The federal government of Nigeria (the “FGN”) has shifted its electricity power policy, in a bid to ensure its viability, profitability and overall recovery. This came on the back of a series of financially turbulent years for the sector, which have been as a result of a number of factors. Amongst these factors is the illiquidity in the sector, arising partly as a result of low tariffs under the current MYTO 2.1 tariff mechanism, as well as insufficient collection by electricity distribution companies.
Furthermore, the economic recession which the country entered into in the second quarter (Q2) of 2016 has led to negative economic growth in several quarters, which decidedly led to a full year’s negative growth of -1.51% in 2016. The economic recession has once again exposed Nigeria’s over-dependence on oil as its sole trade commodity, and revealed a worrying lacuna in the economics of the nation that needs to be rectified immediately. Coupled with this over-reliance on oil, the power sector, which was as at 2013 an investor’s dream has become a pariah of some sort with investors very reluctant to make any substantial investment in the sector.
As a result of the foregoing, a recovery plan was developed by the FGN which focused on the improvement of other sectors of the Nigerian economy, with the aim of gradually leading the country away from the over-reliance on oil in the global marketplace. However, for the power sector, the introduction of a number of sweeteners, including a put call option arrangement which provided some form of security for operators, did not significantly improve the state of play for market participants, with many continuing to face operational and liquidity problems.
The Electric Power Sector Recovery Program, a suite of policy actions, operational and financial interventions, was developed by the FGN to provide support to the power sector. Key deliverables of the recovery program include, but are not limited to:
- the elimination of the accumulated deficit from 2015 and 2016;
- the reduction of the future shortfalls from 2017 till 2021;
- the development of policies to minimize the industry subsidy going forward;
- the restoration of the financial viability of the electric power sector;
- identification of viable sources of funding
- addressing infrastructural gaps
- the establishment of data driven decision making processes across the sector
- the development of communications strategy for stakeholders
- encouraging robust energy mix (and access to electricity) via the promotion of off-grid power solutions
- addressing gaps in infrastructure across the sector
- ensure that all tariffs are cost-reflective by 2021
- implementing a forex policy for the electric power sector and
- making contracts effective and develop a business continuity policy in the sector.
The FGN seeks to implement this recovery plan through the conduct of financial analysis of the power sector, regulatory strengthening together with public communication and the financing of the recovery program.
Challenges and Prospects
Funding of the program, and the sector as a whole, is the key challenge that cuts across all intended objective. For example, having considered a number of options, the FGN seeks to have increased the tariff of all customer classes (except R1, R2 and C1)1 by fifty per cent (50%). It further plans to increase the tariffs of certain R2 customers (who do not require government support, after a disaggregation of the R2 customer class) by January 2018. The tariffs of the remaining R2 customers, R1 and C1 will then be increased by July 2018.
Despite the planned increases in tariffs, it is expected that the shortfall in the electricity market will still be around USD 5.9 billion (about NGN2.3 trillion), and it is likely that the sector will require FGN intervention to cover the shortfall. However, it is unlikely that the FGN will disburse these funds, and if it does it is likely their disbursement will be delayed due to the fiscal appropriation processes. As such, it is likely that much of the liquidity gap will remain in the short and medium term despite the recovery program.
Although, the repeated inability of the Nigerian Bulk Electricity Trading Company (NBET) to pay its invoiced amounts to the electricity generating companies is expected to abate although this would not be without logistical challenges and the reduction may not be too substantial, immediately. Nonetheless, it is expected that by the disbursement of the proposed USD 701 Billion Payment Assurance Program, the Central Bank of Nigeria will provide funds to the NBET for payment assurance to the upstream sector. This means NBET should be well-placed to provide guarantees for the invoiced amounts and in turn have upstream contracts (the power purchase agreements) already executed, activated.
This is turn could help stabilise the market, by reducing market shortfall as the generation companies are sure of their payments, which therefore assures steady supply of electricity. On the other hand, the recovery plan requires reconciliation of historic indebtedness of the electricity distribution companies, the FGN’s debt to the electricity distribution companies and the ministries, departments and agencies debts to the electricity distribution companies. If historical indebtedness and or shortfall in the market stands at over NGN1 trillion as consistently reported, it is unclear if the FGN has proposed sufficient investment to eliminate indebtedness in the market, especially since reduced shortfalls will remain with despite the government (where it does) providing subsidy.
Assuming all of these do add up (but writer is quite unsure, how), in the long term, it will be pertinent to develop clear and continuous monitoring of electricity generation companies, electricity distribution companies and service providers to ensure transparency of operations and prevent accumulated debt into the future and the development of a business continuity policy/regulation, is therefore in order. The enforcement of regulations, penalties, quality standards, metering rules will also aid in fostering a more strengthened sector. The foregoing, together with practical steps to reducing electricity theft, will aid the overall improvement of the electric power sector.
Opportunity in Off-Grid Electricity
As a subsidy-reducing mechanism, the program proposes the intervention of off-grid solutions to meet the demand for power in the Nigerian economy, and such, interventions are crucial to the advancement of the sector. Independent power plants for schools and hospitals, mini-grids, and stand-alone home solutions such as solar home systems, may be utilised. These solutions represent the basis upon which the power sector may be revived and therein, lie the opportunity for the discerning and patient businesses to make long-term investments. This is the best time to seriously consider investing in the sector, as several waivers and concessions may be obtained, and the current uncertainty may mean that some assets may be obtained cheaper than their real value.
To adequately address issues such as gas pipeline vandalism, there is need for communication between the FGN and the stakeholders within these oil producing communities. In the immediate future, the governments engagement with these host communities will help to allay fears and restore confidence in these regions. This will have a knock on effect of guaranteeing the supply of feedstock to operators.
Tied to this is the need to ensure that market operators do not continue to suffer losses tied to counterparties’ inability to uphold contractual agreements. In line with this, the recovery plan suggests operators’ need to be held to contractual minimum standards and performance agreements, and penalties for breach of such standards will be enforced.
A cost-reflective tariff for the power sector needs to be introduced, and it must accurately reflect the cost of production and distribution of power to end users. However, it must be noted that increasing tariffs beyond MYTO limits will affect the affordability of electricity to customers and end users. If the tariffs are set too high, the cycle of unrecovered debt may continue and hampers economic growth.
The timelines set by the Government in the recovery plan may be to incentivize consistent progress towards the stated goals, but on the other hand seem to be a set of unrealistic time-bound goals that all parties are running towards. This may prove ineffective and unsustainable in the end.
Nonetheless, on the whole, the recovery plan is a step in the right direction for the electric power sector. The interventions set out in the plan (if well implemented) will aid the stability and sustainability of this sector.