Solving Nigerian Intractable Electricity Issues – Another view (PART 1)

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By Kester Enwereonu On Jun 17, 2020

The Nigerian Electricity Industry and COVID-19 seemingly share similar traits with the peace of God – they both surpass all understanding and have seemingly defied human understanding.

Unlike the peace of God which confoundment endures forever, the solution to human COVID-19 lies in vaccine and/or a cocktail of drugs that would provide a cure while the cure to the electricity industry’s unending constipation lies in liquifying the market.

Consider the following statistics.

The total number of customers in the books of the Electricity Distribution Companies (Discos) is 10.4m, meanwhile there are more than 20million buildings and facilities connected to the electricity network in Nigeria. Out of the 10.4m customer accounts, more than 20% are inactive. Thus, less than 8m customers are paying for electricity consumed by over 20m consumers.

Of the barely 8m active customers, only 4m are metered, the rest are on estimated billing. Out of the 4m metered customers, 50% of the meters are old, outdated and compromised. Thus, while 4m customers ostensibly pay for electricity they consume, the remaining 4m unmetered customers are meant to pay for electricity consumed by them and the other 12m consumers (who are not yet customers in the books of the Discos), for the books to balance. However, the 4m unmetered customers are not paying and indeed are unable to pay the difference. Meanwhile, Ghana with a population of 30m has 4.8m active customers in the books of their Discos, while Nigeria with a population of 203m has less than 8m active customers in the books of their Discos.

I will now translate this sorry scenario into naira and kobo.

The total average electricity generated by the Electricity Generating Companies (Gencos) amounts to about 3,600mw out of which 100mw are dispatched to Niger Republic, Togo and Ajaokuta Steel leaving 3,500mw which at the average monthly tariff of N32 per kWh should yield about N80.6b.

Out of this amount, the Gencos through Nigerian Bulk Electricity Trading (NBET) are expected to receive N52b, the Transmission Company of Nigeria (TCN) is expected to receive N8.6b and the balance of N20b would go to the Discos.

However, in reality, the Discos cumulatively are only able to collect an average of N40b monthly from the 4m metered customers and 4m unmetered customers. Revenue collections by Discos are tracked by Central Bank of Nigeria (CBN) through the banks. Out of the N40b about N3b is deducted as first line charge for payment to CBN for the Nigeria Electricity Market Stabilization Facility (NEMSF) it disbursed in 2015 to cover payments for legacy gas debts and tariff/market shortfalls which had accumulated over the years even prior to privatization; another N2b goes to FIRS payment for VAT; N8.5b is paid to TCN on the average while NBET receives N12b on the average. The Discos are left with N14Billion to cover their operations.

In the above scenario, the Gencos that ought to have received about N52b receive only N12b remittance from Discos through NBET, which is not enough to cover their gas supply payment obligations not to mention their Operation & Maintenance (O&M) costs thereby leaving a revenue shortfall of N40billion.

TCN is only charging about 50% of its approved tariff of N8.3/kWh due to a NERC freeze on its full cost-recovery. This explains why TCN has regularly relied on government funding and borrowing for its capital expenditure when ideally it ought to be a profit-making company. Instead of receiving about N17b/month TCN receives only N8.5b.

Likewise Discos-the power industry scape goat-are constrained to use only N14b to run operations across the entire country including staff payroll and welfare, state income tax remittances, acquisition and maintenance of transformers, power lines, operational vehicles, tools and equipment, robust ICT infrastructure and until recently meters.

Compare this with a typical GSM network operator that commits an average of N50b monthly to run a national network operation-MTN Nigeria operating cost in 2019 was N754b, i.e. about N63b per month. Meanwhile, the electricity network distribution entails wired lines to every user, the GSM network is wireless.

This is the bane of the Nigeria electricity supply industry. The numbers just do not add up. Nobody is gaming any system. Nobody is stealing any money (because there is not enough to steal) and nobody in the value chain is making any profit.

Neither the gas suppliers nor the gas transporters, nor the Gencos nor TCN nor the Discos are getting enough revenue to provide any meaningful service. You cannot provide N20,000 as monthly feeding allowance and expect your family of five to eat 3-square meals a day complete with proteins and vegetables.

Prior to privatization, this gap otherwise called tariff/revenue shortfall existed and was well beyond the current 50%. However because NEPA/PHCN was owned and operated by the government under the Ministry of Power & Steel, all operating and capital costs of the electricity industry from gas supply to generation, transmission and distribution costs were captured and covered under the Federal Government budget of the Ministry while collections were treated as revenue to government. In so doing the shortfalls were covered by the government. At all times during that period the budget of the Ministry of Power and Steel with specific relation to NEPA was always many times more than the revenue accruing to the Federal Government from the sale of electricity.

Similarly, the Nigerian National Petroleum Corporation (NNPC) is saddled with the importation of Premium Motor Spirit (PMS). The cost being expended by NNPC is higher than the revenue derived from the sales of PMS until the recent crash of oil prices, simply because the landed cost of PMS is higher than the pump price. The rest is being covered by subsidy from the federal government.

Shortfalls like the N40b (50%) funding gap in the electricity industry would usually be addressed in one of the following ways or a combination of both i.e.

(1) Government funding the gap otherwise called subsidy

(2) Increasing the tariff to cover the full cost of the entire electricity value chain – from fuel supply, to generation, transmission, and distribution costs.

(3) Combination of both tariff increase by a certain percentage and government subsidy to cover the gap.

At privatization of the electricity sector this tariff shortfall was duly recognized by the parties, i.e. the Federal Government and the investors, and the third option was adopted. The expectation was that with the shortfall covered by the combination of government subsidy and tariff increase, the investors will make the requisite investments required to reduce the losses to levels that would reduce the need for subsidies; as efficiency and generation by Gencos rise, the retail price for electricity will fall. This informed the adoption of the Aggregate Technical, Commercial and Collection (ATC&C) loss reduction mechanism as basis for selecting the winning bids during the privatization process.

Unfortunately, after privatization neither was subsidy infused per the agreement, nor tariffs adjusted to facilitate capital injection by the investors until a later date when inflation and exchange rate had driven the gap in tariff even wider. It is worthy of note that at privatization the exchange rate was N157 to a dollar, at the point tariff was adjusted by about 30% in 2016 the exchange rate had spiraled to N360 to a dollar (more than 130%) thus rendering the tariff increase of no impactful consequence. Indeed, in dollar terms, the increased tariff was less in value (9 US cents) than the tariff in 2013 (13 US cents). The consequence was that the Disco Investors were no longer able to attract funds to make the required investments to reduce the losses.

It is this tariff shortfall that the regulator NERC and NBET has slammed on the books of the Discos as debts owed by Discos which has made the Discos to have negative balance sheets running into hundreds of billions of naira even when it is clear that these shortfalls arose from a regulatory cap on tariffs and unpaid electricity consumed by largely unknown consumers including federal, state and local government ministries, departments and agencies (MDAs) which contribute almost 10% of this shortfall, a carryover from NEPA days when government MDAs would not pay for electricity.

In the prevailing circumstances, the Discos with such toxic balance sheets are unable to attract any credit needed to fund reduction of ATC&C losses that would result in lower tariffs leading to lower shortfalls in revenues. Thus, this shortfall has remained largely unattended to year after year.

Imagine the government licensing 11 Petroleum Products Marketers with the sole rights to import PMS with determinable landed cost of N195 a liter, pegging the pump price at N145 a liter and posting the shortfalls on the books of the Petroleum marketers as debt to NNPC. Of course, the Marketers will no longer be able to get credit to import petrol and queues will return.

While the Federal Government budgets and pays for shortfalls in PMS supply which are indeed not attributable to NNPC nor Petroleum Marketers, CBN intervention in the electricity sector were used to settle these shortfalls which indeed are not attributable to Discos, nor Gencos nor TCN. However, the general but erroneous perception at all levels including CBN is that the funds were given to the operators in the sector with the Discos fingered as the scape goats since they are supposed to pay fully for electricity received from Gencos through TCN. Truth is that the N1.7Trillion CBN intervention was used to pay for electricity consumed by non-paying customers just like petroleum subsidy.

Having identified the perennial monthly shortfall of N40billion (50%) as the virus dogging the electricity sector which like COVID-19 can only be solved by a cure in the first instance and a vaccine as a permanent solution, I shall proceed to prescribe a short term cure and long term vaccine to this electricity sector virus.

As stated earlier in this piece, the shortfall confronting the sector could be dealt with by either increase in tariffs or government subsidy or combination of both. However, these options will only provide a cure but will not prevent reoccurrence of the ailment from time to time.

Let’s start with increase in tariff. To cover the entire 50% shortfall will entail increasing tariffs by 100% which means that some customers will pay as high as N98/kWh while others pay at the least N60/kWh. In other words, no matter your tariff class at the moment, every customer will have to pay 100% of what is currently being paid. It is, however, doubtful if 100% increase is feasible in the present state of the Nigeran economy considering the impact of electricity tariffs on businesses and homes, and the low earning/purchasing capacity of majority of the people and small businesses plus the attendant impact on the already spiraling inflation.

Let’s consider government subsidy as an option. With the deadly blows COVID-19 and low crude oil prices have dealt on government revenues, which has led to downward revision of the federal budget twice in the last 2 months and its quest for loans to fund the gap in the even reduced budget; can the Federal Government afford N40b monthly (N480b per annum) until such a time the Discos are able to reduce the losses to cover the shortfall which realistically will take upwards of 36 months? It is doubtful that the Federal Government can afford it.

Thus, as an immediate cure, a cocktail of increase in tariff by say 50% and subsidy by the federal government of the balance 50% seems to be the most realistic option in the prevailing circumstances.

Kester Enwereonu is a lawyer and electricity industry stakeholder