Nigeria’s DisCos illiquid as electricity attracts largest energy investments globally

Electricity Distribution Companies (DisCos), which interface with end-users, occupy a critical position in Nigeria’s power value-chain but struggle to stay afloat because of illiquidity and stifling legal framework, while electricity continues to attract the largest energy investments, globally.

On July 17, 2018, Alex Okoh, director general of the Bureau of Public Enterprise said most of the DisCos are technically insolvent.

Okoh made this known during an interactive session held at the instance of House Committee on Power, with critical stakeholders in Nigeria’s power sector including Nigeria’s Bulk Electricity Trading Company (NBET), Electricity Distribution Companies (DISCOs) and Generation Companies (GENCOs).

Globally, the scenario is different. According to Paris-based International Energy Agency (IEA), in a report ‘World Energy Investment 2018’, 2017 was the third consecutive year of decline in global energy investment with energy efficiency the lone sector of growth.

Despite a 6 percent decline in spending, the electricity sector again attracted the largest share of energy sector investments, exceeding the oil and gas industry for the second year in row, as the energy sector moves toward greater electrification.

In 2017, newly sanctioned coal power fell 18 percent, driven by a slowdown in China, India and Southeast Asia. Although, despite declining capacity additions – and a wave of retirements of existing plants – the global coal fleet continued to expand in 2017.

While investment decisions signal a continued shift towards more efficient plants, 60 percent of currently operating capacity uses inefficient subcritical technology. Meanwhile, sanctioned gas power fell nearly 23 percent, due mainly to the Middle East and North Africa (MENA) region and the United States.

In Nigeria the DisCos have failed to attract adequate investments because of their debt burden and lack of competitive tariffs.

An assessment conducted by BPE showed that many of the DisCos are technically insolvent. Their current liabilities are in excess of their assets, most are owed to NBET. They are unlikely to pay because of poor tariff.

DisCos need to improve infrastructure that consumers can pay for, “but technically they do not have the capacity to do so,” Okoh said.

Eugene Edeoga, NBET Director of Procurement lamented that the company is “technically dead and insolvent with huge liabilities” arising from over N800 billion owed it by the DisCos.

To find sustainable solution to the power sector woes and attract investments inflows, four action steps must be taken, people with knowledge of the sector have suggested.

BusinessDay’s check shows that the highest percentage of revenue paid by the distribution companies for electricity received from the generation companies is 29 percent.

One of the radical first steps towards revamping Nigeria’s power sector is for government to find a way of renegotiating, absorbing or setting aside the N800 billion electricity debt stocks, a source who have worked at both the BPE and one of the founding commissioners at the Nigerian Electricity Regulatory Commission (NERC) told BusinessDay, and requested not to be identified.

Secondly, the government needs to give up its 40 percent equity holding in the DisCos, in stages. First, it 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 electricity distribution companies (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.

Thirdly, transmission company Nigeria (TCN) needs to be broken-up and privatised. Experts say this is necessary if the market it 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.

The fourth solution on the list is that those who get a concession must present two evidences: proof of experience doing something similar in a similar economy and proof of liquidity or money to pull off the deal.

STEPHEN ONYEKWELU