Resolving Electricity Sector Logjam

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The inability of the Transmission Company of Nigeria, the generation companies as well as the distribution companies to deliver stable power supply and provide satisfactory customer services to electricity consumers in the country is as a result of inappropriate pricing of electricity, writes Obinna Chima

Since November 2013, when the Power Holding Company of Nigeria (PHCN) successor companies were handed over to their new owners, the perennial challenge of epileptic power supply, which over the years contributed to the frail economic growth recorded by the country has remained unabated.

In fact, the expectation of improved and stable supply of electricity, with the government then, setting a target of 10,000 megawatts after the exercise, has remained a mirage as owners of the privatised power companies have not been able to realise the objectives for which they acquired the assets.

However, rather than taking steps to improve the situation, the power sector investors have been enmeshed in more squabbles than envisaged.

The defunct PHCN was then broken into 11 distribution companies and nine generation companies as well as one transmission company.

Nigeria’s dilapidated power sector is often criticised by analysts for holding back the country’s economic potential.

Businesses and households are subject to frequent blackouts, and many depend on their own generators that are expensive to run.

Analysts have said the challenges in the sector are multi-faceted and require a holistic approach to address, so as to instill confidence among consumers as well as attract the desired investors.

Owing to these challenges in the sector, especially in the area of illiquidity, the federal government since the handover has been forced to intervene to keep the successor companies afloat and prevent a total collapse of the sector.

To address the situation, analysts have stressed the need for the introduction of a cost-reflective tariff regime.

Sector Review

To the Minister of Power, Engr. Sale Mamman, the N1.684 trillion outstanding receivable owed the power generation companies (Gencos) is a key challenge in the sector.

According to him, this has been a major source of concern to the federal government.

Mamman also pointed out that the access of the distribution companies (Discos) to borrowing instruments had been limited by the fact that they were already over-leveraged.

However, as part of efforts to ensure market efficiency and transparency, the minister explained that the federal government had undertaken the improvement of commercial, technical and regulatory components of transaction agreements; promotion of fiscal discipline through the effective utilisation of all power sector loans; promotion of market disciple, and achievement of cost reflective tariff that would facilitate mutual benefits to both investors and consumers.

Mamman disclosed these in a presentation to the National Economic Council (NEC) recently. The current rate of power electrification revealed by the minister in the report placed Lagos as the state with the highest level of electrification in the country, at 95 per cent, closely followed by Anambra (about 92 per cent), and Imo (90 per cent).

But states, such as Adamawa, Bauchi, Benue, Borno, Ebonyi, Jigawa, Taraba, Yobe, and Zamfara, ranked low, with about 30 per cent electrification rate.

Mamman listed other challenges in the sector to include gas constraints for thermal generation, idle generation capacity, and the historically perennial under-investment in the development and expansion of the grid.

He observed the lack of adequate investment in the distribution network.

Pointing out that Nigeria remained among the lowest per capita electricity supply in Africa, with a high rate of rural to urban migration, he identified some present and emerging challenges in the sector to include misalignment between generation, transmission and distribution, as well as the rising cost of undelivered electricity capacity.

Others, he stated, included declining Discos’ remittance, coordination and corporate governance challenge as well as challenges faced by the Discos, the Gencos and the transmission company.

The report put the average tested capacity for hydro in the country at 1,225MW and thermal at 6,241.65MW.

On the other hand, on-grid generation capacity for hydro was said to be 1, 936MW, Thermal – 11,154MW; Average Actual Transmission Wheeled – 4,117.5; Average Unutilised Transmission Capacity – 2,883; Average Total Operational Capacity for Hydro – 1258.18, and Thermal – 4,201.97.

The minister listed measures that were being adopted to address the challenges to include infrastructural alignment, market efficiency and transparency, corporate governance enhancement and sector policy coordination, increasing energy access, and the execution of legacy projects in the sector.

In the area of infrastructure alignment, he listed measures introduced by the federal government to involve the commencement of the implementation of phase one of the Nigerian Electricity Roadmap; continuous implementation of the Transmission Rehabilitation and Expansion Programme (TREP), supporting the full implementation of the Disco franchise, as well as the promotion of grid standardisation and synchronisation.

The minister stated that as part of efforts to ensure market efficiency and transparency, the federal government had undertaken the refinement of commercial, technical and regulatory components of transaction agreements. This, he added, included promotion of fiscal discipline through the effective utilisation of all power sector loans; promotion of market discipline, and ensuring the achievement of cost-reflective tariff that would facilitate mutual benefit to investors and consumers.

In terms of energy access, he said the government had taken steps to scale up its energy access models, develop additional energy access models as well as promotion of investment into off-grid projects.

Cost-reflective Tariff as Way Out

In order to address the challenges in the sector, the Managing Director and Chief Executive Officer of the Transmission Company of Nigeria (TCN), Mr. Usman Mohammed, has called on Nigerians to be prepared for the payment of cost-reflective tariffs on electricity.

Mohammed identified the payment of cost-reflective electricity tariffs as the answer to the problem of power supply in Nigeria.

He said: “We will not move forward if we cannot pay the right tariffs for consumption of electricity. I want to assure Nigerians that there is no relationship between poverty and payment of electricity. So, let us stop deceiving ourselves that we can refuse to pay for electricity and still enjoy constant power supply.

“That is why I said that Nigerians should prepare to pay cost-reflective tariffs so that these contracts can be effective. Also service will significantly improve once tariffs become effective.

“We have to be prepared to remove government from the middle. This issue of government guarantees (subsidy) has not worked and will not work. Look at a place like Burkina Faso that is sitting on one of the poorest part of West Africa is having a collection efficiency of 98 per cent.

“If that country will get electricity from Ivory Coast and pay for it I cannot see any reason someone will say that Nigerians cannot pay. I want to tell you that Nigeria has the cheapest tariff in West Africa.”

He added: “If we are not careful, we will continue to sink money in the power sector and still remain on 4000MW power generation in the next three years.”

He noted that Nigerians must be prepared to pay for electricity in order to improve power supply. Mohammed, said no private investor would invest in the power sector without the assurance of favourable returns.

“Nigeria has done the power sector reform and handed over the distribution sector to the private sector six years ago. Within these years, the federal government has sunk N1.5 trillion in the power sector because contracts were not effective and the revenue flow is not there. So the government was guaranteeing the generation companies to continue to do business.

“But do we want it to continue? No. So how do we stop it? We can only stop it when contracts become effective by assuring cost-reflective tariffs. What the poor need is effective metering of electricity to enable them manage their consumption,” he said

Also, the Bureau of Public Enterprises (BPE), recently reiterated that a cost-reflective tariff structure must be developed and implemented to change the narrative in the electricity sector and make the sector financially viable.

BPE said the electricity market had been haemorrhaging badly needed money due to lack of cost reflective tariff. It also said heavy debts by ministries, departments and agencies (MDAs) of government were also hampering the growth of the power sector.

Those assertions were contained in a recent report, titled, “Nigerian Electricity Supply Industry (NESI) Reform: Processes, Challenges and the Way Forward,” which the BPE presented to the National Economic Council (NEC) Ad-hoc Committee on the Power Sector, a copy of which was obtained recently.

The BPE pointed out in the report that the federal government’s inability to follow through its commitments had affected the Performance Agreements (PAs), frowning on the refusal of parties to adhere to commitments made before the handover.

The bureau recommended the creation of a robust institutional framework that would be ad-hoc in nature, made up of critical actors, and chaired by the Vice President, as a first step towards resolution of the power crisis.

In the report, BPE said its analysis had revealed that the power sector would require funding to the tune of $7.6 billion over a five-year period, stressing that there is a correlation between energy consumption and Gross Domestic Product (GDP) per capita.

It listed other major challenges facing the sector to include withdrawal of the transitional subsidy support and dumping of the Central Bank of Nigeria (CBN)-backed Nigeria Electricity Market Stabilisation Facility (NEMSF) on the balance sheet of the Discos.

BPE also cited the major shift in Nigeria’s macroeconomic indicators (exchange rate, inflation) and lack of stable regulatory environment as factors hurting the electricity sector. It expressed dismay at the grave shortfall in power generation in the country, which averaged about 3,500 MW in the past 10 years, and the liquidity crisis in the sector. The agency lamented that Discos collected only about 30 per cent of market requirements.

BPE said regulatory inconsistency over the years had weighed down the sector.

According to the agency, there is transmission system constraints, where the network can only wheel about 5,000 MW in reality. An independent analysis by Siemens indicated that the existing ‘last mile’ distribution capacity in the operation is about twice as high as the peak supply delivered by TCN to the respective distribution.

“There is also lack of proper coordination of the public sector agencies involved in the power sector and the refusal of parties to adhere strictly to commitments made before handover.”

The bureau said there was an urgent need for implementation of the power sector recovery plan.

It said, “The challenges to the power sector are as old as Nigeria. To solve them, the political leadership must be committed, have sincerity of purpose and the will to take hard decisions.

“The Nigeria goal is to provide universal access to power for Nigerians by 2030. To achieve that, we must have a roadmap and a policy that will attract private sector investment, human capital and an institutional framework to reach set goals.

“The first step in resolving the power logjam is the need to create a robust institutional framework that is ad-hoc in nature and made up of critical actors. The committee is to be chaired by the vice president and made up of heads of relevant ministries and agencies.”

BPE explained that the role of the committee would be to monitor and coordinate the deliverables in the power sector, adding that it would also eliminate obstacles and bottlenecks in the attainment of agreed targets.

The first assignment of the committee, BPE said, would be to ensure the power sector recovery plan approved by the Federal Executive Council (FEC) was diligently and vigorously implemented.

“The power sector plan clearly defined policy actions, operational and financial interventions meant to restore the financial viability of the power sector bedevilled by liquidity crisis,” it stated, explaining, “The issues raised are germane to the socio-economic development of this country. Without resolving the power crisis, Nigeria will remain underdeveloped, with no major educational, industrial or agricultural development.”

The bureau said, “All hands must be on deck working in the same direction to implement the power sector recovery plan approved by the FEC. Nigeria can solve the power deficit challenges under the current leadership. For that to happen, political leadership at the highest level must make the required bold and ambitious moves.

“After all, New Delhi from where we adapted our distribution companies’ privatisation model went through same pains we are going through today.”

To analysts at FSDH Merchant Bank Limited, adjusting the price of electricity is a key reform the federal government must undertake to engender growth in the country.

According to the firm, more investments would be required in the power sector than currently available.

But the sector may not attract investment in the absence of a cost-reflective tariff, they argued.

In the same vein, the Partner/West Africa Energy Leader, PwC, Mr. Pedro Omontuemhen, who stressed the need for a cost-reflective tariff in the sector, however, noted that it would not solve the problems of the sector given the many challenges facing it.

Omontuemhen had told THISDAY that: “The challenges of the power sector in Nigeria are many, but one of the challenges is financing. Technology is a challenge, recovery of debts is a challenge, infrastructure is a challenge, but sometimes you do need money to solve some of these challenges that we have.

“If you don’t have enough money, you will not be able to invest in the required infrastructure. So the issue now is that, if you price this product appropriately and it is well managed, the management of the distribution companies will now have money to invest in the right infrastructure.

“So our view is that it is a step taken in the right direction. But the challenge now is for the distribution companies to ensure that power is now available”.

For the Director, Research and Advocacy, Association of Nigerian Electricity Distributors (ANED), Mr. Sunday Oduntan, appropriate pricing through cost-reflective tariff will go a long way in solving the sector’s problems.

He said: “When you are talking about efficiency, efficiency is also linked to pricing. You cannot be efficient in any business, even in bakery if there is no appropriate pricing.”

Oduntan said inappropriate pricing was responsible for the lack of efficiency of the operators.

He said: “I think we need to be more sensitive to the need of our customers. I think we are not there yet, but the Discos that I represent and everybody, all stakeholders in the value chain are not efficient enough. “Efficiency is very important as I have spoken about the link between efficiency and pricing.

“So, I agree 100 per cent that there is the need for more consumer confidence, consumer education; and like now, people have been talking about tariff increase on January 1. All those ones, we need to do more in terms of letting people be aware of what is going on. The piecemeal or gradual increment makes people to think that they increase tariff all the time.”

He commended NERC for its efforts in making in the last six month to stabilise the power sector.

“The last time a review was done in this sector was in 2015 and it took effect on February 1, 2016. What the law said is that there should be minor review every six months, which is why I have commended NERC for coming out for the first time since 2016 to do what we should have done every six months from that first quarter of 2016.

“What they are proposing is slight increase that will occur in April 2020, and it is even planned to be a gradual thing. We will not have what should be the appropriate pricing of the product this year, what is planned is to see that by the end of 2021, there will be a way to ensure that appropriate things are done such that there will not be that huge shortfall,” he stated.

Oduntan, in a separate statement yesterday, also said the application of the new tariffs by the Discos would be gradual and less painful to electricity consumers.

He added that it would take until 2021 before the differences in the reviewed tariff could be fully passed to consumers.

Oduntan explained that they wanted to clarify to Nigerians how the new tariff framework would be implemented with the aim of clearing the misunderstanding that its announcement had created.

“We make this statement to inform all our esteemed customers that we are not unmindful of news making the rounds that electricity tariffs have been increased effective January 1, 2020 as reported in some print and electronic media.

“For clarity and improved understanding, we state…the Nigerian Electricity Supply Industry (NESI) is primarily regulated by the Nigeria Electricity Regulatory Commission (NERC). NERC is empowered by the EPSR Act (Electric Power Sector Reform) to make orders and declarations in a manner promoting efficiency and sustainability within the NESI,” said the ANED.

According to the association, the NERC has been empowered by EPSRA to carry out minor reviews of power tariffs under the Multi-Year Tariff Order (MYTO) 2015 framework twice a year.

It explained that accurate electricity tariffs help in ensuring efficient power supply as well as assure market participants of their costs recovery and return on investment.

“This makes the business viable. NERC has just reviewed the MYTO 2015 and has published an order on tariffs and minimum remittance for January-June 2020. The tariffs anticipate changes in the currency exchange rates between the United States and Nigeria, changes in the rate of inflation and gas prices,” Oduntan added.

According to him, Nigerians have to start facing the reality that, “if you really want something good you must be prepared to pay for what is good.”

“We as Nigerians cannot expect electricity like in South Africa, in the United Kingdom while at the same time we don’t want to be paying. Even over there in Senegal, they pay. In Ghana, they pay more. And the bread analogy works because what I am telling you is that if the woman is taking bread at N80 per loaf and such a woman is forced by law to sell the same at N30 for instance, there is a shortfall of N50.

“You cannot get the bread after a while because first, there will not be efficiency, with time there will not be availability. So the issue of electricity is availability and efficiency,” he argued in a recent interview on AriseTV, a THISDAY sister broadcast station.

Similarly, CSL Stockbrokers Limited, in a recent report, stressed that the present low tariff regime retards development of the power sector.

Clearly, a situation whereby the MDAs would continue to owe the power companies humongous amount of money continues to impact negatively on the performance of operators.

In addition, Nigerians must be willing to embrace the impending reforms in the sector, which is expected to lead to an improvement in power supply and generally, enhance output in the country.