Monday, February 15, 2016

As NERC Introduces New Electricity Tariffs In Nigeria

By Idowu Oyebanjo
The much talked about increase in electricity tariffs became operational with effect from 1st of February 2016. As consumers brace up for the new tariff regime, there are issues worth noting which will determine the sustainability of the power reform process.

The main focus on the issue of cost reflectivity has been the Distribution Companies (Discos) because they act as the conduit pipe for the collection of monies to be shared by all the stakeholders involved in the provision of energy for the generation, transmission and distribution of electricity to consumers. In effect, they are the cash boxes of the entire electricity value chain. Although 25% of collected revenue is theirs to keep, 60% goes to the generating companies (Gencos), 11% to the Transmission Company of Nigeria (TCN), while the remaining 4% goes to other stakeholders like NERC, NBET etc.

One of the main issue is that the cost reflective tariff is hinged on a recent performance agreement reached between Discos and NERC. Given that the new Commissioners for NERC have not been appointed, albeit a care-taker committee of career officers have been running the show, it is clear that the enforcement of the service level agreements (SLAs) in the performance as agreed will lag behind. There should be a tracking of performance right from the word Go!

But the Discos cannot perform any miracles at all. The investment to be made is huge and will take many years before the overall impact can be felt. They cannot fix the technical losses in the wires and transformers from the monthly bills collected from unimpressed consumers who are likely to display a recalcitrant attitude towards the payment of their bills. At the moment, Discos have huge debts to finance as many of the technical partners have left for lack of liquidity in the sector even after two years. The current 187 billion naira deficit is a case in point. This deficit has the potential to be recurrent year after year if power system engineers are not allowed to lead the privatisation process. Economists and Lawyers will never have a clue. Technically speaking, the contract between a Disco with the federal government is no longer valid once the technical partner has abandoned the partnership. Don't forget the sale of government's asset was based, in part, on the technical capability of the so call "technical partner". Nigeria needs to get it right this time having wasted so much resources on the power sector reform of which time is the most invaluable.

It must be stated that an earlier performance to invest in the network and reduces losses was made by these same companies with BPE at the time of privatisation in 2013. We were told back then that any core investor that fails to deliver the promised service level agreements would lose their investment and will only be paid one US dollar in return. The problem however is that there was no credible baseline loss data to determine the existing loss levels and their can't be. Without credible baseline data, it is difficult to measure the performance of Discos. There is need to involve power system engineers who know their onions now. otherwise, the nation will grope in darkness for much longer.

Apart from this, the entire electricity chain faces daunting operational and financial challenges that the defunct NEPA and PHCN faced and so nothing new will happen except a different approach is deployed. Mind you, this will also take time. Some of these challenges include but not limited to insufficient supply of energy, poor network infrastructure, lack of maintenance, largely untrained man-power, poor customer data, external funding constraints arising from poor credit histories etc.

The current economic climate and the low morale in Nigerian Electricity Supply Industry (NESI) means consumers are reluctant to accept the increase in tariff. It is looking more likely as each day passes, that Banks will begin to lay off their staff in huge numbers following the implementation of different reforms in the Banking sector the rate of change of which we cannot keep pace with nowadays. Since the Discos could not assess external funding, Nigerian Banks have invested depositors funds in the sector without full understanding of the woes of the power sector -jumping the gun! Put succinctly, it is the same money of the poor consumers that have been invested in the collapsed power sector, and the same consumers are now required to fund the rebuilding of it. This is double jeopardy! Significant long term capital investment is required in the NESI now. Short-term borrowing will further exacerbate the financial and operational challenges noted earlier. In this regard, the stabilisation funds from CBN is apt. But without monitoring the judicious use of funds, this too will be considered an exercise in futility in the next few years.

Another issue is that majority of customers (up to 60%) have no meter. Even at that, metering alone does not solve the problems associated with collection losses. Discos will have to address electricity theft, revenue collection inefficiencies, lack of accurate customer database, cash theft by staff, and so on.

One of the most difficult conundrums for experts is the economic regulation of power systems in the face of technical challenges. Customers look at electricity tariffs from the eye of availability of supply and so it is difficult to accept any increase in tariffs without enjoying stable or even appreciable improvement in supply beforehand. Customers will show their grievances by means of protests and as lawmakers threaten a show down with NERC on this matter, your guess is as good as mine as to what will happen in the next few days.

It is my opinion that the privatisation of the NESI will be redefined in a unique way as the government may have to buy back the holdings under the operatorship of the same Discos! Revenue short falls will continue to increase in the short term and going blindly ahead with the implementation of an electricity market is foolish. This is good news as NBET can be scrapped meanwhile especially now that there is a downturn in the price of oil - Funny times ahead.
*Idowu Oyebanjo, a power system engineer, wrote in from the UK. He could be reached with oyebanjoidowu@yahoo.com

4 comments:

  1. It is wrong to insist that the financial crisis facing the providers of electricity can only be resolved of power systems engineers lead the privatization process and that economists and lawyers have no clue.Coming from a power systems engineer it smack as a lobbying tactic. The fact is that you need a multidisciplinary leadership team to resolve the problems plaguing the electrity industty and market. Energy economists for instance have much to contrbute to resolving the issues of billing, collection, optimal pricing, financing, energy mix, etc

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    1. file:///C:/Users/admin/Downloads/nse_president_interview_tell.pdf

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    2. Emma,having had meetings with the right members of the government, they have listened and now NERC is being led by Engineers with experience in Power Systems. If they do not know exactly what to do, they will contact those with superior understanding. When we talk to them,they will understand the language of communication. It is difficult for us to explain the very complex subject to those who ran away from complex mathematics years back into Social Sciences, Arts, Humanities etc, who by sheer stupidity of people in governance, find themselves talking, even commenting on a matter that is highly technical. We are in the business of ensuring the electrification of Nigeria. It is a serious matter of shame and we cannot celebrate mediocrity in this matter nor in any at all!!!

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  2. Emma, thanks for your contribution. Financial crisis are best handled by financial experts for people in my school of thought. Never use a square peg in a round hole. Always allow merit to hold sway. The problems in NESI are multi faceted and will therefore need a team from all the disciplines affected. What the article insists on is that the team of "multi-disciplinary leadership" must be led by a Power Systems Engineer if we must stop going round in circles. When something is true, it remains truth regardless of sentiments. Power System is a unique field. To illustrate, if you want to invest in a Hospital project, you will need a "multi-disciplinary team" but you will always need to depend on medical experts to tell you what to buy and why. There are very few Power Systems Engineers (real ones with Chartered status etc) in the world and when they speak, they have the authority to guide any nascent Power System Development. Such ones do not have to lobby but rather, they allow merit to take precedence and do things properly!!!

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