• Friday, March 29, 2024
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Eskom vs NEPA: A tale of two power sector reforms  

power sector

The South African government will create generation, transmission and distribution companies from its troubled national power company, Eskom, in a plan seen by BusinessDay. A further analysis of the plan reveals lessons that can plug gaps in Nigeria’s power sector reform efforts.

In the South African plan, Eskom will relinquish its near-monopoly and compete with independent power producers (IPPs) to generate electricity at the least cost. Nigeria’s 2013 power sector reform removed the natural monopoly of the National Electric Power Authority (NEPA), but inadvertently created a new one by allocating vast franchise areas to distribution companies (DisCos) who lack the financial and technical competence to manage them.

Last year, Enugu and Eko DisCos sued independent power operators for encroaching on their franchise areas by providing power to communities they left unserved. The Rural Electrification Agency (REA), a government agency set up to ensure power gets to underserved communities, kicked against it.

“The franchise areas are assets purchased by the DisCos, and these include the customers, which were valued on the basis of the revenue being generated, but these embedded generations are not factoring in expected tariff loss to the DisCos,” said Chuks Nwani, an energy lawyer.

Damilola Ogunbiyi, REA’s managing director, in an interview said the communities cannot be held to ransom because the DisCos are unable to serve them.

The Nigerian Electricity Regulatory Commission (NERC) overruled the DisCos allowing for IPPs like the Sura Market and Ariaria Market power projects to proceed to completion.

NERC is now enacting a new franchising regulation that will allow third-party investors to distribute power within a franchise area earlier ceded to a DisCo but the investors would need to do this in concert with the DisCos.

Unlike the Nigerian plan, where the utilities created out of the holding company of NEPA were privatised with the exception of the Transmission Company of Nigeria (TCN), the South African government will keep Eskom’s three new units within a state-owned Eskom holding company to reassure a people distrustful of privatisation.

However, in Nigeria where the power sector was supposedly privatised, operators say the regulator is not independent. Electricity pricing in Nigeria does not guarantee commercial returns but the regulator, until recently, has embargoed raising tariff since 2015 even after all the assumptions that went into fixing tariffs – including gas price, inflation rate and foreign exchange – have changed.

South Africa’s Eskom reform plan did not contain detailed information on how the company will repay its crippling 440 billion rand ($30 billion) debt burden. In Nigeria’s case, the government simply warehoused NEPA’s debt, removing all encumbrances to investors in acquiring the assets.

These operators have failed to make the needed investments to improve the distribution network. Rather, they are piling on new debt.

A BusinessDay analysis of the 2017 financial statements of 10 DisCos in June showed combined accumulated losses or retained earnings of N713.63 billion, from N288.85 billion as of December 2016. In accounting, a firm with negative retained earnings has recorded more losses than it has made a profit since its existence.

A BusinessDay investigation also showed that the Federal Government has approved N1.623 trillion on various intervention funding since it privatised the power sector in 2013, which is over three times what it earned selling them to investors.

Chinwendu Enechi, senior manager, oil, gas, and power at Andersen Tax, told BusinessDay that giving out these bailouts without evaluating their impact is like pouring water into a bottomless pit. It also raises the question: why bother with privatisation at all?

Under the Eskom plan, one or more Eskom generation units will be created to compete with IPPs and the distribution model is structured so that power can be purchased from small-scale producers.

In Nigeria’s power reforms, the Nigerian Bulk Electricity Trader (NBET) buys electricity from the generating companies (GenCos) through Power Purchase Agreements (PPAs) and sells to the DisCos through Vesting Contracts. But the DisCos have been remiss at settling market invoices. The regulator says they barely pay back half of the market invoices they receive for energy supplied.

While the regulation does not prevent them sourcing power through alternative sources, some DisCos have been unwilling to explore other means, including embedded generation, to increase their electricity allocation. GenCos accuse them of load rejection. Nigeria’s Electricity Reform Act lacks an instrument to compel them to compete as the Eskom plan does.

Eskom generates more than 90 percent of South Africa’s power with a total nominal capacity of around 44,000 megawatts (MW) with 36,500 MW of that coming from 15 coal-fired plants. In the new plan, 11,000 MW of power from coal will be decommissioned; around 2,500 MW of hydro generation will be added, including 6,000 MW from solar PV, 14,400 MW from wind, and 3,000 MW from gas and diesel plants.

The Nigerian government says it wants to generate 30 percent of its power from renewables by 2030. Currently, gas accounts for 75 percent of power generation, the rest is from hydro. Solar power generation is still insignificant and even though it is attracting the most investments, the Nigerian government has introduced policies, including a bruising 10 percent duty on solar panels, to further cripple the industry.

 

ISAAC ANYAOGU