• Monday, March 04, 2024
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How FG plans to reform the power sector


The Federal Government has directed the Nigerian Electricity Regulatory Commission (NERC), the electricity sector regulator, to review tariffs to make them reflect the cost of production and compel operators to fulfil their performance contracts.

The policy directives and timelines issued in June by the Federal Ministry of Power, Works and Housing also directs NERC to abide by the requirements for periodic major and minor reviews and processing of valid claims for deficits in tariff as provided for in the rules.

Absence of a cost-reflective tariff is one of the most contentious issues in the power sector.

Despite changes in the factors upon which the tariffs were based including exchange rate, gas prices and inflation rate, NERC has compelled electricity distribution companies (DisCos) to price power around N32 per kWh (kilowatt) while DisCos say they are compelled to pay over N60 kWh since 2016.

According to the Power Sector Recovery Plan (PSRP), a reform plan for the sector, Nigeria should have reviewed tariff upwards by 50 percent between 2017 and 2021. The review was meant to address accumulated deficit attributed to sculpting of the retail tariffs under MYTO 2015. Sculpting is a policy that compels DisCos to under-recover now by charging less than the cost of producing power and recover losses in the future.

Shortfalls in the sector were dimensioned to tariff arising from pricing power below cost of production, volumetric shock in energy supplied and the costs of interest on non-financed shortfalls through retail tariff sculpting.

DisCos are now in a dire situation, reporting accumulated losses of N713.63 billion since the 2013 privatisation exercise while payables to both the Nigerian Bulk Electricity Trading Company (NBET) and the Central Bank of Nigeria (CBN) would now be approximately N2 trillion.

By implementing this policy directive, the electricity market could see increased liquidity by removing restrictions that prevented eligible customers from buying power directly from generation companies (GenCos), and setting a deadline for GenCos to transition at least 59 percent of the capacity contracted to NBET to bilateral contracts with DisCos, eligible customers, franchisees and other traders.

The FG further directed NERC to strengthen the market by implementing existing orders promoting competition, approve pending mini-grid applications, enforce performance agreements in operator’s contracts and set up modalities to refinance accumulated debts.

The Federal Government-owned Transmission Company of Nigeria (TCN) was directed to progress implementation of grid expansion plans, enforce full payment of the market operator’s invoice in accordance with market rules and support transmission requirements of bilateral contracts with other investors to allow for more commercial use of transmission assets.

To better handle technical issues in electricity transmission, the FG directed that TCN should “spin off an independent system operator after satisfying the conditions precedents outlined in the ruling documents and effective separation of its operations, assets and liabilities from those of the Transmission Services Provider licensee”. The Independent will manage administrative functions while technical people grapple with the finer details of transmission.

The Bureau for Public Enterprises (BPE) was directed to appoint representatives on the board of DisCos, perfect shareholder loan and options for loan recovery for the Federal Government’s investment in DisCos. BPE was also directed to effectively monitor operators’ obligations under their Performance Agreements.

The Nigerian Bulk Electricity Trading Company (NBET) was equally directed to design and present for policy direction and NERC regulatory action measures to refinance the accumulated debts DisCos owe it and the debt NBET owes generation companies (GenCos) and the Federal Government.

NBET was further directed to work with NERC to establish a deadline to transit vesting contracts of DisCos to bilateral contracts with defined quantities and delivery points with specific GenCos and enforce DisCos’ contract securities based on agreed thresholds of reducing technical and collection losses and tariff deficits.

Analysts praised the plan which is the Federal Government’s decision to implement the PSRP, a series of policy actions, operational and financial interventions it developed along with the World Bank, to be implemented by the Federal Government to attain financial viability of the power sector and reset the Nigerian Electricity Supply Industry (NESI).

The PSRP, which called for the injection of around $1.5 billion annually for five years (2017 to 2021) to achieve sector viability, said the national economy is losing $29.3 billion annually due to the lack of adequate power.

However, analysts say the policy still needs to be issued by a minister for implementation to begin.

“Any attempt to enforce implementation could be stalled through litigation because it was not issued by a minister,” said Chuks Nwani, a Lagos-based energy lawyer.

Section 27 of the Electric Power Sector Reform Act says only the minister may issue a directive to NERC.

“The Nigerian Electricity Supply Industry has been long overdue for a clear policy direction and I think the Policy Directives is a good attempt in that regard. Without any doubt, the directives have a lot of positives, including the directive to NERC on speedy licensing, cost-reflective tariff, periodic major and minor review, reinvigoration of Vision 30:30:30, aligning industry and policy with the commercial structure contemplated by EPSRA etc,” said Wolemi Esan, partner, energy and infrastructure at Olaniwun Ajayi, law firm.

“However, as always, the devil is always in the detail and in implementation. For instance, whilst the directives set very clear timelines for some workstreams, other critical workstreams such as tariff review have no timelines. But on the whole, my sense is that Policy Directives is properly implemented, would set the challenged sector on the path to recovery,” he said.