Professional Services

Challenges in the Nigerian Power Sector

by Ayodele Oni

January 26, 2017 | 12:04 am
  |     |     |   Start Conversation

Proem

Power generation and supply continue to pose challenges on different fronts in Nigeria. For many decades, successive administrations have made “concerted efforts” to tackle the many challenges that have plagued the sector. However, it appears every solution proffered failed and continues to fail at the first hurdle. The unbundling of the Power Holding Company of Nigeria and the privatisation in the power sector still appear to have missed the mark in reviving the sector and finally providing a lasting solution to the many challenges that plague the sector. The many economic challenges being faced in Nigeria continue to be attributed to, inter alia, the shortcomings in the power sector – especially the generation and distribution of electricity. However, there continues to be divided opinion on which aspect of the value chain – generation, transmission and distribution – should be held culpable for the continued failure of the sector.

Recently, the focus has shifted from the many causes of the challenges faced in the sector to the perceived shortcomings of the Discos. The most notable allegation being levelled against the Discos is the desire to increase electricity tariffs despite the worsening power supply situation. It is, however important to note that the intent to increase electricity tariffs is influenced by a number, of cost inputs in the value chain ranging from generation, transmission to distribution. It is also no secret that due to the fall in oil prices and increased costs of natural gas used to fuel the generation of power in Nigeria, the cost of electricity generation has increased.

Whilst a lot of the 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, this paper aims to make a case for the Discos whilst also highlighting the shortcomings of the Discos, the justifications and shortcomings of the increase in tariff; and the challenges in the power sector generally.

THE DISCOS AND HURDLES FACED

The Discos continue to face a lot of challenges which have impacted on the overall cost of distributing electricity and/or the volume of electricity distributed to end users. A lot of the challenges faced are clearly visible as they have significantly affected their operations and service delivery. These challenges can be summarised into the following points: (a) lack of sufficient energy wheeling via the grid by the Transmission Company of Nigeria; (b) lack of funding and maximum borrowing limit reached by Nigerian banks plus the hesitation by international financial institutions to provide financing where maximum revenue generation and profitability is not guaranteed; (c) obsolete and inefficient network infrastructure;(d) Non-cost reflective tariffs and revenue shortfalls caused in some cases by factors outside the purview of the Discos; (e) Metering challenges – lack of meters, the use of estimated billing as well as poor maintenance of meters; (f) Security issues – pipeline vandalism (although, indirectly applicable to Discos), energy theft, etc.;

One factor that is usually overlooked that inhibits the ability of the Discos to operate effectively is the large geographical area covered by each Disco. Apart from the Lagos Discos, all other Discos cover at least 4 states; Enugu Disco covers the five South-Eastern states. It is not surprising, then, that the Discos are suffering from diseconomies of scale, and business districts which are located outside of the city which houses the Disco’s headquarters may struggle to receiving funding and materials.

Whilst it is expected that the general public will easily lay blame on the Discos, it is clear that these challenges have severely constrained the operations of Discos and ultimately sets back the goals of solving the challenges in the power sector. There is no doubt that these challenges can be overcome with careful planning, utilization of cutting-edge technology and the advent of suitable investment schemes.

THE EXECUTIVE ARM OF GOVERNMENT

It is the case that the executive arm of government has failed in some of its key promises and has not provided sufficient explanation to the Nigerian populace. At the time of the privatization of aspects of the electric power value, the executive arm of the government made certain promises to the core investors.

Some of those promises included ensuring 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. However, it was only recently that the grid expanded by about 40%, 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.

Specifically, the grid capacity to wheel power has been around the 5000MW-5500MW range such that any additional power generated outside that range could not be wheeled. Although, it would appear that this is now reported to be close to 7,000MW, the several years of under-investment have led to some of the problems now faced in the power sector. Thus, 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 and old and collapses incessantly for example, it collapsed four times in four weeks (March 31, April 9, April 23, and April 25, 2016). Very recently (January 19, 2017), there was also a system collapse.

Apart from the foregoing, the government had committed to providing subsidy support of N100 billion for the power firms, but that promise had not been kept by the government. At the moment, the government’s stance is that it would not provide any such subsidy.

ELECTRICITY TARIFF

Undoubtedly, this is the year where electricity billing and collections will go into overdrive, and with possible increase in tariffs and Discos employing increasingly aggressive collection practices, there is the potential for controversy like as was experienced when the MYTO tariff was sought to be increased in 2016.

When it was first introduced, MYTO provided the electricity tariffs for a five-year path over a 15 year period. It allowed for biannual minor reviews for changes in exchange rates and gas prices (subsequently including change in generation capacity), as well as inflation. It also allowed for major reviews every five years for all other assumptions, which include the cost of capital, capex & opex. Since it has been introduced, electricity tariffs have been on an upward trajectory, with the exception of the MYTO 2.1 (amended) Order of April 2015, which sought to reduce tariffs by removing the collection loss element.

Power Value Chain

MYTO’s methodology fundamentally relies on the power value chain. It is important to note that the 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. It is also important to note 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.

Ultimately, 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.

It is also important to note that the retail tariffs are not entirely cost reflective. As such, 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.

The foregoing being the case, a clear path to recovery in the sector, is an increase in tariffs. However, it is questionable, whether consumers should be expected to bear the burden of sudden increases, especially when there has been no improvement in power supply and when increase in tariffs would not guarantee (at least in the immediate) improved power supply. Should tariffs under MYTO be increased to an economically sustainable level (for the Discos), without any improvement in the quality and volume of supply, it is likely that the end result will lead to a greater loss of revenue as more people decide to default on payment of their bills. This piece continues in the next edition of this column.

 

Ayodele Oni

 

Tags:

by Ayodele Oni

January 26, 2017 | 12:04 am
  |     |     |   Start Conversation

Big Read |  

Analysis

What Nigeria must do before signing AfCFTA

Nigeria’s President Muhammadu Buhari last Wednesday gave a hint that he would sign the African Continental Free Trade Area (AfCFTA)...


Top 100 (300 x250)

MTN banner 2

WSE

Newsletter Fixed income