As the year draws to a close, one of the many wishes of most Nigerians would be for a much-improved power supply across the country. This is understandable, going by their unpleasant experience of the outgoing year in terms of electricity generation and distribution which has seen many reported collapses of the nation’s power grid.
The record shows that between January and November 2024, the Nigerian electricity grid, managed by the Transmission Company of Nigeria (“TCN”), collapsed either partially or completely 12 times, impacting both business activities and livelihoods. October was the worst month as the grid collapsed three times, plunging the country into widespread darkness.
The Nigerian Electricity Supply Industry (NESI) was privatized in 2013, pursuant to the Electric Power Sector Reform Act, 2005 (EPSRA). The privatisation of the power sector was envisaged as the pathway to deliver sufficient and sustainable power supply to Nigerians. Although the programme has delivered some benefits, the power sector is still hampered by many challenges, such as lack of liquidity, inadequate investment in infrastructure, vandalism, and energy theft, among others.
The most significant of the challenges listed above is the power sector’s illiquidity. According to a publication by leading law firm Udo Udoma & Belo-Osagie, titled “Creating Liquidity in Nigeria’s Power Sector and Making it More Bankable,” “The power sector’s illiquidity has significantly affected progress in the value chain and impacted the risk appetite of investors that may wish to invest in various facets of the value chain.”
This liquidity issue has been a major headache for both the generation companies (Gencos) and the distribution companies (Discos), especially the latter, who appear to be at the receiving end of the ire of Nigerians for any power disruptions.
One of the major reasons for the liquidity problem facing operators in the power sector, especially the Discos, is legacy debts, the long-standing debts that have not been paid, preventing them from investing in infrastructure and improvements. Often, there have been reported power outages in certain areas of the country due to the faulty or aging equipment of the power distribution company in the area.
According to Kunle Olubiyo, president of the Nigeria Consumer Protection Network, even though grid collapse is part of a typical electrical system, there is the issue of obsolescence and weak infrastructure bedevilling activities of the sector in Nigeria.
These issues facing both the Gencos and the Discos underscore the urgent need for improved liquidity in the power sector. Energy experts say that the huge debt that operators in the sector are battling with is holding back the Federal Government’s target of improved power supply in the country due to the structure of the electricity value chain.
This structure sees electricity generated by the generation companies (Gencos) flowing in one direction from the Gencos down the value chain, while the revenue required to pay all the market participants flows in the opposite direction.
The revenue is realised from the payment (tariff) made by the consumers to the Discos for the electricity they supply them with. At the start of the value chain for thermal power plants, therefore, are the gas suppliers that provide gas to the Gencos to produce electricity.
Following the production of electricity by the Gencos, power is sold through a binding contract to the Nigerian Bulk Electricity Trading Company (NBET). NBET is the central offtaker for electricity connected to the grid, which in turn sells the power purchased from the Gencos to the Discos. The power generated by the Gencos is wheeled through TCN directly to the Discos before the Discos then sell the electricity to the final consumers at a tariff determined by the Nigerian Electricity Regulatory Commission (NERC), which regulates the sector.
In February this year, the Minister of Power, Adebayo Adelabu admitted that the country was owing a total of N1.3 trillion (US$838.560 million) to the power generating companies, out of which 60 percent is owed to gas suppliers and N2 trillion (US$1.3 billion) legacy debt owed to gas companies. According to a 12 December 2024 report by The Punch, the Federal Government’s debt to gas companies has now risen to N2.7 trillion (over $1.7 billion). This was disclosed by the Chief Executive Officer of the Association of Power Generation Companies (APGC), Dr Joy Ogaji, who said this led to wholesale gas-producing companies abruptly stopping the supply of natural gas to the Gencos for electricity production.
In June this year, the Gencos had also threatened to shut down operations over the huge debt. The Gencos, under the aegis of the APGC, want the Federal Government and key stakeholders to urgently address the issue of inadequate payment for electricity generated by Gencos, arguing that this is currently inhibiting their ability to meet their obligations to gas suppliers and lenders, execute necessary maintenance, purchase spare parts, and pay their employees, among other things.
In response to the demand by the Gencos, the Federal Government said in August that it had put in place plans to offset the debt. The government said that it paid N205 billion out of the debt owed to power generation companies in August. It also said that it has paid US$120 million out of the debt owed to gas companies. The payments to Gencos and gas companies, according to the Federal Government, are meant to improve liquidity in the power sector.
The Federal Government said it is paying the debt in two ways, namely through cash injections and a guaranteed debt instrument, such as a promissory note. The promissory note will be a comfort to the companies that the Federal Government is ready to settle the debt over the next two to five years.
The Federal Government’s effort is still a long way from offering comfort to the industry operators and achieving a significant impact. The operators have urged the Federal Government to settle all accumulated debt for electricity generated and consumed if they truly want the sector to reach its potential. A statement signed by the Board Chairman of APGC, Col. Sani Bello (Retd), said members’ operations were being constrained by the huge debts. Among other demands, the group called for the “provision of payment security (guarantees) backed by the World Bank/AFDB to guarantee full payment to Gencos, to enable them to meet their critical needs, improve generation in Nigeria, and implement their respective growth and expansion plans,” a demand that experts say is justified.
Besides the Gencos, the Federal Government’s injection of liquidity in the market will stimulate the growth of the sector and further encourage gas producers such as Seplat and Accugas Limited, among other companies that are actively investing in the domestic gas market. Gas is the major feedstock for electricity generation in Nigeria and is critical to Nigeria’s energy security and transition to a green economy. Indeed, the Federal Government’s Energy Transition Plan, launched in August 2022, sets out a 2060 Net Zero target, which is anchored on natural gas as a transition fuel.
Already, Seplat has announced that it is targeting the end of Q4 2024 to commence gas production from its 300 MMscfpd ANOH Gas Processing Plant. Accugas has also announced that its US$45 million compression project at Uquo Central Processing Facility in Akwa Ibom State is on track to complete construction by year-end, with commissioning to commence in Q1 2025.
Without liquidity, the power market will continue to struggle to develop. And without developing the sector, we will be in trouble because frequent power cuts will continue to occur. In addition, the Federal Government’s plan to achieve a 20-hour supply to Nigerians in urban areas and industrial hubs by 2027 would be severely compromised.
Nathaniel Eze is a public affairs analyst based in Lagos.
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