Nigeria’s power sector reforms yielding more cash than electricity

The Federal Government reforms in the power sector seem to be improving the financial fortune of the sector as shown in the 78.16 percent year-on-year growth in its contribution to GDP, but supply has not materially improved for many Nigerians.

According to the National Bureau of Statistics’(NBS) 2021 second quarter (Q2) GDP report, the electricity, gas, steam and air conditioning supply sector grew by 78.16 percent from 8.66 percent in the first quarter (Q1)of last year and -3.00 percent in the Q2’2020.

On a half-year basis, the sector grew by 56.58 percent year-on-year compared with a contraction of 2.78 percent recorded in the corresponding period of 2020.

When compared with the previous quarter, the sector recorded a growth of 264.23 percent to a real aggregate of N134.19 billion in Q2’2021, as opposed to N36.84 billion recorded in Q1’2021.

Analysts say recent reforms to improve cash returns including hiking tariff and ramping meter supply are having some impact.

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“Several factors contributed to the significant growth recently recorded in the Nigeria’s electricity sector, particularly, the implementation of the service reflective tariffs (MYTO 2020), the intervention by the Central Bank of Nigeria, and the implementation of the National Mass Metering Programme,” Wolemi Esan, deputy managing partner at Lagos-based law firm, Olaniwun Ajayi, says.

Esan says these interventions became effective around Q3/Q4 2020, and that the cumulative effect came to the fore in the Q2’of 2021 in terms of the year-on-year growth numbers.

“The expectation is that there will continue to be increased revenues from the DisCos, especially if the NMMP implementation continues to progress as scheduled,” he states.

However, Nigeria’s power generation has continued to hover below 4,000mw despite a 13,000mw output. The creaking grid has collapsed either partially or totally four times this year, largely due to dearth of spinning reserves – an excess capacity meant to compensate for shortages.

The net effect of this is that electricity supply is improving in areas where collections are growing. In other areas, operators are not making investment to improve their network. In Nigeria’s rural communities, power cuts last for months and even in major cities like Lagos, areas like Festac, Ajah, Ejigbo and others, are poorly served. This paralysises economic activities in these areas.

“Frustratingly, the unprecedented growth recently recorded by the sector has not necessarily translated to increased supply of electricity. Indeed, the nation’s electricity grid has already recorded four collapses in 2021 alone, and this makes plain the significant challenges still being faced by the sector, and the urgent need for investments and improvements across the NESI value chain, regardless of the potentially misleading headline numbers,” Esan notes.

The Nigerian Electricity Regulatory Commission (NERC), the industry regulator, has introduced market reforms including raising tariffs, demanding network improvement to minimise the challenges faced by operators and customers in the industry.

“In particular, tariffs have been raised to near cost reflective levels and adjusted to match consumption via an initiative dubbed Service Reflective Tariffs (SRT),” according to analysts at Augusto in a briefing note.

The analysts say the new tariff model introduced last year as the name indicates is expected to reflect and match the quality of service received by the ultimate consumers of electricity.

“Electricity distribution in Nigeria remains plagued by high technical, operational and commercial inefficiencies,” they note.

The aggregate technical, commercial and collection (ATC&C) losses for the 11 Discos rose to 51 percent in 2020 from 45 percent in 2019.

“This high loss level remains one of the many reasons for the kickback from electricity consumers on tariff increases, especially in the absence of a significant and immediate improvement in power supply,” they say.

The NERC has also introduced a minimum remittance threshold for each DisCco, which stipulates a mandatory payment that must be made to the bulk trader for electricity received.

Furthermore, in February 2020, NERC introduced guidelines for ‘Merit Order Dispatching,’ which involves ranking electricity generation and dispatch by the Transmission Company of Nigeria (TCN) in ascending order of costs with the cheapest electricity – such as those from Hydro plants with no fuel cost component – ahead of more expensive plants.

The order also provides guidelines on the alignment of invoicing for capacity charge and energy delivered as well as a framework for the settlement of any imbalance between DisCos and TCN.

The Merit Dispatching Order should eliminate the shift of responsibility for load rejection prevalent between DisCos and the TCN, and improve the technical and operational efficiencies of these operators.

Analysts say, when this is done, the case of the 2,000mw of stranded power will be eliminated.

In other reforms, in August 2020, the Central Bank of Nigeria issued a circular that all deposit money banks were expected to warehouse and manage collection inflows from all DisCos, (including the collection agents of these DisCos) under specific guidelines as contained in the document.

“The objective of this ‘ring fencing’ is to secure cash collected from the DisCos and ensure that these distribution companies meet their mandatory obligations,” the analysts at Augusto & Co, say.

Apart from these reforms, the CBN invested about N2 trillion as at the end of 2020, equivalent to about 6 percent of CBN’s balance sheet.

“Despite this level of intervention, the generating companies had estimated receivables of over N400 billion in 2020 alone. While the interventions have been central in ensuring the profitability of operators along the industry’s value chain, they remain insufficient and unsustainable,” says Augusto & Co.

Power generation companies still get around 30 percent of their market invoice settled each month, a sore point in the troubled sector.