How Fashola Can Get Power Sector Right



‎A former permanent secretary, ministry of economic affairs, Olusola Adeyemi writes that appropriate pricing system and other stringent actions are required to resolve the power sector conundrum

Electricity supply is considered the most critical impediment to the achievement of the Vision 20:2020 target of double digit growth and reduction of poverty to the barest minimum. The wide gap in electricity supply vis-a vis demand is one of the leading issues in the on-going effort to move the economy towards the desired state of development.

There was a rapid decline in electricity power supply from an average of about 5000MW (megawatts) in the mid 1970s to less than 4000MW by 2014 compared with the current estimated demand of 15000MW. Simultaneously, performance of the manufacturing sector, a key index of real economic growth and development declined from about eight per cent of GDP to six per cent over the same period compared to the achievement of twenty to twenty- five percent in some of the comparator countries including South Korea, Brazil and Malaysia among others.

The situation of increasing gap in electricity demand and supply was exacerbated by the demand on account of the rapidly increasing population (growth rate of about three per cent per annum) and the rising incidence of urbanisation from the estimated twenty to twenty-five per cent in the early 1970s to the 2002 World Bank estimate of about forty-five per cent. One clear manifestation of the growing disequilibrium in the demand/supply scenario was the persistent increase in the demand for private power generating plants by households, private sector establishments and governments at all levels. Total self-generated electricity was estimated at about 8000MW or about three times the amount of electricity being fed into the national grid system.

Appropriate pricing has been identified as the most critical issue of the electricity supply industry (ESI). Energy Commission of Nigeria estimated the average cost of electricity supply at about N12 per kilowatt hour compared to the prevailing tariff regime that ranged fom N6.0 for the lowest category of residential consumers with single phase metre to an average of N15.8 for the commercial/industrial user.

PHCN’s inability to cover cost of production also gave rise to its huge indebtedness to the National Gas Company (NGC) which supplied feedstock to four of the six generating companies (gencos) at Egbin, Sapele, Afam and Delta. There were several instances of huge shortfalls in power supply arising from stoppage of gas supply to PHCN on account of the latter’s inability to meet its commitments to NGC.

Shortage of gas gave rise to a huge amount of unutilized capacity in all segments of electricity service delivery- the gencos, the transmission network and the distribution system. The acute shortage of power delivery was also a key factor in the high incidence of excess capacity and uncompetitiveness of the manufacturing sector vis-a vis imported goods and the consequential high incidence of unemployment. In short, poor electricity service delivery largely contributed to the poor performance in all sectors of the economy.

There is an on-going programme for deregulation and privatization of Nigeria’s electricity since the previous regime of government control could not deliver adequate and uninterrupted power supply . The industry was unbundled into six generating companies, eleven distribution companies and one transmission company (TCN) with each of these being expected to operate as independent market-oriented production units. The ultimate objective was to transform the industry into a wholesale electricity market.

Nigeria’s profile of highly subsidized tariff regime bore similarities to the Indian approach. While India and South Africa operated largely state-controlled electricity pricing systems i.e. state electricity commissions (India) and Eskom (South Africa), the arrangement in the USA and most of Western Europe was patterned after the market – driven system with the operators adopting the oligopolistic market approach.

The issue of cost-related electricity pricing had been a subject of debate in Nigeria over the years. In the vicious circle scenario: the high incidence of dependence on government subsidy by PHCN was a major cause of its poor service delivery and the latter gave rise to social and political resistance to measures to close the wide gap between electricity tariff and the cost of production.

In the spirit of a deregulated market, a power generating company would be free to determine the amount of electricity to be delivered to the wholesale market which currently operates within the Multi- Year Tariff Order (MYTO) under the supervision of Nigerian Electricity Regulatory Commission (NERC) and the amount to be sold to large corporate entities and high profile consumers at bilaterally negotiated prices similar to what currently obtains in Europe and the USA. The same would apply to each distribution company.

The TCN will also be free to make its services available to both the generating and distribution companies based on the wholesale pricing arrangement under the MYTO framework and the negotiated transmission charges with independent energy producers. The scenario is a modified version of the dualised pricing system in India which allows privately owned electricity generators to make stipulated level of return on their investments in designated urban centres. Nigeria under the MYTO arrangement was still a far cry from this scenario as operators with good prospects were made to subsidize markets with poorer prospects under the guidelines provided by NERC.

The prevailing MYTO cost supplementation arrangement with the shortfall in production cost being augmented through a subsidization system and operating as a stop-gap measure pending the full realisation of a market-driven system needs to be reviewed to enhance operational efficiency. MYTO subsidisation should be made to each operator based on its efficiency profile and not to the management of a group of operators . The objective should aim at preparing each operator for market-based operations.

The high incidence of default in settlement of electricity bills and the prevailing corruption in the entire system should be urgently addressed to inspire the confidence of private investors. The pre-paid metering system should be given the priority attention it deserves. The success of prepaid billing system in the telecommunication sector provides a useful lesson.

Pending the realisation of a fully market-driven industry, the outfits that are more viable should be encouraged to operate a dualised pricing system whereby individual plants negotiates a portion of their output with industries on terms that are agreeable to both parties while the remaining output is passed to the national grid. This will break the monopsony in the system. The companies that make such arrangement will however not be entitled to MYTO cost augmentation.

All the stakeholders in the system i.e. gencos, TCN, and discos should establish a forum for determination of the portion of tariff revenues that goes to each producer in the electricity supply chain as opposed to the existing centrally determined allocation system. This would promote the spirit of system ownership by all stakeholders. The NERC would mainly be an observer.

Similarly, the prevailing arrangement whereby the discos in the more prospective markets were surcharged to augment the revenues accruing to markets that were not viable did not promote efficiency in service delivery. This should be discontinued. Government subsidy to unviable discos should be reprogrammed with a definite time frame. This will curtail the incidence of corruption in the system.

Government should map out a programme that would minimize the disruptions and uncertainties that have plagued the supply of gas which accounted for almost seventy per cent of the cost of production of electricity by the gencos. The security of the gas pipelines and implementation of the National Gas Master Plan should be accorded priority. The same should apply to the programme to fully exploit the national coal resources.

Dr. Olusola Adeyemi, (OON), a former federal Permanent Secretary, Economic Affairs, wrote in from Lagos