Introduction
The next time you are discussing with your friends or family about the performance of Nigeria’s electricity sector, do not just ask each other how many hours of electricity you typically have in a day. Also ask “how much money are the electricity companies making?” This question is vital because if the electricity companies are not making sufficient money, the chances remain high that you may never have 24-hour electricity supply from the grid.
There is a liquidity crisis in the Nigeria Electricity Supply Industry (NESI). This crisis means that electricity companies do not have enough cash to meet their costs or invest in the required infrastructure to improve electricity supply. In essence, electricity companies have been selling us N100 puff-puff, but the Government had been telling us to pay only N65, and yet, we were paying N30.
The liquidity crisis in the NESI remains the biggest known hindrance to 24-hour electricity supply. This article discusses the three overarching challenges that sustain the liquidity crisis and constrain new investments in the NESI. They are the Bulk Trader’s monopsony, NESI’s subsidy regime and the distrust between consumers and the electricity supply industry.
NBET’s Monopsony
Given the historical commercial underperformance of the electricity sector, the Federal Government (FG) anticipated the post-privatisation liquidity crisis. This is why the FG created the Nigeria Bulk Electricity Trading (NBET) company. NBET was created three years before privatisation. It buys electricity in bulk from generation companies (GenCos) and sells to the distribution companies (DisCos), who sell to you. The Government created NBET with the mandate to pay unpaid electricity bills on behalf of the market until the market builds sufficient capacity to pay for itself. To handle this task, the Government capitalised NBET with USD 800 million from proceeds of the sale of PHCN assets.
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NBET’s task is to cover the gap between electricity sold and market remittance. For example, GenCos sold NGN 668 billion worth of electricity to the market in 2019. The market was only able to remit 26% of that bill, according to NBET’s monthly market performance data. NBET’s role is to bridge the payment gap; however, the fiscal burden of the electricity market has proved too much for NBET. The burden has led to the need for additional intervention funds from the Government. The Central Bank of Nigeria (CBN) intervened and loaned NBET an additional NGN 213 billion in 2015 and NGN 701 billion in 2017 to support NBET’s effort. Yet, NBET still owes the GenCos over NGN 1 trillion in electricity bills according to the Association of the Power Generation Companies (APGC). This debt is more than 10% of Nigeria’s average annual budget.
Although the creation of NBET was critical to privatisation, the market needs to begin weaning itself off NBET sustainably and systematically. NBET’s task has proved undoable and unsustainable, and in addition, it has created an inhibitive and unproductive monopsony at the wholesale end of the NESI.
NBET’s monopsony prevents competition in the wholesale market. GenCos are only able to side-step NBET and supply electricity to willing credit-worthy buyers with much difficulty. Moreover, NBET does not have the fiscal capacity to facilitate trade at its current scale; neither does it have the resources to pay for tariff shortfalls.
NBET’s unsustainable fiscal position became more evident when, in 2017, the new privately financed 450 megawatts (MW) Azura-Edo power plant began selling electricity to the market. It appeared that the Government had to reduce the amount of electricity it was buying from other power plants to accommodate the Azura-Edo power plant, which operates with legally guaranteed sales to the Government. This guarantee means that the electricity Azura Power generates must be paid for, whether it is transported to DisCos or not. Within three months in 2018, the Azura-Edo IPP’s electricity sales increased by NGN 5.2 billion while Niger Delta Power Development Company’s (NDPHC) electricity sales reduced by NGN 5.5 billion. As it stands, NBET cannot afford to buy electricity from existing power plants, let alone new power plants. Therefore, GenCos need to be able to bypass NBET and sell electricity directly to credit-worthy consumers without excessive difficulty.
In 2018, the Government instituted the Eligible Customer Regulation (ECR), which allows GenCos to sell directly to eligible consumers, who are able and willing to pay cost-reflective electricity prices. Although the ECR takes the market several steps in the right direction, the sector is still a long way off to establishing a functioning and profitable market.
NESI’s Subsidy Regime
The second challenge was the market’s unofficial ‘subsidy’ regime. The previous non-cost reflective electricity-pricing, which was effectively a subsidy, was inefficient because it subsidised the entire market, including credit-worthy consumers who are often willing to and capable of paying cost-reflective tariffs.
Before September 2020, the electricity-pricing regulations prevented DisCos from selling to consumers at a cost-reflective tariff. This restriction hindered the DisCos from reaching their required revenue targets and caused a debt crisis across the entire NESI value chain. While DisCos had, and continue to have their billing and collection inefficiencies, the non-cost reflective retail tariff was one of the sector’s most critical issues. It restricted the DisCos capacity to borrow the investments required to reduce its inefficiencies. In the first quarter of 2019 alone, all eleven DisCos were unable to pay NGN 137.3 billion of their bills. Of that total, the non-cost reflective tariff was responsible for about NGN 67 billion (48.8%) of the shortfall.
The Government’s recent decision to release its hold on the retail electricity price is a critical part of the solution to the liquidity crisis. The ‘service band’ system of pricing electricity is a step in the right direction because it recognises an all-important principle to prioritise profitable electricity trade. However, there is room for improvement.
Consumer-NESI Distrust
The third challenge is the distrust between consumers and market operators. Billing and collection losses in the NESI are significant problems that sustain the liquidity crisis. The DisCos sometimes attempt to solve these issues through estimated billing systems; however, this often leads to overcharging paying customers. Paying customers usually end up bearing the cost for electricity theft caused by others.
Despite this unfair practice, DisCos still do not meet consumers’ expectations for electricity supply. In turn, this causes consumer apathy and energy theft, leading to lower collection rates and commercial losses. This circular causal loop is, paradoxically, a cause and effect of a lack of sufficient
trust between the DisCos and consumers. It is a chicken and egg situation. Which comes first? High customer payment rate or high service delivery? Despite the paradoxical nature of the problem of distrust in the NESI, trust can be built sustainably.
Can the PEM Rescue the Market?
There is no doubt that the Nigerian electricity market has come a long way since the days of NEPA. Despite our slow progress, the industry is headed in the right direction, especially as people begin to perceive electricity as a commodity that must be paid for through a functioning market.
To achieve a properly functioning market, we must find a solution to the liquidity crisis in the sector. The ‘Parallel Electricity Market’ (PEM) is one possible pathway to create a new structure. The PEM will run parallel to the existing electricity market.
In the PEM, GenCos will sell electricity directly to a select category of productive, high-consuming credit-worthy consumers, bypassing NBET. The PEM will provide 24-hour reliable electricity supply to its consumers, helping to build consumer trust. Only large productive credit-worthy consumers will initially be allowed to buy electricity from the PEM. This condition would make the PEM operate at near-zero commercial losses and improve liquidity in the entire sector, with an increasing proportion of sales occurring profitably. Other credit-worthy consumers in the existing market would be allowed to join the PEM in phases until all consumers are included in the PEM. Next week, the series will delve deeper into the structure and nature of the PEM. We will examine its potential as a solution and outline how it differs from the ECR and the new
retail pricing regime.
