Salvaging Power Sector 8 Years After Privatisation

Nigeria Power Grid

When in 2001, Nigeria unveiled the power sector reforms that culminated to the unbundling and privatisation of electricity generation and distribution companies in 2013, there was this air of relief that light will begin to shine at homes and business premises.

The concept of the reforms envisaged four stages of development, ultimately resulting in “a competitive, efficient, private sector-led power sector regulated by Nigerian Electricity Regulatory Commission(NERC), with the ministry of power providing general policy oversight.

The plan set out implementation of four stages, that include the interim period, which started in November 2013 and characterised by the allocation of sector cash deficits across all market participants before expected tariff reviews and the transitional electricity market (TEM), characterised by Nigerian Bulk Electricity Trading’s (NBET) active trading of bulk power – as a buyer from gencos and IPPs and reseller to discos.

But the chief executive officer of the Nigerian Bulk Electricity Trading Plc (NBET), Nnaemeka Ewelukwa, in a recent public engagement, explained that, shortly after the TEM was declared in March 2015, a tariff modification in June same year sent shock wave into the system.

In 2019, the NBET began implementation of the Minimum Remittance Order(MRO), issued by NERC, to all DisCos, which sets the minimum percentage payment each DisCo is to remit to NBET monthly.

The company said, it would continue to deploy strategies and initiatives to enhance the market liquidity in the sector through improving payments to the generation companies, this further supported by its power sector reform program and the market discipline committee.

NBET, on its part, acknowledged the fact that development in the sector had been very slow, but said that there has been a phased but gradual improvement across the value chain.

However, industry analysts do not see a major departure from previous development or serious service incremental especially around distribution and transmission space.

As the electric power industry announced yet another review of electric tariffs in January 2021, after much deliberation and delays, experts have raised concerns as to whether  a rise in tariffs will result in better power supply

Further to this, electricity distribution in Nigeria remains plagued by high technical, operational and commercial inefficiencies. In 2020, the country’s 11 Distribution companies (DisCos) only billed for 74 per cent  of the energy received from the transmission company, below the 81 per cent reported in the prior year.

Billing efficiency which has historically been impaired by a low metering rate and energy theft, with only 37 per cent of registered electricity customers metered in 2020, was severely impacted by the COVID-19 pandemic.

In a recent position paper, Agusto & Co believes the impact of the pandemic was more visible amongst consumer groups with post-paid meters and estimated bills given that the social distancing rules and movement restrictions established to curb the spread of the virus impaired the physical billing process. Collection efficiency also fell marginally to 66 per cent from 68 per cent  one year prior.

Consequently, the aggregate technical, commercial and collection (ATC&C) losses for the 11 DisCos rose to 51% in 2020 from 45% in 2019. This high loss level remains one of the many reasons for the kickback from electricity consumers on tariff increases, especially in the absence of a significant and immediate improvement in power supply.

Agusto & Co, further notes that these challenges have not only weakened the ability of operators to meet electricity demand but also threaten their financial viability, with significant implications for the fiscal health of the country. Despite the series of amendments to the tariff structure, cash flows from MYTO (the Multi Year Tariff Order) have remained insufficient to fully cover the costs of electricity supplied.

The fear of the impact of a ‘rate shock’ on consumers and the accompanying loss of “political capital” has prevented the effective implementation of necessary amendments that will align the MYTO’s assumptions with economic realities.

Electricity has thus consistently been sold at a discount, with end-user electricity tariffs much lower than the cost of electricity supplied.

The shortfall from unreflective tariffs has been borne in large parts by the Federal Government through multiple intervention funds and payment assurance facilities from the Central Bank of Nigeria (CBN) totaling close to N2 trillion, US$4.9 billion as at the end of 2020, equivalent to 6 per cent of CBN’s balance sheet.

Despite this level of intervention, the generating companies had estimated receivables of over N400 billion in 2020 alone. Whilst the interventions have been central in ensuring the profitability of operators along the Industry’s value chain, they remain insufficient and unsustainable.

More recently, there have been notable efforts by the primary regulator NERC to minimise the challenges faced by operators in the Industry. In particular, tariffs have been raised to near cost reflective levels and adjusted to match consumption via an initiative dubbed Service Reflective Tariffs (SRT).

The new tariff model as the name indicates is expected to reflect and match the quality of service received by the ultimate consumers of electricity. Distribution companies will therefore discriminate in the application of tariffs; consumers who enjoy longer daily supply will be expected to pay higher rates and vice versa.

The SRT, like other MYTO models, has key estimates (and projections) for macroeconomic and industry-specific indicators including inflation, exchange rates and electricity generation.

Also,  Agusto & Co believes adopting scenario analysis and modelling will provide a more robust framework to determine an appropriate tariff structure for the Industry in a dynamic macroeconomic environment such as Nigeria’s.

In addition to the SRT, the primary regulator – the National Electricity Commission (NERC) – introduced a minimum remittance threshold for each distribution company which stipulates a mandatory payment that must be made to the bulk trader for electricity received.

In February 2020, NERC introduced guidelines for ‘Merit Order Dispatching’ which involves ranking electricity generation and dispatch by the transmission company of Nigeria (TCN) in ascending order of costs with the cheapest electricity – such as those from Hydro plants with no fuel cost component – ahead of more expensive plants.

The order also provides guidelines on the alignment of invoicing for capacity charge and energy delivered as well as a framework for the settlement of any imbalance between DisCos and TCN.

While operators are generally optimistic that the new tariffs and accompanying regulations would enhance efficiency and position the industry on the trajectory towards achieving financial independence and ultimately improvements in the volume and quality of electricity supply, Agusto & Co remains cautious, saying, ‘in our view, to truly achieve the objectives of privatisation, reforms need to be accompanied by a strong and enabling regulatory environment.’

Furthermore, improved access to finance, efficiency in billing and metering as well as consistent and secure gas supply are vital to reap the benefits of privatisation in the long run.

LEADERSHIP WEEKEND had reported that, from NBET’s N142 billion budget , N139 billion is set aside to be paid to GenCos to augment shortfall from remittances from DisCo’s.

Of Its current N83 billion budget, about N81 billion is estimated to be paid to GenCos for electricity supply to the Discos.

There is an estimated N150 billion yearly budget from 2022 to 2027 to support revenue shortfall of the Discos to ensure consumers are not allowed to bear the brunt of inconsistencies in the system.


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