How Nigeria can achieve stable power supply, By Edu Okeke

 How Nigeria can achieve stable power supply, By Edu Okeke

Background

When Nigeria finished the privatisation of the then Power Holding Company of Nigeria Plc (PHCN) in November 2003, there was that Eureka moment all over the country, as the privatisation had been sold as the solution to all the issues bedevilling the electricity sector. Of course, most of us supported the effort, as we had all agreed that government was not the right party to manage such a critical sector. And Nigerians had seen the transformation in the telecommunications sector, occasioned by the introduction of private sector participants that made the inefficiency of the previous Nigeria Telecommunications Ltd (NITEL) a thing of the past. Government also recognised the two main issues that led to the lack of access all over the country: 

  1. The lack of enough generation, transmission, and distribution capacity to ensure that Nigerian consumers enjoyed stable electricity in their homes and offices;
  2. A non-cost reflective tariff structure to ensure that the value chain was operated and maintained efficiently, and investments made for future growth.

On the first point, an entity called the Nigerian Bulk Electricity Trading Company Plc (NBET) was created. Its mission was to be the bridge between the distribution companies and consumers on one side, and the generation and transmission companies on the other. The logic was that for a country of more than 150 million people (as at the time), less than 3,000 MW of electricity was very inadequate. And increasing this capacity required assuring investors that they would be paid for their investments. So NBET was supposed to shield these investors by using a temporary subsidy, to be provided by government, to make them whole, thereby facilitating more investment in the sector, which would increase capacity, with the magic number then being 20,000 MW. The expectation was that at this level of capacity, there would be stable electricity across the country, which would now lead to the solution to the second problem, the cost-reflectivity of the tariff.

On the second issue, Nigerians have always taken electricity as a social product which should not be paid for. It is difficult to pinpoint when, exactly, this attitude emerged; but it stands to reason that as electricity from the grid became increasingly unstable (and so served as a back-up power source to most people, rather than their primary source), people stopped paying for a product they were not receiving. Cognisant of this, the government at the point of privatisation planned to increase the tariff over time. The logic was that people would only start paying when service had improved, and service would only improve if the previous issue of under capacity was solved. One big flaw in this line of reasoning was that in the process of selling the privatisation programme to Nigerians, a picture was painted of the government taking its hands off the sector,  and no longer spending scarce resources to service it. Subsequently, at the end of the exercise, the government had no plan on how to convince Nigerians that money would still be allocated to make the investors in the generation and transmission sectors whole. With money not provided and consumers not getting any service, payments were not made to the distribution companies (DisCos) and rather than playing the role it was set up for, NBET turned into a post office, passing the upstream delinquency of the DisCos to the generating and transmission companies.

It can be seen from the above that even as engineers, we know our capacities and capabilities but one key ingredient we must consider in our plans is: Will people pay for this service when out? This is because money drives all investments and as I previously stated at the beginning, no matter how good or beautiful a product is, if no one pays for it, it becomes a failure. The beautiful privatisation didn’t deliver on the expectations because government reneged on the most important part of the process – keeping investors engaged and interested in the process long enough for consumers to take over the payment of the electricity being generated and sold to homes and offices. Immediately that chain was broken by NBET serving as a post office, transferring the delinquency of the consumers to the investors, they (the investors) took flight. That’s why since the end of the privatisation, only one power plant has been built in the country. And for that to have happened, serious credit securitisation from both the government and the World Bank were secured. But for a government that is in need of money to service its numerous obligations, it is not ready again to give more. Investors, on the other hand, will not come in when they don’t have any means of recovering their investment or making profit because consumers are not paying for the electricity they use. As for the consumers, how can one ask them to pay when grid electricity serves as a back-up energy source to them, while private generators serve as the primary source? All these now led to a conundrum or as the saying goes, a chicken and egg situation. 

This situation has deteriorated still further as the population has been increasing while investments needed to achieve reliable electricity have stagnated. And government on its part is bankrupt that it can’t pay its way out of the situation. Where then lies the solution? Are we going to leave the situation as it is? The answer should be no, as it’s known all over the world that electricity is the primary commodity that catalyses economic growth. By way of comparison, while annual electricity consumption per capita for most Western countries is typically above 4,000 kilowatt hours, for Nigeria, the current figure stands at just 150 kilowatt hours. It, therefore, means that Nigeria can never develop and maintain economic competitiveness until its electricity sector is fixed. This is not a hyperbole; it is a fact.

The question should simply be: How do we fix this broken system? How can Nigeria be like other countries of the world where citizens don’t have to bother about generators and their attendant noise pollution and leverage the public electricity works to solve their challenges? We can see that, as at today, we are at a crossroads. DisCos are not remitting enough to the industry to incentivise investment in the upstream part of the sector.

The Present Situation

I have only spoken about the past to help us understand where we are, not as an avenue to apportion blame. The question should simply be: How do we fix this broken system? How can Nigeria be like other countries of the world where citizens don’t have to bother about generators and their attendant noise pollution and leverage the public electricity works to solve their challenges? We can see that, as at today, we are at a crossroads. DisCos are not remitting enough to the industry to incentivise investment in the upstream part of the sector. Government cannot bridge the gap because it has barely enough money to pay the salaries of its civil servants. Consumers themselves are not ready to pay because the service being received is highly inadequate. Before tackling these challenges, it is useful to debunk the various myths being bandied about by some players in the industry.

  1. Cost-reflective tariffs will quickly solve all the problems.This myth is being bandied about by the DisCos, who know full well that the government doesn’t have the money to make up the shortfall or the political will to pass on the full cost of reliable power for an unreliable service. Besides, what is really the cost-reflective tariff in an industry that is very inefficient and has not attracted investment for year? Even the basic metering for households to determine their electricity consumption is not readily available. Those who retail this myth tend to ignore the fact that, on average, only 4,000 MW is sent to homes and offices every day, in a country of almost 200 million. This low generation, transmission, and distribution of electricity in the country simply means that even were the tariffs to be raised to high heavens, households would not have reliable and stable power for their use. And when it takes an average of five years to develop and build a new power plant, for a shortfall of more than 40,000 MW, it will take at least 20 years to bridge the gap. So, while cost-reflective tariffs are undoubtedly the key to the turnaround of the sector, they cannot turn the industry around overnight. Instead, a strong and unwavering political commitment will need to be exercised over a long period of time before the sector can turn the corner.
  2. Consumers are not ready to pay for electricity.While it is difficult to ascertain who benefits from this myth, the reality on the ground shows that consumers are ready to pay when reliable and stable services are provided. Examples abound of communities that have pooled resources to pay for power at over N100/kWh in different parts of the country. While some have claimed that this willingness to pay for power is prevalent only in well-to-do and prosperous areas (mostly in Lagos and its environs), recent solar projects in rural poor areas of the North have also exposed the fallacy in this myth as we have seen households in those areas paying more than N200/kWh to have reliable power. Key for all consumers is reliability of supply and proper metering to ensure they are billed for their actual consumption.
  3. Power is a social commodity and should be provided by government.This myth stems from the past when utilities were usually owned by government, which subsidised the service as a way to curry favour with its citizens. But the reality is that power is just like every other product – telecommunications, food, transport, etc. While some governments provide these services free of charge, there is no such thing as as a “free lunch”. Rather, the citizens are paying via the taxes they remit to the same government. Moreover, the inefficiency inherent in the model is that low energy users subsidise the high energy users. That is why some people still leave their light bulbs or air conditioners on during the day and when not needed because they are not bearing the full costs of their consumption. And given the chronic mismanagement of Nigeria’s fiscal resources, the reality is that the government today does not have the requisite funds to subsidise electricity for homes and businesses; and no investor will invest on the basis of subsidy or without seeing a path to profitably recovering their investments. This means that for reliable and stable electricity to be the norm in the country, users of power must pay for it, thereby incentivising more investments in the sector.

Unfortunately for Nigeria and its citizens, while the original path designed for the sector was not without its challenges, succumbing to the above myths by policymakers and industry players alike has halted the move towards reliable electricity and scared away the few investors who were hoping to invest their patient capital. That’s why since 2010, only the 460 MW Azura-Edo IPP has been built by the private sector in Nigeria and there is currently no clear path for other investors to follow, for a country that needs to be adding at least 2,000 MW per annum consistently for the next decade or more. And unless these myths are universally debunked and thrown out, we will witness another decade without any meaningful progress in the sector. 

Unlocking the Bottleneck

With all the challenges in the sector, experience has shown that the key bottleneck to any improvement lies at the DisCo end where either the consumers are not ready to pay for the electricity consumed or the DisCos have not invested the necessary resources to serve those consumers and to collect their tariffs. While not blaming the DisCos for this issue (as confusing policies and utterances from policymakers have played a major role in exacerbating the situation), fixing this challenge and getting the market to cover its cost is fundamental to any future progress.

While the recent service reflective tariff is a step in the right direction, it still restricts the ability of DisCos to charge fully for the service they render and does not hold them under strict obligation to render the said service. While policymakers believe that this protects the poor members of the society, the situation on the ground means that everyone ends up suffering from the insufficiency of investment.

Meanwhile, government subsidy cannot continue as the government doesn’t have the funds to cover this. It is also very inefficient and rather than encouraging investment, it scares away investors who believe that it is unsustainable and can be stopped any day. DisCos, on their part, have become comfortable with the status quo, where they are not challenged on their business practices and can rely on the state to offset their inefficiencies. That is why till today, no DisCo has made any meaningful investment to improve its network nor provide meters to its customers to be able to improve its collections. They explain their inaction on the grounds of “lack of funds”. But the normal business practice under such a situation would be for the shareholders to invest more money in the business or, where they don’t have the means, to allow in new investors who have the resources. But when the government was picking up the tab, existing investors were reluctant to recapitalise (and suffer the consequential dilution of their stake); and this reluctance prolonged the sector’s inefficiency.

For NBET, it has continuously played the role of post office, passing the distribution delinquency up the value chain and for such a long time that it is now difficult to reorientate the agency back towards its original raison d’être. The recent extension of its operating licence – by just three years – has further shown to industry players that it is not meant to play a long-term role in the emerging electricity industry. It will therefore be very difficult for any investor to take NBET into consideration while preparing its investment plans, especially as it has failed to perform the key function for which it was set up over 10 years ago.

The Path Forward

Breaking the chicken and egg cycle is always a difficult task, more so in a country where the trust between the citizens and government has been eroded for a long time. There has also been a huge sunk cost by most consumers in the form of generators, inverters and associated equipment installed in homes and offices, which will be a factor in people’s decision-making process. Any request to pay more, while hoping for an improvement of service, will be met with scepticism. Moreover, electricity is difficult to transmit to those who are eager to have it (unlike the mobile phone technology, the success of which is touted across the country), since for power flow, a cable needs to be connected between the generator and homes and offices. Nevertheless, to move forward, we must learn the core lessons from the successful privatisation of the telecommunications industry. That means accepting that we do not have enough generating capacity to give every citizen stable and reliable electricity. It therefore follows – as a matter of simple business logic – that where there is scarcity of a good or service, the only available means of discrimination to give it to the right party is to auction such goods or service to the highest bidder.

Considering the above, it should also be noted that the DisCos have obligations to two distinct stakeholders in the value chain. The first is to their suppliers, which give them electricity to sell. Their main obligation to this cohort is to pay for the cost of those goods given to them, in this case the cost of generating and transmitting electricity to their networks. To be able to do this, they need to collect enough money from their customers to cover the cost of this electricity supplied, as well as operate and maintain their facilities. That means they have to understand their customers and channel their whole resources to those customers who are able and want to pay for the electricity consumed. While the recent service reflective tariff is a step in the right direction, it still restricts the ability of DisCos to charge fully for the service they render and does not hold them under strict obligation to render the said service. While policymakers believe that this protects the poor members of the society, the situation on the ground means that everyone ends up suffering from the insufficiency of investment. This further reinforces the reluctance of those customers who are supposed to be under a higher band to pay for the said service, thereby repeating the same cycle we have been in for so long.

The right approach rather will be for this policy to be expanded further to fully liberalise tariff and allow DisCos to charge their customers what they are willing to pay, as long as those DisCos meet their obligations to their suppliers. DisCos, as rational businesses, will then channel this scarce resource to the right parties and also invest in metering to ensure they capture and charge for the right quantity of electricity to their consumers. While this means that large sections of the country may not have constant and stable electricity in the short term, toeing this path creates an incentive for more investment in the sector, as well as the release of a more entrepreneurial spirit for solutions for the rest of the country, where grid power is not available. While this might seem like “pure capitalism” and the satisfaction of the rich at the expense of the larger society, the reality is that the poorer members of society consume little, if any, grid-power and their energy needs are met by kerosene, firewood and petrol generators. At the other end of the spectrum, the richer members of society invest heavily in expensive diesel generators. Both rich and poor alike are trapped in a prisoner’s dilemma. And the emancipation of all sections of society – from the grinding energy poverty to which previous policies have condemned them – can only come through a sober confrontation with the ineluctable laws of demand and supply.

Conclusion

While the solution proffered above seems simple, I also wish to recognise that it is not very easy for a politician who is looking at how to garner votes from the citizens in a few years’ time. It therefore becomes easy for them to tinker with a model that works, hoping to satisfy all but at the end satisfying none. But I believe that time has come when we engineers will have to add our voice to this call, as energy is unique in that it cannot be stored effectively and can also not be moved around easily. And the more they tinker, the more we fall behind. Finally, even for those who can afford it, it will still be nice for them to note that grid power remains the cleanest, most reliable, and cheapest form of energy for every home all over the world.

Edu Okeke is the managing director of the 461MW Azura-Edo Independent Power Plant.

The text above was a paper delivered at the University of Nigeria, Nsukka, on Friday, March 25

 

 

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