Nigeria’s Unending Darkness.
“How do you have economic growth without power? No power; no growth because without power there can’t be growth. “Egypt increased its electricity by 10 gigawatts, which is equivalent to 10,000 megawatts in 18 months.
“In Nigeria, we have been struggling for 18 years without adding 1,000 megawatts and we have spent about three times above Egypt, why?
“So, I think we all need to be concerned about that.” — Aliko Dangote, 8th June 2019.
Nigerians lack steady electricity supply and this is a fact. What this Article aims to explore are the reasons for this fact and possible solutions.
With an estimated population of 180 million people, (no one is sure of the real figure because population documentation is very lax) Nigeria has an installed electricity generation capacity of 12,000 MW and averagely generates about 4500 MW of electricity to the grid. To put this into proper context; Egypt with a population of 97.5 million generates about 42,000 MW of electricity and plans to increase its generation capacity to 83,000 MW by 2025. This means that Nigeria, with double the population of Egypt, generates less than 15% of the electricity Egypt generates.
Access to energy in Nigeria is less than optimal, with approximately 80 million people lacking access to electricity. Nigeria has the largest access deficit in Sub-Saharan Africa and the second largest in the world, after India. A World Bank Enterprise Survey shows that electricity supply is consistently the biggest constraint to doing business in Nigeria.
So what is the problem? Why are we struggling?
There are several problems plaguing the effective growth of Nigeria’s Electricity sector (Market), each militating against efficient and effective power generation and distribution in varying degrees of seriousness.
Historically, one of the most visible problems hampering the Market is the infrastructural deficit. For example, the inadequacy of gas infrastructure leads to poor gas supply to thermal power plants which greatly impairs the generation capabilities of the power generating companies (“Gencos”). The distribution infrastructure is similarly lacking with power distribution companies (Discos) seeming difficulty to maintain the insufficient power distribution infrastructure they acquired from the erstwhile State-owned power distribution authority prior to the 2013 privatisation of the Nigerian Electricity supply Industry (“NESI”).
Curiously, this infrastructural deficit is worsened by inefficient institutions in the NESI value chain. The major players in the value chain have yet to prove the competence required to guarantee improved investment in power generation and distribution infrastructure. Significantly, the central regulator, the Nigerian Electricity Regulatory Commission (NERC) has not proved equal to the task of engendering investment in the Sector and is generally regarded as a ‘weak’ regulator only concerned with revenue-seeking through issuance of licenses and permits in the sector. Perhaps more telling are the failings of the Transmission Company of Nigeria (“TCN”) in maintaining and developing the Federal Government operated grid. TCN as a utility company is yet to fully install and utilise the Supervisory control and data acquisition (SCADA) software on its network and is therefore ill-equipped to tackle the gargantuan problem of grid expansion, modernisation and stability.
As if the institutional issues are not intractable enough, it is exacerbated by Policy inconsistency or poor implementation. Synergy is key to achieving the collective goals of the electricity supply sector but poor policy cohesion among the various stakeholders in the sector and contract mismatch has led to individual efforts failing to sync and sometimes even ending at cross purposes. For example, poor technical communication between TCN and the Discos has led to load rejection by the distribution companies because TCN is sending power to weak commercial areas on the distribution networks. Load rejection in recent times has accounted for the declining drop in electricity generation and grid instability.
Other operators on the electricity value chain have not fared any better like the Nigerian Bulk Electricity Company (“NBET”) which has long outlived the lifespan of what was projected as its useful function in the Market and ought to have transitioned a few years ago. One factor underlining the institutional deficit is the lack of requisite technical expertise in the Sector. This technical deficit is never more evident than in the tariff regime for returns on electricity supply to end users in the country. There is a sorry lack of adequate end use meters for electricity customers which, coupled with an inefficient and poorly regulated estimated billing practice, contributes to a liquidity problem in the sector
Thus, the biggest challenge currently choking the industry and eliminating any semblance of stability and growth is the liquidity challenge (absence of cash flow/money) caused in large by the absence of a cost reflective tariff regime.
Electricity Tariff can be described as the method of charging an electricity consumer for electricity consumed. A cost-reflective tariff in the electricity market refers to a situation where the price electricity consumers pay for electricity consumed covers the costs of generating, transmitting and distributing electricity and still makes some profit in addition. Theoretically, the bills the electricity consumers pay to the distribution companies at the end of every month ought to be used to pay the various players in the electricity value chain.
However, research shows that the unit cost of electricity production (compressed natural gas powered) is $0.16 kWh or N 48.96 kWh. Currently, the average Tariff electricity consumers in Nigeria pay for electricity is N 29 kWh which is the dollar equivalent of $0.8 kWh. There is therefore more than a 50% shortfall between the cost of electricity production and the price being paid for it. This shortfall accounted for a N458 Billion loss in the sector between 2015 and 2016.
Currently, the debt profile across the entire value chain in the sector is an astronomically N1.3 trillion (US$4.2 billion) which is altogether too high. How can any market be expected to function, grow and survive with this level of cash shortfall/illiquidity?
NESI strange history with Cost reflective Tariffs.
For a fuller discussion, you can find an Article on how the industry works here >> The Nigerian Electricity Market.
For our purposes here, it is sufficient to note that before the privatisation of the electricity sector in 2013, the sector was run and operated by Government owned companies like Nigerian Electric Power Authority (NEPA) and subsequently, Power Holding Company of Nigeria (PHCN). The electricity supplied under this regime was heavily subsidised and many Government agencies and departments consumed millions of Naira for electricity on credit. Nigerians therefore had (and still have) cheap but extremely erratic electricity supply.
In 2009, the average end user tariff was fixed at N 8.5kWh (equivalent of 5.7 US cents/kWh), which was the lowest in West Africa and far below the average tariff other West African Countries paid. in 2010, The Federal Government in its publication ‘The Road-Map for Power Sector Recovery’ admitted that Nigeria did not have a cost reflective tariff and stated that the sector could not achieve financial viability without a 40% increase in tariff to electricity consumers. It was therefore in tune with policy when from 2009–2014, efforts were made towards cost-reflexivity.
By the end of 2014, the average end user tariff had increased by more than 40% to N29/kWh (US$0.16 /kWh.). It is important to note that electricity pricing is usually estimated using the US Dollar as a reference currency because 80–90% of the materials used in generating electricity are imported and therefore bought using Foreign Exchange (“forex”).
The increase in cost-reflectiveness of the tariff had a profound effect in the electricity market because payments by the distribution companies to the value-chain rose to more than an average of 80%. This created stability and cash liquidity in the market that led to a steady rise of electricity supply. (This was the reason some Nigerians were saying that President Muhammad body language improved the electricity situation when he entered office in early 2015😂)
Anyway, during the process for the tariff increment in 2014–2015, there were some parameters that were followed to ensure that the tariff stayed cost reflective. Factored into the Tariff were factors like inflation, exchange rates and an estimated volume of electricity that the generating plants can produce for the distribution companies to sell (this last factor is very important to take into consideration because the higher volume of electricity produced, the cheaper the cost of production).
But in 2016 Nigeria experienced a recession due to the crash in oil prices globally that limited the flow of foreign exchange (Forex) into the country. The gains that had been made by the Electricity sector disappeared in an instant and the situation became dire as a result of a hugely devalued currency and an escalating inflation rate. This is the breakdown of how the devalued Naira and astronomical inflation rates affected the parameters that were used in structuring the tariff:
With these figures above, it does not take a genius to figure that NESI has reverted to square One on the issue of cost reflective tariff. After devaluation, the dollar value of the tariff went back to less than US$0.8/kWh. It is therefore important to explore the effect of a lack of cost-reflective Tariff in the electricity sector.
Effects of low tariff on the power sector.
From the discourse in the preceding paragraphs, it is evident that the average cost of producing one unit of electricity in Nigeria is higher than the revenue gotten from that electricity when sold. Therefore, the entire sector is currently operating at a loss based on the current Tariff regime. Coupled with other issues like vandalism, corruption and poor per capita income of end users, the Discos that receive revenue on behalf of all the companies in the electricity value chain can simply not remit the full invoice for energy sold to them by Nigerian Bulk Electricity Trading Company (NBET).
Consequently, it can be surmised that from 2017 to 2018, the Discos were only able to pay an average of 28% of NBET’s invoices for electricity supplied. This is the major reason for the huge liquidity challenge that has crippled the growth of the electricity sector. The inability of the Discos to pay a reasonable percentage of their invoices to NBET has led to a massive liquidity challenge in the power sector because it means NBET is unable to make payments to Gencos who in turn are unable to pay their gas suppliers for gas used to power their plants. All the Companies including TCN are therefore unattractive investment vehicles, which means the infrastructural deficit will not be solved by private investment funds.
NERC has neglected to sanction the distribution companies’ poor performances on payment, non-metering and estimated billing because NERC has also failed in its responsibility to call for a review of the Tariff as contained in the Act and this has given the distribution companies a wonderful umbrella of excuses to shield themselves.
At this juncture, it is pertinent to note that the lack of a cost reflective tariff in the sector is not the only reason for the distribution companies’ abysmal payment for electricity supplied to them. The fact that the distribution companies have failed to meter their customers (50% of the 6.85 million customers in the Nigerian Electricity Supply Industry are not metered) and upgrade their distribution infrastructure has created a lot of inefficiencies, electricity loss and theft on the distribution end of the value chain. More so, the unregulated, discretionary and highly unfair estimated bills the distribution companies have foisted on their un-metered customers has led to a lot of angst, bitterness and distrust on the side of electricity customers/consumers. Some stakeholders believe that the failure of the Discos to completely meter all their customers is a deliberate ploy to keep making undocumented gains off the practice of estimated billings. NERC is attempting to tackle the metering challenge with the introduction of Credited Advance Payment for Metering Implementation — CAPMI.
For any market to survive and grow, the product pricing must be right. Right pricing will bring in a serious investors and capital investment into a market with existing high demand, which in-turn leads to healthy competition and a more robust sector. Nigeria’s electricity market is too toxic/risky for any reasonable investor because of the huge debt and wrong product pricing. The toxic market environment has made lenders unwilling to lend capital to the existing generation and distribution companies. No lender will want to give out credit to a market that provides no clear path on how the credit will be paid back because all the Companies on the value-chain are operating at a loss. This has resulted in a situation where the companies operating on the value-chain are unable to raise funds to efficiently run and expand operations. The only reason the Gencos have not failed and filed for bankruptcy is because of the CBN 701 Billion Power Sector Intervention Fund which was used to pay the Gencos’ gas suppliers in order to keep the plants running.
The last major private investment that happened in the market, (the 461MW Edo-Azura Gas IPP) was backed by a Partial Risk Guaranty (PRG) from the World Bank. The World Bank’s PRG simply means that if Azura is not paid for the power they produce and sell to NBET the World Bank will step in and pay the debt which automatically becomes a World Bank loan to the Nigerian Government. (Of course this will definitely be the final outcome!)
The Way Forward
A functioning and healthy Electricity market is hinged on the flow of funds backward from consumers through the distribution companies to the rest of the electricity value chain. A cost reflective tariff is going to help with achieving this objective, but only after first addressing the issue of prepaid end-user meters among other issues identified in this article
Aggressive customer metering is the first step towards ensuring transparency in revenue collection and inefficiency reduction on the distribution side. Metering reduces the incidences of power theft, collection inefficiency and fosters a more trusting relationship between the customers and the distribution companies. This must be done before a cost-reflective tariff can be set and implemented. Thankfully NERC is ahead of this issue with the implementation of Meter Asset provider (MAP) regulations. This regulation has shifted the burden of metering from the distribution companies who are cash-strapped and unable to raise funds to other companies called Meter Asset Providers whose sole objective is the supply, installation and maintenance of meters.
The way forward therefore begins from refining our Electricity sector policy and redefining the role and extent of government involvement and governance structures in the sector. For instance, a stronger and proactive regulator will send the right message to all stakeholders and investors. Appointing the right persons to pilot the affairs of the regulator will be the right step in the right direction. NERC as a regulator is too important and should never again go through what it went through in 2015, when it did not have a substantive Managing Director nor commissioners.
Practical steps which can then be explored after fixing the policy side of things includes stabilizing the supply of gas to thermal plants through development of gas infrastructure, introduction of an appropriate pricing template for gas and diversifying the power generating sources. The Distribution challenges can then be addressed by increasing Grid flexibility and rejigging the location of power generating stations. Finally, payment systems at end user and across the value change have to be upgraded and refined to be more efficient.
