One of the fundamental problems with the power sector in Nigeria is the destabilizing technical and commercial misalignment.
Of these, the technical misalignment is mainly due to poor infrastructure. We generate more power than we can wheel through the transmission company, TCN), and ironically we wheel more power than we can distribute as the DisCos regularly reject electricity for several reasons-a discussion for another day.
The purpose of the Presidential Power Initiative involving Siemens is to address this technical misalignment by rehabilitating and upgrading infrastructure along the generation, transmission and distribution value chains.
The commercial misalignment alluded to earlier, is due to a lack of cost-reflective tariffs and other fiscal considerations.
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The World Bank-funded Power Sector Recovery Programme (PSRP) is designed to address this. The PSRP is a financing plan targeting performance for improvement – meaning that the loan to be advanced by World Bank can only be drawn down on following the satisfaction of certain conditions.
In a nutshell, the loan is to be disbursed in tranches linked to the satisfaction of conditions. If the loan is$750m, satisfy condition A and you get to draw $50m, satisfy condition B and you draw $30m.
Each condition or milestone has an amount attached to it. So even though the loan is for $750m, your ability to access the whole fund depends on your satisfaction of the conditions.
These conditions or milestone achievements or in layman’s terms, improvements in the sector are designed to address the commercial issues besetting the power sector to make make the power sector commercially viable.
These conditions or disbursement linked indicators include amongst other things: – implementation of Performance Improvement Plans by Discos; and
– implementation of a service reflective tariff (SRT), with the subsequent migration to a cost-reflective tariff (CRT) in 2021.
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SRT is an increased tariff but still not cost-reflective and it will be based on improved service levels, that is having power for longer. So the more power you have, the more expensive it gets.
A customer in a service band that is enjoying 20 hours of power a day, for instance, will pay more per unit of energy than someone in the service band enjoying only 10 hours of power a day. So like tax, where the rich subsidise the poor, high energy users will provide cross-subsidy for low energy users/the poor.
Back to the main discussion, the financing plan makes certain assumptions based on the achievement of the milestones/improvements. So in terms of tariff, implementation of SRT assumes that tariff shortfalls on a particular date will be x, therefore the amount available to draw down on the loan should be sufficient to fund x.
Problem is, if a milestone/improvement is delayed, there are financial implications. So if SRT was to be implemented today and tariff shortfall today was supposed to be x, but if the increase has now been suspended, till say Q1 next year, then the tariff shortfall assumption is no longer accurate.
Therefore delaying the tariff increase means that where the shortfall to be x, it would be x + accrued tariff shortfall during the period of the delay, that is ‘today to Q1 2021‘
Meaning more funding will now be required which either has to be borrowed or provided by a federal government that has gone broke as we all know.
And this will have a knock-on effect for other milestones/improvements and correspondent funding required by government and we will no longer be talking about a requirement of$750m but significantly higher.
Essentially delaying the implementation of SRT means assumptions of the power sector recovery programme, PSRP need not be adjusted. Bear in mind we are dealing with the World Bank and not an ordinary bank where approval processes are insanely tedious, and may thus take a while. All the while, we are incurring costs that we can no longer afford.
Obviously, the whole thing is a little more complicated, but this explainer tries to simplify the matter.
Finally, one possible explanation why the DisCos have baulked at implementing the tariff increase now is that with migration to SRT as explained above, this will impose massive obligations in delivering the corresponding service that must come with the increase in tariff and failure by the DisCos to do so could attract very stiff sanctions.
Perhaps some Discos may not have been prepared for the service delivery aspect and are fearful of the sanctions from failure to deliver the corresponding service.
