• Monday, June 17, 2024
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Pricing and incentive mechanisms for the growth in the power sector

Nigeria brightens chances of attracting World Bank’s $750m support on ‘improved’ power sector reforms

Value and pricing as a compass for a sustainable industry

For decades now, Nigeria’s poor power supply has affected her economic growth and the lifestyle of Nigerians to the extent that most citizens doubt if they will ever enjoy 24-hour power supply in their lifetime without having to generate it themselves. Older Nigerians who were around in the days of Electricity Corporation of Nigeria (ECN) may have forgotten that although electricity was not available in every part of the country, the electricity sector worked so well that ECN (a precursor to NEPA), used to send notices of power cuts to Nigerians days before the cut. The date, time, duration, and reason for the cut would be communicated days in advance.

It was the perilous state of the power sector and the need for a solution that led the government to unbundle it to allow and encourage private investors to come in and salvage the sector which led to the birth of eleven distribution companies (DisCos), generating companies (GenCos) and a transmission company. The jury seems to be out on the performance of some of the investors in the sector and views most of them unfavourably. Several questions remain – How do you expect performance from a manufacturer of a product or a salesperson when he/she has no power to decide the price of his/her products, and also ends up not getting full payment for products delivered? How can an investor continue to invest in a sector where he has no power to determine his operating environment and is almost an onlooker despite being heavily indebted to banks for loans taken to acquire the business and help it grow?

For there to be stable power supply in the country, market forces need to determine the cost of electricity, and a competitive landscape needs to grow wherein consumers have several choices of whom to buy power from. Deregulation of the power sector is the way to achieve this, not government bailouts or artificially fixing tariff. A complete liberalisation of the power sector is what we need to not only allow for more innovation and private investment, but also create competition amongst the players in the industry which in turn will lead to better service. It should be clear that the epileptic power supply witnessed in the country would become a thing of the past if the government allows market forces to determine pricing in the entire value chain, from gas production and transport to electricity distribution.

Explaining the connectivity

A high-level overview of the electricity industry’s value chain would help the reader better understand the challenges faced by some of the investors in the power sector, and the corollary effect on pricing. The value chain, specific to gas-fired power plants, has energy flow starting with gas production and then gas transportation via pipelines or virtual pipelines (trucks). The chemical energy in gas fuel is converted to electricity by generating companies, and this electricity is transported by the Transmission Company of Nigeria (TCN) to the respective eleven distribution companies. The DisCos deliver the transmitted power to homes, businesses and factories, collect money from these customers and pay TCN and the GenCos, who in turn pay the gas producers and transporters.

The value chain is straightforward, but its state of being broken is the bane of the NESI. Adequate metering remains a major issue across the eleven DisCos, with less than 30% of the populace metered. This means that many power consumers are either consuming power they don’t pay for or paying too much for what they consume, while many other potential consumers are not connected to the national grid at all. Further, out-of-date infrastructure causes high losses, which means that all the transmitted power cannot get to the DisCos or their customers, and at the end of each month, the DisCos cannot pay the GenCos for the power sold to them. This also means that the rest of the value chain cannot be properly paid for their supply or service or both. With very low cash flow and significant monthly unpaid receivables that continue to grow, it is almost impossible for these companies to make the required investments to upgrade their assets.

Gas producers are unable to increase their gas producing/processing capacity because of a lack of payment. Existing and potential new gas pipeline owners including the government through Nigerian Gas Company (NGC) cannot build significant networks of new pipelines, or properly maintain existing ones. Several privatised on-grid GenCos with dilapidated equipment are unable to make the investments they promised to make for the same reason. Finally, virtually all the DisCos have not made the expected improvements via the reduction in aggregated technical commercial and collection losses (ATC&C) which they committed to during the privatisation for several reasons. The regulator has been unable, unwilling, or both to impose sanctions as stated in the privatisation process. Against this backdrop of challenges in the value chain, it is clear that government regulations have failed to stimulate and catalyse the required private investment and growth in the sector. Continued government initiative will see the sector continue to flounder in its current near comatose state. One can see then that the only viable option for growth is to allow market forces take full control.

Replicating success of the telecoms reforms

A good place to start the needed changes would be for the federal government to leverage the deregulation model that was adopted in the Telecoms sector. This deregulation as we know, resulted in a strong telecommunications industry in Nigeria, the creation of hundreds of thousands of direct and indirect jobs, as well as boosting economic growth in the country. Despite the challenges the sector is facing today with regulations amongst others, the Nigerian Communications Commission (NCC) stated that in June 2020, there were 196,379,542 cell phone subscriptions, 143,725,634 internet subscribers, and 78,784,226 broadband internet subscribers. Further, in the first quarter of 2020, the telecommunications industry contributed 10.88% to Nigeria’s GDP.

A cursory review of the telecommunications industry makes it obvious that the only way to allow the power sector grow is complete privatisation and liberalisation. The different parts of the value chain should be able to charge cost-reflective prices for their products or services, and competition should be the lever that drives the prices down. Gas suppliers should be able to compete amongst each other to provide the best value to GenCos shopping for fuel gas. GenCos should be allowed to compete amongst themselves to sell power to DisCos or “Power Traders”, or even directly to off-takers with high consumption rates.

Finally, DisCos should be liberalised in such a way that “Power Traders” would be able to sell power directly to off-takers, either on their own or in partnership with DisCos to provide off-takers with options based on value. In such a setting, competition will drive service quality and price, not regulation, and the government’s role will be to create enabling regulations and incentives to encourage desperately needed private investment.

The regulators believe that they are helping the Nigerian people by fixing prices, but in reality, they are unconsciously hurting the industry and stifling organic growth. Ultimately, it is the people that lose. Most Nigerians with the means, generate a large percentage of the daily power they consume, either with diesel or petrol generators (with their attendant noise and exhaust pollution), solar electric systems, inverter systems, or a combination of these. Analysis has shown that self-generation can cost as much as 4 times the price of grid power.

An average size residential customer paying N29/kWh to a DisCo for example may get an average of 6 to 12hours per day from the DisCo with the attendant fluctuations in service every few hours. Supplementing their power supply with their standby generator(s) can cost about N100/kWh with the stresses of self-generation. Such a customer would readily accept steady, stable grid electricity of up to N60/kWh if they are guaranteed at least 20 hours supply per day. Many estates in Lagos have opted to connect to embedded GenCos that guarantee up to an average of 22hours of steady power per day at tariffs up to N60/kWh or more. Such estates have no need for the unhealthy and laborious option self-generation. This is further proof that market forces rather than regulations should be allowed to drive the industry if Nigeria is to finally get the power sector right after decades of failed government interventions.

It is time to do things differently since one cannot keep doing the same thing and hope for a different result. Hope is not a strategy.

 

Dr. Umeh is the Managing Director/CEO of Century Power Generation Ltd and the Group Chief Operating Officer at Nestoil Group.