The Power Industry- Looking Up In spite of Challenges
Like a few other African countries, Nigeria has been working hard at accelerating its rise and integration into the world economy. However, without access to affordable and reliable energy, that economic rise and integration would be rather slow and laborious. With the knowledge of the drag to economic growth occasioned by poor power supply and the low oil prices, the electric power sector in Nigeria has been a beehive of activities from the federal government to donor agencies and also the private sector.
The power companies- both generation and distribution are also quite busy doing several things at the moment, including pushing the government to consider new policies, concepts and ideas. It is also the case that several people are disappointed with the state of the electric power sector despite the privatization of the sector and more needs to be done in terms of expanding electrification in Nigeria.
Consequent upon the foregoing, this week and the next few weeks, we would be looking at a number of matters in the power sector that give hope and suggest ways to further improve the state of the electric power sector. We would highlight the downs and see how those can become highs and also make recommendation on how to improve on the highs.
The Idea of Mini-Grids
With twenty-two (22) transmission related projects and a number of other projects going on in the electric power sector, the federal government is making progress developing power infrastructure in Nigeria. However, despite the government’s best efforts at ensuring that electrification reaches several communities through the extension of the national transmission grid. However, there are, for financial, geographic and other limitations to having the national power grid reach all localities in Nigeria.
In view of recent technological innovations, independent networks together with mini-grids, have become viable alternatives in Nigeria, especially if these are run in sync with renewable power generation. The foregoing notwithstanding, it was only until recently that the regulators issued draft regulations dealing with mini-grids in Nigeria.
Although, there have been regulations for independent electricity distribution networks, those regulations have been fraught with challenges and practicability challenges. Therefore, increasing the pace of deployment of mini-grids by granting policy support for same can play an important role for meeting the growing energy needs of the country, especially when one considers the need of the increasing informal sector of the economy.
Pursuant to the Nigerian Electricity Regulatory Commission (“NERC”)’s powers to make regulations, it issued draft regulations for mini-grids recently. The intent behind the issuance of the set of regulations, is to fast-track the electrification of areas without existing distribution network and areas with an existing but poor or non-functional distribution systems.
This would be particularly useful in rural and semi-urban areas where many factories and productive structures are situated or set up such as the Ikorodu, Epe and Agbara areas of Lagos State. It would reduce the cost of self-generation by pulling these clusters together such that they benefit from the economies of scale.
The writer does have certain reservations with some of the provisions of the Regulations but does admit that it is a step in the right direction, albeit certain provisions of the Regulations need to be re-considered.
Financial consideration in the industry
There have been complaints (and rightly so) from market participants that there is a huge cash shortfall in the sector. It is noteworthy, to mention that the privatization of the industry was based on wrong assumptions and calculation. The cash collected from end customers is much lower than expected; thus, this cash is not enough to cover all industry costs such that there a huge cash/ payment shortfall. In fact, it is estimated that the shortfalls in the industry would have accumulated to about N1 trillion (if left unchecked) in financial shortfalls by December 2016.
The privatization program envisaged a lot more generation output which in turn would produce more cash from electricity sales for funding and investment together with attendant reduced tariffs which still work because of the laws of averages. However, this did not pan out as expected and generation output has been held back by lack of gas, gas transportation capacity and power transmission capacity.
The financial institutions do not look like an alternative option to this huge shortfall as they are already heavily exposed in the power sector (with many of them exceeding their sectorial limits), and the uncertainties arising from the present situation increases their risk perception, thus, making additional financing from banks and other institution almost impossible.
What could be an immediate solution to the financial problem is adjusting tariffs to reflect actual costs. The implication of this would mean that tariffs would increase by over 40% with a backlash from the populace with the currently harsh, economic realities. To reduce the effect of a spike in tariffs, government can provide loans to the sector at single digit, subsidized metering, subsidized generation costs.
Government can also provide financial support through injecting funds into the power sector. Although, there have been some intervention attempts like the Central Bank of Nigeria credit facility of N213 billion, there may just be need for more funding by the federal government of Nigeria, unfortunately. Apart from the foregoing, there is need for further funding for research to deal with issues in the sector.
The rollout of smart meters, maintenance and Ele
A number of electricity distribution companies (“Discos”) are rolling out meters. It is critical that they continue to do this and in particular, to make available more smart meters around Nigeria. This will help reduce substantially, the use of estimated billing which has led to both a lack of accountability and also dis-interest by the populace in paying for electricity. The reality is that consumers are more likely to pay when they know they are being billed only for electricity used.
Recently, the kaduna electric distribution company announced that it will launch fifty thousand (50,000) units of smart meters and has assured that customers who have paid will get same. The eko electricity distribution company is also currently rolling out smart metering technology with over forty-one thousand (41, 000) customers, whilst the installation of meters under the Credited Advanced Payment for Metering Implementation is still on-going. These actions are quite commendable by the Discos and could potentially reduce collection and commercial losses by reducing fraud and making consumers more willing to pay for electricity.
Apart from the foregoing, steps should be taken to stop electricity theft which in this part of the world includes by-passing of meters, removal or damage of meters and illegal adjustment of meters. Furthermore, actions such as unauthorized and illegal direct connections to power lines also constitute electricity theft. The effects of the foregoing include amongst others, an increase in the cost of electricity for legitimate users. Ultimately, same curtails investments in the sector and thus, inhibits the much needed improvement in the sector.
Regulatory compliance is also key to ensuring that the power industry attains the height it should. The fear of the repercussion of failure to comply with must be real, on the part of all market participants. A pre-defined process of effectively achieving compliance, should address issues around assessment, remediation and even monitoring.
In this respect, NERC appears to be taking bold steps such as, the fine imposed on the Discos in Benin and Port Harcourt for failure to comply with the decisions of Forum further to complaints filed by its customers, amongst other reasons. This piece continued in the next edition.
Ayodele Oni (ayodeleoni@outlook.com), a solicitor, specializes in international energy (oil, gas and power) investment law.