Wonodi: It’s Time to End Electricity Subsidy

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The founding head of the Nigerian Bulk Electricity Trading Plc, Rumundaka Wonodi, in this interview speaks about on-going issues in Nigeria’s electricity market. Chineme Okafor provides the excerpts:

What is your opinion about the new electricity tariff?

The new tariff seeks to bring about some changes in the industry which is expected to improve service and financial sustainability of the industry.

Unfortunately, not only does is seek to bring about a cost reflective tariff, it transfers this cost that were historically borne by government to consumers.

Consumers in general will see a rise in tariffs. It is important to note that there really is no perfect time to raise tariffs for a product essential to productivity and quality of life for consumers. However, as the saying goes, ‘never waste a crisis!’, considering the economic crisis facing the nation and the government, there is a no better time for the removal of subsidies which benefit the most affluent in disproportionate order. Imagine that according to a World Bank report, 40 per cent consume 80 per cent of the subsidy in the electricity sector. Now imagine that another 50 per cent of the population, arguably the poorest of us, are not on the grid and therefore are not in any position to be direct beneficiaries any electricity subsidy. On other provisions of the tariff such as tariff tied to service level, minimum remittance by Discos, I welcome those and the initiative for quick mass metering. It is important that consumers can manage consumption and bill. Back to the issue of timing, a major concern is that consultations with consumers have not been robust and may cause confusion in implementation. Let me say that definitely there will be some pain on consumers who are already squeezed and that is where we need to focus on, but we cannot continue to deny the fact that electricity is a product that requires a price, thus, for the sake of the general economy, this may be the time to takeout subsidies that benefit mainly the extremely rich.

The NERC said this tariff is a ‘service level’ tariff; from your perspective what is different about it?

If you remember in May 2017, I wrote an article “A case for Clusters” published by ThisDay in which I made the argument that Disco footprints are dispersed and made up of clusters of consumers who have different willing to pay and at the same time are enjoying different level of supply in terms of hours and therefore, I said that it made sense aggregate consumers in clusters that I called electricity tariff jurisdictions. Having advocated for a tariff that is tied to service level in term of number of hours of service per day, I am happing to see an adoption of the principle. In effect what the service level-based tariff is saying is that the rates paid by consumers will be tied to the average number of hours of service per day over a one-month period. Furthermore, NERC has approved five bands ranging from a minimum of 4 hours daily to minimum of 20 hours for the most basic to premium service. Intuitively, the more the hours of service the higher the rates. This tariff also recognizes the fact that not all clusters can be served alike. In my earlier piece, I highlighted the fact that consumer clusters have different payment capability or if you like willing to pay but, in the language, here, the notice highlights infrastructure readiness or adequacy of clusters to offer service. Not minding the reasons, we are at the same starting point.

How well do you think this will serve the industry; what should consumers expect from it?

First off, there is a basis for accountability in terms of service and a pathway to financial viability and independence from the government. As you know, the tariff also stipulates higher minimum remittances by Discos to NBET and Market Operator. However, returning to consumers, it will bring about a more equitable tariff structure where those who receive premium service, pay more and those who enjoy a more basis service pay lower rates.

That said, we need to further refine the service level, hopefully through consultation between consumers and their Discos to incorporate a consideration for time of use. Time of use is critical in raising utility value of the service and ultimately consumer satisfaction. Take for example consumers in Band C whose service level is based on a minimum 12 hours a day average over a month. Does it mean that the DisCo can provide service for 24 hours over 15 days and then, zero for the rest of the month? Technically, that meets the requirement. Again, consider the case of a consumers in majorly commercial cluster, what will be the utility value of a 12 hour a day service that shows up at 7pm and goes away at 7am or for a residential cluster showing up at 7am when consumers are leaving the house for work or school and then the power goes away at 7pm as dusk sets in. We can even add another layer to say that power shows up daily at irregular interval and periods. In all those cases, the utility value will be low but if we further refine the service to incorporate time of use and predictability, then we can raise utility as one, consumers know when the power will show up and that when it does, it is at the most suitable time for them to use it.

Let’s not kid ourselves, this will not be a magical transition. It will require a lot of diligent work and collaboration between the Discos, Transmission Company and consumers. We need to acquire the data for planning and for investments to meet the implementation plan. Diligence and patience are the keywords. This action transfers some semblance of control to the consumers where they can personally monitor the performance of the distribution companies. To this end, it forces people to be more objective in monitoring the service level rather than estimating on an emotional basis.

But will this address the market’s liquidity challenge which is still dire?
As I mentioned earlier, the tariff is not limited to the service level in terms of hours of supply, but also stipulates higher minimum remittance for each Disco to be made to the Nigerian Bulk Electricity Trading Plc and the Market Operator.

On this note, the tariff seeks to address the liquidity challenges in the electricity market.

Apart from the strict requirements, there’s a potential that if the service is delivered in a manner that I have suggested to raise the value of service to customers, we see that in spite of the hike, customer satisfaction will rise to where payment compliance is better. Behavioural economics have shown that value drives loyalty. We know that the dependence on generators is driven mostly by the erratic nature of grid service, so if we can provide power to people in a regular predictable fashion, they will save much more in the long run.

The NERC and its regulations ought to be the sector’s tailwind; do you see that kind of industrious governance of the sector from it so far because opinions are divided on its independence?

Let me start with the second limb of your question regarding the independence of NERC. It is important to understand what this means and what it does not. For example, according to the Electric Power Sector Reform Act, NERC takes policy directives from the minister in charge of the sector and secondly answers to the National Assembly; the decision to appoint and extend tenures is the prerogative of the government, so let’s put that in perspective. The independence therefore is about its regulatory process and instruments which must be done in a transparent manner and should not be subject to government intervention.

Again, look at the industry, for whatever reasons, the government has remained the biggest financier of the sector and with that comes a lot of control and directives to operators in a manner that erodes the regulator’s independence. As you know, all investments required in the sector should be financed through tariffs. At present, the tariff collections are not even sufficient to pay for current generation not to talk of investments in network expansion and enhancement. The government has injected over $4 billion in loans and subsidies and is facilitating the loans to support the deal with Siemens. So, the government is the piper and dictates the tune. I’ve provided these perspectives for a better understanding of the hurdles of NERC not as a defence because we know that NERC, not limited to the present, could also have fared better in building public trust and confidence. In some cases, the actions of the regulators appear more reactive than proactive.

The Siemens new deal, which is on the table, how do you see it?

This could be a game changer for the sector. Capacity alignment across the value chain of the sector is critical as both cost reflective tariffs and metering.

With the current misalignment in the electricity value chain, where generation outstrips transmission and transmission outstrips distribution, the Siemens deal championed by the ‘Presidential Power Initiative’ is expected to close the gaps and allow the stranded generation which is about 7000 megawatts (MW) to reach homes and business in four years, that is effectively more than double what is generated in the system. From just above 5,000MW to 11,000MW. And unlike in the present case, we expect that the losses due to poor infrastructure and metering will be reduced significantly leading to possible reduction in tariffs and increasing the financial viability of the industry. Another anticipated outcome is that it should support the activation of commercial agreements in the market.

As you know, there is a reluctance to activate Power Purchase Agreements (PPAs) and Gas Sales Agreements (GSAs) knowing that because of constraints, the NBET will be required to pay for idle capacity. This situation has not been fair to the Gencos; so, to the extent that this is resolved it will catalyse the next phase of investments that is planned to take us to 25,000MW.

What in your view should be the priority conversation in this sector following the COVID-19 pandemic?

I am tempted to say that the government has to find a way to provide a cushion for some of the consumers but our history is that subsidies have never been well targeted, so we can start by making sure that consumers are not placed in tariff bands higher than their true service level. More importantly, meters should be made available so that consumers can really control their costs.

That said, the power sector on its own is not different or divorced from other sectors of the economy, so, there must be global as in national policies and conversations on the economy.

Let’s talk about your former workplace – the NBET, it would appear like it’s recently overwhelmed by all sorts of governance and process issues; would you talk about this, how do they impact on the electricity market?

It has not been quite a pleasant situation at the NBET but I’m glad to note that we have seen the worst and that with the new board and management in place, the agency should return to focusing on its mandate. As you are aware, NBET is a key catalyst in the electricity market for investments across the value chain especially for generation and gas supply, and to some extent distribution. NBET assumes most of the sovereign risks along the value chain; it is the anchor of government’s guarantees and has become the sector’s bank in quotes for government financial intervention in the industry. Therefore, when it is distracted by both internal and external problems, it does not bode well for the industry.

Investors’ confidence plummets and not surprising, transactions stall and finding solutions to market problems take a back seat. This is not good. The good thing however is that we have an opportunity for a reset. A strong board is now in place, the new chief executive is a pioneer management staff and the management has been reinforced with additional experienced personnel and I expect staff morale to be restored.

You were head of the NBET when the PPA for Azura IPP was consummated, which is now attracting controversies, what is your take on the issues?

It is true that I led the federal government’s team in the Azura transactions. For good reasons, I am quite proud of the opportunity and achievement. It is unfortunate that such a landmark transaction that had been celebrated by both GEJ and PMB administrations would attract such controversies because of a temporary setback in the sector. Mark you, this is a 20-year PPA and we are less than three years in its lifetime, so there’s ample time to fix the issues in the sector that has made Azura challenging. I’ve said, issues in the sector because, there’s no major issue with the transaction. The pains come from the fact that Azura receives full capacity payment even when it is not fully dispatched and because of its active contracts, it enjoys priority dispatch and then its payment is clockwork and when made in Naira, it must be provided foreign exchange (FX) to meet loan servicing obligations. These are standard contract terms and practices.

However, to the extent that the market is unable to generate the revenue to pay all Gencos and gas suppliers, government has to fund the gap. Now while, we can batch the make up in arrears, Azura’s strict requirement could be irritating to government. I think that with current initiatives in the sector targeting ramping up revenues and expanding the networks such that less generation is stranded with consumers receiving more power, the issues of paying for idle capacity or not dispatching more competitive power plants should reduce the misgivings about the transaction. One of the things we set out to do was to attract very well-structured projects unlike what we had where plants are completed without the complimentary infrastructure such as firm gas supply, evacuation corridor, gas pipelines and what have you and we largely succeeded. So today, Azura is one of the three power plants with firm gas supply outside of the NNPC-IOC power plants.

As for the project finance structure, it has become a model, especially the Put Call Option Agreement (PCOA), for many countries on the continent. Everyone, Nigerian or otherwise who contributed to the transaction should be proud and that includes the GEJ and PMB administrations and their officers.

Do you think the industry is still attractive to investors?

With a population of 200 million and installed generation base of about 13 gigawatt (GW), Nigeria has an immense potential for investors. Unfortunately, so are other countries around us such that when we don’t put our acts together, investors look elsewhere. We’ve seen the appeal wane in international forum over the past few years. With the right consistent policies in place, more regulatory certainty and I not talking just about NERC but other MDAs, together with the fulfilment of the Siemens deal and a functioning payment system where consumers pay for exact electricity supplied, investors will return. One last thing, investments in power cannot be isolated from the economy, when these investments are made, we hope to see a thriving consumer base who can afford to pay the bills; so, policies that drive manufacturing and good jobs must be taken care of.

To attract investors, policies need to be right, implementations need to be consistent, and, the legal framework and regulations need to be fair and firm.