The power sector conundrum

By Kelvin Ayebaefie Emmanuel

Twenty-five (25) generation and distribution companies owe nine (9) Nigerian banks 1.493 trillion naira. If the Bureau of Public Enterprise had properly investigated the firms that went through bidding in 2013 during the unbundling of PHCN, it would have realised that most of the companies didn’t have the financial wherewithal to win a properly structured competitive bidding process. Most of these companies, mostly on the distribution side, used the licence as collateral to secure bank loans that were reasonable at the time in terms of principal payments and interest but started escalating when the FX market went through several rounds of depreciation and devaluation of up to 89 percent, which caused monumental revaluation losses. Imagine a $200 million loan that was valued at about 30 billion naira in 2012, attracting 14 percent interest per annum of 4.2 billion naira, that is now valued at 250 billion in principal repayment sum, attracting an annual interest payment of 30 percent per annum (because of dependency from the rising prime lending rate) at 75 billion naira per annum.

Not only did the Discos not have the right equity to debt structural balance to invest in proper distribution networks, but especially as it concerns prepaid metering, which till today still stands at 43 percent, the Discos relied on the government interfacing with NBET as an intervention fund to meet their revenue shortfalls and impairments in final settlement statements that are derived from the Nigeria Electricity Supply Industry (NESI).

“GENCO’s are owed by Discos because electricity is either stolen, sabotaged, or rejected by the Discos; GENCO’s are unable to pay for gas or capitalise on hydro as rain is cyclical and cannot be relied on.”

There are three (3) categories of debt that make it difficult for the Nigeria Governors Forum to inherit generation, transmission, and distribution as mandated in Section 31 of the fifth amendment to the 1999 Constitution for the Electricity Act:

1.493 trillion owed by 25 generation, transmission, and distribution companies to 9 banks;

1.2 trillion owed by generation companies to upstream gas suppliers;

1.3 trillion owed by distribution companies to generation companies through the market operator from historical tariff shortfalls.

While the banks taking over the Discos in a takeover—strip down assets—recover as much as you can—and hold a lien for future shareholders—is the most viable way for any financial institution to recover their money, the government re-privatising the Discos through a well-grounded competitive bidding process to companies that are financially viable seems like the most credible path to driving the mass-metering programme, as well as the downstream infrastructure required for reducing impairment in their FSS.

The Government raising marginally the prices of gas to generating companies at $2.42 per mmbtu (well below market average) because its afraid that allowing gas prices to float according to the bending moment formula for gas pricing that tracks diesel by 40 percent, will raise electricity prices and cause social unrest, is counter-productive, and this is because discounted gas prices that has over the years not provided any incentive for the upstream companies that trap mostly associated gas from well-heads, clean, treat, dry, separate and transmit from gas gathering points, is the exact reason you’ve seen low-pressure on pipes that has impacted on the ability of generation companies to maintain uptime.

GENCO’s are owed by Discos because electricity is either stolen, sabotaged, or rejected by the Discos; GENCO’s are unable to pay for gas or capitalise on hydro as rain is cyclical and cannot be relied on. GENCO’s also do not have any incentive to invest in raising their capacity, as not only is there inconsistency in uptimes, they are afraid that the lack of deregulation in pricing of electricity and the government’s need to regulate pricing with a quasi-interventionist scheme it has set up in NBET will derail any chances there’s of actually making money from the value chain.