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.
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| *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
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
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
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.
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
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