A Word of Advice to the Power Minister

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Ijeoma.Nwogwugwu@thisdaylive.com

By Ijeoma Nwogwugwu

The Minister of Power, Mr. Saleh Mamman, has become the latest political entrant to the Nigerian Electricity Supply Industry (NESI) to engage in a war of words with the 11 electricity distribution companies, better known as Discos, over incessant power outages and the darkness that continues to pervade the land. His threat, which he was later to clarify, to handover the Discos to the German multinational conglomerate, Siemens, did not sit down well with the operators responsible for last mile delivery of electricity to consumers.

In his clarification, he said there was no recommendation to the federal cabinet for the handover of the distribution infrastructure to Siemen, but his ministry had submitted a “proposal to the government on the problem of distribution”, leaving it for the federal government to decide what to do with the proposal. Mamman went on to complain that the country generates 13,000MW of electricity and therefore should be able to transmit and distribute same to consumers, but that the Discos were shortchanging the system by receiving 3,000MW and only paying for 1,000MW. According to him, the government was being forced to subsidise the inefficiency inherent in the system by paying for the balance.

While it will be foolhardy to speculate on the “proposal” that the power minister said he had submitted to the federal cabinet, as he provided no insight on its details, it is easy to see that Mamman is following in the same path chosen by his predecessor in the power ministry, Mr. Babatunde Fashola. The former minister, from 2015 to 2019, had engaged in a war of attrition with the Discos and achieved nothing as far as improving electricity delivery to homes and businesses is concerned.

To be fair, the Discos are not entirely blameless for the problems in the Nigerian power sector. According to a 2017 paper delivered by lecturers of the Federal University of Technology, Minna in Niger State, on the Methodology of Evaluation of Aggregate Technical, Commercial and Collection (ATC&C) Losses in a Typical Radial Distribution System, it was acknowledged that as the last mile in the delivery of electricity to consumers, it is the distribution system that has always been the feeblest link in the power sector value chain, and the most susceptible to criticism by consumers of electricity.

The preference by Discos to resort to unscrupulous estimated billing, rather than metering end-customers on their networks, has also made them extremely unpopular. This along with power surges that have led to fire outbreaks, in many instances, the loss of lives, and the complete destruction of people’s electrical appliance, homes and business, has made them the bashing boys of the electricity supply chain. To be sure, there is no denying that the Discos, post-privatisation, have not lived up to their billing in the area of network rehabilitation, upgrade and expansion. The result is that several Nigerians continue to go for weeks or months without electricity, not because of the shortage of electricity received from the power plants, but because of localised faults that have been exacerbated by dilapidated or non-existent distribution equipment and infrastructure.

Still, it might not be too late for Mamman to embrace and champion the corrective measures needed to salvage Nigeria’s power sector. Unlike Fashola, he should not allow himself to get caught in the web of the debilitating politicking that has befuddled the issues in the power sector. I am certain that the minister is acutely aware that the power sector, post-privatisation, is made up of the upstream sub-sector comprising the gas producers/suppliers, and thermal and hydro power generation companies (Gencos); the midstream sub-sector comprising the transmission grid that is a wholly owned government asset and operated by the Transmission Company of Nigeria (TCN); and the downstream segment operated by the Discos. It is this entire value chain that is responsible for electricity supply from source to end-users. Each of the operators in the value chain is expected to operate on the basis of the market rules spelt out by the sector regulator – the Nigerian Electricity Regulatory Commission (NERC).

Unfortunately, the entire value chain is in a state of flux and grossly inefficient because of the misalignment that exists between policy pronouncements and actual reality. According to data obtained from website of the System Operator, a business unit of the TCN, and other industry reports, the forecast for national peak demand stood at 25,790MW as at last Wednesday, February 26th. As shown in the table below, the country on that same date had an installed capacity of 12,910MW (approximately 13,000MW), but actual generation capacity stood at 7,652.6MW. Transmission wheeling capacity was put at 8,100MW, while actual peak generation attained the day before by TCN stood at 4,964.5MW. Data from the System Operator further showed that the highest peak generation ever attained by TCN was 5,375MW, which must be added, was achieved at 9.00pm on February 7, 2019. Meanwhile, a stress test report produced by the TCN in 2015 on total distribution network capacity showed that the 11 Discos have the capacity to transmit 6,288MW of electricity to consumers, while a more recent audit presented by Siemens to the power ministry showed that distribution network capacity currently stands 11,000MW.

What can be deduced from above is that the installed generation capacity of about 13,000MW, transmission wheeling capacity of 8,100MW, and installed distribution capacity of 11,000MW, by far exceed actual peak generation of under 5,000MW that is currently wheeled out by the government-owned TCN and the highest peak of 5,375MW that the transmission company attained on February 7th last year. So the question we should all be asking the minister and industry regulator is why the excess capacity inherent in the electricity industry is not being utilized? As it stands, with national peak demand forecast at 25,790MW, operators in the electricity sector should be able to meet approximately 40% of that demand. Instead, they are only able to wheel out less than 20% of peak national demand.

Starting with the upstream component of the power sector, it is apparent that the country still has some way to go before it can close the gap between installed generation capacity and national demand requirements. All the investments by past administrations (not by the extant administration) and independent power producers (IPPs) to date in thermal and hydro-electric generation plants, have only managed to close the gap by 50% while there is another 50% and growing that needs to be closed. However, due to the structural deficiencies in the system, the sector has remained unattractive to power sector investors, effectively limiting incremental growth in installed generation capacity and actual output.

But for the existing Gencos to generate electricity, they must pay gas suppliers such as the Nigerian Gas Company (NGC) and other oil companies at a market determined rate of N80 per million standard cubic feet per day (mmscf/d). This money, however, is paid by the Gencos in US dollars at the exchange rate of N360 to $1. On the other hand, NERC, using the Multi-year Tariff Order (MYTO) and by capping the exchange rate at the official rate of N306 to $1, has allowed the Discos, which import their equipment at N360 to the dollar, to charge end-customers at retail rates/tariffs that are well below the N80 paid by the Gencos. Under MYTO, the allowed tariff charged by Discos in 2015 was N24.99 per kilowatt-hour (KWh), in 2016 – N29.01 per KWh, 2017 – N30.81 per KWh, 2018 – N30.65 per KWh, 2019 – N30.66 per KWh, and in 2020 – N30.70 per KWh.

Now, it needs to be said that the Discos play a very critical role in the electricity value chain for one simple reason: It is the distribution companies that are the recipients or collectors of all the revenue from electricity customers that is required to cover the cost of service for the entire value chain. In effect, it is the balance sheets of the Discos that carry all the liabilities of the entire electricity supply industry. As such, when the Discos are illiquid and are unable to recover the cost of electricity generation, transmission and distribution at cost-reflective tariffs, the sector will remain shortchanged, un-bankable and unattractive to prospective investors. Without mincing words, this is the primary reason the power sector has continued to flounder post-privatisation.

The revenue shortfall, notwithstanding, the Discos are expected to pay for the electricity that they take from the Gencos, which in turn pay the gas suppliers. Under the transition arrangement for the Power Sector Recovery Programme (PSRP), that payment is made through the Nigeria Bulk Electricity Trader (NBET), which operates as the bulk off-taker or buyer of electricity from the Gencos. However, because the Discos are unable to recover fully the cost of electricity generated, transmitted and distributed, the industry regulator stipulates to them the minimum remittance requirement that they must make to NBET monthly to partly pay for the electricity that they have bought or that they have been invoiced by NBET. Note that at about N30 per KWh, what the Discos collect from end-customers is well below the price that the Gencos pay for their gas needs, much less covering the cost of operations of the Gencos and the profit margin that the power plants are expected to make.

In addition to paying NBET, the regulator determines what the Discos should pay to the TCN and Market Operator to partly cover the cost of electricity transmission. Added to this is the first line charge that the Central Bank of Nigeria (CBN) presently has on the Discos’ revenue in order to recover the loans it has made available to industry operators under the Nigerian Electricity Market Stabilisation Facility (NEMSF) and Power and Airline Intervention Fund (PAIF).

The CBN and the Ministries of Power and Petroleum Resources signed the MoU on the N213 billion NEMSF in 2014. The loans from this facility were granted to some Discos and Gencos so that they could settle outstanding payment obligations due to market participants during the transition rules of the electricity market as well as legacy debts owed by the Power Holding Company of Nigeria (PHCN) to gas suppliers. The N200 billion PAIF was yet another facility created by the CBN to assist power and airline operators plug the funding gap in their operations. Loans under this facility were disbursed to the beneficiaries through the Bank of Industry at concessionary interest rates. Due to the first line charge that the CBN has on the Discos’ revenue, both the NEMSF and PAIF facilities are fully serviced monthly by the operators, and this ensures that the loans are not delinquent.

Given the revenue shortfall, plus the minimum remittance obligations (MROs) that the Discos are saddled with monthly, is it any wonder that they continue to struggle to meet their remittance obligations to NBET, TCN and the CBN, and at the same time meet their obligations to their staff, fund metering rollouts, and upgrade and expand their distribution network infrastructure? To compound matters for the Discos, last June NERC, while keeping electricity tariffs constant, revised upwards their MROs, effectively leaving the Discos with less funds to meet their OPEX requirements, much less funding their CAPEX obligations. This accounted for the attempt by the Discos to unilaterally reduce their July 2019 payments to NBET and the subsequent threat by NERC to revoke their licences.

As this article is being written, the matter remains unresolved and the Discos continue to struggle to meet the revised MROs imposed on them by NERC. If the dire situation remains unaddressed, we should not be surprised if the Discos, a few months down the line, start owing staff salaries, are forced to lay off staff, and even start shutting down their distribution infrastructure. It should be noted that as the life is being squeezed out of the Discos, the ultimate result will be the diminishment of the electricity supply industry as well as whatever efficiency gains made by the operators in recent years.

It will be noteworthy to add that Yola Disco, over which a force majeure was declared by its former buyers and returned to the federal government some six years ago, is now a basket case. It’s ATC&C losses have ballooned from 58.7% in 2017 to 71% in December 2019, relative to the moving average of 45% recorded by the other Discos not owned by the federal government. Ikeja Disco, meanwhile, recorded the best ATC&C losses of 24.9% as at December ending 2019. ATC&C losses are the sum total of technical losses, commercial losses, and shortage due to the inability of a Disco to collect the total amount that it has billed for electricity supplied to consumers. The most efficient Discos typically record low ATC&C losses and generate higher revenue, while less efficient operators record higher losses on their networks and concomitantly lower revenue. As a measure of their importance, the ATC&C losses projected by investors in their post-acquisition plans for the Discos, formed part of the basis for their selection during the privatisation process for the distribution assets in 2013.

Now back to the role of NBET in the power sector value chain: Whereas the federal government, through the CBN, had put in place a payment assurance facility/guarantee (PAF) of N701 billion, effective January 2017 to December 2018, and then another N600 billion last year for NBET, so that the latter can make up the balance that the Discos are unable to pay and keep the Gencos and gas suppliers liquid, the reality is that the subsidy element provided by the central bank to NBET/Gencos is unsustainable. As of October 2019, financial support from the CBN to Nigeria’s power sector stood at N1.695 trillion. Note that it is the N701 billion, plus N600 billion, plus N213 billion, plus N181 billion, that have been disbursed under PAF (to cover invoices issued by the Gencos to NBET to a minimum level of 80%), NEMSF and PAIF respectively, that make up the almost N1.7 trillion that the National Economic Council last Thursday claimed had been spent by this administration on the power sector since it came into office. Of this amount, in reality, N1.301 trillion was blown on subsidising the true cost of electricity generation while the balance was disbursed as loans to operators in the power sector. That is the reason no one hears any complaints or noise from the Gencos. All they do is generate electricity, issue invoices to NBET which buys the electricity from them in bulk, and get paid in full from the minimum remittance obligations paid by the Discos and the balance made up by the CBN. But this is an unsustainable model that only helps to conceal the inefficiency in the system and retards real growth of the power sector.

Fortuitously, the unsustainability of the current structure provides the power minister a unique opportunity to correct the misalignment and impediments to growth in the sector. The payment assurance facility of the CBN is expected to run out in June this year. What this means is that the transition market is about to draw to a close and the Discos expected to enter into bilateral power purchase contracts (also known as vesting contracts) directly with the Gencos. It also presents a perfect avenue for Mamman to advise NERC to cut to the chase by recalibrating MYTO and implementing an extraordinary tariff review that enables the Discos to charge cost-reflective tariffs that factor their performance agreement targets in the form of ATC&C losses and revenue requirements that cover the cost of service of the entire electricity value chain.

Of equal importance, the minister must initiate reforms that will improve the wheeling capacity of the TCN in the short to medium term, and initiate a blueprint that will make long-term recommendations on either the balkanization of the grid, or its management by the private sector as provided under the Electric Power Sector Reform Act. A performance assessment of the transmission network would reveal that since 2015, there has hardly been any improvement in the electricity wheeled out by the TCN. It continues to be flat and is only affected by a seasonal effect between the dry and rainy seasons. Also, the absence of network redundancy (termed spinning reserve), load misalignment with the Discos’ and TCN interface issues, poor system/dispatch planning, delays in the implementation of TCN’s expansion plan, and the often bandied load rejection by Discos, seemingly seek to hide all of the listed inefficiencies in the transmission network.

What is worse is that the TCN continues to rely on manual voice calls from its technical staff at its sub-stations nationwide when a fault has occurred on the transmission grid. In this day and age of automated systems, TCN needs to upgrade to the supervisory control and data acquisition (SCADA) system that can immediately detect faults on the system, isolate them and ensure that electricity is wheeled out from alternative sub-stations. With the SCADA in place, total system collapses will become a thing of the past, while partial collapses will become infrequent. Right now, only Eko Disco boasts of the SCADA on its network. It is telling that the transmission grid which allocates load to all the Discos lacks one.

It will be impossible to end this article without mentioning the Metering Asset Providers (MAP) selected by NERC to bridge the metering gap in the power sector. Introduced in 2018, NERC approved the MAP regulation to encourage the development, supply, installation and maintenance of independent and competitive end-user meters for metering services in the electricity industry. In pursuance of the local content policy, MAP investors were expected to acquire a minimum of 30% of their metering volume from indigenous meter manufacturers.

Regrettably, the MAP regulation has fallen flat on its face, because local manufacturers of meters cannot get funding from banks at low interest rates. The problem was further compounded when the Nigerian Customs Service (NCS) slapped a duty of 45% on imported meters for the sector. The outcome is that the MAP initiative is dead on arrival, leaving the Discos with the responsibility of metering consumers, if they are to improve on their collection efficiency and by extension their ATC&C losses. But with the order issued last week by NERC capping estimated billing and limiting the wiggle room that was once available to the Discos to shore up their revenue, it has become imperative for the industry regulator and the power ministry to implement tariffs that enable all operators in the value chain to recover their costs.

As for end-customers of electricity, it is still infinitely cheaper to pay more for electricity supplied from the grid than to expend more than double that amount for electricity powered by generators and power inverters. Today residents of Banana Island, NICON Town, Magodo, Ikeja GRA and Shonibare Estates, all in Lagos, that entered into bilateral power arrangements with the Lagos-based Discos and IPPs to pay for the electricity that they consume at higher tariffs, are all guaranteed 22 hours of electricity every day at the minimum and 24 hours daily at the maximum. End-users in the mentioned estates are all fully metered, their distribution infrastructure rehabilitated and modernized, and fault detection and resolution carried out with efficient alacrity. The good news from such success stories is that NERC and the Lagos State Government have taken notice, with the latter now engaging Eko and Ikeja Discos to extend similar bilateral power arrangements to more residential neighbourhoods, business districts and industrial layouts in the state.
What this tells us is that the electricity sector can work, if only those in government can stop passing the buck and take corrective steps to revitalise the sector.

As this column has stated time without number, one of the primary reasons Nigeria remains uncompetitive and we continue to pay more for locally made goods and services is because our businesses are expending as much as 30%-40% of their OPEX on private power generation. With cost-reflective tariffs, operators in the power sector will be better placed to amortise the humongous debts on their books, raise fresh capital, and invest in network expansion programmes and extra generation capacity, which inevitably will force down electricity tariffs.

OPERATIONAL REPORT as at 26/02/2020
National Peak Demand Forecast 25,790MW
Installed Generation Capacity 12,910MW
Actual Generation Capacity 7,652.6MW
Transmission Wheeling Capacity by TCN 8,100MW
Peak Generation on 25/02/2020 4,964.5MW
Peak Generation ever Attained by TCN on 07/02/2019 5,375MW
Installed Distribution Capacity (Based on TCN stress test in 2015) 6,288MW
Installed Distribution Capacity (Based on Siemens’ audit in 2020) 11,000MW