Friday, July 28, 2017

Nigeria: Eligible Customer Declaration In NESI – SWOT Analysis

By Idowu Oyebanjo
The declaration of eligible customers prior to the prevalence of conditions precedence as stated in the contract between FG and DisCos became inevitable because the DisCos have not been transparent with remittances of monies collected from consumers thereby worsening the illiquidity crisis in the electricity market within the Nigerian Electricity Supply Industry (NESI). In addition, DisCos have failed to invest in customer metering and the reduction of aggregate technical, commercial and collection losses as required by their distribution licences. Federal Government (FG) has therefore invoked the eligibility customer clause according to section 27 of the Electric Power Sector Reform Act (EPSRA) 2005 under Ministerial directives.
*Idowu Oyebanjo
One can easily understand the FG trying to preserve the health of the sector however, the initial reaction of the DisCos may be to cry foul. This may not be necessary as some of the transactions will still go through DisCos and TCN. It is therefore in order to evaluate the Strength, Weaknesses, Opportunities and Threats in FG’s decision to allow GenCos to sell electricity “directly” to four categories of customers with average monthly consumption of 2MW and connected to the medium and high voltage segments of the electricity network. This in my opinion should be described as customers with minimum Authorised Supply Capacity (ASC) of 2MVA. This is equivalent to a consumption of 100 Amperes (unit of current) at 11kV

*Strength
By declaring the eligible customers, Nigeria’s privatisation addresses the myth around subjecting a “natural monopoly” to economic regulation rather than competition in a privatised electricity supply industry by deepening competition in the electricity market of natural monopolies. Such competition or liberalisation will force the existing 11 DisCos to improve their operational efficiency and customer service. This will become a reference wherever matters of electricity regulation are being discussed in the world of power systems.
The advent of Distributed Generation and bringing of generation close to consumers will help to improve the liquidity of the electricity market and achieve the desired reduction in network losses more quickly if the scheme is properly implemented.

Overall, the declaration of eligible customers and full liberalisation offer many benefits to NESI, address some of the causes of the liquidity issues bedevilling the industry, re-establish confidence in NESI, send the right signals to potential investors, will create jobs in an improved manufacturing sector and therefore the economy, introduce competition in demand side as well as in distribution of electricity, improve operational efficiency, reduce network losses, encourage customer friendly operations, introduce innovation, end the era of unnecessary bailout funds and hopefully reduce cost of wholesale electricity in the long term.

*Weaknesses
The main reasons for the inability of the DisCos to perform have not been tackled. They are technically and financially bankrupt. As it stands, government will need to fund metering of consumers and network infrastructural development by DisCos or wait for them to return the Asset to BPE for fresh investors with technical cum financial capability to take over the operation of the assets. Also, the government-owned TCN network is the Achilles heel of the electricity value chain. In the last three years of privatisation, investment in transmission and distribution infrastructure has not been made to facilitate the uptake of stranded generation capacity. In its current state, the transmission network is capable of wheeling a maximum of between 4,600 – 5,500 MW of electricity. Thus, this policy directive by government has the potential for the privatisation or concessioning of the transmission network to qualified investors. There are also the lingering issues of cost–reflective tariffs and base-line network losses which I must say are difficult to solve.

Gas-to-Power initiatives in Nigeria need increased attention and dedication to ensure adequate investment in gas infrastructure to deliver gas to thermal power plants dotted around the country without which there can be no increase in the quantum of electricity to be supplied to eligible customers. In addition, the incessant cases of vandalization of gas pipelines for economic sabotage has to be addressed by going to the root of the matter, meeting the yearnings and aspirations of agitators and stakeholders, accelerating the passage of the bill to out-law gas flaring and consideration of other alternatives such as mini-LNG, LPG, CNG for gas-to-power schemes.

Eligible customers are located in widely separated geographical areas, and more importantly, at considerable distance from existing GenCos. Thus, except independent power plants are sited near aggregated clusters of consumers, the scheme will be difficult to implement. It must be emphasised heretofore that implementation will have to commence gradually and in clusters in various parts of the nation for the positive impact to be felt. This aligns with our earlier proposition that regional network development along with distributed generation schemes provide the fastest means of ensuring incremental, stable and uninterrupted power supply in Nigeria.

*Opportunities
The expectation is that large industrial consumers of electricity, Manufacturers Association of Nigeria (MAN), Industrial clusters, Business and Energy parks, Distributed Generators including renewable generation from solar, tidal and wind energy will be the immediate beneficiaries of the proposed scheme. More production firms can now opt for procurement of electricity directly from independent power plants (IPPs) in industrial clusters. Ultimately, this will lead to the creation of more jobs for Nigerians and the reduction of wholesale electricity prices, and other goods and services. The manufacturing industry is expected to pick-up as we witness the return of most companies that left our shores, abandoning Nigeria for neighbouring countries due to intermittent supply of electricity. In addition, domestic customers who live in the neighbourhood of customers that meet the eligibility criterion will benefit, hopefully, from the improved quality of electricity supply that should result from this move.

Where applicable, DisCos to a large extent will still have to design, install, maintain and operate the network through which eligible customers in relevant categories procure electricity from generators. This means customers who can afford it will pay DisCos for direct connection to the electricity grid. This will inevitably gravitate towards the independent electricity distribution networks ownership already provided for by the EPSR Act. Opportunity now exists for interested investors to set up independent distribution network companies, obtain licences from NERC and provide efficient and reliable customer-centric service within NESI.

The main income stream of DisCos are from connection and distribution network use of system charges.  As both still apply the way the scheme is designed for certain categories of customers, there is potentially no significant loss in revenue to DisCos as power still flows through their networks. DisCos will suffer loss of revenue where independent networks are installed. To this end, the declaration already provided for financial incentives to DisCos if they experience any drop in income as a result of implementing the scheme. This has the potential for disagreement as it will be difficult to determine, inter-alia, the value of income that would have accrued to DisCos but for the declaration.
From service provision point of view, there will be opportunities for competent independent connections providers, consultancy services, and companies that can handle the delivery of turn-key Engineering, Procurement and Construction (EPC) power projects. In this regard, the compilation of a register of certified providers of services in a national electricity register is apt. This is an opportunity to strengthen the Nigerian Content act of the power sector as enshrined in NERC regulations to ensure the targeted localization of the industry. The mistake of the oil industry must not be repeated in the power sector.

Opportunity now exists for GenCos to sell more power from their hitherto constrained capacity and obtain better return on investment in NESI at lower financial risk as power will be supplied to credit-worthy off-takers at a much higher economies of scale through bulk purchase of electricity. This has the potential to enhance their long-term business development strategies. They will also be able to make up their dwindling revenues and hopefully be in a better position to make payments to gas suppliers as and when due.

As the power network becomes more complex, so does the importance of Health and Safety within NESI. With a poor history of safety, there is an urgent need for a Health and Safety Executive body which will have the powers to investigate and prosecute licensees in NESI found to be culpable of neglect in so far as not putting in place measures so far as is reasonably practicable to prevent danger of electrical hazards to its staff and to the general public. Technocrats with demonstrable knowledge and experience in power system planning, design, operation, control, protection and management will be most invaluable in helping to ensure the effective implementation of this policy directive and stable development of NESI.

*Threats
The threats emanating from the declaration of eligible customers depend on which hat one wears. For example, the scheme, when fully implemented will create competition in the distribution of electricity. The DisCos will argue against the timing of the declaration quoting section 24, sub-sections 2 and 3 of EPSRA that the pre-requisites for the declaration of eligible customers have not been met. These pre-conditions have regards to the degree of privatisation that has occurred, the existence of sufficiently large number of competitive entities, adequate metering of all consumers, availability of communication and information technology infrastructure required for the smooth operation of a modern electricity market. The maximum demand customers, many of whom constitute the bulk of eligible customers, represent the main sources of revenue to the DisCos. 

If such large consumers such as industrial, commercial and clusters of both within the DisCos’ franchise area sign up to bilateral arrangement for the procurement of electricity via the transmission network and or directly from generators, DisCos will lose a reliable source of steady income stream. Congruent to this is the fact that the reduced tariffs paid by residential consumers is as a result of the higher income stream DisCos derive from these same larger power consumers. Thus, this declaration may lead to an increase in tariff regimes for residential consumers, who are already disenfranchised and frustrated by the goings on in the electricity sector. Thus, the potential for protests and rejection of hikes in tariffs by residential consumers, organised labour and members of the National Assembly is very high.

The transmission network as it is will not be able to deliver on this policy except significant investment is made towards its upgrade. Significant network losses mean that eligible customers in certain categories will suffer from poor service delivery and this has the potential for illiquidity since power supplied by generators will not reach eligible consumers. Also, the transmission network operator may collapse under the weight of financial penalty for failure to meet service level guarantees when imposed.

GenCos in supplying eligible customers will face further competition from existing captive power plants, independent power producers and DisCos that encourage the connection of distributed generators to their network, the stiff competition of which consumers will be the ultimate beneficiaries.
Absence of infrastructure for revenue collection and transparent disbursement to relevant stakeholders in a way different from the status quo will spell doom for this policy directive and therefore a more sophisticated and technology dependent approach is required. If generators are unable to secure payment guarantees from eligible customers or service level delivery is not attained, the potential for illiquidity will persist.

In view of antecedents, potential investors will be seeking to understand how NERC will go about the actual implementation of this policy with regards to sacrosanctity of contracts with DisCos, the establishment of new bilateral contracts between eligible customers and generators, mechanisms for revenue collection, tariffs and pricing of electricity supply to eligible customers, the impact of policy on the revenue stream of DisCos, potential policy summersault due to unforeseen reaction of DisCos, the creation of service level agreements that incentivise good performance but at the same time punish failures to honour guarantees. 

Other issues requiring attention include matters of route through which new electricity infrastructure will travel and the attendant way leaves, easement or land use, the cost of building the network connecting eligible customers especially directly to generators, safety issues when running parallel networks with possibility of multiple earthing and increase in electrocution, ability to manage, operate, maintain, and protect the network, Interactivity issues and customer apportionment factor for relevant categories of eligible customers etc
There is also the possibility to frustrate the scheme if the same DisCos with their ineptitude and inefficiency are asked to develop the infrastructure for the direct connection of eligible customers to GenCos and or distributed generators since the core of skills and expertise in-country resides with them. It would be better to allow new but qualified investors to create competition with the DisCos in building required network capacity for eligible customers where applicable.

*Idowu Oyebanjo CEng MNSE MIET writes from the United kingdom(oyebanjoidowu@yahoo.com)

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