FG’s reforms breathe life into power sector, improve liquidity

New data from the electricity market show that the Federal Government’s reforms to improve cash flow and market discipline in the power sector are starting to bear tangible fruits.

The latest market data show that power distribution companies (DisCos) collected N65 billion in revenues from the tariff they charge last month, the most since inception, on the back of the new service-based tariff system introduced in September.

As a corollary to this, the monthly remittances of the DisCos have also improved considerably to near 100 percent of the minimum threshold established for them by the industry regulator. The improvement could be a catalyst for the flow of renewed investment into the once beleaguered sector.

Government officials attribute this to improved coordination in the sector with President Buhari’s Power Sector Reform Working Group co-led by Vice President Yemi Osinbajo.

The Working Group also consists of the governor of Kaduna, the Chief of Staff to the President, the minister of finance, budget and planning, the governor of the central bank, and the special adviser to the President on Infrastructure.

According to government officials, the group adopted a carrot and stick approach with the DisCos. The government has brought about improved transparency and better control of the flow of funds in the sector in exchange for critical reforms on tariff and the clean-up of historical tariff shortfall debt on the Disco balance sheets (that was caused by inaction for successive years over the cost-reflective tariff).

Read Also: DisCos; collections hit N56.1bn in December, highest ever

“The DisCos have submitted to bank account control and payment discipline waterfalls that ensure that market payments are transparently made to Gencos, TCN, NBET, and gas providers.

“In return, the DisCos are accessing financing and loans facilitated by the CBN to accelerate metering and critical investments needed to make the new Service Based Tariff regime a success. In four months, market collections have jumped by almost 50 percent,” Ahmad Zakaria, special adviser to the President on infrastructure, told BusinessDay.

DisCos have also quietly withdrawn all court cases against the government as a precondition for government-provided support in the form of regulated lending and the recent World Bank facility for metering and enhanced infrastructure.

Measures by the central bank, the Ministry of Finance, Budget and National Planning and the Nigerian Electricity Regulatory Commission to instil discipline on sector payments have also played a role, BusinessDay learnt.

All DisCo revenues go into a primary collection account that is centrally administered by the central bank to ensure payments for Generation, Gas, and Transmission.

This measure alongside the Service-Based Tariff has reduced the subsidy payment for power by the government by over N20 billion per month. This subsidy reduction is very important at a time government revenues have nosedived due to the Covid-19 pandemic and its adverse effect on oil prices.

Government officials also say that they are distributing 600,000 meters under the National Mass Metering Programme, about 10 percent of the total commitment. The CBN confirmed the disbursement of N14.35 billion to the DisCos for the purchase of about 263,000 meters in January.

Enhanced metering programme will strengthen the collections, reduce losses, and could move the sector toward almost N100 billion in collections by the end of the year by some analysts’ estimates.

Another positive has been the progress made in discussions between the government and the Organised Labour. The FGN- Labour Committee on Electricity Tariffs, which includes Nigerian Labour Congress and Trade Union Congress and experts and consumer rights group, has had progressive discussions, Joe Ajaero, a member of the committee, told BusinessDay.

The committee has been instrumental in recommendations and actions on creative subsidies using VAT and enhanced monitoring of the Service-Based Tariff compliance.

The high cost of electricity in Nigeria and the associated high cost of the subsidies to the government is attributable to a low generation of power.

Despite the gains described above, the government will still be spending more than N100 billion this year on subsidising electricity customers on band D and E of the Service Reflective Tariff (this is a significant reduction from the N400bn+ spent in 2020).

The government recently obtained a $500 million facility from the World Bank for distribution and metering infrastructure and continues to communicate progress with the Siemens Presidential Power initiative.

However, analysts warn that the sector must work hard to wean itself off dependence on loans.

“These loans have to be repaid and constant borrowing is not a sustainable strategy,” said Chuks Nwani, a Lagos-based energy lawyer.

With all of this, the administration’s challenge is to increase delivered power above 5,000mw and set clear trajectory to the promised 10,000mw it promised. With the improved coordination in the sector, there is some hope that this can be achieved.