Electricity Market Revenue: A Shortfall Foretold

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In 2014, a report by the Nigeria Infrastructure Advisory Facility (NIAF) warned that chronic financial illiquidity was about to hit Nigeria’s privatised electricity market, and offered suggestions to come against the event. Two years down the line, the prediction is full-blown with the sector reeling in heavy revenue shortfall. Chineme Okafor writes

“Monthly receipts are only about half of monthly total billings for bulk power supply which is approximately N24 billion. Improving payment performance is crucially important to the viability and commercial sustainability of the privatised market,” said a 2014 report, titled, ‘Dealing with the financial shortfall in Nigeria’s electricity market’ which was prepared by the Nigeria Infrastructure Advisory Facility (NIAF) for the market operator.

Obtained exclusively by THISDAY then, the report stated that the power sector, which was just about a year old from privatisation, was going through a key financial phase that had the potential to make or mar its expected advancement into a truly contract-based electricity market.

“At present rates, it could take up to five years to eradicate the recurring monthly shortfall. Cummulative payment arrears would amount to approximately $4 billion.

“It is far from clear that all companies in the sector can continue to self-fund a significant proportion of their operations over such an extended period. Significant losses are being registered by the many banks funding the power sector. Without action, this trend seems likely to worsen,” the NIAF report added.

At that time, the market regulator, the Nigerian Electricity Regulatory Commission (NERC) overlooked the claims in the report, saying the report had overestimated the sector’s financial challenges and that it was in talks with the Central Bank of Nigeria (CBN) for a stabilisation fund to cushion whatever shortfall that may exist.

A N213 billion CBN-driven stabilisation fund was subsequently initiated in this regards, but two years down the line, the market’s revenue shortfall has grown to about N809 billion, which operators recently disclosed.

Current market shortfall

Recently at a forum in Abuja, operators in the sector disclosed that the total financial shortfall of Nigeria’s electricity market has reached N809 billion and may add up by the end of 2016.

Speaking at the October edition of the Nextier Power Dialogue in Abuja, representatives of both generation and distribution companies explained that the sector was in dire straits and needs urgent policy intervention.

The Managing Director of the Niger Delta Power Holding Company (NDPHC), Chiedu Ugbo, and Executive Director of the Association of Nigeria’s Electricity Distributors (ANED), Azu Obiaya, said the country’s electricity sector was currently under a very serious liquidity crisis that could undermine its progress.

Ugbo and Obiaya spoke from the perspectives of their respective sub-sectors, and posited that it was indeed a trying time for the sector.

Obiaya, who spoke from the Discos perspective, stated that the combination of regulatory decisions taken by the Nigerian Electricity Regulatory Commission (NERC) on the deployment of a cost-reflective tariff, huge debts owed by government agencies as well as customers’ push-back on the electricity tariff had contributed to the huge shortfalls recorded by the market.

He said the Discos now record an average monthly shortfall of N38 billion, while debt owed by the government for energy supplied to its ministries and departments had as at July 2016 increased to N53 billion.

According to him, the revenue shortfalls of the Discos could reach N309 billion by the end of 2016, and that high demand customers like the Manufacturers Association of Nigeria (MAN) do not pay bills based on the MYTO 2015 model.

He stated that the current situation of poor revenue collection due to prevalent payment defaults had been encouraged by Nigeria’s indecision on what economic philosophy it wanted to adopt for the power sector, adding that the sector had continued to run on a tariff that is not cost reflective.

Obiaya also stated that with the current market situation, banks had been reluctant to lend funds to Discos for capital injection.

“From the period of November 1 through to December 2014, MYTO 2.0 was not cost-reflective and as a result of that we have a revenue shortfall of N298 billion as at December 2014,” he said.

“There has to be a boundary between economic efficiency and social welfare, either we elect as a government to be socialist or a capitalist,” he added.

Obiaya explained that the decision of NERC to freeze a class of consumers tariff in 2015, cancel collection losses amongst other regulatory decisions and the country’s economic challenges had also compounded the situation.

Also, Ugbo said the financial and operational challenges of the NDPHC in its eight power stations that generate and transmit about 1700 megawatts (MW) of electricity into the national grid, were quite similar to what other generation companies experience in the sector.

He added that up to N105.235 billion is owed to the NIPPs so far by the market as unpaid cost of energy supplied.

“Since Olorunsogo, which was the very first to come into the grid in January 2011 to August 2016, the total energy invoiced by the eight operational power plants amounted to N235 billion, out of that about 55.3 per cent of the invoice is what has been paid because at the initial stage before the interim period we were getting significant payments and after the interim period, there was also significant payment by the Discos,” said Ugbo.

The chief executive gave a breakdown of the company’s transaction with the market, saying, “So, we have about 44.7 per cent total in debt. We got a tiny percentage from the CBN intervention – N8 billion, that is why the outstanding debt is a bit reduced. But as I speak today, as at August, which was the last invoice, we were owed by the market about N105 billion, and it is not imaginary but based on the invoice as settled by the entity saddled with the responsibility to do that and that is the market operator.”

“The market operator settlement process shows we are owed N105.235 billion as at today. Just to take us back to history, in 2011, we invoiced N8.2 billion; in 2012, we invoiced N21.9 billion; 2013 – N46.9 billion; 2014 – N51.3 billion; 2015 – N62.4 billion and 2016 – N44.6 billion, and that is the total of N235.4 billion.

“Of these invoices, in 2011 we got 39 per cent; 2012, we got 26 per cent; 2013, we got 62 per cent; 2014, we got 72 per cent of the invoice; 2015, we got 62 and 38 per cents in 2016. It keeps going down in 2016, and for the June invoice, we got about 18.5 per cent and 19 per cent in July.”

Ugbo further said: “Very soon, we might run out of money and that means that about 500 people will not have jobs. For the legacy period, we received about N30.58 billion, for the interim rule period, we received N15 billion and for the Transitional Electricity Market period, we received N59 billion.

“When you compare this to our operational expenses, you will see that we are already in trouble. From the collections, our gas bill in January and February N3.8 billion, March was N3.4 billion. There is no month we have a gas bill less than N2.4 billion. The total we owe for gas now is about N42.207 billion.”

He noted that the liquidity affected the NDPHC such that it was not able to fully utilise its available generation capacities because of the lack of gas.

He also said because of the challenges, the company recorded significant plant idle time at their locations.

“We have low productivity and inability to meet obligations. This company is owned by the three tiers of government and they have made investments and should expect returns on their investments but we are yet to post any returns to the governments because of the lack of liquidity in the sector. As a going concern, this is challenging us. Are we able to continue to do business in the sector?,” he added.

Even though the NIAF in 2014 tipped off this development, and suggested preventive measures, the situations as indicated by Ugbo and Obiaya’s disclosures have remained unchanged with signs they may not improve soon.