Resetting the Electricity Market for Improved Performance

With the failure of the federal government and the private investors tofulfil their respective obligations in the performance agreement they signed during the power privatisation in 2013, it has become imperative for both parties to reset the electricity market as the initial five-year agreement lapses in November 2018, Ejiofor Alike reports

Under the performance agreement, the federal government agreed to enthrone a cost-reflective tariff regime, pay N100 billion subsidy and hand over the assets to the private investors with clean balance sheets so that they can deliver adequate and sustainable power to customers

The protracted electric power sector reform which commenced in 2001 was successfully concluded with the hand-over of the power assets to private investors on November 1, 2013.

But before the federal government transferred the ownership of the distribution and generation assets to the investors, both parties had signed a performance agreement, which stipulates the obligations of each party within a five-year period, ending November 2018.

The power agreement contains the obligations of the federal government in the areas of enthroning market-reflective tariff regime, supply of gas to power generating companies and payment of subsidy to the investors.

On the part of the investors, the owners of the distribution assets are required to allocate specific amount of money yearly to upgrade the assets and provide meters to customers.

The generation companies are also required to ensure that their machines are up and running such that with the declaration of the Transition Electricity Market (TEM) and the activation of all the vesting contracts agreements, the Gencos will pay for any gas which the Nigerian National Petroleum Corporation (NNPC) is ready to supply but their machines are not in good conditions to take.

Also, if the machines of the Gencos are in good conditions to take gas but the NNPC are unable to supply the gas, the federal government is required to pay the Gencos for the power, which the machines should have generated with their available capacity.

Under the performance agreement, the federal government agreed to enthrone a cost-reflective tariff regime, pay N100 billion subsidy and hand over the assets to the private investors with clean balance sheets so that they can deliver adequate and sustainable power to customers.

On the part of the companies, they are obligated to invest a specific amount yearly to upgrade the assets, reduce commercial and technical losses, install a specific number of meters yearly to ensure that all customers have meters by the end of the first five years.

However, five years after the agreement was signed, the federal government has failed to make enough gas available, pay subsidy and enthrone the agreed cost-reflective regime.

With the selling price of electricity lower than the actual cost price, the investors are running at huge financial deficits, while some Discos resorted to outrageous estimated billing to meet the running costs.

The failure of the federal government to fulfil its obligations under the performance agreement has fuelled serious liquidity crisis in the power sector, which hampered the capacity of the distribution and generation companies to meet their obligations.

Even when the Gencos managed to generate power in the face of the challenges, the federal government only pays them a fraction of their monthly invoices because even the World Bank partial guarantee has not guaranteed regular payment to the Gencos.

While some Discos approached the banks for credit facilities to boost their assets, they have failed to provide meters as agreed in the performance agreement.

It is estimated that the banks are exposed to the tune of over N1 trillion to the power sector.

Liquidity Crisis/Inadequate Tariffs

A key function of the Nigerian Electricity Regulatory Commission (NERC) as contained in section 32(d) of the Electricity Power Sector Reform (EPSR) Act 2005, is to ensure that the prices charged by licensees are fair to customers and sufficient to allow the licensees to finance their activities and to allow for reasonable earnings for efficient operation.

It was in pursuant of this mandate that the authority vested in NERC that the commission established a methodology for regulating electricity prices called the Multi-Year Tariff Order.

The MYTO provides a 15-year tariff path for the Nigerian Electricity Industry with minor reviews each year to reflect changes in a limited number of parameters, such as inflation and gas prices.

The MYTO made provision for major reviews every five years, when all inputs are reviewed with stakeholders.

The current MYTO, the first, came into effect November 2013.

It is a common knowledge that in this first five years under the MYTO, NERC has not implemented the cost reflective tariff as envisaged under the arrangement.

“it is unfortunate that five years is coming to a close with NERC yet to implement the key clauses of the five years performance agreement the federal government signed with the DISCOs,” an official of a Disco said.

The three key areas which have been ignored by the federal government are the cost-reflective tariff regime, a clean debt-free book which Discos were supposed to have inherited in 2013 and the N100 billion annual subventions for two years to bridge the gap between what consumers pay and the actual cost of electricity.

Up till this time, the Discos are still being forced to sell their product at an average retail price of N32 per kilowatt hour, for a product that should sell for more than an average retail price of N80 per kilowatt hour.

While the federal government has forced the Discos to sell power below the market price, some Discos have resorted to sell at black market price, far higher than the market price, in the form of estimated billing.

The implication of this gross underfunding and other fall-outs such as interest charges, electricity marketing stabilisation fund, and historical debts such that as at now the total shortfall in the sector is to the tune of N1.35 trillion and still growing.

The current situation is unsustainable and as the first five-year agreement lapses this year, the government needs to come in decisively through NERC by resetting the market and starting afresh.

It is obvious that the government has not fulfilled its own side of the bargain, and this has made the other members of the value chain to fail in their obligations.

So, it is futile and of no use resorting to blame game.

“The only way the distribution end of the value chain can work as envisaged, and by extension, ensure that all other members of the value chain operate effectively and efficiently is for the government to start afresh with the Discos, clean the debt books and commence the implementation of the cost reflective tariff as enunciated in the MYTO,” said an official of the Transmission Company of Nigeria (TCN, who spoke to journalists in Lagos.

The way out and solution to the power sector underfunding and the Discos’ current handicap, according to the official who pleaded for anonymity is the immediate commencement of the implementation of the Power Sector Recovery Programme (PSRP) as this is the only panacea to tackling the crisis in the power sector.

The PSRP envisions that the market shortfall will be addressed through an annual federal government budget that will include provisions for fully funding historical and future sector deficit from 2017 to 2021; as well as through the establishment of cost reflective tariffs across the board over the next five years and sooner a bilateral willing buyer/willing seller for premium customers;

The market shortfall can also be addressed through the payment assurance facility to be established by the Central Bank of Nigeria (CBN), to support NBET, and other such funding initiatives by the World Bank Group on the one hand, and IFC and MIGA, on the other, up to $2.5billion and $2.7billion respectively.

From all indications, it is not in doubt that the 11 electricity distribution companies that invested about N11 trillion to buy the Power Holding Company of Nigeria, (PHCN), distribution assets in 2013 are today in deep crisis owing to acute shortage of funds to invest in infrastructure and expand their operation. Providing prepaid meters for millions of customers has become a big challenge and the entire value chain is crippled by poor funding.

Energy experts have suggested that the way forward is to reset the market through cost reflective tariff and not bringing in new investors.

“Contemplating bringing in new set of investors now is a wrong-headed approach. In any case, no investor will be willing to commit funds to a business where he cannot charge a cost reflective pricing. The problem is not with the DISCOs investors per se, even though one is suggesting that they are saints.

“The problem, however, is with the government and its refusal to live up to its billings. Let the government start afresh, inject funds, allow cost reflective tariff and play by the rules, you will see how investors will be competing to have a foothold in the sector within the first year. It is the only way to go,” said an investment analyst.

Indeed, as the five-year Performance Agreement which the 11 Discos signed with the federal government lapses, November this year, it has become imperative for the federal government to reset the market and commence a new set of Agreements with the investors, if the nation is desirous of a stable and efficient power sector.