Making Nigeria’s electricity market competitive
Five years ago, Nigeria set off a comprehensive reform of the power sector, in a privatisation move that was acclaimed by players in the space as one of the boldest reforms but faced by insufficient cash flows due to losses along the power value chain.
This reform was designed to achieve two things: fix chronic efficiency gap in old public utilities and attract private capital needed to drive the sector to meet Nigeria’s fast growing electricity demand.
Half a decade later, the power sector has not recovered from one of its biggest challenges, ‘shortage’. From gas availability to electricity units delivered to the end-user, there are severe constraints that not only threaten the viability of the sector, but practically repel fresh funding and investment across the value chain. This has led to sub-optimal utilisation of generating capacity, inadequate transmission infrastructure and distribution losses and low rates of collection.
To illustrate this, over 3, 000 MW of generating capacity is stranded due to gas constraints. Transmission capacity can transport 50 – 60 percent of installed capacity, while collection losses range between 40 – 60 percent at the electricity distribution companies (DISCOs) level.
People with deep knowledge of the sector say insufficient cash flows have significantly impaired the ability of electricity generating companies (GENCOs) and DISCOs to recover all costs and generate appropriate return on investment.
BusinessDay investigations show that to make Nigeria’s electricity market competitive some urgent steps must be taken to push reforms in the sector further along market oriented lines. To find sustainable solution to the power sector woes, experts have suggested some steps.
Debts are accumulating at the Nigerian Electricity Supply Industry as only four of the country’s 11 DISCOs, paid for supplies of power they received for transmission to their customers from the generation companies, GENCOs in January 2018.
BusinessDay’s check shows that that the highest percentage of revenue paid by the distribution companies for electricity received from the generation companies is 29 percent.
Total debt stock in the power sector is close to N800 billion, a source with knowledge of the matter told BusinessDay. Creative financial deals, backed by sovereign guarantees would be needed to free the power sector of this debt.
The government needs to give up its 40 percent equity holding in the DISCOs. This could take place in stages. The 40 percent could be managed by a consortium and some commercial banks. However, the government will have to ultimately give up its equity entirely.
This is not completely novel because, on September 25, 2017, Babatunde Fashola, minister of power, works and housing, stated that the federal government would be open to welcome new and tangible offers that would lead to it divesting its 40 percent shares in Nigeria’s 11 DISCOs.
The other point is to ensure that government, going forward, would not owe DISCOs. It must budget for power in the way that it budgets for diesel and travels. “We have done that in the 2017 budget; we will do it again in the 2018 budget, and enforce compliance by agencies to pay their debt” Fashola said.
This will help in bringing stability to liquidity problems in the power sector, ultimately for the benefit not only of the DISCOs but the entire value chain.
Transmission Company Nigeria (TCN) needs to be broken-up and privatised. Experts say this is necessary if the market is to be optimally deregulated.
In other countries where the electricity industry was formerly a government owned, vertically integrated, monopoly; the reforms have generally involved splitting the industry into separate generating, transmission and distribution sectors.
The transmission system often remains a government-owned common carrier, or is kept under extensive regulatory control as a natural monopoly. Stakeholders in Nigeria’s power industry say Nigeria’s TCN needs to be broken up into mini-privatised operations to make the system work.
Finally, those who get a concession must present two pieces of evidence: proof of experience doing something similar in a similar economy and proof of liquidity or money to pull off the deal.
STEPHEN ONYEKWELU