Tag: NESI

• Seeks cost-reflective tariff

From President Bola Ahmed Tinubu’s assessment, the privatised Nigerian Electricity Supply Industry (NESI) has performed below expectations in the past 10 years. But stakeholders in the industry have blamed the horrifying scorecard on the lack of a cost-reflective tariff that has starved them of cash for investment and operations, reports JOHN OFIKHENUA

Unequivocally, President Bola Ahmed Tinubu dropped a chilling verdict of underperformance to the operator of the Nigerian Electricity Supply Industry (NESI) after a decade of their takeover. Declaring open the Nigeria Electricity Supply Industry (NESI) Market Participants and Stakeholders’ Roundtable in Abuja, Special Adviser to the President on Energy and Power Infrastructure, Office of the Vice-President, Mr Sodiq Wanka, who represented him, submitted that the operators have not met the objectives of privatisation. He described how deplorable the state of the sector has been in the period under review. Tinubu said: “Ten years on, I believe it is fair to say that the objectives of privatising the sector have, by and large, not been met. Over 90 million Nigerians lack access to electricity. The national grid only serves about 15 per cent of the country’s demand. This has left households and factories to rely on expensive self-generation, which supplies a staggering 40 per cent of the country’s demand. “What is worse is that the total amount of electricity that can be wheeled through the national grid has remained relatively flat in the past 10 years. The grid capacity has increased from just over 3000MW to typically just over 4,000MW currently. This is against a 40,000MW target by 2020 that the Federal Government had set pre-privatisation.” Also admitting that the companies have failed to live up to expectations, the Minister of Power, Chief Adebayo Adelabu vowed that their performance will be a factor in the renewal of their licensees. He insisted that “renewal of license is not automatic.”

 One of the salient points that unanimously re-echoed in the roundtable was the clamour for the cost-reflective tariff. The gathering was essentially targeted at taking stock of how far the industry has fared 10 years after its privatisation. Aside from the transmission, generation and distribution of power were handed over to the private investors in November 2013. While the Federal Government holds a 40 per cent equity stake in the 11 electricity Distribution Companies (DisCos), it divested 60 per cent to private operators. From the handover to date, the electricity market has not operated maximally in line with the Power Purchase Agreements the parties entered into because of political interference and socio-economic drawbacks. To this end, the Federal Government has always subsidised the cost of electricity with different Central Bank of Nigeria (CBN) interventions. As Chairman of the Bureau of Public Enterprises (BPE), Dr. Alex Okoh pointed out; the Federal Government has also initiated a series of interventions targeted at improving the technical, operational and financial positions of the Discos. He said these include the Power Sector Recovery Programme; CBN interventions, including Opex and CAPEX loan facilities; the Distribution Sector Recovery Programme in collaboration with the World Bank; National Mass Metering Programme and the Presidential Power Initiative. On the whole, the Federal Government has reportedly intervened in the industry with over N7 trillion. For instance, the Nigerian Electricity Regulatory Commission (NERC) in its second quarter 2023 financial report revealed that the government in that quarter subsidised the consumption of the utility with N135 billion.

 Following the 2005 Electric Power Sector Reform Act and the 2023 Electricity Act, the NESI should embark on biannual minor reviews of the Multi-Year Tariff Order (MYTO). In addition, the commission is expected to carry out its extraordinary review of the tariff review in due course. On its own, the commission said under procedures set out in Section 76 of the Electric Power Sector Reform Act 2005, the Nigerian Electricity Regulatory Commission adopted the Multi-Year Tariff Order (MYTO) methodology for electricity pricing in Nigeria, which sets out the basis and pricing principles and procedures for effecting minor and major reviews of electricity tariffs in Nigeria.

 NERC said: “The MYTO provides a tariff path for the electricity industry, with biannual minor reviews to take into account the impact of changes in a limited number of parameters (specific inflation, US Dollar exchange rate to Naira, natural gas price and available generation capacity) and major reviews every five years when all other inputs are reviewed with stakeholders.” Section 9 of the Regulation on Procedures for Electricity Tariff Reviews in the Nigerian Electricity Supply Industry,” says “NERC allows for Extraordinary Tariff Review in instances where the utilities can demonstrate that industry parameters have changed from those used in the operating tariffs to such an extent that a review is required urgently to maintain industry viability.”

 However, the commission’s arms are always tied when the need to review the tariff mostly due to some economic and political considerations. While the government chooses to bear the burden of subsidising electricity consumption in the country, it cries out most often about the unbearable weight of the payment on its shoulders.

Last year, the former Minister of Finance and National Planning, Zainab Ahmed revealed that the government had quietly exited the electricity subsidy regime. Thus, the commission’s report of the record of electricity subsidy in the second quarter of 2023 was irreconcilable. As the government is overburdened to a snapping point with the subsidy and its refusal to allow a cost-reflective, it has become difficult for the operators to implement their Performance Improvement Plans (PIP). This has culminated in low investment in Capital Expenditure (CAPEX) of the different power firms. On this note, President Tinubu, operators, of NERC and Civil Society Organisations at the roundtable, insisted on a cost-reflective tariff. Tinubu opted for a review of the tariff to know the exact current cost of the utility. This, according to him, ascertaining the cost will lead to adequate cost recovery for investment. He stressed the need for the appreciation of the shortfalls in the market and the measures to finance them. The President also insisted that the sector must establish its debts to the different stakeholders and how to defray them. He hinted that the reconciliation exercise is already in the pipeline.  His words: “We need to have a clear plan to re-base tariffs. So, we recognise the real costs and loss levels of the entire value chain, and we allow for adequate cost recovery for investments. We need to be clear on what shortfalls are and how we will finance them. There must be a clear path to extinguishing historic sector debts to various value chain stakeholders. A reconciliation exercise in this regard is already underway.” Similarly, Adelabu called for the injection of liquidity into the NESI. He observed that liquidity is the fulcrum around which the industry revolves. Stressing the essence of liquidity in the business, he insisted that the industry cannot attract investment or record improvement without liquidity. He said: “The Federal Government has been intervening in many programmes to bring in liquidity to the sector. Liquidity is the name of the game from generation to distribution to transmission to distribution… If you do not have liquidity, you cannot invest in infrastructure. You cannot improve in the last line connection.” The illiquidity in the industry was explicitly captured in Tinubu’s view as he dropped the hint that the 11 DisCos are undercapitalised to the tune of N2 trillion. He called for the recapitalisation of the distribution firms. He was emphatic that those who were issued with licences must have the financial muscles in addition to technical muscles to cope in the industry. Tinubu said: “We have to create an environment where the worst performers do not continue to drag the sector down. All those who were issued with licences must not only have the technical capacity to deliver on their licence but must also have the financial muscle to invest and grow their operations. “Preliminary analysis shows that the DisCos today are undercapitalised to the tune of close to N2 trillion. We must facilitate a reorganisation and a recapitalisation process that brings in new partners and new capital to jumpstart performance in this critical section of the value chain.” At the heart of liquidity in the sector, is metering, which is required to measure consumption of the energy. Again, investment in metering has been low due to a lack of finance in the sector. While Adelabu observed that “you cannot measure without metering,” the President revealed that only around 45 per cent of NESI customers are metered currently, with wide variations across DisCos. He added that “the scale of investment needed to meter current and new customers and replace obsolete meters is not trivial. The government is committed to supporting the metering drive through the World Bank Distribution Sector Recovery Programme (DISREP) which should add at least 1.25 million meters, while activating the Meter Acquisition Fund to procure another four million meters. But we must also realise that long-term sustainable metering should be within the remit of DisCos and their partners.” Meanwhile, the Director-General of the BPE Dr. Alex Okoh reminded the stakeholders how illiquidity has held down the industry in the last 10 years owing to tariff shortfall. He said: “Bear in mind that post-privatisation, there were years of mutual non-performance by both the private sector and public entities, huge market and tariff shortfalls, creating a huge liquidity problem and an imposing debt profile in the market, and other issues such as severe lack of investments, invariably creating a complex web of challenges which now face the sector.” The Speaker of the House of Representatives, Abass Tajudeen noted that despite the efforts made by the legislature over the years to enact legislation that provides legal support for the operations of the power sector, numerous challenges persist. In response to these challenges, according to the Chairman of the House Committee on Power, Victor Nwokolo, who represented him the 10th House of Representatives has prioritised the power sector in its Legislative Agenda. The Speaker further explained that the aim was to address issues such as insufficient generation and transmission capacity, energy theft, inefficient distribution, tariffs, and corruption, among others. “The House will equally prioritise investments in the transmission and distribution infrastructure to reduce technical and non-technical losses; decentralise energy productions by promoting off-grid solutions, especially in rural areas where grid connectivity is challenging: strengthen legislation to increase penalties for energy theft, meter tampering and vandalism of energy infrastructure; adopt legislative measures to promote renewable energy through tax incentives, grants for investments in renewable energy sources such as solar, wind and hydro and mandate regular and transparent audits of all entities in the energy sector to curb corruption in the industry.”

 Abass revealed that the House recently directed its Committee on Power to investigate the Federal government’s financial interventions for the power sector since the privatisation in 2013.  This inquiry, he said, has become imperative due to persistent complaints from the Distribution Companies (DisCos) about revenue generation and collection, despite the government injecting N7 trillion into the sector. From the private sector perspective, Mainstream Energy Solutions Limited (MESL) also sought a cost-reflective tariff in the industry.  The company took over and has operated the Kainji and Jebba Hydro Power Plants for 10 years.

 Thus, the Chairman of the Board of Directors, Col. Sani Bello (rtd} noted that the bane of the industry is the lack of a cost-reflective tariff that should have afforded liquidity to the industry. He also said there is a need to criminalise energy theft to deter the perpetrators. The chairman noted that non-payment of electricity bills was affecting the industry. He urged the government agencies to endeavour to pay their bills. His words: “The major challenge we continue to tackle today is the lack of cost-reflective tariff that will provide sustainable liquidity for the entire value chain. “There should be strengthening of laws and enforcement of these laws that will criminalise and deter energy theft as well as non-payment of electricity bills. “We also implore that all arms of government and government agencies should also pay all their invoices to the NESI.”  Besides, the chairman said, multiple taxations, and levies on the value chain have hindered the growth of the industry and prevented the inflow of investments to the sector. Bello said the ever-present liquidity challenge exacerbated by inflation and a dearth of foreign currency continues to affect industry operations. On the electricity market situation, the former Managing Director of Abuja Electricity Distribution Company (AEDC) Plc, Adeoye Adeniyi attributed the failure to improve power supply to customers to a lack of cash flow. Similarly, the Country Director of the Energy Market and Rates Consultant Limited (EMRC), Mrs Rahila Thomas said since less than 45 per cent of customers are metered in the market, they have become so sensitive to constant increases in tariffs. According to her, (Aggregate Technical Commercial and Collection Losses (ATC and C) are one of the major variables driving up tariff costs in the market. She called for a balance between what the NERC proposes and the market realities. Her words:  “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.

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“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. The government is now paying subsidies that have amounted to N3.34 trillion. Out of that, the government has paid N2.8 trillion to support tariff.” The Chairman of Mojec Meters Limited, Chantelle Abdul admitted meter provision as the responsibility of the distribution firms. On the other hand, she said financial challenges in the sector have constrained the DisCos from providing the meters accordingly. The Mojec boss said: “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. Most of the customers are poor and won’t be able to pay for meters.” She noted that it will be difficult to rely solely on the government intervention for funding or intervention.  According to her, there is a need to develop a bankable proposition, and that requires a cost-reflective tariff and the right pricing of meters.” For the time being, Sage Consulting and Communications Limited’s lead Consultant/CEO, Mr. Bode Fadipe, who spoke with The Nation from a Civil Society Organisation point of view said for obvious reasons, the issue of tariff will continue to attract attention not just because it is a moving target but also because it is the principal and only channel for recovery of revenue for reinvestment in the sector. Fadipe, who is the former AEDC Public Affairs General Manager, said the tariff issue is critical.

 “To the extent of the fact that the investor is not a charity organisation, his continuous stay in the market is driven majorly by the fact that he wants to see a light of sight for the recovery of his investment. Not being a government that has a welfare responsibility, the funds invested in the business must return to him with a reasonable profit margin.” The former spokesman added that on the flip side of a cost-reflective tariff is also a service-based tariff. He described it as a different phenomenon that will continue to engage stakeholders in the NESI. Continuing, he said: “The issue is, therefore, a case of position. For as long as the price of the electron that flows through the wire is determined by forces of demand and supply, the call for a cost-reflective tariff will continue to engage the attention of the stakeholders. While affordability has also become an issue, another school of thought hold the view that the right pricing should be ensured until such an extent that only those who can afford it enjoy the service and thereafter, part of the profit is used to develop other areas of the market.”