Electricity Generation: How Govt Debts Hinder Discos

Obioma Ogbonnaya examines the performance of the energy sector and some of the challenges that have hindered its optimum performance, the role of government, and other palliatives that can sustain the gains already made

Electricity Distribution Companies (Discos), according to Odion Omonfoman, an energy consultant and CEO of New Hampshire Capital Limited, provide the last mile services in the electricity supply value chain. Discos provide the connection between customers and the electricity grid and as such, are plagued with the “last mile problem” of high costs and quality of service similarly faced by last mile service providers in the telecoms industry. Discos are said to be responsible for transforming or stepping down electricity from the high voltage of 132 kV at the transmission level, to the lower voltage levels of 33kV/11kV/0.415kV depending on the category of customer. Electricity in most residential homes is supplied at voltage level of 0.415kV. Discos are also responsible for the marketing and sale of electricity to customers. This, Omonfoman said is an extremely important function in the electricity value chain as Discos are the cash boxes of the entire electricity value chain, as all the revenue needed to sustain the electricity industry is earned through the distribution sector.

Presently, there are eleven Discos in Nigeria, arising from the unbundling of the Power Holding Company of Nigeria (PHCN). The eleven Discos have since been fully privatised and are private sector operated and managed, with the exception of Yola Disco, where the core investor declared force majeure arising from the continued insurgency in North-Eastern Nigeria.

Over the years, the discos have strived to provide services to Nigerian despites some unforeseen obstacles and what other Nigerians will refer as incompetence on the part of the Discos.

Some years down the line some Discos are faced with huge operational challenges, which some experts noted that are clearly visible in their operations and service delivery.

Some of the challenges, the experts said, include lack of sufficient energy supply from grid; old, obsolete networks; lack of maintenance of network equipment, poorly trained manpower; poor customer data; low meter penetration; health, safety and environmental issues; and a near absence of investments due to poor revenues, inadequate tariffs and external funding constraints.

In recent times the challenges have come to include the refusal or the inability of government parastatals and MDAs not paying their bills to Discos nationwide, which now stands at about N100billion. The pegging of the tariff at around N28/W when the market demands about N50/W for sustainable operations for all DISCOs. As a result of this pegging, there’s a shortfall in tariff of about N500billion nationwide, which is currently slowing Discos down, as they cannot invest and expand their capacity.

These challenges could be further summarised into the these broad categories including arid energy insufficiency and instability; network infrastructure challenges (overloaded transformers and feeders, obsolete equipment, limited network, lack of automation, etc); tariff challenges and revenue shortfalls (non-cost reflective tariffs, low collection efficiency, etc.); metering challenges (huge metering gap, estimated billing, poor meter maintenance, etc.); operational challenges (long feeders, quality of workforce, large operational areas, etc.); energy theft; funding challenges (absence of long term “patient” capital (equity/debt) to fund apex investment, high cost of borrowing, poor credit history of Discos, etc).

While these challenges may have severely constrained the operations of Discos and thus, the non-realisation of the supposed gains of the privatisation of the power sector, experts say it is important to state that these challenges were precisely the reason why the privatisation of the power sector was done in the first place.

The broad objective of the privatisation was for the private sector to address these challenges that had plagued successor Discos while under government ownership. The reality is that these challenges were underestimated and in some instance, completely overlooked, by the BPE, NERC, core investors and their financiers. Notwithstanding, “we must emphatically state that this is not a rush to judgment about the power sector privatisation process. These challenges are teething challenges that core investors are faced with, and would eventually overcome with the right investment and reasonable time.

Despite these challenges, the Discos through their creativity have been able to improve Power generation across the country. For example, Eko Disco has improved service in areas like VGC, Banana Island, Ajah, and other places under it, for up to 20 hours of uninterrupted power supply. If the services continue to improve, the huge impact of this improvement on local businesses would be enormous as the economy would grow, local manufacturing will increase, attraction of foreign investment, improve local infrastructure, and accelerate Nigeria’s physical development.

For the Discos to before optimally, experts in the energy sector and the Discos themselves, agreed that government agencies need to pay their bills. Ultimately also, government needs to empower the DISCOs to do their jobs and help fulfill the objectives of the privatisation of power, as well as provide some financial instrument or programme to deal with the shortfall. This is so because if the shortfall is allowed to continue to rise and nothing is done, it may reverse all the progress and gains made so far in the system.

Just recently, the Minister of Power, Works and Housing, Mr. Babatunde Fashola, warned power firms in the country to deliver better services to electricity consumers or exit the industry.

Fashola, who stated this during the 11th Monthly Stakeholders’ Meeting held at the Ikeja West Transmission Station, Ipaja-Ayobo, Lagos, said, “We must use this year to tell our staff members that without our customers, they don’t have a job; and if you are not in a good mood, don’t pick the telephone.

“Without the customers and the consumers, there is no business; and I think that all of us in the public and private sectors must understand that. If you don’t have the skin and the patience to serve, leave.” He noted that the ministry was conscious of the challenges facing operators in the sector, but added, “My team and I are working as hard as we can to make the environment more responsive to you; and as I have said and will repeat that as pioneers, you will carry some burden. You will have to sacrifice perhaps more than what you have done, but I am optimistic that it will get better; I am optimistic that we can win together and we can win for the Nigerian people.”

On the issue of inadequate liquidity in the sector, Fashola assured the operators that work had commenced with development, local and international partners to resolve it. “We are trying to see what we can do together in order to bring the liquidity issues under some control and from there eventually solve it,” the minister added.

Fashola said, “We have listed and identified what the problems are; what we are trying to finalise is what comes first, what follows and what runs concurrently, because some of them have domino effects; if you solve one problem, you will solve three together.

“We will keep in constant touch with you as they evolve, to hear your side; we will use this meeting to continue to share the details of what we are seeing and to hear what you are experiencing.

“We need to do whatever is possible to do in our various distribution areas to improve the quality of service to continue to train personnel, to recognise that the customer is king and even if we cannot provide or solve the problem, we owe it a duty to explain what we are doing.”

According the federal government, discos craving for tariff increase in recent time should jettison the idea as it said that it will not approve a fresh electricity tariff hike at least for now, stating that it is still meeting with stakeholders in the country’s electricity sector, including the World Bank to provide some level of interventions to the market, which the Discos are also asking for.

By this, Fashola confirmed reports that government and the World Bank had initiated efforts to bail the country’s power sector from the existing liquidity challenges threatening its survival, just as the Nigerian Electricity Regulatory Commission (NERC) is expected to announce the new cost-reflective electricity rates to reflect current operational indices in the industry.

Statutorily, NERC undertakes periodic reviews of the tariff to factor in changes in operational indices like foreign exchange and inflation rates, price of gas for power, as well as changes in generation capacities. However, Fashola said that if the government’s deliberations with the World Bank on the financial challenges of the market end well, Nigerians would be protected from a possible electricity price hike.

“Government still has to deal with how to stabilise the value of the naira to the dollar, and again that will be impacted by how much money we get from oil production, which is still our major foreign income earner. We have used our leverage in OPEC to get OPEC to agree to a production cut, which heralded a price rise but can we as a protagonist take advantage of this by stopping to fight?

“People must be clear that if government accepts the recommendations that we will make to intervene, it is not to give the Discos a golden parachute, but first to protect citizens from price hike in terms of power for now and also to keep the subsectors so that they don’t lose their businesses.” A win win situation!!

Fashola identified the some of the root of the problems of some of the discos: “You would have heard that there are liquidity issues in the power sector that came from the way the privatisation itself was structured, essentially through bank loans. Most of the people who bought them had very little if any skin in the game in terms of their own private equity.”

He said technically, the banks owned the power assets, explaining that that was part of the problems of the Discos because of their debt burden, which had made it difficult for them to get more money to expand their distribution assets, their transformers and to get meters.

“Now all of that underperformance is not necessarily only their faults, it is also the way the economy has played out. Assets they bought and loans they took at N197 to a dollar have certainly lost value. We had a tariff increase to cushion that effect but all of that was almost wiped out by the depreciation in the naira to the dollar.

“Gas as a component of power production is indexed in dollars but the collection is in naira, so the bills that you could pay if you need only N200 to pay, you now need N400 to pay and you can’t increase the tariff to deal with that and those are the liquidity gaps.

“What we have seen in many parts of the world where these things have taken place, (is that) there have been a transitional funding support and when we recommended it or proposed it to the World Bank, they looked in their books and saw very correlative historical precedents that government still needs to intervene but not necessarily by giving money to the Discos and this is not a concluded policy, but perhaps in a way in helping them manage their debts with certain conditions either in governance, diminution of shares, requiring them to recapitalise or take some technical expertise.”

Fashola also said that the Transmission Company of Nigeria (TCN) had increased its electricity wheeling capacity to 7200 megawatts (MW), claiming that the transmission network was no longer the weakest link in the sector as often stated by stakeholders.

“The generalisation about the grid not been able to carry what we generate is really an inaccurate reflection of realities. We have expanded the grid; additional projects are going on, and the Kudenda substation in Kaduna is part of the grid expansion.”

With creativity and bilateral agreement with GENCOs, generating 140MW for its coverage area, companies like Eko Discos are working with Egbin to generate no fewer than 100MW, just as it also partners with Paras to generate 40MW. With all these creative initiatives, they the Discos believe that they can perform better if MDAs and other government parastatals pay their bills as when due and government can cushion their liquidity, Nigerians are in for brighter days ahead.

 

 

 

 

Related Articles