The Nigerian Electricity Industry and COVID-19 seemingly share similar traits with the peace of God – they both surpass all understanding and have seemingly defied human understanding.
Unlike the peace of God which confoundment endures forever, the solution to human COVID-19 lies in vaccine and/or a cocktail of drugs that would provide a cure while the cure to the electricity industry’s unending constipation lies in liquifying the market.
Consider the following statistics.
The total number of customers in the books of the Electricity Distribution Companies (Discos) is 10.4m, meanwhile there are more than 20million buildings and facilities connected to the electricity network in Nigeria. Out of the 10.4m customer accounts, more than 20 percent are inactive. Thus, less than 8m customers are paying for electricity consumed by over 20m consumers.
Of the barely 8m active customers, only 4m are metered, the rest are on estimated billing. Out of the 4m metered customers, 50 percent of the meters are old, outdated and compromised. Thus, while 4m customers ostensibly pay for electricity they consume, the remaining 4m unmetered customers are meant to pay for electricity consumed by them and the other 12m consumers (who are not yet customers in the books of the Discos), for the books to balance. However, the 4m unmetered customers are not paying and indeed are unable to pay the difference.
I will now translate this sorry scenario into naira and kobo.
The total average electricity generated by the Electricity Generating Companies (GENCO’s) amounts to about 3,600mw out of which 100mw are dispatched to Niger Republic, Togo and Ajaokuta Steel leaving 3,500mw which at the average monthly tariff of N32 per kWh should yield about N80.6b.
Out of this amount, the Gencos through Nigerian Bulk Electricity Trading (NBET) are expected to receive N52b, the Transmission Company of Nigeria (TCN) is expected to receive N8.6b and the balance of N20b would go to the Discos.
However, in reality, the Discos cumulatively are only able to collect an average of N40b monthly from the 4m metered customers and 4m unmetered customers. Revenue collections by Discos are tracked by Central Bank of Nigeria (CBN) through the banks. Out of the N40b about N3b is deducted as first line charge for payment to CBN for the Nigeria Electricity Market Stabilisation Facility (NEMSF) it disbursed in 2015 to cover payments for legacy gas debts and tariff/market shortfalls which had accumulated over the years even prior to privatisation; another N2b goes to FIRS payment for VAT; N8.5b is paid to TCN on the average while NBET receives N12b on the average. The Discos are left with N14Billion to cover their operations.
In the above scenario, the Gencos that ought to have received about N52b receive only N12b remittance from Discos through NBET, which is not enough to cover their gas supply payment obligations not to mention their Operation & Maintenance costs thereby leaving a revenue shortfall of N40billion.
TCN is only charging about 50 percent of its approved tariff of N8.3/kWh due to a NERC freeze on its full cost-recovery. This explains why TCN has regularly relied on government funding and borrowing for its capital expenditure when ideally it ought to be a profit-making company. Instead of receiving about N17b/month TCN receives only N8.5b.
Likewise, Discos-the power industry scape goat-are constrained to use only N14b to run operations across the entire country including staff payroll and welfare, state income tax remittances, acquisition and maintenance of transformers, power lines, operational vehicles, tools and equipment, robust ICT infrastructure and until recently meters.
Prior to privatisation, this gap otherwise called tariff/revenue shortfall existed and was well beyond the current 50 percent. However, because NEPA/PHCN was owned and operated by the government under the Ministry of Power & Steel, all operating and capital costs of the electricity industry from gas supply to generation, transmission and distribution costs were captured and covered under the Federal Government budget of the Ministry while collections were treated as revenue to government. In so doing the shortfalls were covered by the government. At all times during that period the budget of the Ministry of Power and Steel with specific relation to NEPA was always many times more than the revenue accruing to the Federal Government from the sale of electricity.
At privatisation of the electricity sector, this tariff shortfall was duly recognised by the parties and a combination of government subsidy and tariff increase was adopted to cover the shortfall. The expectation was that with the shortfall covered by the combination of government subsidy and tariff increase, the investors will make the requisite investments required to reduce the losses to levels that would reduce the need for subsidies; as efficiency and generation by Gencos rise, the retail price for electricity will fall. This informed the adoption of the Aggregate Technical, Commercial and Collection (ATC&C) loss reduction mechanism as basis for selecting the winning bids during the privatisation process.
Unfortunately, after privatisation neither was subsidy infused per the agreement, nor tariffs adjusted to facilitate capital injection by the investors until a later date when inflation and exchange rate had driven the gap in tariff even wider. It is worthy of note that at privatisation the exchange rate was N157 to a dollar, at the point tariff was adjusted by about 30 percent in 2016 the exchange rate had spiralled to N360 to a dollar (more than 130 percent) thus rendering the tariff increase of no impactful consequence. Indeed, in dollar terms, the increased tariff was less in value (9 US cents) than the tariff in 2013 (13 US cents). The consequence was that the Disco Investors were no longer able to attract funds to make the required investments to reduce the losses.
It is this tariff shortfall that the regulator NERC and NBET has slammed on the books of the Discos as debts owed by Discos which has made the Discos to have negative balance sheets running into hundreds of billions of naira even when it is clear that these shortfalls arose from a regulatory cap on tariffs and unpaid electricity consumed by largely unknown consumers including federal, state and local government ministries, departments and agencies (MDAs) which contribute almost 10 percent of this shortfall, a carryover from NEPA days when government MDAs would not pay for electricity.
In the prevailing circumstances, the Discos with such toxic balance sheets are unable to attract any credit needed to fund reduction of ATC&C losses that would result in lower tariffs leading to lower shortfalls in revenues. Thus, this shortfall has remained largely unattended to year after year.
While the Federal Government budgets and pays for shortfalls in PMS supply which are indeed not attributable to NNPC nor Petroleum Marketers, CBN intervention in the electricity sector were used to settle these shortfalls which indeed are not attributable to Discos, nor Gencos nor TCN. However, the general but erroneous perception at all levels including CBN is that the funds were given to the operators in the sector with the Discos fingered as the scape goats since they are supposed to pay fully for electricity received from Gencos through TCN. Truth is that the N1.7Trillion CBN intervention was used to pay for electricity consumed by non-paying customers just like petroleum subsidy.
Having identified the perennial monthly shortfall of N40billion (50 percent) as the virus dogging the electricity sector which like COVID-19 can only be solved by a cure in the first instance and a vaccine as a permanent solution, I shall proceed to prescribe a long-term vaccine to this electricity sector virus.
The vaccine lies simply in a mechanism that brings those unknown 12m electricity consumers into the payment basket. The mechanism to achieve the above is a combination of customer enumeration using geographic information system (GIS) to trace electricity supply cables to each user and universal and compulsory metering of all customers.
To cover the value chain revenue of N80b per month for 3,500MW of electricity, each of the 8m paying customers in the books of the Discos will need to pay an average of N10,000/month, while if the entire 20m users are brought into the payment basket each user will only pay an average of N4,000/month. Currently each of the paying customers are only paying an average of N5,000 a month to make up the current N40billion collection.
At the average rate of N55,000 for single phase and three phase meters, the universal compulsory metering programme will cost about N990b to implement.
Given the daily haemorrhage of collection losses of about N1.3billion, this nation cannot afford the luxury of allowing customers pay for meter acquisition at their own pace especially as the MAP programme tailored for extended repayment has failed because there is no long term fund for the MAP providers to tap into to provide long term repayment schemes. Worse still MAP providers can only access short term commercial loans at average of 18-20 percent to be passed on to the repayment program.
However, there exists different mechanisms to fund the universal compulsory metering programme which requires equivalent of $2.6b – less than 40 percent of Mambilla Hydro Power Plant funding requirement of $5.8b.
This includes borrowing from development funds targeted at electricity infrastructure which funds are currently available at Africa Development Bank (AfDB), AfriExim Bank, Africa Finance Corporation (AFC) etc. or floating a special bond by the Debt Management Office DMO with repayment from electricity customers who will have to either pay outrightly for the meters upon installation or have an extended repayment programme up to 10 years the life cycle of the bond. Deduction of an average of N500 per month on electricity recharge payment of a customer over 10 years will pay off the bond. This is a perfect product for investment by pension fund managers.
To meet the exigency of time, the CBN can provide immediate bridge finance of 50 percent of the N990b required for meter procurement and installation, while the process of bond issue or development bank credit is being finalised; which proceeds will be used to refinance the CBN bridge funds and meet the balance 50 percent funding requirement. This way no customer will have any excuse not to have a meter and it shall become a criminal offense of electricity theft to be connected to electricity without a meter.
The attainment of 100 percent metering will change the outlook of the Nigerian electricity industry, liquify the industry and make it attractive for massive investments. Assembly and installation of 18m meters over 18months will employ about 50,000 skilled labour both at the meter plants and as meter installers, which more than ever is now needed given the economic impact of COVID-19. This singular programme has been shown to hold the key to unlock unprecedented investments in the electricity sector which will in turn unlock Nigeria’s rapid economic growth and development.
Enwereonu is a lawyer and electricity industry stakeholder