Generation Companies, Distribution Companies, Eligible Customers & the Regulator
The privatization of the Nigerian power sector was heralded as precisely what the failing sector required. With so much anticipation, investors were invited to take over the control, operation and or the maintenance of the entire power industry. However, things have not exactly panned out as expected as serious liquidity problems have been the order of the day.
The Ministry of Power, Works and Housing believes that the power sector requires stability, specifically as regards the production side of the energy value chain, to really take lift. The Minister of Power recently stated that giving confidence to investors interested in playing in the sector but who are weary of the serious challenges recovering their investment should be key to what the Federal government (FG) aims to achieve for this industry to move forward. There is no doubt that a lack of investors’ confidence has definitely hampered the expected growth of the sector, as it has been nearly impossible to get new money into the sector.
The abysmal market liquidity squeeze originating from the inability of distribution companies (“Discos”) to collect tariffs due them has got generating companies (“Gencos”) struggling to secure the necessary funding for their operations, acquiring spare parts and equipment, and meeting other obligations for the power generation stations. Disco themselves, who are in need of funding to operate and adequately maintain the depilating assets they paid hundreds of millions of naira to acquire. The reader of this article should not forget the mounting debts owed by these Gencos and Discos. Although, the federal government has now provided some help in form of a N701 billion guarantee.
Market payment statistics shows that on a monthly basis, generation companies’ invoices amount to about N35 Billion to N40 Billion, out of which only about N7 Billion is paid. The implication is that the debt profile of the Gencos is about N30 Billion per month.
Despite earlier market projections and the various business plan models submitted by these successor companies during the privatization process, their failure to justify these projections and deliverables has directly resulted in their collective inability to meet the performance expectations they were required to by virtue of their executed Performance Agreements with the Bureau of Public Enterprises.
Investors and other stakeholders in the power industry recently at the Nigeria Power Summit, which is part of the ongoing Nigeria Oil and Gas Conference (NOG) holding in Abuja, regretted the neglect of the power sector by different administrations in the country over the years. Research has shown that only 20 percent of the cost of power produced across the supply value chain is being paid for. The foreign exchange (forex) challenge also remains a major bottleneck for power investors as a result fluctuating exchange rates, which was less than N200 to a dollar when the power assets were bought, and currently above N350. There is need for the FG to address this evident liquidity issues.
Liquidity Issues in the Power Sector
Liquidity challenges have proved to be an almost immovable obstacle to the regular supply of electricity. Over N534 Billion in revenue was lost by the power sector in 2016. Among the reasons for the loss are shortages in gas supply, frequency and line limitations and water levels management constraints that led to several cases of outage in the country. There have been quite a number of total system collapses in 2016 alone. The average daily revenue loss has been put at N1.5 Billion, said gas constraint remained one of the major challenges facing the electricity sector. Specifically, Discos have not been receiving enough revenue from the customers (who either do not pay enough or out rightly refuse to pay for energy consumed) to be able to pay the Nigerian Bulk Electricity trading Plc (“NBET”). As such, the moneys owed to NBET by the Discos is transferred to the Gencos, which in turn leads to the Gencos unable to pay gas (and other fuel) suppliers to guarantee regular supply of gas for power generation. Over time, Discos’ remittances to NBET for energy has fallen from an average of 65% in 2015 to 35% over 2016, whilst monthly revenue shortfalls have increased from an average of N9 Billion in 2015 to N25 Billion in 2016.
The N534 Billion is the value of electricity lost on account of the challenges, part of which could have been used to bridge the liquidity gap in the power sector, that is put at N1 Trillion. Simply put, the billions of naira lost do not exactly reassure investors (particularly foreign ones) that NBET shall be able to deliver on its own obligations through the Gencos, in spite of the fixed N701 billion federal government guarantee. The trickledown effect is that Gencos end up owing gas suppliers significant amounts of money for gas supplied to the power sector even before the completion of the privatization. This was part of the sector debt that the N213 Billion the Nigerian Electricity Market Stabilization Facility was meant to liquidate. Unfortunately same was inadequate given the enormous liquidity required to achieve this objective.
Evidently, the sector is finding it difficult to access more loans from Nigerian banks due to their inability to meet the payment obligations connected with previous debts. This situation has also affected the capacity of the power firms to improve on electricity supply to consumers for domestic and industrial uses. If this continues, industries and other users will carry on with the burden of providing own electricity outside the national grid for the foreseeable future. Production and prices of goods and services will be negatively impacted and hopes of any early recovery from the current recession will be dimmed.
In a recent report, the Transmission Company of Nigeria (TCN) was owed about N107 Billion as at December 2016 as arrears for energy wheeled to the 11 Distribution Companies (Discos) and other electricity industry operators. This was disclosed in the TCN’s market operations fourth quarter 2016 payments and outstanding for Discos and service providers. A copy of the publication showed that the debts were racked up in 22 months (February 2015 to December 2016). Between January and December 2016, the Discos paid to TCN N28.9 Billion from the total invoices of N90.8 billion leaving an outstanding N61.9 billion. The publication showed another N45.3 billion outstanding debt that piled up in 2015, bringing the total Discos liability to the TCN to N107 billion.
Are the Regulators Doing Enough?
The regulators of the power sector have a key role to play in reigniting investors’ confidence in this industry. Although observers have expressed optimism at the keen interest the Muhammed Buhari-led government has in the power sector, there is still much that can be done by the regulators. Firstly, the newly sworn commissioners of the Nigerian Electricity Regulatory Commission (“NERC”) need to think about regulations that open the market and make doing business attractive. Also, they should consider what type of regulations that should be driven to reassure confidence in investors, and regulations that would make the Nigerian energy mix more robust. The power sector requires financing and these commissioners should tap into making it more investor and investment friendly.
NERC may be required to implement its regulatory powers in a more robust manner when dealing with the Discos. Some industry experts have the view that these Discos see themselves as monopolies and run themselves as a private business where they feel they are not required by both law and contract obligations to share information with the regulators. Discos should be more transparent and the regulators should demand such transparency. If there are claims that the Discos receive revenues and refuse to remit same to NBET, regulators should do more than lip-service to resolve this. The Discos should be held accountable to how much they receive rather than seek for some interventions from the market.
The regulators should explore improvements to regulations for eligibility customers in a way that reduces the fear revenue losses by Discos. A fear borne by the concern by Discos that allowing the concept of eligible customers means that Gencos would take over their best customers. Specifically, the structure should be such that the industry allows Gencos (this also includes independent power plants) to use local distribution networks to move electricity to eligible customers. For this service, the generating company is required to pay a “wheeling charge” which may be incorporated into a Distribution Use of System Agreement. Such a regulation should look into granting NERC the power to approve the wheeling charge which shall allow the Disco make some much needed revenue.
It should be noted that the FG has indeed begun to provide some solution to the revenue gap in the industry which has grown too large over a short period of time. The Federal Executive Council recently provided some boost to the power sector by approving N701 Billion as Power Assurance Guarantee (the “Guarantee”) for the Nigerian Bulk Electricity Trading (NBET). It is believed that this move will guarantee payment for gas supplied for power generation and could act as an incentive for improved gas supply to power generating plants across the country. It is suggested that the Guarantee should be used, primarily, to settle gas debts owed to Gencos. Of the total Guarantee sum the FG aims to resolve over N500 Billion debts owed to gas suppliers to further boost confidence in investors. The government’s aim in the long run is to ensure that there is payment guarantee and that there are no more shortfalls in payment to the Gencos.
In addition, the Guarantee should provide some confidence that the government’s ministries, departments and agencies (MDAs) shall be made to pay up their debts to the Power sector and also ensure that future payments are made promptly. This would help improve the sector’s liquidity.
For more information on the power sector, read the text, “The Nigerian Electric Power Sector: Policy. Law. Negotiation Strategy. Business” by the writer.
Ayodele Oni
Ayodele Oni (ayodele.oni@bloomfield-law.com), a solicitor, specializes in international energy (oil, gas and electric power) investment law and policy.