In 2001, the Federal Government of Nigeria launched a far-reaching set of power sector reforms which ultimately led to the unbundling and privatisation of electricity generation and distribution companies in 2013.
The initial design of the reforms envisaged four stages of development, ultimately resulting in “a competitive, efficient, private sector-led power sector regulated by Nigerian Electricity Regulatory Commission (‘NERC’), with the Ministry of Power providing general policy oversight.”1
The plan was to be implemented in four stages, namely:
• The interim period, which started in November 2013 and was characterised by the allocation of sector cash deficits across all market participants before expected tariff reviews;
• The transitional electricity market (TEM), characterised by Nigerian Bulk Electricity Trading’s (NBET) active trading of bulk power – as a buyer from gencos and IPPs and reseller to discos;
• The medium-term electricity market, characterised by all contracts being between gencos and discos (NBET ceases to exist at this stage and its contracts/PPAs with generation are novated to discos); and
• The final market, with bilateral contracts between electricity buyers and sellers at all levels, and, a central balancing mechanism through the creation of a spot electricity market.2
However, in January 2015, when TEM was effectively declared, not all the predetermined pre-requisites had been met. This meant that the reforms were still at TEM stage, while commercial operations had not yet been fully implemented.
Nigeria has 13,400MW of installed power generation capacity of which 8,000MW is mechanically available. However, less than 4,000 MW has been dispatched on average over the last 2 years due to constraints in gas supply, electricity transmission and distribution. The lack of constant electricity supply has affected consumers’ willingness to pay and contributed to an inherent shortfall in the tariff and the accrued sector cash deficit.
The sector thus faces multiple challenges relating to infrastructure, liquidity, and governance that require specific and urgent attention. The Federal Government recently launched the Nigerian Power Sector Recovery Program: 2017 – 2021, which lays out plans to improve the financial capacity of NBET and improve the viability of the distribution companies in the country.
Non-cost reflective tariffs
Part of the drive for privatisation was an understanding that tariffs would reflect the ‘end-user tariff trajectory’ and that agreement would be made regarding tariff adjustments over the course of the period. However, the end user tariff has only been cost reflective for short periods since the multi-year tariff order (MYTO) was reviewed in June 2012.
This has resulted in a huge sector cash deficit and has effectively eliminated any incentives the private sector owners of the discos may have had to invest in improving efficiency.
Shortfall of cash
The lack of cost reflective tariffs has led to significant cash deficits across the sector. According to the Nigerian power sector recovery programme: 2017 – 2021 documentation, “between February 2015 and December 2016, the market shortfall (amount owed by discos to the rest of the market) is estimated at NGN 473 billion ($1.5 billion), while the tariff shortfall (amount owed by consumers in aggregate to the power sector) is estimated at NGN 458 billion ($1.4 billion).”
Pace of loss reduction very slow
In order for the reformed power sector to remain efficient, long-term viability of the discos is vital. However, current figures from the Nigerian Electric Regulatory Commission (NERC) would indicate that between 2014 and 2016, performance may well have dropped. This has been mainly attributed to the lack of cost reflective tariffs.
Debt recovery from government
Well over $200 million is owed by ministries, various federal government departments and agencies across the sector. Combined with a lack of effective governance and enforcement of rules and policies, the challenges have been reinforced. Part of the remedial actions proposed by the federal government included the inauguration of new NERC commissioners in February 2017.
Proposed action plan:
The Nigeria’s power sector recovery programme: 2017 – 2021 sets out a number of remedial actions which must be undertaken in order to “to restore the financial viability of Nigeria’s power sector, improve transparency and service delivery, and reset the Nigerian Electricity Supply Industry for future growth.” The plan will be carried out over a five-year period and includes the following interventions:
In order to fund historical and future sector deficits, the federal government will “commit to fund implied future sector deficits from 2017 to 2021 and execute a plan to fund the required electricity market support until tariffs attain cost recovery levels. The Medium-Term Expenditure Framework (MTEF) and the annual federal government budgets will include provision for this funding.”
Additionally, sector revenue deficit must be addressed and all ministry, departmental and agency debts must be paid. Future payments for these will be automated.
Cost reflective tariffs will need to be restored over the next five years, and the methodology for tariff setting reviewed. Part of the tariff adjustment will see increases for non-residential consumers being implemented from July 2017.
A facility of $2.3 billion has been provided to assist NBET meet its payment obligations, thereby easing liquidity challenges.
Finally, the World Bank has expressed its willingness to help the federal government with the recovery programme and support may total as much as $2.5 billion coupled with support from the IFC and MIGA which may unlock a further $2.7 billion in private investment.
A minimum of 4,000 MWh/h must be guaranteed and distributed daily from 2017 to ensure stability of the grid. This, in turn, will help drive improved disco performance. Coupled with aggressive plans to tackle technical and non-technical losses, through the implementation of a metering programme, the discos should be in a position to undergo financial restructuring and recapitalisation.
Restoring and improving sector governance will include ensuring the properly qualified boards are appointed to government agencies and that qualified government representatives are included on the boards of the various discos.
Improved sector transparency, data driven decision making and effective contract implementation are key and must be accompanied by a clear communication strategy around the power sector reform programme, in order to ensure the public, judiciary, industry and legislators are sufficiently informed.
An additional monitoring team will be set up to ensure the proper coordination and monitoring of the power sector reform programme.
An FX policy needs to be developed and implemented, which includes an FX rate for the power sector and access to foreign exchange for the gencos and discos. It is estimated that 70% of the cost of electricity in Nigeria is linked to FX. Due to the depreciation of the Naira against the US dollar, current tariffs are insufficient to meet the cost of production and delivery of power to consumers.
In addition, in order to continue attracting private sector investments, clarity must be provided on the terms and conditions of government support across the sector. This must include a timetable for the transition to competitive generation and cost reflective tariffs for the discos.
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