The problem with Nigeria’s power sector and how to fix it

The 2013 power sector privatisation programme was designed to address an intractable situation where despite massive investments, Nigerians remained in darkness.

In the nifty arrangement designed for the sector, DisCos would collect and pay the Nigerian Bulk Electricity Trading (NBET) Plc who will pay every other operator in the value chain – generation companies, (GenCos), gas companies (GasCos) and the Transmission Company of Nigeria (TCN). It was assumed that the DisCos would collect a cost-reflective tariff hence a Multi Year Tariff Order (MYTO) was developed.

But political interference marred the process. First, the privatisation exercise was abused towards the end, when competent people driving the process were fired and replaced with those pliable to special interests. The regulator was weakened and became susceptible to political interference, especially in matters of tariff and the DisCos became the enfant terrible of the electricity market.

It soon became a con game.  The weeks leading up March 28 general elections were the darkest Nigerians ever saw. Power supply fell below 1,500 MW and large swaths of the population were thrown into darkness. People could not wait to cast away the Jonathan government.

So, on March 31, 2015 when Jonathan called to concede defeat, light came to the land. Without any investment, without any policy intervention, power improved suddenly.

Weeks after the inauguration of President Muhammadu Buhari, Nigerians were posting on social media pictures of bottles that broke because they had become too frozen. They said the body language of the president was responsible for it.

By February 2, 2016, power generation had ramped to 5,074 MW, the highest in Nigeria’s history. Two weeks later, Niger Delta militants blew up the Forcadoes pipeline which feeds gas to all the critical gas-fired plants in the country. This led to the collapse of Nigeria’s power sector.

Conservative estimates say losses were over $3billion dollars by September 2016, with over 1,500MW of power lost because Forcados is Nigeria’s major artery and accounts for 50 percent of gas production. Nigeria depends on gas-fired plants to generate 75 percent of its power.

By May 2016 when Babatunde Fashola, minister of Power, Works and Housing, introduced an incremental power policy, the fissures in the power sector had begun to show. Decades of lack of investments in improving power infrastructure, a shoddy power privatisation exercise that saw assets handed over to investors lacking technical capacity and an illiquid market brought the sector to its knees.

The Nigerian Electricity Regulatory Commission  (NERC) had announced months in advance that a new electricity tariff would be introduced by February under the Multi-Year Tariff Order (MYTO) 2015, which would see residential customer pay up N23.60 per kilowatt/hour, commercial and industrial customers as much as N38 per kilowatt/hour.

Labour unions and civil society staged protests over the tariff increase. Their opposition was based on poor supply and estimated billings due to non-supply of prepaid meters. It didn’t matter that gas prices had risen and inflation rate had soared past earlier assumptions, rage and reason rarely find harmony.

Human rights lawyer, Toluwani Adebiyi challenged the increment in a Federal High Court in Lagos. Trial judge, Justice Mohammed Idris, annulled the increment in tariff in July describing NERC’s action as procedurally ultra vires, irrational, irregular and illegal.

Already, a liquidity challenge had set in as a result of absence of market price for power. The law suit further worsened the liquidity crises in the electricity market. GenCos could not pay gas suppliers; DisCos collected poorly and kept more for themselves than they should; Transmission Company of Nigeria (TCN) got less than 25 percent of invoice value and NBET reported poor remittances. Liquidity gaps in the sector grew north of N1trillion in 2018.

Chuks Nwani, energy lawyer and vice president of PowerHouse International, an energy consultancy said, “The prevailing Disco tariff today was modelled against variables that have been overtaken by time and events and therefore does not reflect the true pricing of electricity. MYTO 2015 for Discos were built on 196/$1, 8.3 percent inflation rate, certain available capacity and therefore the final tariff was a product of this variables.

“You recall that from late 2015 there were changes in these variables which would require reciprocal adjustment of the tariff but the government did not allow NERC to increase the tariff to meet up with the current realities. The shortfall that the Discos could not account for becomes a debt for the market which the government is under obligation to pay since it is at their instance that the tariff was not increased.

“This is why the government has to fully implement the revised customer tariff plan even if at the end of the day, the government is not going to fully pass it on to the customer, but it has to act fast to bring in liquidity to the market as this will save the sector from total collapse and attract new investments,” said Nwani.

Babatunde Fashola, minister of Power, Works and Housing, insists that DisCos are not even providing cost-reflective service and if they improve collections by metering more people, this could assuage their losses.

But this argument is disingenuous because it assumes the problem is only poor collections, but the real challenge is capacity. Customers who are metered pay as they should for power while those without meters are forced to pay charges that would have been criminal had the regulator been alive to its responsibilities. Addressing power theft needs serious investment which can only be made available through cost reflective tariff.

For over 20 months, the minister has had monthly engagements with operators and this has helped to provide a forum for frank discussion of the problems. It has since being discontinued.  But while it lasted, DisCos were compelled to produce audited accounts, TCN’s assets stuck in the ports for years were increased and the management was restructured.

Remedial actions

In 2015, through the Central Bank of Nigeria (CBN) under the administration of former president Goodluck Jonathan, the Federal Government provided the sum of N213billion as Power Sector Market Stabilisation Fund at concessionary interest rate below market rate to DisCos and GenCos.  In March 2017, the Federal Government provided a N701billion guarantee to gas producers.

In June the Federal Government committed to invest N72 Billion for procurement of equipment and installation to help get the 2,000 MW to consumers. Early this year, the Federal Government said it had taken advantage of the new Meter Asset Provider (MAP) regulations to give a grant of N37 billion to a private sector operator to supply meters to interested Distribution Companies (DisCos). It soon reached N1.023 trillion this year

But much of these intervention funding has not done much to lift the sector.

“The danger with all these bailouts is that Nigerians will still pay for these monies, many which are given without the consent or knowledge of market operators,” said Joy Ogaji, executive secretary of AEGC  told BusinessDay.

Nigeria secured approval for a Power Sector Reform Implementation Programme along with the World Bank and African Development Bank for a $7.6 billion funding for the sector in 2017 and began a phased implementation of aspects of the programme.

Last year, Fashola announced that Gencos could now sell power directly to eligible customers and a competition transition charge has been announced by the minister to assuage the concerns of the DisCos that they will lose huge market share.

NERC has approved a mini grid regulation which has provided opportunity to deepen energy access for rural communities. The Rural Electrification Agency (REA) is ramping up efforts to help communities without access to the grid or those who are underserved to get power through renewable energy sources. There are also many projects coming on stream in rural communities.

Analysts say these efforts can only translate to results if the electricity market in Nigeria is made to work. Electricity cannot be treated as a social service and any plan to reform the sector must first start with improving the market.

“This is not a time to trade blames, because there is enough to go round, rather it is a time to reiterate everybody’s responsibility and urge all of us to brace up, to do what we are obliged to do, which is to serve the people” Fashola said recently.

Improving liquidity, experts say, is the first task in rebuilding the power sector. Nigeria’s eleven electricity distribution companies (DisCos) collected N106.6 billion out of the N171 billion of electricity invoice to customers between January and March this year and remitted 31 percent of the amount to the NBET, to settle obligations to generation companies and the Transmission Company of Nigeria, the regulator has said.

In its 2018 first quarter report, the Nigerian Electricity Regulatory Commission (NERC) blamed poor collections on non-cost-reflective tariff and customers’ apathy.

“Financial illiquidity remains the most significant challenge affecting the industry’s sustainability. This serious liquidity challenge is partly attributed to non-cost-reflective tariffs, and high technical and commercial losses aggravated by consumers’ apathy to payment arising from estimated billing and poor quality of supply in most load centres,” the report says.

NERC said this has resulted in a situation where “Out of the ₦171.1billion billed to customers in the first quarter of 2018, only ₦106.6billion was recovered, representing 62.3 percent collection efficiency. Therefore, out of every ₦10 worth of electricity sold during the quarter under review, ₦3.8 is uncollected.”

After improving market liquidity, the regulator needs to be strengthened to be independent and hold power sector operators to deliver the terms of their performance agreements.

 

ISAAC ANYAOGU