Why value chain synergy is critical to power sector revival
With power generation hovering between 2,000MW and 3,500MW in recent times amid poor infrastructure, lack of sufficient funding, security issues and the uncertainty surrounding the present foreign exchange regime, energy experts say only a harmonised power sector value chain can solve the current hiccups.
They argue that 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.
Odion Omonfoman, an energy consultant and the CEO of New Hampshire Capital Ltd said it is imperative that core investors inject significant patient capital to address the challenges identified in the power sector, saying that short-term debt or borrowings will not suffice and only serve to exacerbate the financing and operational challenges.
Omonfoman 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.
He equally opines that Discos should be 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”. He added.
On his part, Ayodele Oni, a lawyer with keen interest in the power, oil and gas sector observed that electricity which powers the value chain can only generate revenue for the entire sector from the consumer end of the chain, where the distribution companies operate.
Oni said every part of the value chain must be able to generate sufficient revenue from the consumer price for the sector to be sustainable.
He observes that MYTO’s methodology fundamentally relies on the power value chain. According to him, “MYTO sets tariffs for all parts of the power value chain – specifically the “Gas-to-Power” value chain, as the majority of the electricity generated in Nigeria is as a result of thermal power plants”
“Retail tariffs (from where the Discos aim to gain their profit) are designed to cover payment for electricity from the generating companies, Transmission Use of System charges for bulk electricity delivered to supply (as determined by MYTO), capital expenditure (Capex) and operational expenditure (Opex), costs of billing and collection, and the cost of distributing electricity across the network”. He said.
Oni opines that these retail tariffs determine the overall profitability of the power sector. “Without consumers paying their bills, the Discos are unable to pay NBET. In the absence of further capitalisation of NBET, this will eventually lead to NBET’s inability to pay the generating companies (which means they are unable to pay sums owed to gas suppliers). Essentially, failure of consumers to pay retail tariffs will lead to the entire value chain starving for lack of funds”.
He however said that government has failed to honour any of its commitments to investors as the issues of improvement in gas supply have not materialised.
KELECHI EWUZIE