Empowering Nigeria’s electricity landscape: The pivotal role of distribution companies

Nigeria’s electricity sector reform has opened doors for significant private sector involvement. Distribution companies (DisCos), playing a central role in delivering power to end-users, stand at the forefront of this transformation. Understanding their operations, the challenges they face, and the potential they hold is crucial for investors seeking to capitalise on this dynamic market.

Amidst the recent move by the Federal Government to revoke the licences of underperforming distribution companies across the country, top-performing DisCos like Abuja, Eko, and Ikeja have demonstrated their ability to distribute electricity efficiently to diverse consumers.

For example, the Nigerian Electricity Regulatory Commission (NERC), in its latest report, revealed that a total of 148,389 metres were installed in the third quarter of 2023. The new installations resulted in a 0.35 percentage point increase in the net end-user metering rate in the Nigerian Electricity Supply Industry (NESI) between 2023/Q2 and 2023/Q3.

They have excelled in overseeing billing, revenue collection, and facilitating remittances to the Nigerian Bulk Electricity Trading Plc (NBET) and the market operator under the purview of the Transmission Company of Nigeria (TCN).

With over 12 million registered customers, Nigeria’s electricity market is projected to experience growth fueled by rising urbanisation and economic development.

The success story of the Geometric Power Plant in Aba exemplifies the potential of reliable power generation to stimulate economic activity. In addition, the Federal Government has made it known that it seeks private sector investment in DisCos, offering incentives and a supportive regulatory framework, creating fertile ground for investor participation.

According to Mordor Intelligence, the sector is expected to grow at a 4.28 percent compound annual rate from $391.69 million in 2024 to $483 million by 2029, driven by industrialization and urbanisation. Distributed Power Generation (DPG) presents significant opportunities, although increasing infrastructure costs may hinder growth.

Among potential entry points, acquisitions present a particularly attractive approach, according to analysts. Compared to greenfield projects and mergers, acquiring existing DisCos offers several advantages.

Investors gain immediate access to a large, established customer base, reducing the time and resources required to build a new market. Existing infrastructure and distribution networks are readily available, minimising upfront investment costs.

In addition, acquiring established DisCos allows investors to benefit from the existing team’s knowledge and experience in navigating the intricacies of the Nigerian electricity market.

Distribution licences and tariff regulations

The Commission issues distribution licences, authorising licensees to construct, operate, and maintain distribution systems and facilities, including customer connections, metre installation, billing, and collection. Distribution licencees may also have the obligation to provide electricity to customers, per the terms of NERC’s trading licence.

DisCos are mandated to collect revenue based on the approved tariff, a percentage of the cost-reflective tariff, as determined by NERC’s Minimum Remittance Order (MRO). This assigns a certain percentage of NBET’s monthly invoice to each DisCo.

Cost-reflective tariffs, sector growth, and drivers

Cost-reflective tariffs are crucial for attracting private sector investment and ensuring DisCos’ financial viability. The Electric Power Sector Reform Act (EPSRA) and the Multi-Year Tariff Order (MYTO) legislation mandate the adoption of cost-reflective tariffs, and NERC is tasked with pursuing this objective.

According to Ezuma Okoronkwo, an energy consultant, the importance of cost-reflective tariffs cannot be overemphasised, as DisCos cannot break if tariffs are not cost-reflective at the very least. “Electricity is the primary product the distribution companies sell,” he said.

Victor J. Bassey, lead energy analyst at Bavijas Ventures, an energy consulting firm, said that the propensity of consumers to pay electricity tariffs when due greatly influences returns on investment in the Nigerian power sector. “This applies to other utilities, too.”

“Investors need better returns on their investments, and where this is absent, progress gets stuck. Consumers should pay tariffs on the electricity they consume to encourage more investments in the sector,” he added.

Consumers’ willingness to pay electricity tariffs when due greatly influences returns on investment in the Nigerian power sector, encouraging further investments. Urban areas like Lagos, Abuja, and Port Harcourt, with higher income levels and commercial activities, are better positioned to support cost-reflective tariffs.

Despite challenges, DisCos’ revenue collections have shown improvements, indicating the potential for further investments. In the first nine months of 2023, total revenue for DisCos reached N782.58 billion, a 30.7 percent increase from the corresponding period in 2022, representing a 78.58 percent turnover from the N1.06 trillion billed.

Ikeja Electric, Eko Electric, and Abuja Electric ranked top of the collection revenue chart of DisCos, with N162.68 billion, N127.9 billion, and N123.97 billion, respectively, with the southern region accounting for 47.6 percent of revenue collected.

Pedro Omontuemhen, Partner and Energy, Utilities & Resources Leader at PwC’s West Market Area, highlighted the pivotal role of two critical factors propelling the surge in revenue within the power sector.

Omontuemhen emphasised that advancements in customers’ onboarding processes, coupled with effective mitigation strategies targeting commercial and technical losses, have facilitated this notable development.

“The momentum of this upward trajectory is contingent upon DisCos persistently enhancing power supply reliability while concurrently minimising operational losses,” he said.

NERC’s role and investment opportunities

“NERC plays a crucial role in ensuring fair play and protecting investor interests,”  Joshua Olorunmaiye, an energy lawyer, said. The Electricity Act of 2023 mandates NERC to secure private sector investment in the transmission network, ensure a fair spread of investments, provide electricity to underserved areas while ensuring reasonable investment returns, and guarantee the protection of investments.

He said, “With the constitutional amendment granting states the power to create their own electricity markets, healthy competition among DisCos within each state is envisaged. DisCos can also purchase power directly from generation licensees and other trading licensees, presenting further investment opportunities in the supply chain.”

The expert asserts that capitalising on opportunities within the Nigerian DisCo space requires addressing challenges, fostering a conducive investment climate, and leveraging the potential for growth and development in the power sector through cost-reflective tariffs, efficiency improvements, and regulatory support.