The journey of a thousand miles to any destination starts with a single step. In order to get to one’s destination as efficiently as possible however, he must not forget the destination he set out to travel to and must shun distractions along the way no matter how tempting.
Nigeria’s journey to creating a liberal power sector, where parts of the value chain (fuel producer and transporter, GenCos, Transmission Company and DisCos) as well as the consumers engage in a willing buyer-willing seller trade amongst each other, began a few years ago. This started with the Electric Power Sector Reform Act (EPSRA) of 2005, and then the creation of the Nigerian Bulk Electricity Trading Plc (NBET) in July 2010. The government’s role in this entire journey is to set effective regulations that guide the power sector and stimulate private sector investment in Nigeria.
As the manager and administrator of the electricity pool in the Nigerian Electricity Supply Industry (NESI), NBET purchases electricity from Generating Companies (GenCos) through Power Purchase Agreements (PPAs), and uses Vesting Contracts to resell to Distribution Companies (DisCos) and other large customers who off take electricity from the transmission system. NBET essentially sat between GenCos and DisCos and was to act as a shock absorber of some sort to ensure that GenCos did not have any shortfall in revenue from DisCos.
The company was conceived as a Special Purpose Vehicle (SPV) with a 5-year lifespan, which will expire once a transition market to willing buyer willing seller takes effect. The expected transition has not happened and the company remains in a quagmire, saddled with underpayment issues that are largely caused by the broken NESI value chain. Nigeria has succumbed to distractions along the way and seems to have forgotten its destination. The transition market has not happened as planned, and NBET still bears the burden of playing middle man between GenCos and DisCos.
From January 2020 through May, NBET received a total invoice of N294.16bn from the GenCos but paid only N57.98bn, representing 19.7 percent of the invoiced value. In the same 5-month period, the 11 DisCos were invoiced N292.93bn for the power they received in that period, but only remitted N56.3bn, representing 19.2 percent of the invoiced value. In this pack, Eko DisCo had the highest remittance of 33 percent and 35 percent in April and May 2020 respectively, with Ikeja as the second highest with 40 percent and 20 percent in February and March, respectively. At the lower end of the spectrum, Kano DisCo remitted nothing (0 percent) for three straight months March to May, and Kaduna followed suit with 3 percent in February, 0.04 percent in March, and 0 percent in April and May. With this abysmal payment performance from the DisCos, the government needs to step in to provide funds to NBET to pay the GenCos enough to avoid a total collapse of the NESI.
In a free market setting, a DisCo would only procure electricity that it can pay for from a GenCo, and no more. In order to serve its customers, the onus then lies on the business to ensure that it’s able to get its product to the consumer and more importantly, that it’s able to collect payment for the product. In the current dispensation, however, DisCos still receive power which cannot be fully paid for, and in some cases, pay absolutely nothing for, and the government through NBET is expected to step in with bailout funds.
Such bailout funds have so far come in the form of a CBN interest bearing loan titled “Payment Assurance Fund (PAF I and PAF II)”. The PAF I fund assured that the 25 grid-connected generating companies received payment for up to 80 percent of their total monthly invoice from January 2017 to December 2018. A combination of PAF I and II was used to augment the market collections and pay the GenCos 100 percent of their invoices in January and February of 2019, while PAF II was used to make up monthly payments to 100 percent from March 2019 till September 2019 when the funds were exhausted. From October 2019 till date, with the exception of Azura Edo IPP, NBET is only able to pay GenCos an average of 25 percent of their monthly invoices. In the thirty three months that the PAF loan lasted, NBET has spent up to N988.93bn of borrowed funds to pay the generating companies.
The hard fact is that this is money spent to compensate for poor performance by the DisCos. Under the stipulated agreed rules of the privatisation, monthly collection by the DisCos should be improving steadily as they reduce ATC&C losses, strengthen their distribution networks and improve metering according to the individual bids they submitted during the privatization. Nearly a decade after privatisation or semi-privatisation of the sector, the government is still neck-deep in the sector, giving loans that will probably never be paid to fund invoice payments in the sector. The N988.93bn may have been better spent as a low-interest rate loan to the DisCos to fund their efforts to rapidly improve and strengthen their networks, and ultimately make them independent. If monthly remittances by DisCos are an indication of network improvement, Eko and Ikeja seem to be in the lead.
NNPC, the Nigerian Gas Company (NGC), as well as the Nigerian Gas Marketing Company (NGMC) are making strides to make more gas available for power generation. As their supplies increase, however, the lacuna between GenCos and DisCos vis-a-viz the abysmal collection by the DisCos to pay for the power they receive will become more glaring. NBET’s indebtedness to the GenCos will continue to increase as a result, calling into question the bankability of the PPAs signed by those GenCos. In this sort of scenario, private investors will of course be unwilling to invest their hard earned money, thereby forcing the government to sink deeper into the abyss of government investment in the NESI in spite of its seemingly noble effort to divest from it.
We see this happening with the proposed N61b investment the government has committed to make through Siemens, as well as the 4,000MW that NNPC is committing to make in the Northern part of the country. No matter how one analyses the NESI and what it needs to survive, the critical mind will realise that the only solution is liberalisation of the market.
Dr. Umeh is the Managing Director/CEO of Century Power Generation Ltd and the Group Chief Operating Officer at Nestoil Group.
