Power Sector Investment Outlook Bleak Without Cost-reflective Tariff

The power sector outlook still remains bleak without the institution of cost- reflective tariff, this has been the position of many analysts ever since the partial privatization of the power sector.

Stakeholders are of the view that the sector would make more progress if a cost-reflective tariff regime is adopted.

The need to look at this and other challenges has become more compelling in the face of a further decline in power supply in the past few weeks.

It would be recalled that a decade after the partial privatisation of the Nigerian Electricity Supply Industry (NESI), the industry is still mired in the morass of below the average performance in spite of the fact that trillions have been injected into the sector in the past ten years.

It’s no longer news that national grid only serves about 15 per cent of the country’s demand, leaving households and factories to rely on expensive self-generation, which supplies a staggering 40 per cent of the country’s demand.

More worrisome is the fact that more than 90 million Nigerians do not have access to electricity as the total amount of electricity that can be wheeled through the national grid has remained relatively flat in the last 10 years, with grid capacity increasing from just over 3,000 MW to typically just over 4,000 MW currently versus a 40,000 MW target that the federal government had set pre-privatisation

The reasons for the disappointing performance of the sector varies, ranging from poor governance in the sector, to power theft, poor funding as well as operational issues.

In the past the N750 administrative charge that the DISCOs’ predecessor, NEPA collected from every customer went along way in sustaining the sector from feeling the heat of other defects .

The current estimation of energy delivery of 4,000 MW to a population of over 200 million Nigerians is grossly inadequate and falls short of efficient service, limits business opportunities, hinders investments, and raises the cost of production and goods

The underperformance of the sector can be attributed to deep commercial, governance, and operational issues that have plagued the industry, particularly, stakeholders say, the lack of a cost-reflective tariff, which impedes investment in the NESI.

To improve the electricity services in Nigeria, the government has embarked on a total reform of the including subsidies which continue to strain the federal government’s resources.

Perhaps these challenges bedeviling the sector was dissected recently by major stakeholders, including top government functionaries, industry operators, regional electricity providers, among others, during the Nigerian Electricity Supply Industry (NESI) Market Participants and Stakeholders’ Roundtable (NMPSR) to mark the 10th anniversary of the privatisation of the power sector in Nigeria.

Recall that at the roundtable, President Bola Tinubu, described it as the perfect opportunity to reflect on the progress achieved and the challenges faced since the unbundling and privatisation of the sector.

He said emphatically that the key objectives of the privatisation effort were to improve the efficiency of the power sector and unlock private sector investments, the president stressed that the objectives of the privatisation programme were yet to be attained.

Represented by the Special Adviser to the President on Energy and Power Infrastructure, Office of the Vice President, Sodiq Wanka, he stated that:

“Ten years on, I believe it is fair to say that the objectives of sector privatisation 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 last 10 years.

“The grid capacity has increased from just over 3,000mw to typically just over 4,000mw today versus a 40,000mw target by 2020 that the federal government had set pre-privatisation,” he lamented.

“As of Q2 2023, for every kWh of electricity sent to the grid, only 60 per cent of it is paid for. But as we know, even the tariff paid for that unit of electricity is far from being cost-reflective, especially in light of recent devaluation of the Naira.

“The sector has suffered from chronic underinvestment, especially in transmission and distribution. Many of the successor utilities of the PHCN have failed to meet their performance improvement targets due to technical and financial capacity issues.

“ We are in a vicious cycle of under-performance and under-investment, and everyone has a different view of which value chain player should be blamed for continued sector malaise,” he added.

He stressed the need to address commercial issues and improve the investment attractiveness of the sector.

In his view, only around 45 per cent of NESI customers are metered today, with wide variations across Distribution Companies (Discos).

The scale of investment needed to meter current and new customers and replace obsolete meters, he said, is not trivial.

However, he stated that the government was committed to supporting the metering drive through the World Bank programme which should add at least 1.25 million meters, while activating the Meter Acquisition Fund (MAF) to procure another 4 million meters.

Nonetheless, the president said that the long-term sustainable metering should be within the remit of Discos and their partners.

“We need to have a clear plan to rebase 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. And 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,” he revealed.

Operationally, Tinubu stated that there a number of key imperatives that the sector must pursue, noting that with 80 per cent of grid generation today being from gas, he intends intend to convene all relevant stakeholders to develop a gas policy for the power sector delineating where the power sector will get gas from and how it will pay for it.

Stressing that Nigeria cannot build a sector on best endeavour arrangements, the president advocated what he described as a single source of truth in terms of data in the sector.

“ We have to create an environment where the worst performers do not continue to drag the sector down.

“All licencees 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 Discos today are under-capitalised 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,” he noted.

Many stakeholders are angling for the adoption of a cost-reflective tariff regime to attract private sector investments and save the power sector.

For the past 10 years, the privatisation of the NESI has been hampered by the inability of the distribution companies (DisCos) to charge cost-reflective tariffs. As a result, all operators in the NESI value chain have been affected, effectively constraining investment in the downstream (DisCos), midstream (TCN) and upstream segments of the power sector (comprising gas producers and GenCos). As such, though total installed generation capacity stands at 13,000MW, Nigerian barely generates 4,000MW of electricity daily, while the rest is stranded. This reflects a misalignment of the entire value chain from gas to consumers. Without cost-reflective tariffs, the federal government has been forced to subsidise the real cost of electricity and has spent some N7 trillion subsidising epileptic electricity supply to end users.

The Nigerian Electricity Regulatory Commission (NERC) issued an order in March 2020 to transition from demand-based to cost-reflective and service-reflective tariffs, which took effect in September 2020

The tariff structure aimed to ensure that consumers who receive fewer than eight hours of electricity per day do not see tariffs increase until the quality of service improves

However, the metering gap remains a challenge, with only about 45 per cent of Nigeria’s 12 million active electricity consumers having meters to measure actual consumption and quality.

Stakeholders who spoke at the Nigerian Electricity Supply Industry (NESI) conference in Abuja, stated that the lack of cost-reflective tariff in the market is one of the contributory factors aiding liquidity issue that has characterised the sector since privatisation in 2013.

With the government failing to adjust electricity tariffs after the unification of the foreign exchange, and inflation, among other woes the economy faced in the second part of the year, subsidy payment would rise above what was paid in the first half of the year.

Already, the country’s power generation has stagnated at 4,500 megawatts despite having a generation capacity of 13,000MW.

Experts have blamed the lack of investment in infrastructure which has seen the country stuck with the use of obsolete infrastructure to wheel power and maintain equipment.