data relevant totariffsorperformanceofmarketparticipants.

3. Developingeffectivebusinesscontinuityplansincaseofnon-performingDisCotoensurecontinuityofservicesandimprovedperformance.

4. Consultation processes that involve stakeholders, including the public in general, forrevisionstoregulations,tariffsreviewsandapprovalofplans.

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4. POWERSECTORRECOVERYPROGRAMME

ThePSRPisFGN’sresponsetotheissuesthesectorfaces,andtheneedforurgentdecisiveaction.

4.1.THEPSRPPRINCIPLES

The FederalGovernment ofNigeria (“FGN”) has prepared the Power Sector Recovery Programme(PSRP)recognisingthatthedeteriorationinthefinancialviabilityofthesectorislinkedtothedeclinein electricity service to industries, commercial and households, leading to severe economicconsequences.

ThePSRP is a series of carefully thought out policy actions, operational, governance and financialinterventions to be implemented by the FGN over the next five (5) years to restore the financialviability of Nigeria’s power sector, improve transparency and service delivery, address customercomplaints, reduce losses and electricity theft, andRESET the Nigerian Electricity Supply Industry(“NESI”)forfuturegrowth.

4.2.THEPSRP’sOBJECTIVES

TheobjectivesoftheProgrammeareto

1. Restorethesector'sfinancialviability;

2. Improvepowersupplyreliabilitytomeetgrowingdemand;

3. Strengthenthesector'sinstitutionalframeworkandincreasetransparency;

4. Implementclearpoliciesthatpromoteandencourageinvestorconfidenceinthesector;and

5. Establishacontract-basedelectricitymarket.

4.3.SUMMARYOFINTERVENTIONSOFTHEPSRP

ToaddresspowersectorchallengesandRESETthemarket,thePSRPcomprisesof17reformactionsin four groups of interventions – financial, operational/technical, governance and policyinterventions,whicharedescribedindetailbelow.

i. Financialinterventionstofullyfundhistoricalandfuturesectordeficits:

1. Establishsustainableandappropriateelectricitytariffs.

2. Dimensionandcommittofullyfundsectordeficitsduetotariffshortfallfrom2017to2021(FinancingPlan).

3. ClearhistoricalsectordeficitsdueaspartoftheFinancingPlan.

4. SecurefinancingsourcesfortheFinancingPlan.

5. ClearhistoricalMDAdebtsandautomatefuturepayments.

6. SecureWorldBankfinancialsupport.

ii. Operational/Technicalinterventions:

1. Baselinepowergeneration,transmissionanddistribution.

2. ImproveDisCoperformance.

3. Adequategassupplyforpowergeneration.

iii. Governanceinterventions:

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1. Restoresectorgovernance.

2. Improvesectortransparency.

3. Makecontractsfullyeffective.

4. ClearcommunicationsofPSRPtokeystakeholdersincludingcitizens.

5. PSRPImplementationMonitoringTeam.

iv. Policyinterventions:

1. Fiscalandmonetarypoliciesaimedatencouragingprivatesectorinvestments.

2. Increaseelectricityaccess.

3. Economicprocurementofpower.

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5.DETAILEDCOMPONENTS–FINANCIALINTERVENTIONS

Implementanelectricitytarifftrajectorythatensuressustainabletariffsinthenextfive(5)yearsandcommittofundhistoricalandfuturesectordeficits(2017–2021)

The interventionsunder thiscomponenthave theobjectivesof (i)addressingand fundingsector’srevenue shortfall, (ii) establishing and consistently implementing an efficient tariff regulatoryframework that promotes quality service delivery and has adequatemonitoring systems; and (iii)achievingaself-sufficientNigerianpowersector.

TheFinancingPlaniskeyparttoachievetheseobjectives,toquantifyandensurefundingof(i)thehistorical tariff shortfall; (ii) the future revenueshortfalluntil tariffs reachcost recovery level,andthedebtpaymentsassociatedwiththefinancingoftheshortfall.

5.1.ESTABLISHSUSTAINABLEANDAPPROPRIATEELECTRICITYTARIFFS

Theprivatesector(bothinternationalandlocal)willonlyinvestinNigeria’spowersectorifthereisclarityandconfidenceonhowto recovercapitalandoperational costs.Approximately65%of thecostofelectricity inNigeria isUSDdenominated (costof turbines forpowerplants,naturalgas topower the turbines, and other operating andmaintenance costs). Due to the depreciation of theNaira,decrease ingassupply fromtheNigerDelta,anddelays in implementingtariffadjustments,theaverageelectricitytariffisnowmuchlowerthanthecostofproducinganddeliveringelectricitytoconsumers.Theimplementationofasustainabletariffmethodologythatreflectsthefullefficientcostofsupplyingelectricityisrequiredtoprovidethatclarityandconfidence.

FGN recognises that a sustainable tariffmustbe achievedover thenext 5 years inorder to allowmarket participants to recover the efficient cost of supply and promote investments. This RESETintervention involvesacombinationofpolicyandregulatorymeasures.TheFGNwill issueapolicyguiding the tariff trajectory towards cost recovery level by 2021 at the completion of Reset,consistentwithimprovementsinservice.

To implement the policy, NERC will refine the procedures/approaches within the existing MYTOmethodologyfordeterminationofthemainparametersoftherevenuerequirementofeachDisCo(e.g.OPEX,CAPEX,regulatoryassetbase(RAB),ratetobeappliedforremunerationoninvestments,remunerationof investments (depreciation), allowanceon losses,etc.) in full consistencywith theapplicable laws and policies, and taking into consideration the specificities of the situation of thedistributionsegmentatthetime.

NERC will determine the revenue requirement for DisCos and for TCN, through a consultationprocess (i.e. NERC will implement a major MYTO review). The process will require that DisCospreparePerformanceImprovementPlan(including investmentplans)accordingtoguidelinestobeissued by NERC. Assumptions on generation costs will be based on generation operation planpreparedbytheSystemOperator.Allowedrevenuerequirementwillbesubjecttoachievementofperformance targets, and NERC will monitor implementation of the approved PerformanceImprovementPlansandactualperformance.

Duringthetransitionpath,therevenueshortfall(thedifferencebetweenthetarifftorecoverthefullapproved revenue requirement and the tariff paid by consumers) is allocated to generation costsandfundedthroughfinancialinterventions(theFinancingPlan).

ActionSteps

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Actionsstepstowardsimplementationareasfollows:

1. NERCissuesGuidelinesforDisCostopreparePerformanceImprovementPlans(PIP)aspartofMYTOMajorReview(Reset);

2. NERC finalizes and approves after consultation, refinement of theMYTOmethodology fordeterminingtherevenuerequirementofDisCosandforTCN,takingintoconsiderationFGNtariff policy, inputs by the System Operator and including procedures and formulae forperiodicadjustment;

3. TCNfilesfornewMYTOrevenuerequirementfollowingtherevisedmethodology,includingthetransmissioninvestmentplan,forNERCreview,consultationanddetermination;

4. EachDisCopreparesandsubmitstoNERCthePIPcoveringtherequirementsandproceduresinNERCguidelines;

5. NERCreviewsthetariffapplication(basedontheirrevenuerequirement)filedbyeachDisCofollowing the MYTO methodology, including the PIP, and the setting of performancebaselinesandtargets,andcarriesoutconsultation/hearing;

6. NERCissuestheMYTOorderforeachDisCoandforTCN;

7. NERCmonitors implementationof approvedPIP, andofperformance results compared tobaselineandtargetstoevaluateimprovementofeachDisCos,andreportsinitswebsiteforeachDisCoprogress in implementationofthePIPandevolutionofperformancecomparedtobaselineandtargets;and

8. Automatic adjustments (minor reviews) are implemented as required in themethodologysubjecttothetarifftrajectorypolicyduringthetariffperiod,foreachDisCoandforTCN.

5.2.DIMENSIONANDCOMMITTOFULLYFUNDFUTURESECTORDEFICITSFROM2017TO2021

Developandexecuteaplan to fully fundthe requiredElectricityMarketSupportdue to revenueshortfall,untiltariffsattaincostrecoverylevelsfrom2017to2021.

ThefinancialsustainabilityofthepowersectorisatthecoreofthePSRP.ThePSRPrecognisesthatuntil tariffs reach cost recovery, the governmentmustmakeup thedifferencebetween the coststhatthetariffallowsmarketparticipantstorecoverandtheapprovedfullrevenuerequirement.TheFinancingPlanforthePSRPreflectstheFGN’scommitmenttoaddresshistoricalandongoingretailtariffshortfallsinthesectorastheelectricitymarkettransitionstoanefficientandsustainabletariffregime.

Todevelopacomprehensive,credibleandfiscallysustainableFinancingPlan,theFGNestablishedamulti-agency team, consisting of representatives from NERC, PSRP IMT, CBN, NBET, FMoF, theBudgetOfficeandtheDebtManagementOffice(DMO).

TheFinancingPlancontainsthefollowing:

1. Estimatesofthefundingrequirementstofullycovertheannualrecurringrevenueshortfallofthesector2017-2021,thesettlementofthehistoricaltariffshortfall(2015-2016),andthedebtservicepaymentsassociatedwiththedebtfinancingofthePlan.

2. Thesourcesof funding identifiedby theFinancingPlanare thePaymentAssurance facilityfunded by the CBN andmanaged by NBET, additional FGN budgetary contribution, and aWorldBankPerformanceBasedLoan(PBL).

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3. Analyses of the associated fiscal costs: public expenditures and gross financing needs andtheimpactofthedebtfinancingonpublicdebtstock.

4. Abasecasescenarioandasetofriskscenarioswithcontingencyplans.

TheFinancingPlaniscontainedinthe2018-2020FSP/MTEFapprovedbytheNationalAssemblyandin the 2018 FGN annual budget awaiting legislative approval. The Plan is premised on a series ofmacro and sectoral assumptions and is consistentwith themost up-to-dateMYTO.However, thiswill require periodic reviews to ensure that it remains credible and fully funded as the baseassumptions change. The multi-agency task team will quarterly review the Financing Plan andupdate it,asnecessary.TheFinancingPlanwillbe reflected in theannually revisedFSP/MTEFandtheFGNannualbudgets.

ActionSteps

1. DevelopandupdatetheFinancingPlantoensurethatthePlanremainsfullyfundedtocoverallTariffshortfalls;

2. Analysis of fiscal sustainability and contingent liabilities of the sector and analysis of themultipliereffectoftheproposedgovernmentsupport;and

3. Developthedetailedfundsflowmechanismforthepaymentoftariffshortfallsonmonthlybasis.

5.3.CLEARHISTORICALSECTORDEFICITSDUETOTARIFFSHORTFALL

Clearinghistoricalaccumulatedsectorrevenuedeficits(2015to2016)aspartoftheFinancingPlan

The power sector liabilities/deficits before privatisation in 2013 were absorbed into NELMCO. InDecember2014,theaccumulateddeficitsbetweenNovember2013andDecember2014wereNGN213billionwhenthatdeficitwasfinalisedaspartoftheMYTO2015review.TheNEMSFloanfromCBN to theelectricity sectorwasdesigned to fullypayoff thisdeficit.WhileNEMSFhasnotbeenfullydisbursed todate, theNGN60billionoutstandingbalancewill bedisbursed.Discounting theforexdevaluationsince2014shouldfullyeliminatethesectorcashdeficitthroughDecember2014.

Thedeficitcanbeseparatedintwoparts:

A. MarketShortfallofNGN476billion:ThisisthetotalamountunderpaidbyalltheDisCostoNBET and MO for invoices submitted to each DisCo for electricity delivered to theirdistributionnetworks.ItwascalculatedbydeductingeachDisCosmonthlypaymenttoNBETandtheMOfromthevalueofeachmonth’selectricityinvoiceissuedbyNBETandMO.

B. TariffDeficit ofNGN420billion: This is the aggregate amount of shortfall in the allowedrevenueforeachDisCoduetothelackofasustainabletariff.TheNGN56billionexcessoftheMarketShortfall(A)overtheTariffDeficit(B)is,bydefinition,thenetamountduefromDisCosasagroupto the“market”. Inaggregate, thesedeficits reflectpaymentsdue toallsectorstakeholdersandserviceproviders.ThishistoricaltariffshortfallwillbecoveredintheFinancingPlan.

FGNrecognisestheimpactofthehistoricaldeficitsonsectorviabilityandconfidence.Inaddressingthesedeficits, FGNexpects that responsibility for thesedeficits shouldbeallocated to responsibleparties.Assuch,FGNacceptsresponsibilityforthetariffdeficit,andexpectsthattheNGN56billionexcess of themarket shortfall over the tariff deficit will be addressed under the existing vestingcontractsbetweenNBETandtheDisCos.

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ActionSteps

Actionssteptowardsimplementationareasfollows:

1. Aprocess forsettlementofdeficitsdue fromDisCos innetpayablepositions tobeagreedbetween the DisCos, NBET and the MO, and communicated to the Ministry of Finance,MinistryofBudget&PlanningandtheMinistryofPower,WorksandHousing;and

2. PrepareliabilitymanagementstrategyforNELMCO.

5.4.SECUREFINANCINGSOURCES

Identify and secure domestic and external financing sources to cover the total fundingrequirementsestimatedintheFinancingPlanduring2017-2021

Toensurethatthesectorremainsliquidandtopreventtheaccrualoffurtherdeficits,FGNisfirmlycommittedtosecuringallnecessaryfundingtosupportthesector’srevenueshortfallasdescribedinthis financialcomponentof thePSRP.Currentestimatesof theprojected total tariff shortfall from2017-2021isNGN1.150trillion.Thesourcesoffundingareoutlinedbelow:

1. NGN701.9billionfundingcommitmentguaranteedbyFGNthroughthePaymentAssurancefacilitytoNBET,aCBNshort-termbridgefinancingfacilitytoassistNBETinmeetingpaymentobligationsunderitsPowerPurchaseAgreements(PPAs)withGenCosandIPPs.

2. US$1billionPerformanceBasedLoanfromtheWorldBank

3. NGN927billiontobefundedthroughbudgetarycontribution.

NBETPAYMENTASSURANCEFACILITY:CBNhasprovidedaNGN701.9billionfacilitytoassistNBETinmeetingitspaymentobligationswithingenerationinvoicesandeasetheliquiditychallenges.ThePaymentAssurancefacilityisaloantoNBETfromCBN,guaranteedbytheFMoF,tosupportNBET’spaymentstoGenCosandtheirassociatedgassuppliers.ForthePaymentAssuranceprogrammetobeeffective,itisimportantthatitisnotviewedasabailoutfacilitythatsupportstheexistingmarketbehaviourbutonethatsupportsacredibleplantowardsachievinganefficientandself-sustainablemarket. It isexpectedthatthemarketwill improveon itsbillpaymentperformancewithdecliningdrawdowns from the facility, to address payment gaps over the next 2 years, through theimplementationofinterventionsdescribedinthePolicyandGovernanceComponents.

Under the PSRP, the Payment Assurance is used as a bridge financing for 2017-2018, until otherfinancing sources are realized, starting in 2018 (FGN budgetary contribution and World BankPerformance Based Loan). The terms and conditions of planned funding interventions need toconsiderthelong-termsustainability.Withoutthetimelyresolutionofoutstandingissuesrelatingtoadequate market liquidity and behaviour, disbursement of funds under this programme will notachievetheexpectedimpactandoutcomes.

Actionsteps


1. Securefundingforhistoricaldebtandfuturerevenueshortfallsuntiltariffsareappropriateandsustainable;

2. Secure funding to address system constraints such as transmission/distribution interfacebottlenecks;

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3. ThePSRPIMTreviewsandupdatestheFinancingPlanonaquarterlybasis,withthesupportofthemulti-agencyfinancingworkingteam;

4. CBN,NBETandFMoPtoensuretimelypaymenttoGenCos;and

5. FMoFandBudgetOfficetoensureadequatefundingprovisionandtimelydisbursements.

5.4.1.SUMMARYOFFINANCINGPLANTheFederalGovernmenthasincludedinthe2018-2020MediumTermExpenditureFrameworkandFiscal Strategy Paper (MTEF/FSP) approved by the National Assembly in December 2017 anestimated funding requirement for a total of NGN 1,934 billion / US$6.34 billion over the period2017-2021.Thiscomprisesoffundstofullycovertheexpectedrevenueshortfallfor2017-2021,theclearance of historical sector revenue deficit from 2015-2016, and the debt service (interest andprincipal)paymentsNBETwillmakethroughtheCBNPaymentAssurancefacilityduring2017-2021.

Table4:ProjectedFundingRequirements2017-2021byUseofFunds

NGNBillion USDMillion %SectorRevenueShortfall(2017-2021) 1,150 3,770 59.5

SectorHistoricalDeficit(2015-2016) 420 1,378 21.7CBNPaymentAssuranceFacilityDebtService 363 1,191 18.8Interest 132 434 Principalrepayments/amortization 231 757 TotalFundingRequirements 1,934 6,339

A total of NGN 1,934 billion/US$ 6.34 billion of financing to fully fund these payments has beenidentifiedandcommitted to:TheCBNPaymentAssuranceFacility (short-termbridge financing foronly 2017-2018); the World Bank performance-based loan; and Additional Federal GovernmentBudgetaryContributiontothepowersector3.

Table5:ProjectedFinancing2017-2021bySource

NGNBillion USDMillion %

CBNPaymentAssuranceFacility(debt-domestic) 702 2,301 36.3%AdditionalFGNBudgetaryContribution(debt-mixed) 927 3039 47.93%WorldBankperformance-basedloan(debt–external) 305 1,000 15.8%TotalGovernmentFinancing 1,934 6,339

TheFinancingPlan isunderpinnedbyasetofassumptionsonkeymacroeconomic(exchangerate,inflation)andsectoralvariables,whichmaychangeoverthePSRPimplementationperiod,andaffectthefundingrequirements.Therearealsoriskstotherealizationoftheidentifiedfinancingsources,for example: under-execution of the proposed additional Federal Government BudgetaryContribution due to fiscal revenue shortfalls. Therefore, the Financing Plan will be updated on asemi-annual basis at the same time as theMYTOminor reviewprocess to ensure that it remainsaccurate,credible,andfullyfunded.

3Includedintheapproved2018-2020MTEF/FSPandinthe2018FGNbudgetas:‘Service-widevotePowerSectorReformProgramme’expenditure line item.Theassociatedexpendituresareassumed tobe financedaspartof theFGNbudgetdeficit with a mix of external and domestic medium to long-term debt instruments, as per the Government’s debtmanagementstrategy.

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The PSRP Implementation Monitoring Team will monitor on a quarterly basis and update semi-annually the Financing Plan, with the support of the multi-agency financing working team asdescribedintheGovernanceComponentofthePSRP.

TheFinancingPlan,asupdated,willbefullyfundedandincludedintheMTEFandFSPthattheFGNsendstotheNationalAssembly.TheproposeddraftbudgetwillidentifyandcommitthebudgetarycontributionrequiredbytheFinancingplan.

Appendix 1 contains an analysis of the total fiscal costs of the Financing Plan for the FederalGovernment.

ActionSteps


1. TheinitialFinancingplanisapproved;

2. Analysis of fiscal sustainability and contingent liabilities of the sector and the multipliereffectoftheproposedplan;

3. Theannual2018FGNbudgetto includetheFGNBudgetaryContributionprovisionpertheMTEF;

4. PSRPIMTwiththemulti-agencyfinancingteamreviewsandupdatesquarterlytheFinancingPlantoreflectrevenueshortfallandhaveafullyfundedFinancingPlan;

5. ThePSRPisupdatedeachyeartoincorporatetheupdatedFinancingPlan,andtheFSP/MTEFisupdatedaccordingly;and

6. ForeachFiscalYear (FY), theFGNannualbudget submitted to theNASS includes theFGNbudgetarycontributionneededasspecifiedintheFinancingPlan.

5.5.CLEARHISTORICALMDADEBTSANDAUTOMATEFUTUREPAYMENTS

FGNintendstoretirealltheaccruedMDAdebtsandensurethatmechanismisinplaceinordertoforestallaccruingfuturedeficits.

FGN is committed to settling historical MDA debts owed to DisCos, and has completed theverificationofMDAoutstandingpowerbillinvoices.TheFederalGovernmentwillensurethatfutureMDAelectricitybillsarepaidonatimelybasis.

MDA’stotalverifiedunpaidelectricitydebtsowedtoDisCosisNGN26billion.FGNhasresolvedtosettleallMDAoutstandingarrears.CBNwilldevelopanMDAdebtpaymentsystem,andNERCwillimplementamechanismforregularpaymentofMDAelectricitybillsinfuture.NGN40billion(US$131.1million)wasincludedinthe2017federalbudgettopayMDAelectricitydebts.

TheverifiedMDAdebtsofNGN26billionwereincludedinthe2017budget.

Actionsteps


1. HistoricaldebtofMDAsiscleared;

2. Government issues a directive specifying the mechanism to ensure timely payment ofelectricitybillsbyallMDAsanditsimplementationtimetable;

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3. Implementation ofGovernment directive to ensure regular payment for power consumedandencourageenergyefficiencyatallMDAs;

4. Onamonthlybasis,DisCosinformsNERCanylateornon-paymentbyeachcustomerthatisaMDA,andtheaccumulateddebt;and

5. NERC informs the FGN and reports in its website progress in payment by MDAs and inimplementationofthemechanisminthedirective.

5.6.WORLDBANKFINANCIALSUPPORT

TheWorldBankhasexpresseditswillingnesstoassisttheFGNinpreparingandachievingacrediblepower sector. TheWorld Bank has indicated potential support for the Programme totalling up toUS$2.6billon, aimedat supporting the FinancingPlan, funding transmission infrastructureneeds,investments to reduce DisCos ATC&C losses, and enhancing energy access through off-gridinitiatives.

Table 6: The World Bank potential support

S/N Item Description WBpotentialfunding(US$’mn)

1 Performance basedloan for financialsupport to eliminatecashflowdeficits

Performance based loan as a funding source of theFinancing Plan intended to ensure that every sectorcompany receive their full revenue requirement(DisCos, TCN, etc.) and GenCos paid for invoices,subjecttoeachtheinterventionsbeingimplemented

1,000

2 Loss Reduction indistribution includingmetering

Support funding of the prioritymeasures that will beidentified in the Performance Improvement Plans(PIPs)ofDisCosapprovedbyNERC

500

3 SupporttoTCN FinancingprogrammeforTCNpriorityprojects. 486

4 Rural electrificationinitiatives

Solar mini grid projects, social solar electrificationprojects – schools, hospitals, and rural electrificationfund

350

5 Guarantees International Bank for Reconstruction andDevelopment (“IBRD”) securities for private sectorinvestmentingenerationanddistribution

305

Total 2,641

ActionSteps


1. WorldBanktoclarifytheirinternalprocessestoFGNontheseprojects;and

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2. FGN to fulfil the conditionsprecedentpre-agreedwith theWorldBank inorder toensuretimelydrawdownandutilisationofthefunds.

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6.DETAILEDCOMPONENTS:OPERATIONAL/TECHNICALINTERVENTIONS

Associatedwith this component, theNigerian ElectricityManagement ServicesAgency (“NEMSA”)plays a role on quality and safety in the power system. NEMSAmanages and enforces technicalstandardsandregulationsaswellas technical inspection intheNigerianElectricalSupply Industry.NEMSA collaborates with relevant government agencies, including the Standards Organisation ofNigeria,toensurethatallmajorelectricalmaterialsandequipmentusedinNigeriaareoftherightqualityandstandards.

ActionSteps

1. NEMSAtoconductnetworkintegrityandsafetyrankingauditofallNESIassets;

2. IncreaseavailabilityofNEMSA’ssupportservices;and

3. NEMSAperiodicpublicationofinformationbeneficialtosafetyandgrowthofpowersystem.

6.1.BASELINEPOWERGENERATION,TRANSMISSIONANDDISTRIBUTION

Ensureminimum baseline power supply of 4,500MWh/Hour to the national grid is distributeddailyfrom2018toachievegridstabilityandphaseoutoperationalshortages.

Withthisgoal,acoherentstrategyandplanswillbedevelopedtoaddresstheconstraintsacrosstheelectricitysupplychain.

Analysisshowsthatat4,000MWequivalentofpowergeneration,thereisnoticeableimprovementin power supply. In the past, daily peaks have surpassed 4,500MW but the annual average (orbaseline) has always been low despite optimistic projections4. The generation projection isimportantbecausethisisacomponentbywhichtariffsaredeterminedinMYTO.Failuretoachievethegenerationprojectionresultsintheaccumulationofcashdeficits.

Tofacilitatetheexecutionofatarifftrajectorythatensuresappropriateandsustainabletariffsinthenext five (5) years, it is critical to improvecustomers’perceptionof servicedeliverybyensuringaminimum available supply of 4,500 MWh/Hour. Whereas generation levels are still far belowNigeria’sestimatedpowerrequirementsof13,000MW,itdeliversaminimumthresholdofpoweratwhichcustomersarelikelytobesatisfiedwithimprovementsinpowersupply.

With this in mind, the Programme has developed power generation forecasts, starting with anestimatedenergysentoutofcirca3,628MWh/Hourin2017andincreasingto6,182MWh/Hourby2021.

ThePSRPhasidentifiedalistofexistingthermalplantsthatbasedontheir2016testedcapacityandgasavailabilityinadditiontothelistofhydroplants,coulddeliverenergyabovethebaselinepowersupplylevel.

Key toachieving thebaselinepower supply level is the resolutionof constraints affecting thermalpower plants, especially as at September 2017, gas availability and the transmission grid capacitycouldsupportdeliveryinexcessof4,500MW.

ActionSteps


4 MYTO2015assumesagenerationlevelof5,465MWin2016

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1. Identification and prioritisation of power plants to be supported to achieve theminimum4,500MWh/Hourbaseline;

2. TCNprepares transmissionexpansionplanandsubmit forapproval toNERCaspartof theMYTOresetprocess;

3. TCNpublishesinitswebsitetheapprovedtransmissionexpansionplan;

4. NERC monitors progress in TCN implementation of the transmission investment planapprovedinthetarifforder,andpublishesquarterly/annuallyinitswebsite;

5. EachyeartheSystemOperatorpreparesanannualgenerationoperationplan,includinganassessmentofexpectedtransmissionandsystemsecurityconstraints;and

6. Eachyear,TCNupdatestransmissionexpansionplan.

6.2.IMPROVEDISCOPERFORMANCE

This technical – operational intervention complements the RESET of MYTO methodology anddetermination of DisCos revenue requirements, to cover commitments by each DisCo oninvestmentsandperformanceimprovements.

The long-term sustainability of the country’s power sector is dependent on the operational,commercial and financial performance of theDisCos. This includes their ability to collect revenuefromcustomersforelectricityconsumedandaggressivelyreducethehighATC&Closses.

ThePSRPrecognizestheneedforademand-baseddistributioninvestmentplanforeachDisCo,usinga bottom-up approach, to phase out distribution constraints and improveDisCos performance, inorder for consumers to benefit from the increased generation/transmission capability. Networkimprovement is importanttoensuredistributionefficiencywhilenetworkexpansion is requiredtosupportboththeon-goingandproposedinvestmentsinthetransmissionandgenerationsegmentsofthevaluechain.

AsdescribedinthefinancialcomponentonthetariffRESET,PerformanceImprovementPlans(alsoknownasBusinessPlan)willbepreparedbyeachDisCo,reviewedandapprovedbyNERCundertheassociatedGuidelines.TheNERCGuidelineswillrequirethePerformanceImprovementPlans(“PIP”)totakeintoconsiderationandaddressthecurrentsituationofthedistributionsystemsandfactorsnegatively affecting its performance, such as lowmetering rates, high non-technical losses, poorcollection,inexistenceofreliabledatabases(customersandnetworks),anddilapidatedconditionofnetworkinfrastructureleadingtobadqualityinelectricitysupply.Therefore,thePIPapprovedwiththetarifforderofeachDisCocouldincludeinvestmentsinmeteringsystems,additionaldistributionlinesandsubstations,reconfigurationoftheexistingdistributionnetwork,includingre-conductoring,improvingreactivepowerandupgradingdistributiontransformers.ThePIPsshouldaimtoremovedistributionconstraintsandmeetperformancestandardssetbyNERCregulations.

Meteringoptionstoimproveperformance:ThelackofimprovementinDisCoefficiencieshasbeenattributedpartly to theverypoor investment inmetering.Thehigh levelofunmeteredcustomersindicates that commercial and collection losseswill notbe resolved in the short term. ThePSRP’sinterventionsthroughtheMYTOresetwillcommiteachDisCotoPIPtoachieveperformancetargets,including effective revenue protection programs and metering strategies, relevant meteringtechnologiesandcommunications,collectionandsecurityofmetereddata.

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Businesscontinuitymeasures:There isaneedforthe industrytohavemechanismsofpreventionand recovery (business continuitymeasures) to dealwith failure of one ormore of theDisCos toperform.Proactive andwell thoughtoutbusiness continuitymeasureswill limit events that couldnegativelyimpacttheservicesprovidedtoconsumersbyaDisCo.

NERC is currently taking a proactive step in this regard with its proposed “Business ContinuityRegulation”which seeks toensure continuityofbusinessandoperational functionsof aDisCo (orGenCo)shouldtheyfailtoperformorbecomeinsolvent.

Thekey issue intheeventoffailurewouldbefacilitatingtheentryofnewmanagementtoensurecontinuity pending re-privatisation. NERC will develop the necessary procedures that couldculminateinaneventualchangeofownershipif/whererequired.

NERC will establish tighter regulatory oversight over the performance of DisCos. NERC willestablish performance standards focusing on key operational indicators of DisCos, includingtechnicalandnon-technicallosses,collectionsandservicequalityandreliability.NERCwillestablisha robustmonitoring framework for theDisCos that isaimedat increasing the likelihoodofATC&Clossreductions;monitoringofimplementedcapex,andpublicdisclosureofperformanceindicators(KPIs). The assessment of DisCos progress in performance will determine applicable businesscontinuitymeasuresincaseofdeterioration.

ActionSteps


1. NERCtoensurethateachDisCocommencesandupdatesacompletecustomerdatabase,toidentifytheircustomersandcommencemeteringprogramme;

2. NERCreviewsandapprovesthePIPforeachDisCo;

3. NERC monitors each DisCo’s progress in implementation of PIP, and evolution ofperformanceindicators,andenforcingcompliancewithcommittedinvestments;

4. NERCto finalisebusinesscontinuity regulationafterconsultingwithstakeholders includinginvestorsandmanagementofDisCos;

5. Based on approved targets and baseline in MYTO reset for each Disco, BPE updatesPerformance Agreements with private investor of each DisCo, to incorporate keyperformance indicators in MYTO reset and clarify each party’ obligations and theconsequence(s)forfailuretoperform;and

6. BPE monitors Performance Agreements based on information provided by NERC andassessescompliance.

6.3.ADEQUATEGASSUPPLYFORPOWERGENERATION

Nigeria’sgassupplywasparticularlyvolatilein2016,withproductiondroppingtocirca450MMscf/dat its lowest point, which decreased available generation. Maintaining gas supply for powergeneration to support 4,500MWof thermal generation capacity, is critical to ensuring the powersector issustainable. Ifactualgasproduction fallsbelowtheassumptions inMYTO, thesectorwillrequire adjustmentsof tariff increases to cover the additional costs andensure the tariff remainsappropriateandsustainable.

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Toguaranteeabaselinegenerationlevelof4,500MW(withhydrosprovidinganaveragecapacityof700MW), it is estimated to require 800MMscf/d gas supply to power plants (excluding own-usesupplytoAfamVIandOkpai).Theaverageannualsupplywasonly553MMscf/dand450MMScf/din2015and2016respectively,basedonreasonableendeavourastherewerenoeffectivegassupplycontracts.

Nevertheless,thegovernmentisconfidentgasdeliverytopowerplantscanbeincreasedtorequiredlevels as Nigerian gas production is sufficient to meet demand (daily production is circa 1,300MMscf/d). The Government will address major issues constraining gas availability to the powersector,notablypipelinevandalism,arrearsduetogassuppliersandlackofpaymentsecurityforgasdeliveries.

Highlevelpoliticalengagement:HisExcellency,theVicePresidentoftheFederalRepublicofNigeriavisitedtheNigerDeltaregioninNovember2016,thefirstofaplannedseriesofmeetings.ThisvisitreaffirmedFGN’scommitmenttotheregion,andemphasizedtheimportanceofthedependenceontheNigerDelta–particularlytheenergyandpowersectors–toNigeria’seconomicrecovery.Totalgas productionbyNigerianNational PetroleumCorporation (NNPC) has increased123% from327MMscf/dinJune2016to730MMscf/dbyJune2017.

ActionSteps

Thefollowingactionsareintendedtoreinforcethegovernmentengagement:

1. Strategic levelengagement ledbyHisExcellency, theVicePresidentwithMinisterofStateforPetroleumand9stategovernorstoidentifycriticaldevelopmentprioritiesforeachstateintheregion;

2. Operational engagement by representatives of various MDAs, including the Office of theVicePresidenttoconverttheregion’sdevelopmentprioritiesintospecificprojects;

3. Ownershipstakesbyhostcommunitiesinoilandgasassetstocreateincentivestosafeguardtheseassets;

4. Engaginghostcommunitiestosecureassetsintheirtownships;

5. CompletionofcriticalprojectsintheaffectedNigerDeltacommunities;

6. FulldisbursementsofNEMSFtoensurehistoricaldebtsarepaidtogassuppliers;

7. MinistryofPetroleumResourcestodevelopclearplanongasvandalismpreventionstrategy;and

8. Projectmanagethedeliveryofkeygaspipelineinfrastructure(includingtheOb-Obpipeline)toensurethatgasisreadilyavailablewhereitisneeded.

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7.DETAILEDCOMPONENTS:GOVERNANCEINTERVENTIONS

In the interest of propermarket growth and viability of theNESI, it is critical that efficient sectorgovernance is improved and maintained. The current industry regulations and rules containprovisions that are comprehensive. However, there is a need for continuous implementation andenforcement,combinedwithreviewandupdatestoalignwithsectorrealities.

7.1.RESTOREPROPERSECTORGOVERNANCE

Restorepropersectorgovernancetoimproveinvestorconfidence

The FGN will appoint qualified persons to the Boards and management of related governmentagenciesandDisCostorepresentGovernment’sinterest.

Investor confidencewill largely be determined by effective, predictable and consistent regulatoryactionsandcrediblesectorinstitutions.

RestoringgovernancewillinvolvetimelyappointmentofqualifiedprofessionalstotheMDAboardsandthegovernmentrepresentative inDiscos’Boards,acapacitydevelopmentplan for institutionsandatrainingprogrammeforFGN’sboardrepresentatives.

Governancearrangements for theBoard include(i)at leastonememberof theBoardofDirectorsbeingindependent;and(ii)thereisanAuditCommitteeestablishedandfunctional.

ActionSteps


1. CurrentBPEdirectors inDiscos’Boardarereplacedbyqualified independentprofessionalsthroughatransparentprocess;

2. Identification and appointment of qualified boardof sector agencies includingNBET, TCN,NELMCO,NEMSA,NDPHC,andREA;

3. ProvideextensiveandcontinuoustrainingforFGNboardrepresentatives;and

4. FGNtoputinplaceaspecialpolicedepartmentorprovideDisCoswithrequiredpolicestafftohelpthemenforcepaymentdiscipline.EngageStateGovernmentstouse localcourtstoadjudicateenergyoffences.

TheBureauofPublicEnterprises(“BPE”):BPEisresponsiblefortheprivatisationoftheNESI.Inlinewith thePerformanceAgreements,DisCos are required to fulfilminimumperformance standards,particularly loss reduction performance targets to ensure that sector financial projections areattained. The governance arrangements of BPE will be enhanced by coordinating with NERC toupdate Performance Agreements based on MYTO reset performance standards, and in mattersrelatedtobusinesscontinuity.

ActionSteps

ActionsstepsforBPEtowardsimplementationareasfollows:

1. ObtainallmanagementaccountsfromeachDisCoonamonthlybasis;

2. Obtainallauditedaccountsyearly;

3. DevelopcontinuityprocessintheeventofDisCofailure;and

4. PresentproposalonwayforwardforTCN.

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7.2.IMPROVINGSECTORTRANSPARENCY

Regularpublicationofkeyoperationalandfinancialinformationonthepowersector

PSRP’s success is dependent on transparency and availability of up-to-date information by sectorstakeholders,theFGNandthepublic.

1. AccesstoOperationalData:Operational resultsandperformanceshouldbe fully transparentandavailable tostakeholdersandconsumers. MarketparticipantsandNERCareexpectedtousetheirwebsitestopromotetransparency, access to information and facilitate public awareness on their core activities.Disclosing of information, documentation and results of monitoring and enforcement willdemonstrateimprovementinperformanceandaccountabilityofDisCos.

2. AccesstoCommercialData:

Promoting transparency of power companies’ revenues, income and expenditures is animportantaspecttorebuildinvestorconfidenceintheNESI.Non-transparentbilling,settlementand payment systems reduce consumer confidence and can contribute to the high collectionlosses. To rebuild trust and confidence in the sector, a system that is comprehensive andaccessibleneedstobepromoted.

• Public disclosure of regulatory information: Nigerian power companies must produceauditedreportsandaccountswithinsixmonthsoftheendoftheirfinancialyear.Theymustalso produce quarterly revenue and expenditure statements in accordance with theregulatoryaccountingguidelineswhichmustbewidelyaccessibleon theirwebsites.Theremust also be a reconciliation of information provided in the audited accounts to theinformationsubmittedtoNERC.

• Dataaccessbyconsumers:MobiletelephonypenetrationinNigeriaisatapproximately90%(thereare155millionmobiletelephonelinesfor180millionpeople).Basicoperationalandcommercialdatashouldalsobetransparenttoelectricityconsumers.Abasicmobilephoneapplication (App)shouldbedesignedandaccessiblebyall consumers.Thiscanbedone inconjunctionwiththecommunicationsstrategyonthePSRPgoingforward.

TheregulatedpowersectorcompanieswillberequiredtosubmitperiodicallytoNERCoperationalandfinancialinformation.NERCwillassessandpublishinitswebsitekeyoperationalandfinancialinformation and indicators on a quarterly basis, including: (a) energy sent-out by eachGENCO (inkWh),theresulting invoicestoNBET,andNBETpaymentsagainsttheseinvoices;(b)theelectricitydelivered to each DisCo (in kWh), the resulting DisCo bill (invoice amount), and DisCo paymentagainst these invoices; (c) load shedding and the number of hours of electricity delivered to endusers by each DisCo; and (d) amount of funding disbursed to cover the revenue shortfall of thesector.

ActionSteps


1. Attheendofeachfiscalyear,NERCpublishesonitswebsite:(i)auditedfinancialstatementsofGenCos,DisCos,NBETandTCN;(ii)NERCmonitoringreport;

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2. Quarterly,NERCpublishesinitswebsiteoperationalandfinancial(marketsettlement)dataofDisCosandTCN,andoperationaldataofGenCos, theSystemOperatorand theMarketOperators;and

3. FGNmanagesacentralisedwebsite(NESISTATS)thatprovidesuptodateinformationandafeedbacklooptochecktheprogressandactivitiesofthePSRP.

7.3.MAKECONTRACTSFULLYEFFECTIVE

Encourage and support a fully effective contract based market that promote competition andperformance.

FGN’sultimategoalwithpowersectorreformistocreateanefficientelectricitysectorthatdeliversreliable electricity to end users and enables competition. Without contracts between marketparticipants (inparticularcontracts tobuyandsellelectricity)beingeffective, itwillbedifficult toholdsectorparticipantsaccountablefortheiroperationalandmanagementresponsibilities.Fortheprivatised GenCos and DisCos, it will also be difficult to enforce their obligations, includinginvestmentsandmaintenance.

The industry contracts (suchasVestingContractsbetweenNBETandDisCos, PPAsbetweenNBETand GenCos, and GSAAs between GenCos and gas suppliers) have not been formalised sinceprivatisation.Thisispartlyduetothecashdeficitsinthesectorasdescribedpreviouslyandlackofenforceable payment securities to backstop payment obligations between contractualcounterparties.Fullactivationof theGSAAswillallowgassuppliers tobecomeeligible for take-or-paypaymentsfromGenCoseveniftheyareunabletoutilisethevolumesofgascontractedfor.TheGenCos will become eligible for available capacity payments once the contractual commercialarrangementsareeffective.

The sustainable operation of the power sector is dependent upon the activation and consistentenforcementofcontracts,includingPowerPurchaseAgreements(PPAs)andGasSupplyAgreements(GSAs)withGenCosandVestingContractsofNBETwithDisCos.ThisinterventioninvolvesincreasingactivationandenforcementofPPAs/GSAsandVestingContractsintwophases:pre-Resetandpost-Reset.

Intheshort-term,thegoalisensuringthatsufficientcontractedcapacitythatcanbeaccommodatedby the system have activated / effective contract, tomeet the base generation capacity of 4,500MW. The activation of contracts upstream needs to be done with caution, in order not tooverburdenthemarketwithpaymentforgenerationcapacitywhichcannotbeutilisedatthisstage.Phasedcontractactivationcommensuratewiththevolumeofenergythatcanbeutilisedwouldbetheviablepathtowardsmaintainingmarketstabilityintheinterim.

Eachyear,therevenuerequirementsforTCNandDisCoswillbesetbasedontheMYTOorderandautomaticadjustments, and the fullpass-throughof thegenerationcosts consistentwith contractactivationarrangementsforGenCos.

Annually, the SystemOperatorwill develop the generation operation plan, identifying the powerplantsandenergygenerationnecessarytomeetforecasteddemandbyaneconomicdispatchwithinsystemsecurityconstraints,includingoperationalreserves.TheSystemOperatordemandforecastswill be based on a bottom-up approach (demand projections provided by DisCos) monthly andconsolidatedbasedonhistoricaldemandandloadprofileidentifiedinactualsystemoperation.

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Each year, NBET will design a strategy and plan the GenCos contract to become effective, incoordinationwiththeSystemOperatortotakeintoconsiderationthegenerationoperationplansfornext12months.

NBET will enforce full payment of invoices by DisCos so no new arrears are accumulated fromDisCos.Tothatend,beforetheReset,NERCwillinstructNBETto(i)adjustDisCosinvoicessoDisCoscancovertheirrevenuerequirement,subjecttotargetlosses;and(ii)partiallyactivateandenforcevestingcontracts(totheinvoiceamount).Vestingcontractswillbecomeeffective,topaytheinvoiceamount with reduction resulting from a NERC order, and all DisCos provide a Payment Security(usuallyinformofBankGuarantees(‘’BG’’)orLetterofCredit(‘’LC’’).

Theseactionswill allowNBET todefine the shareofGenCos’ invoices thatwillbe settled throughDisCos’ remittances to NBET and the share that will be funded from the financing plan until thetariffsreachefficientcostrecoverylevel.

After the tariff adjustment, DisCos will receive their full revenue requirement, subject to targetlosses,andtheirvestingcontractswillbefullyactivatedandenforced.IntheextremecaseofaDisConon-payment(evenafterwithdrawalofLCsbyNBET),provisionsinthevestingcontractforpaymentdefault will apply. Additionally, NERC will exercise disciplinary action and financial performanceconsiderationswillbeassessedasmayberelevantforbusinesscontinuityregulations.

Themedium-termgoal is to fully activatea contract-basedelectricitymarket in coordinationwiththeMYTO reviewand themechanism toensure fundingof revenue shortfalls, under the financialcomponentofthePSRP.ThePPAs/GSAswithGenCosareexpectedtobefullyactivatedby2020.

Asconfidence isrestoredtothesector,tariffsmovetosustainable levels, thesanctityofcontractswillprevail.Atthisstageofmarketdevelopment,additionalavailablecapacitythatisuncontractedcanbebroughtonstreamasthemarketmaturesandthepaymentguaranteesarelesslikelytobeusedasprimarymeansofsettlingmarketobligations.Lostcapacitycanberecoveredfromexistingbrownfields,anyoutstandingNIPPprojectswillbecompletedandthegasrequiredcontractedfor.AdditionalgreenfieldprojectsunderconstructionandwithPPAs (signedorundernegotiation)willalsobecompleted.Thismayprovideanavailablegenerationcapacityofupto10,000MW.

Thelong-termgoalistoaddgreenfieldIPPsthroughprojectsidentifiedintheleastcostdevelopmentplan and the competitive procurement framework being developed by NERC, as described in thepolicy intervention. The issuingof sovereignguarantees forgreenfielddevelopersmayeventuallylead to a “run on the sovereign” if NBET fails tomeet its payment obligations under its PPAs, ormandatethesovereigntoacquiretheplantsatapre-determinedprice.

ActionSteps


1. Eachyear,SystemOperatorpreparesanoperationalplanofgenerationbasedoneconomicdispatch of planned available generation,within system constraints, and demand forecastdevelopedinconsultationwithDisCos;

2. TheSystemOperatorupdatesaftersixmonthstheannualgenerationoperationplan;

3. IncoordinationwithNERC,NBETdesignsaplanforthephasedactivationofPPAsandGSAAstomeet thebaselinegenerationcapacityof4,500MWh/Hourand theoperationalplanoftheSystemOperator;

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4. NERCissuesordertoNBETonallowablepowerpurchasecoststoDisCosinvestingcontractinvoices;

5. NBETmakes vesting contracts effective up to invoice cap inNERC order, subject toDisCopostingrequiredLC;and

6. Eachyear,NBETincreasesthePPAslevelofactivation.

7.4.CLEARCOMMUNICATIONOFPSRP

DevelopandimplementacommunicationstrategyforthePSRPimplementationthatwillfacilitatestakeholderengagementandoutreachtothepublic.

A clearly defined Power Sector Recovery Programme communications strategy is fundamental tofullyachievingPSRP’sobjectivesateverystageofimplementation.

ThesuccessofthePSRPcriticallydependsonthesupportandengagementofthekeystakeholders.The multi-faceted stakeholder landscape includes the Federal Government, MDAs, the NationalAssembly,private sectoroperatives,organizedprivate sector, investors, civil societyorganisations,nationalandinternationalmediaandthepublic.

Additionally,communicationwiththepublicisimportanttostartbuildingtrustinthepowersector,whichhasbeenerodedasaresultofsectorunderperformance.

TheobjectiveofthecommunicationsstrategyistoeffectivelydelivertargetedmessagingtoallthePSRPstakeholders(particularlythepublic),andgarnersupportontheobjectivesandbenefitsoftheProgramme. The strategywill involve educating the public about core power sector issues, publicadvocacyontheProgrammeobjectivesandgoals,establishconsistentchannelsofcommunication,anddialogueonPSRPactivitieswithstakeholders.

KeyPSRPCommunicationsStrategyComponents

1. Messaging strategy for specific stakeholders: The communication strategy outlines corestrategicmessaging,supportedbytacticalmessagingtailoredtoeachstakeholdergroupbasedontheirroleandinterestintheProgrammeandthepowersector.

2. Conduct sector stakeholder engagements: A stakeholder analysis has been conducted toenable government to successfully engage with stakeholders and achieve communicationsobjectivesthroughoutimplementation.

3. Public sensitisation campaign: A comprehensive nationwide public awareness campaignwillbeconducted tobuildpublic trust, shape thenationaldialogueabout thepower sector,andraiseawarenesstothePSRPgoals.

4. Measure, evaluate, and assess communication impact: Given the scope and scale of thecommunications strategy, thorough monitoring and evaluation is integral to assess thecommunicationsimpactandeffectivenessonthetargetaudience. Assuch,amonitoringandevaluation (M&E) framework has been developed to identify areas of improvements andcommunication gapsbasedon stakeholder feedback. Thiswill be supportedby surveys andfeedbackbykeystakeholdersthroughoutthePSRPimplementation.

ActionSteps

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1. Implementationof a communications strategy thatpromotesunderstandingandbuy-inofthePSRPbyallsectorstakeholders.Thiswouldinvolvecoremessagesforkeystakeholders,stakeholderengagements,andmediacommunicationswiththepublic;

2. Engagetheservicesofareputablecommunicationsfirmthatwill leadthecommunicationsstrategy implementation and tactical activities of the nationwide PSRP campaign to buildpublicconfidenceandtrustintheGovernment’splans;

3. The Power Sector Communications Team (PSCT), comprising of MDA media andcommunicationsrepresentatives,willbeacriticalvehicletoexecutevariousaspectsofthecommunicationsandstakeholderengagementstrategy;and

4. Engagement of all arms of government (Executive, Judiciary): This is required to promoteandfacilitateknowledgebuildingandalignmentwithinGovernment.

7.5.PSRPIMPLEMENTATIONMONITORINGTEAM

A dedicated implementation monitoring team has been set up to coordinate and monitor theimplementationof thePSRPandreport toHisExcellency,TheVicePresident.The implementationmonitoringteamprovidestheexpertisetodeliverthevariousinterventionsinthePSRPonbehalfoftheFGN.Theteamwillundertakeplanning,executionandcontrol,monitoringandevaluation,andextensivestakeholdermanagementinthevariousactivitiesrequiredtomeetthePSRPobjectives.

TheteamwillmonitorandevaluateimplementationandresultsofthePSRP,toaddressunexpecteddevelopmentsordelays. Toenablestrongcoordination,multi-agencyteamswillsupportthe IMTforcomponentsandinterventionsthatinvolveseveralagencies,inparticularmulti-agencyteamsforfinancingandleastcostdevelopmentplans.

Specialistrolesmaybecontractedasneededtosupporttheteam.

1. ProgrammeCoordinatorwillprovideoverallleadershipandisaccountableforallaspectsofthedelivery of the Programme and its team. The role will lead the engagement, interaction andcommunication with Donors, FGN, International Finance institutes and other high-levelstakeholdersrelevanttoattainingtheobjectivesofthePSRP.Inadditiontoensuringoversightoftheteam,theSupervisorwillsupportproblemsolvingattheappropriate levelstomeettheProgramme’sobjectives.

2. TheProjectManager(PM)willcoordinatethedailyactivitiesoftheImplementationMonitoringTeaminalignmenttothevariousinterventionsofthePSRPandtherebysettheactivitiesoftheteam.

3. The Communications Specialist will be responsible for the development and delivery of thecommunicationsandengagementswithstakeholders(includingthepublic)thatwouldfacilitatealignmentandbuy-inintotheProgrammeviastrategiccommunicationproductsandactivities.

4. TheFinancialSpecialistwillleadandmanageallaspectsoftheplanninganddesignoffinancialmechanisms, implementationandthemonitoringof the financial interventions included in thePSRP.

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5. The Legal Specialist will develop legal reviews on various interventions within the PSRP. Thespecialist leads the planning, design, implementation and monitoring of the governanceinitiativesinthePSRP.

6. TheTechnicalLeadwillmanageallaspectsoftheassessment,planning,design,implementationandmonitoringof theoperationaland technical interventions required toachievegrowthandaddressinfrastructuredeficitsandweaknessesacrossthesector.

7. The Document Manager will provide an administrative secretariat function to theimplementationteamthroughstandarddocumentmanagementservices.

8. MonitoringandEvaluationspecialistwilldevelopandimplementtheM&EplanforthePSRP

9. Disco turnaroundexpertwill provide support toNERCand theDisCos toprepare, implementandevaluatethePIPs.

10. Economistwillassistinevaluatingthecontingentliabilitiesonaperiodicbasis.

ActionSteps


1. IdentifythecriticalrolesforthePSRPImplementationMonitoringTeam;

2. Commencetheresourcingprocesstoidentifyandrecruitsuitablecandidates;

3. Commenceonboardingprocessandinaugurateteammembers;

4. Organizeandoperationalizeamulti-agencyfinancialteam;and

5. Organizeandoperationalizeamulti-agencyLCDPteam.

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8.DETAILEDCOMPONENTS:POLICYINTERVENTIONS

8.1.FISCALANDMONETARYPOLICIESTOENCOURAGEPRIVATESECTORINVESTMENTS

Increaseawarenessoffiscalandmonetarypoliciesrelevanttothepowersectore.g.dutywaivers,pioneer status, capital importation, and foreign exchange policy, in order to encourage privatesectorinvestments.

In addition to resolving the financial challenges of the sector, the process for channelling privatesector investment into Nigeria’s power sector could be further streamlined to reduce projectdevelopmenttimeandcost.Thiswillenhanceprivatesectorinvestmentintothesector.

As multiple agencies decide on various aspects of the project development cycle, templates willneedtobeestablishedtoavoidalengthyprocessandreducethecostofprojectdevelopment.

Government has developed options for sustaining the sector by providing fiscal and monetarypolicies toencourage investment suchasdutywaivers,pioneer status for taxholidaysandcapitalimportation.Thesearedesignedtoprioritiseindustryrequirementsforagivenperiodtoencourageprivatesectorinvestments.

ActionSteps


1. Review and update existing policies and incentives to ensure alignment with PSRPobjectives;

2. NBETtodevelopsimplifiedtemplatesforIPPkeyprojectdocuments;and

3. RecommendmeasuresforadoptionacrossPSRPinterventions;

8.2.INCREASEELECTRICITYACCESS

Implementoff-gridandrenewableenergy.Createaframeworkfortheoff-griddevelopmentplanincludingmini-grids,andsolarhomesystems.

The REA in line with its mandate to increase electricity access is championing and promotingrenewableandotherdistributedoffgridpowersolutions.

OFFGRIDSOLUTIONS

Increaseelectricityaccessbyimplementingoffgridrenewablesolutions

As part of its plan to fast track achieving the overall objective of the government outlined in theERGP and PSRP, the Rural Electrification Agency (REA) has developed the off-grid electrificationstrategy with the primary objective of increasing electricity access to rural and underservedcommunitieswithinthecountryandtooptimisethedeliveryofatleast10,000MW(off-gridandon-grid)ofoperationalcapacityby2020.

The off grid electrification strategy is premised on the need to shift from centralised powergenerationanddistributiontoadecentralisedapproachwithaviewtoachievingeconomicviability,demanddriven,marketorientedandprivatefocusedelectricitymarket.Withthisgoal,theMiniGridRegulation2016wasenactedtoaccelerateelectrificationinunderservedareasandpoorlyelectrifiedcommunitiesandnon-functionaldistributiongrid.

REAhasidentifiedthefollowingoffgridsolutionsforimmediateimplementationandpromotion:

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1. Rural mini-grids: This component would fund the electrification of unserved andunderserved areas that havehigh economic potential. The focuswould beon solar-basedminigrids,whichcanberolledoutquickly,and later integratedwithDisCos.Thetentativetargetis200,000households,subjecttoscalingupordownduringprojectpreparation.REAwillalsoencouragethedevelopmentofmini-gridsbycommunitiesandprivateenterprises.

2. Stand-AloneHomeSolutions:Thiscomponentwouldpromotethedevelopmentandroll-outofstand-alonesystemsincludingSolarHomeSystems(SHS)andsolarlanterns,amongotherproducts, forareaswheremini-gridsarenotviable.Thestand-alonesolutionsmay includeindividual photovoltaic (PV) systems that can provide sufficient electricity to satisfy theneeds of households and small commercial enterprises (e.g., lighting, radio, TV, fan). Inaddition,thestandalonesolutionswillprovidebetterservicesat lowercostthankerosene,small petrol generators and battery powered torches. These systems will provide criticalservicestothehardest-to-reachcustomers.

3. Reliablepowerforfederaluniversitiesandteachinghospitals:ThefocuswillbeonNigeria’sEnergising Education Programme. The objective is to develop off grid independent powerplant(IPP)projectsforthegenerationandprovisionofadequatepowersupplyto37federaluniversities,7universityteachinghospitalsacrossthecountry(includingstreetlighting)andsurrounding communities. The Federal Ministry of Power, Works and Housing willimplementthiscomponent.Thepowerwillcomefromoff-gridsystemsrangingfrom1MWto 10 MW. This programme has been broken down into phases and is expected to becompletedwithina12monthperiod.Thefirstphaseconsistsof9universitiesand1teachinghospitaldistributedacrossthesixgeo-politicalzones.

4. Economicclusters:Thefocusistoprovideadequatepowertoselecteconomicclusterswithhigh levels of commercial activities. The goal is to provide efficient, clean and sustainablepowertocatchmentareasthathavehighgrowthimpactontheeconomyandrelyheavilyonelectricity to run their businesses. These catchment areas include Somolu PrintingCommunityinLagosState,AriariaMarketCommunityinAbiaStateandSabonGariMarketinKanoState.

5. Energy database: The focus is to provide online visualisation on communities, economicclusters,population,energydemandandsolarirradiance.

6. EligibleCustomer:Customersthatutilisemorethan2MWofenergyfromthegridhavetherighttocompetitivelypurchaseelectricitydirectlyfromGenCosastheyhavebeendeclaredbyGovernmentpolicytobeeligiblecustomers.

The REA has identified and selected catchment areas in the North West, South East and SouthWesternpartsofthecountryforimmediateinterventionundertheeligiblecustomerdirectiveusingspecific industry indicators such as population density, trade, employment sustainability, amongstothers. The focus on the Micro, Small and Medium Enterprises (MSMEs) sector cannot be overemphasizedastheyconstitutethebedrockofeconomicdevelopmentinmostcountries.

ActionSteps


1. ImpactanalysisonDisCoandGenCobusinesses;

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2. Developingaframeworkforeligibility;

3. NERCtofinalizeconsultationwithstakeholdersontheframeworkforeligibility;and

4. NERCtoreleaseregulationonEligibility.

Developing Off-grid Master plan: The Rural Electrification Agency’s objective is to increaseelectricity access and to accelerate electricity service penetration across the country to meetnationaldevelopmentgoals.Keycomponentsasstatedaboveincludethemini-gridregulation,off-gridsolutionssuchastheruralminigrids,SolarHomeSystems,captivegenerationandeligibility.

ActionSteps


1. Reviewexistingpolicyframeworkstodeterminetheiradequacy;

2. Developstrategydocumentthatoutlinesthegoalsandapproachesforoff-gridsolutions;

3. Set targets of rural electrification access in line with Government’s overall electricityobjectives;and

4. Concludetheconsultationprocessforthemini-gridregulationandEligibility.

ThiscomplementaryprogrammewillbeassessedforWorldBanksupportandpotentiallyforsupportfromotherdonors.

REA PMU: The overall objective of the PMU is to address the Rural Electrification Agency (REA)Management needs associated with the Energising Education. Critically, the team will need todevelopthenecessarydocumentationtomeettheprescribedservicestandardsoftheWorldBank.ThePMUwillprovidethemonitoringandcoordinationandwillberequiredtobuildcapacityintheREAwhilstinteractingwithnormaloperations.

ActionSteps


1. DevelopblueprintfortheREAPMUstructure;

2. DevelopworkplanfortheimplementationoftheREAPMUactions;and

3. Increaseelectricityaccessby implementingoffgridrenewableenergysolutions:RuralMiniGrids,StandaloneHomeSolutions(SHS),IPPsforfederaluniversitiesandteachinghospitals.

ONGRIDSOLARSOLUTIONS

In addition to the above mentioned off-grid solutions, improved electricity access can also beachieved through on-grid solar power solutions. NBET has signed PPAswith 14 frontrunner solardevelopers(IPPs)anditisexpectedthattheseprojectswilladdbetween1,000-1,100MWofpoweroncecompleted.

8.4.ECONOMICPROCUREMENTOFPOWER

Promoteleastcostgenerationentryandensurecompetitiveprocurementofpower.

Althoughinstalledgenerationcapacity iscurrentlynotamajorconstraint,newgenerationcapacityshould be planned in advance in a least cost and transparent manner to ensure economicprocurementthatbenefitsconsumersandenablescompetitivetariffs.

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Itisessentialthatadditionalgenerationcapacityrequirementsareassessedandphased-incarefully,inparalleltotheremovaloftheexistingconstraints.Thiswillhelpmanagepowersectorcostsandcontingent liabilities; thus allowing the sector to achieve financial sustainability with lower tariffadjustments.

Theexistingregulatoryframeworkprovidesstepsandprocessesrelevanttoplanning:

1. The Grid Code includes conditions for the System Operator to develop 20 years demandprojections, and data exchange for planning purpose. However, demand projections areestablishedmainlywithatopdownapproach.

2. Acomplementarymechanismorprocedureshouldincorporatealsothebottom-upapproachbasedondemandprojectionsofDisCos,whichcouldbebuiltbasedontheDistributionCodethatrequiretheDisCotocarryoutdemandforecastingandloadprofiling.

3. TheGridCodeestablishesthestandardsandproceduresfortheSystemOperatortodevelopthetransmissionexpansionplan.

4. TheMarketRules(forTEM)includeaproceduretodetermineeveryyearloadforecastandtheneedfornewgenerationentryorpowerprocurement:

i. the System Operator prepares and NERC approves a Load Projection Report,covering 10 years demand forecast for each DisCo and total demand, reserverequirementsandanassessmentoftheadequacyofthetransmissiongrid.

ii. TheMarketOperatorsubmitsthegenerationadequacyreportforNERCsreviewandapproval.

iii. based on the assessment of each Disco and total demand for the system, MOdetermines the adequacy of contracted generation to supply future demand andreserves,asdefinedintheapprovedLoadProjectionReport,andquantifiestheneedfornewgeneration.

TheLCDPwillalsoassesstheimplicationsonaverageelectricitytarifftorecovercosts,coveringnotonlygeneration investmentsbutalsotransmission investmentsforsystemreliabilityandeconomicdispatch. The LCDP combined with the generation adequacy report will guide the timing of newgenerationprocurement.Generation capacitywill be procured based on approved LCDP through competitive procurementprocedures to manage sector costs and contingent liabilities. During the implementation of theLCDP, NERC and NBET will ensure that new generation capacity procurement is competitive andconsistentwiththeLCDP.AspartoftheLCDPapproval,oversightforsomepipelineprojectsmayberequired(thosewithsignedPPAs)whilecarefullyreviewingcost/contingentliabilityimplications.

ActionSteps


1. The FGN issues a policy/strategy to guide generationmix, including targets on renewableenergyresourcesandinterconnections;

2. Each year, the System Operator prepares demand projection based on Grid Code andMarketRules,workingcloselywithDisCos,followingwhichNERCreviewsandapproves;

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3. Eachyear,theMarketOperatorpreparesthegenerationadequacyreportestablishedintheMarketRules,basedontheSystemOperatorLoadProjectionapprovedbyNERC;

4. Aplanningmultiagencyworkinggroupisestablished,ledbytheSystemOperatorandundertheoversightandcoordinationoftheMinistryofPower,WorksandHousing,topreparethegenerationexpansionplanbasedondemandprojectionscenariosandgenerationmixpolicy;

5. IncoordinationwiththeLCDPteamandstandardsestablishedintheGridCode,theSystemOperatortogetherwithTCNdevelopsthetransmissionexpansionplan;

6. The LCDP with the generation expansion plan and the System Operator transmissionexpansionplanaresubmittedtoNERC,forreviewandapproval;

7. TheLCDPisreviewedannually;

8. ClarifytheentityresponsibleforthepreparationoftheLCDP;

9. NERCupdatesitspowerprocurementregulationsadjustedtoestablishthatnewgenerationcapacity is procured competitively and consistent with the generation expansion inapprovedLCDP;

10. NBET prepares the standard bidding documents for competitive procurement of newgeneration,consistentwithNERCregulations;and

11. Based on generation adequacy report and the LCDP, NERC assesses the need for newgenerationentryandauthorizedtenderfornewpowerprocurement.

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9.ACTIONPLANANDTIMELINES

9.1.ACTIONPLAN–PSRPTASKSFORNEXT12MONTHS

MDA ActionItem TargetDate

Federal Government ofNigeria

1. FEC approval of the Power Sector RecoveryImplementationProgramme

Completed

2. Inclusion of the Financing Plan in the FiscalStrategyPaper/MTEF2018-2020

Completed

3.Policystatementthattariffmustbeappropriateandsustainableoverthenext5years

Completed

4.EstablishedboardsforNBETandTCN April302018

5. Established boards for BPE, NDPHC, NAPTIN,NEMSAandNELMCO

April302018

6. Designate professional directors inrepresentationofBPEonDisCoboards

April302018

7.PaymentofMDApastdebtsettlement March312018

8. Commence mechanism to ensure Payment ofMDAfutureelectricitybills

March312018

OfficeoftheVice-President

9.Establishtransparentandcomprehensivesectorwebsite

Completed

10. Project manage FGN deliverables for WorldBank Group prior Disbursement Linked Indicators(DLIs)

April302018

11. Conduct desktop verification process forMDAdebts

Completed

12.Conductphysicalverificationexercise forMDAdebts

Completed

Federal Ministry of Power,WorksandHousing

13. Coordinate FGN communication strategypreparationandroll-out

Completed

14.EstablishcommunicationsstrategyforPSRP Completed

15. Issue clear directives on tariff (i.e. proposedfundingtocovershortfall)

Completed

16.Ensureall requirements forNEMSFaremet toallowcompletionoffulldisbursement

March312018

Nigerian Bulk ElectricityTrading Company (NBET)Plc.

17. Finalize and make effective vesting contractswithDisCos(Abuja,Kaduna,Benin,Yola)

March312018

18. Commence phased activation of PowerPurchaseAgreements(PPAs)

June302018

19.Developcompetitiveprocurementplan June302018

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BureauofPublicEnterprises(BPE)

20.LegalreviewofPerformanceAgreements Completed

21. Obtain all management accounts from eachDisCoonamonthlybasis

Ongoing

22.Obtainallauditedaccountsyearly Ongoing

23. Conduct legal review of contracts anddirect/bankagreementswith theconsequencesofalltypesofterminations

Completed

24. Comment on NERC Draft Business ContinuityRegulation

Completed

25.PresentproposalonwayforwardforTCN Completed

26.ConductassessmentofATC&Closses March312018

27. Report on Adequacy of DisCos technicalpartners

Completed

Nigeria ElectricityRegulatory Commission(NERC)

28. Conduct tariff methodology reviews andincludequarterlyupdates

December 312018

29. NERC to engage with BPE on DisCo revisedbusiness plans to be negotiated, finalized andeffected

March312018

30. Implement mechanism for regular futurepaymentofMDAelectricitybills

March312018

31.Developprocessofmanagement contractor intheeventDisCofailure

Completed

32. Pause on new generation procurement(unsolicited)

June302018

33.NERCtoconductforensicauditofallDisCosSeptember 302018

34.CommencetheactivitiesleadingtotheRESET Completed

35. Phased implementation of the RESETcommences

October12018

36.CompletionofImplementationofRESET June302019

37.PublishtariffreviewresultsonNERCwebsite June302018

38. Publish all audited accounts of DisCos, NBETandTCNonNERCwebsite

January312018

39.Projectsustainabletariffoverthenext5years January312019

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40.BuildcapacityofNASS,Judiciary,etc.onsectoractivitiesandpublicize

April302018

41. Require DisCos to identify all customers andcommencemeteringProgramme

September 302018

42. Establish compliance strategy for licenseesandpublicize

Ongoing

43. Finalize business continuity regulation aftercompletingconsultation

March312018

44. NERC enhances website (communication) andincludesperformanceevaluationofDisCosandTCN

March312018

Transmission Company ofNigeria(TCN)

45. MO to execute market participationagreementsandmakeLCseffective

March312018

46.SOsubmitdemandprojectionreportfor5yearsto NERC for approval and SO publishes Report inwebsite

June302018

47. MO Submit generation adequacy report toNERCforapprovalandpublishesinMOwebsite

June302018

48. Submission of least cost generation andtransmissionexpansionplanforNERCapprovalandTCNadoptionoftransmissionexpansionplan

June302018

49. Update Grid Code as needed to ensurefeasibilityandmanagementofshortages,includingdemand forecast bottom up approach and openaccessprovisions

March302018

50. Regularly submit to NERC performance dataandplannedtransmissioninvestment(Monthly)

Ongoing

51. Publish inTCNwebsite:updated transmissionexpansion plan, standard connection and use ofsystem agreement, and procedures for newconnections

March302018

Nigerian Electricity LiabilityManagement Company(NELMCO)

52.Preparestrategyonliabilitysettlement March302018

MinistryofFinance53.PaymentmechanismforMDAdebtpayment March312018

54. Advise on possible funding options for PSRPandoperationalmechanism

Completed

CentralBankofNigeria

55.AccelerateLCresolutionforAbujaandKaduna March312018

56.CompleteNEMSFdisbursement June302018

57.Concludeupstreampaymentassuranceplan Completed

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Niger Delta Power HoldingCompany(NDPHC)

58.Completeallprojectstoevacuationstageforall10powerplants

September 302019

59.CompletealltransmissionprojectsSeptember 302019

60. Privatize Calabar, Geregu 2, Ihovhor andOmotoshopowerplantsinconjunctionwithBPE

December 312018

61.FinalizeallcommercialagreementsSeptember 302019

Ministry of PetroleumResources/NNPC/NGC

62. Develop clear plan on completion of gas-to-powerprojects

September 302018

63.Developclearplanongasvandalismpreventionstrategy

Completed

64.Activategassupplyagreementsandcontracts Ongoing

Nigeria ElectricityManagement ServicesAgency(NEMSA)

65.ConductNetworksintegrityandsafetyauditofDisCosandTCN

September 302018

66. Increase accessibility and availability ofNEMSA’ssupportservices

October12018

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APPENDIX1FiscalExpendituresandGrossFinancingRequirementsoftheFinancingPlan

Toassessthetotal fiscalcostsoftheFinancingPlanfortheFederalGovernment, it isnecessarytoinclude the estimated debt service payments associated with government borrowing incurred inordertofinancetheadditionalFGNBudgetaryContribution5.

Toestimate the total fiscal expenditure requirements, the interestpaymentsof theCBNPaymentAssuranceFacilityandthedebtfinancingoftheAdditionalFGNBudgetaryContributionareaddedtotheexpectedrevenueshortfallfor2017-2021andtheaccumulateddeficitfrom2015-2016.Thetotalfiscalexpenditurerequirementsfor2017-2021areestimatedatNGN1,840billion/USD$6.03billionunderbasecasemacroandsectorassumptions.

To estimate the total gross financing requirements, the principal repayments/amortization of theCBN Payment Assurance Facility and the debt financing of the Additional FGN BudgetaryContributionareaddedtotheexpenditurerequirements.Thetotalgrossfinancingrequirementsfor2017-2021areestimatedatNGN2,071billion/USD$6.79billionunderbasecasemacroandsectorassumptions.

Table7:ProjectedFiscalExpendituresandGrossFinancingRequirements2017-2021

NGNBillion USDMillion %

SectorRevenueShortfall(2017-2021) 1,150 3,770 62.5%SectorHistoricalDeficit(2015-2016) 420 1,378 22.9%InterestPayments 270 884 14.7%CBNPaymentAssuranceFacility(debt-domestic) 132 434 7.2%AdditionalFGNBudgetaryContribution(debt-mixed) 137 451 7.5%TotalExpenditureRequirements 1,840 6,033 Principalrepayments/Amortization 231 757 CBNPaymentAssuranceFacility(debt-domestic) 231 757 AdditionalFGNBudgetaryContribution(debt-mixed) 0 0 TotalGrossFinancing(Inc.amortization)Requirements 2,071 6,790

Thefinancingsourcesidentifiedsofarwillfullyfundtheestimatedtotalexpenditurerequirements:2017-2021sectorrevenueshortfall,accumulatedhistoricaldeficit2015-2016,andinterestpaymentsfromthefinancingoftheplan.

5 The debt service payments associated to the World Bank performance-based loan during 2017-2021 are still beingestimatedandsoarenotincludedinthecalculations;however,thesepaymentsareexpectedtobeofasmallmagnitudecomparedtootherfinancingsources.

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