Electricity distribution companies: Huge challenges yet unresolved
In the power sector tripod arrangement of generation, transmission and distribution in the post privatisation era, electricity distribution companies (DISCOs) provide last mile services in the electricity supply value chain.
Any keen follower of the Nigerian power sector would readily attest to the fact that DISCOs by providing the connection between customers and the electricity grid are equally plagued with the challenges of high costs and quality of service.
It was equally not farfetched that vandalism, limited gas supply, regulatory uncertainty, lack of respect for contract sanctity and government policy inconsistency has further added to operation woes of the DISCOs.
Industry watchers observed that DISCOs are strategic because classically, they serve as the mid-point between generators (who expect payment from the DISCOs) and final consumers who are supposed to make the payment expected from the DISCOs, by the generators.
They however noted that the DISCOs are unable to receive payment for the volume of electricity made available to final consumers, then, on-grid power generation will not be profitable.
Industry watchers however pointed out that despite private investment into the power sector, issues with collection, transmission, gas supply among others have limited the impact that private sector would have had in the sector especially as it affect the generation companies (DISCOs).
They expressed concern over the state of the power sector in Nigeria and the implications for investors in the sector and the various disruptions to the operations of other enterprises in the economy.
Analysts are equally worried that the Discos have not been able to make substantial improvements to the distribution networks they cover due to the paucity of funds.
DISCOs and the growing challenges
The power sector tripod of electricity generation, transmission and distribution makes up the value chain that brings electricity to consumers.
In a recent publication, Tolulope Aderemi, an energy consultant said that apart from the Eko Distribution Company Plc and the Ikeja Distribution Plc., about every DISCO operates across 3 to 4 states. Each distribution network comprises of overhead lines, cables which are largely 11kV and 33kV, transformers, switchgears, service lines, meters, control equipment and other apparatus to support the distribution of electricity to industrial, commercial and domestic users.
Aderemi observed distribution companies play a tactical role because, through their ownership of the sector’s entire on-grid customer base, they are the sources of all the revenues that drive the Nigerian Electric Supply Industry’s value chain.
Energy operators however argue that considering the importance of power as the fundamental ingredient for the growth of any economy, getting all the parts to work in sync is crucial. But, getting the distribution to function effectively is vital.
“The make-up of the electricity sector consists various players, from the fuel suppliers (water, gas, oil, and other renewable sources of fuel); generators (who generate the power), transmitters (transporters of the generated power to the distributors) and distributors (who retail the power to household consumers and other smaller businesses”. They said.
Odion Omonfoman, an energy consultant and the CEO of New Hampshire Capital Ltd in one of his contribution to power sector discuss opines that DISCOs are faced with huge operational challenges, which are clearly visible in their operations and service delivery.
Omonfoman observed that a lack of sufficient energy supply from grid, old, obsolete networks, lack of maintenance of network equipment, poorly trained manpower, poor customer data, low meter penetration, health, safety and environmental issues and a near absence of investments due to poor revenues, inadequate tariffs and external funding constraints.
He noted that while these challenges may have severely constrained the operations of Discos and thus, the non-realisation of the supposed gains of the privatisation of the power sector, it is important to state that these challenges were precisely the reason why the privatisation of the power sector was done in the first place.
According to him, “The broad objective of the privatisation was for the private sector to address these challenges that had plagued successor Discos while under government ownership. The reality is that these challenges were underestimated and in some instance, completely overlooked, by the BPE, NERC, core investors and their financiers”.
Strategic solution required
Power operators disclosed that DISCOs have made significant capital investments towards capacity enhancements, it is however instructive to note that a lot more needs to be done to ensure that the operators surpass the requirements of their performance agreements.
Sunday Oduntan, executive director, research and advocacy, Association of Electricity Distribution Companies observe that as long as the same fundamental issues and challenges exist in the power sector, there are no miracles to seeking the turnaround that we all desire. “No investor will invest in a sector that returns, approximately, 50 kobo of every Naira of energy that is delivered”.
Oduntan pointed out that government have failed to honour any of its commitments to investors as the issues of improvement in gas supply have not materialise because Pipeline vandalisation have constantly resulted in an average of 50 percent reduction in generation, for the period of May, June and July.
In the views of Odion Omonfoman, as a first step towards resolving the financing challenges facing DISCO operations, core investors, in line with their performance agreements, need to urgently capitalise DISCO operations by the injection of “patient” capital by way of long-term debt or equity.
He said it is imperative that core investors inject significant patient capital to address the challenges mentioned above. Short-term debt or borrowings will not suffice and only serve to exacerbate the financing and operational challenges.
Omonfoman further insist that underpinning any debt or equity capital raise is a sustainable and cost reflective electricity tariff and a long-term tariff path. Without cost reflective electricity tariffs, the electricity sector is not likely to attract and sustain the much needed investments.
“The entire electricity sector is faced with huge revenue shortfalls. The implementation of cost reflective tariffs, access to long-term debt capital and equity injection, will still not address the revenue shortfall to the system in the short term”, he said.
The energy expert is of the opinion that DISCOs are encouraged to adopt off-balance sheet funding solutions to fund key capital items such as metering, network expansion and embedded generation. Off-balance sheet funding solutions include outsourcing meter financing and operations and vendor financing. DISCOs also need to start looking at franchising opportunities, particularly in rural areas or areas with high losses.
“The rationale for fixed charges must be understood by electricity customers. Regardless of energy flow, there are huge fixed costs to the sector, which must be recovered through fixed charges. Fixed charges also provide some level of guaranteed revenue to the sector” he added.
KELECHI EWUZIE