How electricity tariff dispute could worsen cash crunch in power sector

Nigerian Labour Congress (NLC) along with its affiliate groups has compelled the Federal Government to suspend the new electricity tariff increase that took effect September 1, calling for justification, but this could worsen the cash problems in the power sector.

Power Generation Companies (GenCos) say their market invoice has not been settled for one year, hindering their ability to pay gas suppliers for the feedstock required to provide power. Over 75 percent of the country’s supply comes from gas-fired plants.

“Our invoices have not been settled in over a year now,” Joy Ogaji, executive director, Association of Power Generation Companies (APGC), told BusinessDay, saying, “We cannot pay salaries anymore.”

Labour unions threatened an industrial action that was supposed to commence yesterday, and to stave off the threat, government officials met with the union leaders and achieved a truce. At the meeting held at the early hours of Monday morning, the parties agreed to set up a Technical Committee comprising government ministries, departments, agencies, the NLC, and Trade Union Congress (TUC) to within two weeks come up with a justification for the new policy.

The group will also determine why it has been difficult to meter customers and give labour unions a role in power sector administration. The labour unions also want more government representation on the board of DisCos.

However, the challenges with the power sector in Nigeria are more nuanced. For example, though the government has limited representation on the board of DisCos, no material decision can be taken without government’s approval. The Nigerian Electricity Regulatory Commission (NERC) plays an active role in regulating the sector.

One key challenge with the power sector, according to analysts, is with the market. Nigeria’s electricity market does not recover the proceeds of investments mainly because the tariffs do not guarantee commercial returns and operators do not fulfil their market obligations. So, it depends on government bailouts, costing over N1.72 trillion within the past five years.

“The erosion of capital in the power sector due to the absence of a credible market and poor tariffs are some of its biggest challenges,” Eyo Ekpo, CEO, Excerdite Consulting Limited, said at a recent BusinessDay digital conference.

Ekpo excoriated market participants for flouting rules governing the market, the lack of corporate governance, and poor leadership from the sector regulator.

Analysts say one way to resolve the market challenges is the implementation of a service reflective tariff, which prescribes tariff bands based on hours of electricity consumption. This has compelled DisCos to take the matter of metering customers more seriously as there is now an incentive to do so.

The government has removed a 35-percent levy on imported meters and is discussing loans with the World Bank and the Central Bank of Nigeria to procure meters en mass for Nigerians.
The agitation by labour groups, unless it is to speed up these initiatives, will only imperil the market more, analysis show.

It is not clear how greater participation by labour unions in the power sector administration will address market constraints. Meanwhile, if the suspension lasts much longer, and talks got more knotty, the liquidity challenges in the sector will worsen. The frustration over tariff increase by many Nigerians is largely on account of a lack of equity in electricity pricing. Millions are on estimated billing and feel exploited by their DisCos. Yet, self-power generation through diesel or petrol-powered generators is twice the cost of the reviewed tariff.

“From the point of view of radically improving the sector, this suspension is a setback,” Ayodele Oni, energy lawyer, and partner at Bloomfield Law firm, noted.

Oni said from the socialist/welfarist cum state of economy points of view, considering the issues around Covid-19, the state of the economy and the losses suffered by people, it could be argued that it should be done, but maybe this was not the right time.

“Overall, I think an increase in tariff is probably a good idea, even now, because without the increase, the sector is less likely to improve and power supply too will not improve as drastically as we want the same to improve.

“With poor power and increase in fuel prices (as a result of deregulation and improved international crude prices) people will spend more on self-generation and compared to the proposed changes to the tariffs, people will still end up spending more; that is, especially people (like barbers and hairdressers) in the informal sector of the economy,” Oni said.