A Review of the Nigerian Electric Power Sector Recovery Program
Proem
The federal government of Nigeria (the “FGN”) has made a shift in the policy surrounding the Nigerian electric power sector, in a bid to ensure its viability, profitability and overall recovery.
This came on the back of a series of financially turbulent years for the sector, which have been as a result of a number of factors. Amongst these factors is the illiquidity in the sector as a result of low tariffs due to the tariff mechanism known as sculpting and insufficient collection by electricity distribution companies. Furthermore, the economic recession which the country entered into in the second quarter (Q2) of 2016 has led to a series of negative economic growth, which decidedly led to a full year’s negative growth of-1.51% in 2016.
The recession revealed Nigeria’s over-dependence on oil as its sole trade commodity, and revealed a worrying lacuna in the economics of the nation that needed to be rectified immediately. As a result of the foregoing, a recovery plan was developed which focused on the improvement of other sectors of the Nigerian economy thereby gradually leading the country away from the overreliance on oil in the global marketplace. Coupled with this over-reliance on oil, the power sector which was as at 2013, an investor’s dream has become a pariah of some sort with investors very reluctant to make any substantial investment in the sector. Sadly, the idea of the introduction of a number of sweeteners, including a put call option arrangement, has not done much to improve things.
Consequent upon the foregoing, the electric power sector recovery program which is a suite of policy actions, operational and financial interventions was developed by the FGN. Key deliverables of the recovery program, include (but are not limited to), the elimination of the accumulated deficit from 2015 and 2016, the reduction of the future shortfalls (2017-2021), the development of policies to minimize the industry subsidy going forward, the restoration of the financial viability of the electric power sector, identification of viable sources of funding, addressing infrastructural gaps, the establishment of data driven decision making processes across the sector, the development of communications strategy for stakeholders, having a more robust energy mix (and access to electricity) via the promotion of off-grid power solutions and addressing gaps in infrastructure across the sector.
Apart from the foregoing, the FGN seeks to ensure that tariffs are cost reflective by 2021, implement a forex policy for the electric power sector, make contracts effective and develop a business continuity policy in the sector, an aspect which the author had played an active role in.
The FGN seeks to implement this recovery plan through the conduct of Financial analysis of the power sector, regulatory strengthening together with public communication and the financing of the recovery program
The main challenge, however, for this program as a whole is the funding. Crucial to the execution of the project, is the need to mobilise external funding for the viability of the recovery plan.
The Issues, the Challenges and the Prospects
Having considered a number of options, the FGN seeks to have increased by fifty per cent (50%); the tariffs of all customer classes save for R1, R2 and C1. It further plans to increase the tariffs of certain R2 customers (who do not require government support, after a disaggregation of the R2 customer class) by January 2018. The tariffs of the remining R2 customers, R1 and C1 should be increased by July 2018.
Despite the foregoing phased increases in tariffs, it is expected that the shortfall in the electricity market will still be around USD 5.9 billion (circa NGN2.3 trillion), except there is government support to cover the said amount. Nevertheless, government being what it is, these funds may or may not disbursed and where they are, same might be released late due to delays in appropriation and the passing of the appropriation bill.
Thus, the repeated inability of the Nigerian Bulk Electricity Trading Company (NBET) to pay its invoiced amounts to the electricity generating companies, is expected to abate. Although, as had been alluded to above, this inability to pay, which has been one of the reasons behind the non-viability of this sector is expected to abate, this would not be without challenges and the reduction may not be too substantial, immediately.
Nonetheless, it is further arguable that with the disbursement of the proposed 701 Billion US Dollars Payment Assurance Program, the Central Bank of Nigeria will provide funds to the NBET for payment assurance to the upstream sector. The effect of which, is that NBET should be well-placed to provide guarantees for the invoiced amounts and in turn have upstream contracts (the power purchase agreements) already executed, activated. This is turn could help stabilise the market, by reducing market shortfall as the generation companies are sure of their payments, which therefore assures steady supply of electricity.
Under this recovery plan, there would be a need to reconcile the historic indebtedness of the electricity distribution companies, the FGN’s debt to the electricity distribution companies and the ministries, departments and agencies debts to the electricity distribution companies. If historical indebtedness and or shortfall in the market stands at over 1 trillion as consistently reported it is unclear how all of these figures highlighted above would eliminate indebtedness in the market especially since reduced shortfalls will remain with government (where it does) providing subsidy.
Assuming all of these do add up (but writer is quite unsure, how), in the long term, it will be pertinent to develop clear and continuous monitoring of electricity generation companies, electricity distribution companies and service providers to ensure transparency of operations and prevent accumulated debt into the future. The enforcement of regulations, penalties, quality standards, metering rules will also aid in fostering a more strengthened sector. The foregoing, together with practical steps to reducing electricity theft, will aid the overall improvement of the electric power sector.
The Business Side for the Discerning Investor
The program proposes that in minimizing the subsidy going forward, the intervention of off grid solutions to the power needs in the Nigerian economy is crucial to its advancement. Independent power plants for schools and hospitals, mini grids and stand-alone home solutions such as solar home systems may be utilised.
These solutions represent the basis upon which the power sector may be revived and therein lies the opportunities for the discerning business person and like the writer always insists, for the patient and business person who likes to invest long-term, this is the best time to seriously consider investing in the sector as several waivers and concessions may be obtained and coming in now when things are a bit hazy means assets may be obtained cheaper than their real value.
Conclusion
To adequately address issues such as gas pipeline vandalism, there is need for communication between the Federal Government and the stakeholders within these oil producing communities. In the immediate future, the governments engagement with these host communities will help to allay fears and restore confidence in these regions.
Tied to this is the need to ensure that market operators do not continue to suffer losses tied to counterparties’ inability to uphold contractual agreements. In line with this, the recovery plan suggests operators’ need to be held to contractual minimum standards and performance agreements, and penalties for breach of such standards will be enforced.
A cost effective tariff for the power sector needs to be introduced, that accurately reflects the cost of production and distribution of power to end users. The issue with increasing tariffs beyond the limits stipulated in the MYTO is the ripple effect on customers and end users. If the tariffs are set too high, the cycle of unrecovered debt may continues and hampers economic growth.
The timelines set by the Government in the recovery plan may be to incentivize consistent progress towards the stated goals, but on the other hand seem to be a set of unrealistic time-bound goals that all parties are running towards. This may prove ineffective and unsustainable in the end.
However, on the whole, the recovery plan is a step in the right direction for the electric power sector. The interventions set out in the plan (if well implemented) will aid the stability and sustainability of this sector.
Ayodele Oni, (ayodele.oni@bloomfield-law.com), a commercial lawyer and Partner in a leading Nigerian law Firm, specializes in international energy investment law & policy advising a number of electric power developers. He holds a mini-MBA in Power & Electricity and has been advising some ministries, departments, and agencies of the federal government of Nigeria on the post-privatization restructuring of the electric power sector.