Ten years after the partial privatisation of the Nigerian Electricity Supply Industry (NESI), the industry is still grappling with sub-par performance. The national grid only serves about 15 per cent of the country’s demand, leaving households and factories to rely on expensive self-generation, which supplies a staggering 40 per cent of the country’s demand.
Also, over 90 million Nigerians lack access to electricity as the total amount of electricity that can be wheeled through the national grid has remained relatively flat in the last 10 years, with grid capacity increasing from just over 3,000 MW to typically just over 4,000 MW currently versus a 40,000 MW target that the federal government had set pre-privatisation
The reasons for the underperformance of the sector in the last decade are already well known and include deep commercial, governance, and operational issues that have beleaguered the sector
The current estimation of energy delivery of 4,000 MW to a population of over 200 million Nigerians is grossly inadequate and falls short of efficient service, limits business opportunities, hinders investments, and raises the cost of production and goods
The underperformance of the sector can be attributed to deep commercial, governance, and operational issues that have plagued the industry, particularly, stakeholders say, the lack of a cost-reflective tariff, which impedes investment in the NESI.
To improve the electricity services in Nigeria, the government has embarked on a total reform of the including subsidies which continue to strain the federal government’s resources.
Many of the stakeholders are, however, pushing for the adoption of a cost-reflective tariff regime to attract private sector investments and save the power sector.
For the past 10 years, the privatisation of the NESI has been hampered by the inability of the distribution companies (DisCos) to charge cost-reflective tariffs. As a result, all operators in the NESI value chain have been affected, effectively constraining investment in the downstream (DisCos), midstream (TCN) and upstream segments of the power sector (comprising gas producers and GenCos). As such, though total installed generation capacity stands at 13,000MW, Nigerian barely generates 4,000MW of electricity daily, while the rest is stranded. This reflects a misalignment of the entire value chain from gas to consumers. Without cost-reflective tariffs, the federal government has been forced to subsidise the real cost of electricity and has spent some N7 trillion subsidising epileptic electricity supply to end users.
The Nigerian Electricity Regulatory Commission (NERC) issued an order in March 2020 to transition from demand-based to cost-reflective and service-reflective tariffs, which took effect in September 2020
The tariff structure aimed to ensure that consumers who receive fewer than eight hours of electricity per day do not see tariffs increase until the quality of service improves
However, the metering gap remains a challenge, with only about 45 per cent of Nigeria’s 12 million active electricity consumers having meters to measure actual consumption and quality.
Stakeholders who spoke at the just concluded Nigerian Electricity Supply Industry (NESI) conference in Abuja, stated that the lack of cost-reflective tariff in the market is one of the contributory factors aiding liquidity issue that has characterised the sector since privatisation in 2013.
With the government failing to adjust electricity tariffs after the unification of the foreign exchange, and inflation, among other woes the economy faced in the second part of the year, subsidy payment would rise above what was paid in the first half of the year.
Already, the country’s power generation has stagnated at 4,500 megawatts despite having a generation capacity of 13,000MW.
Experts have blamed the lack of investment in infrastructure which has seen the country stuck with the use of obsolete infrastructure to wheel power and maintain equipment.
Speaking at the three-day conference, chairman of Mainstream Energy Solutions Limited, Sani Bello, said the entire value chain in the sector has suffered due to the absence of cost reflective tariff.
“What we continue to tackle today is the lack of cost-reflective tariff that will provide sustainable liquidity for the entire value chain, strengthened laws and enforcement of these laws that will criminalise and deter energy theft as well as non-payment of electricity bills,” Bello said.
He however said that 10 years after privatisation, the sector has seen some growth with companies like Egbin, Mainstream, Geregu and Ughelli making strides in the generation sub-sector while Eko and Ikeja Electric have also distinguished themselves as major players in the part of distribution.
He noted that despite the achievements in the sector, energy transmission and distribution still pose a severe challenge to a functional NESI due to the state of the infrastructure and “require significant capital to finance its rehabilitation and expansion.”
In his remark, President Bola Tinubu also emphasised the need for a cost-reflective tariff in the sector, stating that the DisCos are under-capitalised to the tune of close to N2 trillion.
President Tinubu also admitted that the objectives of sector privatisation have by and large not been met and that the sector has failed to meet its objectives.
An energy expert and country director, Energy Market and Rates Consultant Limited (EMRC), Rahila Thomas, stated that rising inflation, forex and other critical variables like generation capacity, and regular review of the tariff should be sacrosanct in the sector.
“A review ought to have happened in July and the realities in inflation and forex mean tariff ought to have gone up but for political reasons, this hasn’t been done.
“Government is now paying subsidies that have amounted to N3.34 trillion. Out of that, the government has paid N2.8 trillion to support the tariff,” she stated.
“Every six months, the regulator is expected to review the tariff using economic indices to bring pricing to market level. Some of these variables are inflation, forex, and generation capacity.
“Unfortunately, all these monies are resting on the books of the Discos and have impaired their ability to attract funding to improve their networks,” Thomas who spoke during a panel session at the just-concluded NESI roundtable in Abuja said.
The group managing director of Sahara Group, with interests in Egbin Power and Ikeja Disco, Kola Adesina, also backed some of the actions and steps listed to rescue the sector.
The businessman stressed that there must be alignment of the entire value chain from gas to customer , while pricing must be segmented and must reflect market realities as well as align with the customer experience.
He also suggested that electricity consumers in Nigeria must be turned to paying customers, advising that technology must be introduced to deliver optimum service.
In addition, he argued that while government institutions and agencies must pay for electricity supply and access to forex must be given to the power sector, policies and regulations must be stable and predictable.
“Economies/industrial and commercial entities must be prioritised in terms of supply. Legacy debts must be cleared. Investor confidence must be assured,” he advised.
Power supply remains a long term business. So, experts have argued that deploying short term loans will not work. What the sector needs are long term-loans at reasonably low interest rates by operators in the industry, which will assist them to scale up their business, roll out new network infrastructure, as well as upgrade and maintain existing infrastructure.
As it is, Gencos and Discos cannot meet their operating costs, much less meet their capital expenditure requirements. Without the latter, Discos in particular are unable to upgrade and expand their networks to supply electricity to underserved and unserved households, businesses and industries in their respective franchise.
Besides, the inability of Discos to charge cost-reflective tariffs, has rendered their businesses ‘unbankable’ and impossible for them to raise debt from banks and capital markets, or even from prospective investors.
The chairman/CEO, Mojec Meters Limited, Chantelle Abdul said while it was the duty of the distribution companies to provide electricity meters to customers, financial challenges in the sector means they are unable to do so.
“There are about 10 million customers in need of meters. Seven million customers without meters and three million with old meters that need to be replaced. The cost to finance that is about $1.5 billion.
“We are talking about opening up the market and whether the regulator should be regulating the price of meters. Majority of customers are poor and won’t be able to pay for meters”.
While admitting that it would be difficult to grow the sector while relying on government’s intervention or funding, she noted “We need to develop a bankable proposition, and that requires a cost reflective tariff and right pricing of meters”.
In this connection, the immediate past managing director, Abuja Electricity Distribution Company plc (AEDC), Adeoye Fadeyibi, pointed out that presently, only Ikeja, Eko and Abuja Discos can continue as a going concern, given the multifaceted problems.
Speaking during the three-day programme, he noted that negative cash flow in the industry was affecting operations and the ability to improve power supply to customers.
One other challenge that has hobbled the sector’s capacity to perform is that at the federal and state levels, ministries, departments and agencies owe the Discos hundreds of billions of naira and this has also constrained liquidity in NESI. With these legacy debts bogging down the sector, it’s not likely to make any headway soon.
Besides, part of the operation of the power sector is dollar-denominated. The federal government has to bear in mind that most of the equipment, plants and machinery used in the power sector are imported.
This means that a huge percentage of capital expenditure requirements of operators is in dollars. Therefore, as long as the naira continues to depreciate against the dollar and inflation continues to rise, tariffs would have to be adjusted to reflect market realities.
“However, if it is the government’s desire to make cheap electricity available to Nigerian consumers, then it would either have to continue subsidising the cost of generation, providing FX to operators at a subsidised exchange rate, or subsidising the cost of gas.
“But it should bear in mind that any of the choices it takes, will come at a hefty cost to the treasury, is prone to abuse, and may not be sustainable in the long run,” a close observer of the sector
While there have been attempts at ramping up the provision of meters in the last few years, to make it easier, the government must continue to roll out policies to support Meter Access Providers (MAP).
Furthermore, this will help manufacturers through either the outright removal or imposition of lower excise duty on the metering components that they import, while the Discos should find a way of cascading the cost of metering customers into the tariffs.
There have also been calls for the consolidation of the Presidential Power Initiative (PPI) including the Siemens deal and any other power sector intervention programmes such as the central bank’s intervention initiatives and the USAID’s Nigerian Power Sector Programme (NPSP).
Experts argue that they should be made to align with what the NERC and the World Bank have done under the Power Sector Recovery Programme (PSRP) to prevent disjointed arrangements. Even at that, cost-reflective tariffs will still be necessary for Siemens’ investment under the PPI to be commercially viable.
If the industry must improve, it is also largely believed that Discos must improve their service delivery by upgrading their substations and other distribution infrastructure and use technology to reduce ATC&C losses.
“It is not enough to push for cost-reflective tariffs if they are not prepared to improve efficiency and reduce losses arising from technical and billing issues within their franchise. Estimated billing remains unpopular among consumers, so Discos cannot leave the rollout of post and prepaid meters to MAPs alone,”one expert said.
In addition, the TCN remains the weakest link in the entire electricity value chain. Management of the national grid has left much to be desired, which is evident in frequent system collapses.
If the TCN is not restructured to be responsive and its network expanded to roll out more than its current capacity of 5,200mw, the Electricity Act 2023, which empowers state governments to generate and distribute electricity in their states, could render it redundant in five to 10 years time.
