Nigeria: Power Privatization: Need to Reset Market, Start Afresh

electricity distribution

A key function of Nigerian Electricity Regulatory Commission (NERC) as contained in section 32(d) of the Electricity Power Sector Reform (EPSR) Act, 2005 is to ensure that the prices charged by licensees are fair to customers and sufficient to allow the licensees to finance their activities and allow for reasonable earnings for efficient operation.

It was in pursuant of this authority vested in NERC that the Commission established a methodology for regulatory electricity prices called the Multi Year Tariff Order.

The MYTO proceeds a 15-year tariff path for the Nigerian electricity industry with minor reviews each year to reflect changes in a limited number of parameters, such as completion and gas.

Unfulfilled promise

MYTO provides for major reviews every five years, when all inputs are reviewed with stakeholders.

The current MYTO, the first, came into effect in November 2013. High level power sector sources agreed in their analysis that this first five years under MYTO, NERC had not implemented the cost restructure tariff under the arrangement.

Said an investment analyst: “It is unfortunate that five years is coming to a close with NERC still unable to implement the key clauses of the five years performance agreement the Federal Government signed with the DISCOs.”

The three key areas, which have been ignored, are the cost require tariff, a clean debt-free book, which DISCOs were supposed to inherit and N100 billion annual subvention for two years to bridge the gap between what a consumer pays and the actual cost of electricity.

Up till this time, DISCOs are still being forced to sell their product at an average retail price of thirty-two naira (N32) per kilowatt hour, for a product that should sell for an average retail price of eighty naira(N80) per kilowatt hour

Implications of non-cost reflective tariff

The implication of this gross underfunding and other fall-outs such as interest charges, electricity marketing stabilization fund and historical debts, among others, is that as at now, the total shortfall on the sector is about one trillion, three hundred and fifty billion naira (N1,350,000,000,000) and it is still growing.

The current situation is unsustainable. Government needs to come in decisively through NERC by resetting the market and starting afresh. It is obvious that government has not fulfilled its own side of the bargain, so, it’s futile and of no use blaming the DISCOs. The only way the distribution end of the value chain can work as envisaged is by ensuring that all other members of the value chain operate effectively and efficiently. This means that government must start afresh with the DISCOs by clearing the debt books and commence the implementation of the cost-reflective tariff as contained in MYTO,” a key power sector investor stated.

The way out and solution to the power sector under-funding and the DISCOs current handicap, according to a Ministry of Power, Works and Housing official who pleaded anonymity, is the immediate announcement of the implementation of the power sector recovering programme (PSRP) as this is the only way to solving the crisis in the power sector.

The PSRC envisions that the market shortfall will be addressed through:

a) An annual Federal Government’s budget that will include provision for fully funding historical and future sector deficit from 2017-2021.

b) Establishment of cost reflective tariffs across the board over the next five years and sooner on a bilateral willing buyer/willing seller for premium customers.

c) A payment assurance facility to be established by the Central Bank of Nigeria (CBN), to support NBET and other such funding initiative by the world bank group on one hand and IFC and MIGA, on the other, up to two billion five hundred million dollar ($ 2,500,000,000) and two billion seven hundred million dollar ($ 2,700,000,000) respectively.

Funding challenges

From all indications, it is not in doubt that the 11 distribution companies that invested about N11 trillion to buy the Power Holding Company of Nigeria (PHCN), distribution assets in 2013 are today in deep crisis, owing to acute shortage of funds to invest in infrastructure and expand their operation. Providing prepaid meters for millions of customers has become a big headache and the entire value chain is crippled by poor funding

Energy experts opine that the way forward is to reset the market through cost-reflective tariff and not bringing in new investors.

Contemplating bringing in new set of investors now is a wrong-headed approach. In any case, no investor will be willing to commit funds to a business where it cannot charge a cost-reflective price. The problem is not with the DISCOs’ investors per se, even no one is saying that they are saints. The problem, however, is with government and its refusal to live up to its billings. Government should start afresh, inject funds, allow cost-reflective tariff and play by the rules. Consequently, investors will be competing to have a foothold in the sector within the first year. “It is the only way to go,” said an investment analyst.




Please enter your comment!
Please enter your name here