Troubled Discos threaten to unravel Nigeria’s power privatisation
by PATRICK ATUANYA & ISAAC ANYAOGU
April 6, 2017 | 1:20 am| | | Start Conversation
Electricity Distribution Companies (Discos) in Africa’s largest economy are earning less in tariffs than the cost of power they supply to households and businesses, meaning they are technically insolvent, which threatens to unravel the entire power privatisation effort.
The Discos are at the consumer facing end of a complex chain of Gas producers, Power Generating Company’s (Gencos), Independent Power Producers (IPPs) and the Transmission Company of Nigeria (TCN).
“The DisCo segment is the key issue in the power sector. Current DisCo tariffs are based on N197/$, while the power generation tariffs are higher than power distribution tarrifs,” said Dolapo Oni, head of Energy Research at Ecobank Group, in response to BusinessDay questions.
Discos need to mitigate collection risk (the ability to be paid for electricity supplied) which makes it difficult for them to raise financing for capital expenditure to improve their networks.
Discos however, are challenged by a lack of cost reflective tariffs, set by the Nigerian Electricity Regulatory Commission (NERC), high Aggregate Technical Commercial and Collection (ATCC) losses, as well as electricity/equipment theft. These are hampering operations.
This has created a current shortfall of N809 billion in the Nigerian Electricity Supply Industry (NESI) which operators say current funding interventions cannot solve, as the fundamental issues are left unaddressed.
“Without the requisite full recovery of costs via the appropriate pricing of power, it means a resultant worsening of the market revenue gap,” said Sunday Oduntan, executive secretary of the Association of Nigerian Electricity Distributors (ANED) who speaks for the DisCos.
Liquidity gaps in the sector are the consequence of operator’s inability to recover costs as economic realities have rendered obsolete the assumptions on which tariffs were based.
Since 2013, gas prices have increased from $2.44/mmbtu to $3/mmbtu, inflation rate has risen from 8.8 percent to double digits above 17 percent and foreign exchange rate is north of N350/$1 from N198/$1.
Worse still, the DisCos have been unable to collect above 30 percent of the tariffs, as Nigerians demonstrate an aversion to paying for electricity, which many see as a social service of government.
DisCos have also had to deal with many cases of customers who bypass meters to steal electricity, with many reporting as high as 30 percent loss of revenue due to power theft.
A metering programme by DisCos has largely stalled due to huge costs of acquiring meters.
Sources in the industry say that at an average cost of N50, 000 per meter, metering two million customers alone, could cost N100 billion.
“Discos don’t have the money to fund such a cost and even if they could, shareholders won’t approve because tariffs are not cost reflective. A move to increase electricity tariffs has been opposed by the National Assembly, as well as by a court order,” a source in one of the Lagos based Discos told BusinessDay, on condition of anonymity.
While the DisCos occupy the most critical position in the value chain, providing the funds that keep every other loop working. The Federal Government is yet to articulate an intervention or address critical issues affecting their business.
Twice, the Federal Government has provided intervention funding in the gas supply market, a N213 billion intervention in 2016 and the recent N701billion to settle claims of gas suppliers.
A key reason, according the NERC is because the DisCos have not brought new investments they promised when the assets were handed to them in 2013 nor have they satisfied a requirement to meter their customers.
Experts say that at the heart of it all, is a flawed privatisation programme in which buyers of the privatised assets paid for them in dollars, without being able to conduct due diligence on the assets, while revenue from the assets are in naira.
The Federal Government’s total take from the sale of ten distribution companies in 2012 was $1.55 billion or N243.35 billion.
A depreciation in the naira has meant power sector investors would have to pay much more to meet repayment schedules. Gas supplies are also priced in dollars.
Supply from the TCN has also been inadequate to address the needs of the market.
TCN, which wheels out power generated from the GenCos say DisCos settle barely 25 percent of their invoice.
“Today, 5th April, 2017, as at 1:37:00 hrs National Generation was 2,568.61 MW; the allocation to EEDC is 231.17 MW,” reads a Twitter message on the social media handle of Enugu DisCo.
Enugu Disco serves over 15million Nigerians in the franchise states of Abia, Anambra, Ebonyi and Imo States.
Another problem is that the design of Nigeria’s electricity market created monopolies when DisCos were assigned franchise states, limiting choice of customers to move to relatively better DisCos.
Keen to protect market share, DisCos have not taken kindly to embedded power projects from investors and protracted negotiations have stalled power purchase agreements for several projects.
“A complete overhaul of the electricity sector is now necessary,” says Chuks Nwani, energy lawyer and vice president of PowerHouse International, an energy market advisory.
Nwani further adds, “The regulator (NERC) should be bold enough to tell Nigerians that the privatisation exercise has failed to achieve its aims, because government and investors have not performed their responsibilities of enforcing market rules and attracting investments.”
Nigeria needs $10 billion a year, or up to $100 billion of new capital investments over the next ten years, to meet its power sector needs, according to the Power ministry.
Odion Omonfoman, energy analyst and chief executive, New Hampshire Capital, told BusinessDay that Nigerian Bulk Electricity Trader (NBET) should use its capitalisation fund in excess of $800 million to bridge the revenue shortfall of DisCos.
“For NBET to be successful in its mandate to guarantee the viability of the power sector, it must have enough capital to meet its payment obligations to Gencos in a sustainable manner and the only feasible way is for NBET to embark on a long term, Bond Issuance program, guaranteed by the Federal government,” Omonfoman said.
Nigeria’s, current per capita electricity usage of 136 kilowatt hour (KWH), compares with an average per capita electricity usage of 4,803 KWH in South Africa, which generates about 41,000 MW.
PATRICK ATUANYA & ISAAC ANYAOGU
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