On the 1st of March, 2017, it was announced that the Minister of Power, Works and Housing, Babatunde Fashola briefed State House correspondents about the Federal Government’s approval of the sum of N701 billion as what is termed as ‘Power Assurance Guarantee’ (PAG) for the Nigerian Bulk Electricity Trader (NBET) to guarantee payment for the evacuation of electricity produced by the Generation Companies (Gencos) to the national grid who will in turn be able to pay gas suppliers.
It is expected that the fund will be drawn on a monthly basis to tackle the liquidity challenges faced by Gencos. NBET will be required to pay Gencos in arrears of electricity generated as a deliberate step to improve their confidence and that of intending investors in the sector. It is unclear at this stage the mechanics of the intervention fund in terms of whether it is a subsidy or a loan. In the event that it is a loan, the pricing mechanism in the sector value chain has to be right to reflect costs across the entire value chain.
It is also unclear as to whether the PAG will be used to clear historical debts to gas suppliers and Gencos.
The fund though commendable in making attempts to address the ongoing liquidity crisis plaguing the sector only addresses one aspect of the liquidity challenges which has the potential to exacerbate rather than alleviate the shortfalls in the sector. The Government needs to adopt a holistic approach to complete the cycle in the entire value chain.
- Transmission: The issue that stems on the transmission end of the value chain is with regard to the wheeling capacity of the transmission network to consistently wheel the increased energy generated stemming from increased investments on the part of the generators. The observed wheeling capacity of the transmission network has been around 5,000MW for some time due to several factors such as aging network, obsolete substation equipment, overloading of certain transmission corridors, community and right of way issues, etc.
The transmission network is plagued with huge infrastructural challenges which cannot presently be addressed by the constrained 2017 budgetary allocation of N40.2 Billion which is grossly insufficient and at variance with the Multi Year Tariff Order (MYTO) - 2015 Financial Model Capital Expenditure (CAPEX) provision for TCN of N418.504 Billion. This funding constraint will hinder planned and on-going transmission projects and TCN’s operations in general in meeting its network reinforcement targets except private investment is encouraged as the Federal Government cannot bear the burden of TCN’s capital projects alone and must create the enabling environment to attract private sector investment through fiscal incentives, regulatory stability guaranteeing an enabling environment, government support, etc. If this is not encouraged, the increased generation will only result in stranded capacity on the transmission end based on the current limited transmission wheeling capacity hinged on the unstable transmission grid.
With increased generation capacity comes the question of the ability of the Distribution Companies (Discos) to pay for increased energy delivery without tariffs being truly reflective of costs and the sculpted nature of tariffs which requires the Discos to under-recover in the early years and over-recover in later years with little or no means to finance the shortfall gap. Also, because of the above limiting factors and the insufficient CAPEX provision for the Discos in the MYTO, they will be unable to secure adequate funding to undertake the expected investments in their network to cope with increased generation capacity. This could lead to load rejection patterns which could ultimately lead to reoccurring system collapses.
- Distribution: As earlier stated, the PAG addresses only one aspect of the co-mingled/interdependent electricity value chain, i.e. the production side of the power value chain. One of the objectives of the fund is to achieve the resultant effect of increased generation which will in turn boost consumer goodwill in terms of bill payments and increased collections for the Discos whilst justifying a case for increased tariffs.
The fund fails to holistically cater to the liquidity crisis currently plaguing the distribution arm of the value chain which if not addressed would present further challenges because without tariffs being truly reflective of cost, the Discos will be unable to fulfil their market obligations to NBET irrespective of the existence of the fund which seeks to cater to the gap between Discos remittance to NBET and the total invoice amount NBET receives from the Gencos. Except the fund is treated as a subsidy in which case it needs to be regularly replenished till the sector is made whole, tariffs must be cost reflective so that a depletion of the funds is prevented which could in effect widen the current gap it currently seeks to cure.
- Other Key Issues: Several issues have to be addressed beforehand for any Government initiative to achieve its intended objectives such as:
- The cost and pricing inconsistency in the MYTO which is at variance with the PPAs governing the relationship of NBET with the Gencos due to mismatch of cost elements;
- Forex and inflation pass-through costs in Genco invoices by NBET not properly reflected in tariffs based on market realities and therefore cannot be passed through in retail tariffs to customers;
- NBET’s interest charges which are not a pass through cost in retail tariffs to customers;
- The menace of electricity theft which results in increased losses in the system;
- Legal and regulatory inconsistencies, etc.
Conclusively, whilst the initiative of the PAG is a good step, it is pivotal for any intervention from the Government to address the liquidity challenges in the industry holistically based on the integrated nature of the electricity value chain irrespective of ownership and operation.