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The Siemens’ Power Deal: Why The Noise?

The recent release of the technical and commercial proposals of the deal has generated alot of conversations among Nigerians as almost everyone is tired of this pandemic of epic proportion bedeviling the Nigerian Electricity Supply Industry (NESI) – the disease of darkness and all that comes with it including over-estimated billing.

An Embarrassment

Some commentators believe that employing the services of a foreign government to salvage the power sector is an over-kill. However, this is not so. This step is necessary and should have been the case even before privatization. It should have been the first step before the privatization of the moribund vertically integrated power company, NEPA, a forerunner of PHCN and the privatized entities. It is an attestation and acceptance that we lack the requisite will and ability to revamp the power sector without introducing the Nigerian factor. Also, we have tried for many decades now to have a functional power system to no avail. Moreover, 85 percent of the finance for the project will be provided by the German Government while Nigeria will provide the remaining 15 percent in counterpart funding to be paid directly to Siemens. No one will expect the German Government to finance a project only for an American Company, such as GE, to implement it. Embarrassing as it appears, it is one of the best decisions made so far since the power sector reform exercise began exactly two decades ago. Afterall, the existing power system was built, not by Nigerian Engineers, but by British Engineers. Many nations that have developed in a similar manner to this deal with Siemens include UAE, Egypt, and Iran.

The Electric Power Sector Reform Act (EPSRA) 2005 gives enough power to the Nigerian Electricity Regulatory Commission (NERC) to sanction erring operators in the NESI such that there wouldn’t be any need for an external intervention of this nature. However, the regulator has not been given the autonomy and independence required for this level of privatization. It does not have the capacity (human resources) to deal with the problems.

The Nigerian Electricity market was designed to fail, according to Dr. Sam Amadi, a former NERC chairman, and rightly so. The distribution companies (DisCos) are unable to fulfil their roles because of several market flaws, some not of their own making, ones that will require corrections, before we can experience huruhuru in the NESI.

The correct implementation of the Nigerian Electrification Roadmap (NER) Project with Siemens will greatly improve the experience of consumers in the power sector.

Experience

Siemens is one of the power industry giants worldwide. They have significant experience in power generation, transmission and distribution systems. Some have asked whether Siemens have any experience in power generation. While it is true that Siemens does not own or operate generation, transmission or distribution substations, they are a notable service provider when it comes to building the necessary infrastructure for many power systems worldwide. In fact, Siemens has a power Generation outfit solely for power generation related businesses just as they have transmission and distribution services centres worldwide. Even if it requires working with consortia of local and international partners, Siemens has experience in building power plants. They have done so in Germany, France, Belgium, Egypt, South Africa, and Nigeria among others. They have worked on power generation projects such as the Azura Edo (in partnership with Julius Berger) and Gbaran Ubie in the Niger-Delta lately.

Local Content

The deal naturally comes with alot of local content packages. Yet, there is need for the project management team on the Nigerian side to focus specifically on the Nigerian Content Regulation 2014 released by NERC and the presidential executive order 5 on Nigerian Content while they identify services and opportunities to demonstrate local content in this project. The aim is to ensure that overall, more Nigerians will become empowered to carry on with the operation, management, and maintenance of the assets to be delivered. Also, in view of the fact that this kind of deal needs to be replicated throughout the country for at least 3 decades, it makes economic sense to domesticate the know-how and technology as quickly as practically possible. One area to focus on is the engineering design phase of the project where project governance and management will take place. Another area to focus on is the establishment of manufacturing plants and factories in Nigeria. If the market presents a long-term favourable outlook such as this, Siemens should manufacture transformers, circuit breakers, switchgears, relays etc in Nigeria. They should build fabrication and test yards in the country. This will have significant impact on local content, providing jobs and opportunities for Nigerians in the NESI.

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There is a huge scope for the implementation of the local content Act within this deal. All detailed engineering design should be done in Nigeria as a minimum. In the preparation of the Act in 2014, I have listed a number of services which should be handled by Nigerians and further work was done with NERC in 2017 to expand the list to develop a broader scope of deliverables including financial, legal, commercial and technical services. This deal will create employment opportunities within the sector while providing training that enhances the quality of existing human capital resources in the NESI.

Notably, Siemens conducted interviews for local partners and EPC contractors that they will work with in Nigeria as far back as the last quarter of 2019.

System Studies

Siemens referred to several system studies carried out to arrive at the areas of focus investments in the three-phase power project. There is need for the project management team on the Nigerian side to study these reports. Siemens should not simply rely on studies done by others to make investment decisions.

Incomplete Technical & Commercial Proposals

The released document does not contain fine details of the commercial proposal agreed by both parties. A signed copy has not been sighted. Moreso, parts of the items to be delivered in the phase 1 of the project are yet to be costed. This is on critical path. With no detailed scope and price agreed, it is possible for a party to the contract to reneged on certain terms, do little or cause budget overrun or variation. There is much work to be done by the project management team on the Nigerian side.

Metering

One of the dire needs of the NESI is a national electricity metering infrastructure which provides meters for all consumers in such a way that data from consumer consumption and payments made is transparently available to relevant stakeholders. This deal with Siemens is however limited to the back-end which escrows payments by consumers to ensure transparency throughout the NESI and does not help with the slow pace of deployment of meters by MAPs.

Although the Siemens deal does not cover the provision of meters to consumers, it offers a technology-based solution to integrate payments for electricity into one escrow account, visibile to all relevant stakeholders. From here, parties can be paid their fair share of the tariff. The government, in a separate intervention, may still have to fund metering of consumers in the power sector either through the Meter Assets Providers (MAP) scheme or via the DisCos.

Operations and Maintenance

Before the completion of the Siemens’ deal, it will be necessary to have developed experience in asset management to cater for the life cycle ownership of the installations nationwide. The DisCos (or the entities that take over from them) should not be allowed to make the power assets worse than received. They have to embark on a regular maintenance regime which hitherto has not been their practice.

Project Management

A project management team consisting of technocrats and seasoned power system engineers should be assembled in line with the presidential power initiative.

The privatization process failed partly due to lack of project management and thus, there is need to avoid a repeat. It makes no sense to go through the deal only to realize years later that we have put the cart before the horse. Power Sector technocrats, especially those with demonstrable knowledge of power systems, are needed to manage the interface between the FG and Siemens from the word go.

Without due diligence, the Siemens’ deal will be like the regular turn around maintenance (TAM) of our refineries which remain non-functional after several rounds of investments.

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Single-Sourcing

In contract management, this deal is an example of single-sourcing. This is fraught with obvious disadvantages including the absence of competition, possibility of price monopoly in the face of poor performing sub-contractors that can prevent the intended cost-savings and or value-for-money from being realized. It may serve the NESI better if the same project scope is offered to three industry giants including ABB, GE and Tata to submit quotations to serve as benchmarks that offers the most technically and commercially viable bid. If not, it may be very difficult to create a sense of competition in the award of new services in the future. In addition, there is the future risk of the lack of available component spares especially when there is a failure of a batch of equipment installed throughout the network. We can soon run into a situation where a specific firmware on a protection relay installed all over the country mal-functions and the system goes in disarray. Also, it is possible for the manufacturer to cease production of a network component which forces a total replacement nationwide. These things take place!
On a more technical front, it must be highlighted that the deal in the first phase does not include the construction of overhead lines and the power factor used in the design calculations is 0.93. This needs to be increased to at least 0.95 while introducing penalties for poor power factor consumption to reduce network losses.

Synergy with TCN & DisCos

As TCN, fully owned by the FG, already received financial support for transmission network upgrade via a combination of loans and grants from several donor agencies, it had plans in the Transmission Rehabilitation and Expansion Programme (TREP) to build transmission capacity greater than anticipated in this deal in the short to medium term. Similarly, a total of 72billion Naira has already been approved by the FG for the Distribution Expansion Programme (DEP) following due consultation with DisCos. The intended scope of work in this deal with Siemens is a subset of both DEP and TREP. This has a potential for duplication of scope and mismanagement of funds.

As the DisCos came to the end of their 5-year contract with the FG in December, 2019, they have been asked by the Nigerian Electricity Regulatory Commission (NERC) to prepare Power Improvement Plans (PIPs) detailing the scale of investment they plan to carry out during the next regulatory review period upon which tariffs will be set. Clearly, some of the planned upgrades to be catered for by tariffs payable by consumers are the same as those included within the scope of the Siemens’ deal – a case of double jeopardy for consumers who have to pay for both!

Furthermore, DisCos and GenCos are private entities. It is not clear how the arrangement will work with Siemens. One thing is certain, to make a success of the deal, Siemens will have to work in synergy with the operators to ensure the realization of the objectives, effectively becoming the de-facto technical partner of all the operators while representing the interest and or shareholding of the FG where applicable. This may create technical, legal and commercial issues. Already, the DisCos have sued the FG for intrusion into their corporate existence with the planned forensic audit recommended as part of the review of DisCos’ ownership by the El’Rufai adhoc committee inaugurated by the national economic council (NEC).

Inadequacy of Gas Infrastructure

The majority of our portfolio of power plants are gas-fired. With lack of adequate gas infrastructure and pricing, the successful implementation of this deal remains in doubt. More has to be done in the area of flare gas collection and utilization, gas-to-power initiatives, pricing, and a more secure network of gas distribution with adequate redundancies or flexibility.

The FG is determined to attract private sector investment in the power sector by upgrading the transmission and distribution networks while ramping up generation capacity available for consumption by consumers in the Nigerian Electricity Supply Industry (NESI) to 25000MW (25GW). The proper implementation of the deal with Siemens is capable of making this a reality.

Contributor: Engr. Idowu Oyebanjo

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