Fresh pressure on Tinubu as illiquid power sector nears collapse

Nigeria’s tottering power sector, which has seen electricity generation fall to below the worst levels under the Muhammadu Buhari administration, now faces an acute cash shortage, which experts say could lead to its imminent collapse and with it a new front of pressure against the government of President Bola Tinubu.

Electricity supplied to the national grid is today as low as 3,700 megawatts (MW) and if the export power is excluded, that means Nigerians are receiving less than 3,000MW to their homes and offices, BusinessDay investigation has revealed.

Our investigation showed that the electricity market shortfall has now ballooned to a hefty N90 billion monthly or over N1 trillion a year on account of the massive devaluation of the naira, which has led to an unprecedented surge in the price of gas, a key energy input in Nigeria.

Nigerians who are already hammered by rising petrol price and a devalued naira with resulting inflationary pressures plus an erosion of purchasing power now get electricity less and less lately, and consumers could now be asked to pay as much as as N110 per kWh or a 50 percent jump in some of the premium bands to cover for the market shortfall that has now emerged and for the sector to be cost-reflective.

Read also: Top firms battle rising costs as energy bill hits N221bn

It seems like déjà vu all over again as energy subsidies, which created a national crisis have reared their ugly head largely on the back of the massive devaluation and floating of the naira, according to one energy economist.

Players in the sector told BusinessDay last night that the electricity sector is facing a liquidity challenge driven initially by the six underperforming distribution companies, which until the devaluation had been unable to meet their market obligations to the tune of about N30 billion per month.

With the devaluation and floating of the naira, industry estimates show that the shortfall may have reached N90 billion per month, easily the highest shortfall in the history of the beleaguered market.

Senior electricity sector officials say the shortfall is mainly driven by the abrupt naira devaluation causing significant hike in the gas pricing and the price of generation contracts (like Azura) that are pegged to the US dollar.

The situation is all the more worrisome as the Buhari administration had reduced subsidies from a peak of almost N600 billion in 2019 to just about N100 billion last year, and at the current trajectory, electricity subsidies would hit N1.2 trillion annually (another record) in two years, officials said.

“The more pressing concern by market experts is the fact that this new subsidy is unfunded and unplanned for by the administration,” one official said. “It seems the Tinubu administration, which has yet to appoint a cabinet six months after the February election, didn’t assess the full impact of the naira devaluation on the power sector at all.”

He added: “The key problem for government and the sector now is how do you pass on such a high cost of electricity to consumers that are receiving the lowest amount of energy since privatisation in 2013.”

With the persistent liquidity issues, generation and gas supply are grinding to a halt as generation companies (GenCos), especially those using gas, are groaning under the weight of mounting debts. One of the tasks the Nasir El-Rufai-led expert team had worked on was how to set up a sustainable solution for tariff shortfalls that would allow the sector thrive while balancing the impact on Nigerian consumers in an era of falling purchasing power.

The team is also said to have undertook a robust review on the debts owed to generators and gas suppliers, with an aim to improve supply in the short term and resolve the longstanding liquidity issues.

One expert told our reporter that “with the mounting debt and the record-breaking unfunded shortfall, it is only a matter of time before the market grinds to a complete halt. And that will be devastating.”

With the inability of the government to modulate the pricing of petrol as frequently as needed because of the volatility of the naira, it is feared that billions will now be spent to cover the emerging subsidy of petrol consumption.

Experts speak of an increasing negative investor sentiment on the Nigerian electricity supply industry without clear indication and uncertainty regarding who will lead the power (or energy) sector.

Development finance institutions and Nigeria’s multilateral partners are also relooking at the commitments made to the sector, given the lack of certainty in direction and the reversal of trajectory on electricity subsidies (a key pre-condition for their support).

One investor who asked to remain anonymous said: “The Nigerian electricity sector, as it stands now, is uninvestible due to legacy policy failures and regulatory uncertainties plus the emerging massive market cash shortfall. The expectations of an El-Rufai-led reform with strong backing from Tinubu had seemed exciting to us. But with that now not happening, we are all on a wait-and-see mode.”

Current investors are also quite concerned. A GenCo investor told our reporter: “At this rate, the debts that are mounting will make anyone think twice about putting any new money in Nigeria, for the model we see is unsustainable. The progress made in the past has now been wiped out.”