Energy Crisis: The never ending hiccups trailing power sector
Nigerians were hopeful that the unbundling of the Power Holding Company of Nigeria and the privatisation in the power sector in 2013 would do the magic but the situation remains chaotic as the power companies have to a large extent performed abysmally in their efforts to revive the sector.
A cursory look at the operations of the power sector shows that the grid capacity to wheel power has been around the 5,000MW-5,500MW range such that any additional power generated outside that range could not be wheeled.
Generation levels between 2014 and 2016 which were expected to be between 5,000MW and 7,500MW had been between 2,000MW and 4,750MW. The national grid is still very weak, old and collapses incessantly.
Industry close watchers observed that challenges in the power sector are largely occasioned by poor infrastructure, lack of sufficient funding, failure by the executive arm of government to pay for power, security issues and the uncertainty surrounding the present foreign exchange regime.
They opined that despite the concerted efforts by successive government to tackle the power sector challenges, the problem appears to be more man-made than engineering or technical.
According to them man-made problems like communities’ disagreement over right of way, court issues bordering on resettlement claims among other have for long frustrated government efforts in developing a lot of power projects.
What the power value chain entails
Ayodele Oni, a lawyer with special interest in Energy sector in a recent article explains that MYTO’s methodology fundamentally relies on the power value chain. According to him, electricity which “powers” the value chain can only generate revenue for the entire sector from the consumer end of the chain, where the distribution companies operate.
Oni equally noted that even the generating companies rely on feedstock (typically gas) and as such even gas producers are quite dependent on consumer electricity prices. “Every part of the value chain must be able to generate sufficient revenue from the consumer price for the sector to be sustainable”.
“MYTO sets tariffs for all parts of the power value chain – specifically the “Gas-to-Power” value chain, as the majority of the electricity generated in Nigeria is as a result of thermal power plants. Retail tariffs (from where the Discos aim to gain their profit) are designed to cover payment for electricity from the generating companies, Transmission Use of System charges for bulk electricity delivered to supply (as determined by MYTO), CAPEX and OPEX, costs of billing and collection, and the cost of distributing electricity across the network”. He said.
Oni opines that these retail tariffs determine the overall profitability of the power sector. “Without consumers paying their bills, the Discos are unable to pay NBET. In the absence of further capitalisation of NBET, this will eventually lead to NBET’s inability to pay the generating companies (which means they are unable to pay sums owed to gas suppliers). Essentially, failure of consumers to pay retail tariffs will lead to the entire value chain starving for lack of funds”.
Explaining further on the retail tariffs which he noted are not entirely cost reflective, the energy expert observed that it is difficult for the distribution companies to generate the necessary revenue to make their activities profitable as well as making the necessary investment.
“The base tariff structure is one which seeks to have the sector (particularly Discos) run at a loss for a number of years before being ultra-profitable much later in time; a structure referred to as sculpting”. He said.
The way forward
Odion Omonfoman, an energy consultant and the CEO of New Hampshire Capital Ltd said that as first step towards resolving the financing challenges facing Disco operations, Core Investors, in line with their performance agreements, need to urgently capitalise DISCO operations by the injection of “patient” capital by way of long-term debt or equity.
He said it is imperative that Core Investors inject significant patient capital to address the challenges mentioned above. Short-term debt or borrowings will not suffice and only serve to exacerbate the financing and operational challenges.
Omonfoman further insist that underpinning any debt or equity capital raise is a sustainable and cost reflective electricity tariff and a long-term tariff path. Without cost reflective electricity tariffs, the electricity sector is not likely to attract and sustain the much needed investments.
“The entire electricity sector is faced with huge revenue shortfalls. The implementation of cost reflective tariffs, access to long-term debt capital and equity injection, will still not address the revenue shortfall to the system in the short term”, he said.
The energy expert is of the opinion that Discos are encouraged to adopt off-balance sheet funding solutions to fund key capital items such as metering, network expansion and embedded generation. Off-balance sheet funding solutions include outsourcing meter financing and operations and vendor financing. Discos also need to start looking at franchising opportunities, particularly in rural areas or areas with high losses.
“The rationale for fixed charges must be understood by electricity customers. Regardless of energy flow, there are huge fixed costs to the sector, which must be recovered through fixed charges. Fixed charges also provide some level of guaranteed revenue to the sector” he added.
Ayodele Oni was emphatic when he said that the executive arm of government has failed in some of its key promises and has not provided sufficient explanation to the Nigerian populace.
According to him, ‘‘at the time of the privatisation of aspects of the electric power value chain, the executive arm of the government made certain promises to the core investors’’.
Oni disclosed that government promised to ensure a substantial increase in the capacity of the grid such that enough electricity would be wheeled along the transmission network to ensure that the generation companies could send sufficient power whilst the Discos would receive enough power for distribution in order to generate sufficient electric power.
‘‘It was only recently that the grid expanded by about 40 percent, effect of which had been that the Discos could not receive sufficient power and consequently generate sufficient income to service the remaining parts of the electric power supply value chain’’.
Industry analysts is worried that government have failed to honour any of its commitments to investors as the issues of improvement in gas supply have not materialised.
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