Let There Be Darkness — Analyzing Nigeria’s Power Challenges
Last week I got home to discover that generators in our compound was on while there was no sound of generators from the other compounds in the neighborhood yet their bulbs were on. Apparently, employees of one of the contractors working with the Ikeja DisCo decided one of the households was bypassing the metering system and in his wisdom decided to shut off everyone in the compound from the national grid. Upon investigation it was found out that none of the households was guilty and it was simply a case of an overzealous worker looking to generate more revenue for his employer.
Good news for us, power was restored. And while my neighbors were agitated at the unfair treatment, I somewhat sympathized with the electricity (distribution) company.
Why, you ask? Because I sympathize with them on the challenges being faced by everyone in the industry.
A lot of Nigerians know that there used to be an entity called NEPA (the National Electric Power Authority). Established in 1972, this fully-government owned corporation was solely in charge of providing power supply to Nigerians. It was solely in charge of generating the electricity, transmitting it, distributing it, regulating it, as well as investing in it. Of course, like all things operated by the Nigerian government, it failed to serve its purpose. It was such a failure that Nigerians renamed NEPA PLC as Never Expect Power Always, Please Light Candle. Tony Allen even released a memorable song about it in 1984. Nigerians could relate.
In 2005, President Obasanjo seeing the power of the market coupled with the liability NEPA has become replaced it with the Power Holding Company of Nigeria (PHCN) through the Electric Power Sector Reform (EPSR) Act. What followed was the unbundling of the different parts of NEPA namely Generation (GenCos), Transmission (TCN) and Distribution (DisCos).
To digress a bit, here is what needs to happen before your bulbs lighten up when you turn on your wall switch: Natural gas used to turn the turbine must reach the generating station via pipelines. Once generated, power is transported through the transmission lines to the transmission point. It is from there that it is distributed to the distribution stations who then deliver them to your house. (Natural gas generates about 70% of our electricity, while the rest is produced via hydro.)
In the unique wisdom of the Nigeria government, (and unlike the privatization done for the Telecommunications industry), the government decided that it will sell generation of power to six companies (GenCos) and distribution of power to 11 companies (DisCos), but will solely be in charge of the transmission (TCN). In addition, it decided that it will still own 40% of the GenCos and DisCos. These sales were effected by President Goodluck Jonathan in 2011. 14 more GenCos would be added but the initial ones would remain the top six.
This ruse is what Nigerians call the privatization of the power industry.
1. Gas Supply: By some amazing logic, the pipelines which were supposed to supply gas to some power plants were not built. So you have several generators owned by the GenCos wasting away because the government didn’t provide infrastructure to power them. So while Nigeria has the installed capacity to generate 10,396MW of electricity according to the Nigerian Integrated Power Project, average generation hovers around 3,000 MW.
2. Transmission: As you may have guessed, the government retains the most important leg of this power tripod via the Transmission Company of Nigeria (TCN). No matter what the GenCos produce, if they are unable to get what is generated to the DisCos, nothing else matters. And as usual, the government continues to ‘show itself’. Due to the inefficiency occasioned by the weak transmission links between itself and the GenCos, TCN loses more than 7% of all power that is transmitted to it. Despite the injection of up to $1.6billion grant from international donors like World Bank, AfDB), JICA, and EU, the company continues to be bedeviled by the inefficiencies government institutions have been known for.
3. Distribution: Because GenCos are running a business, economy of scale is important for them. The more power they get to distribute to Nigerian households, the more revenues accrues to them. As you may have guessed, the two other processes through which electricity gets into your homes are not in the hands of the DisCos. In fact, the DisCos are at the mercy of the first two processes. Indeed, in 2018, while a total of 88,566.43MW was generated throughout the year, only 46.405.56MW got distributed to the consumers across the country due to the poor distribution infrastructure. That’s barely 50%. The federal government maintains the national grid, which is a key infrastructure in distribution, and despite huge funds poured into the industry, the grid is always collapsing. On 9th November 2019, the national grid collapsed for the 11th time this year throwing the nation into darkness. With an available capacity of about 8,000MW, Nigeria’s transmission system can only transmit (transport) about 5,000MW, while the distribution capacity of 3,700MW habitually collapses the grid.
4. Metering System: The government through the Nigeria Bulk Electricity Trading (NBET) buys electricity in bulk from GenCos and sells to the DisCos, which then supply it to the consumers. Instead of allowing the DisCos to charge a fair rate to the consumers, the government through the Nigerian Electricity Regulatory Commission dictates to the DisCos how much they should pay for the electricity generated. In addition to that it’s been found out that 47% of all installed prepaid meters are by-passed by consumers. So huge revenue is lost by consumers who illegally use electricity without paying for them. The government has also created confusion in the introduction of the MAPs system of getting the meter devices with the DisCos insisting they do not have the obligation of getting them to the electricity consumers. Little wonder, the estimated billing for the consumers without the devices have become really crazy.
The consequences of all these problems is that expecting regular power supply under these conditions is a mirage. The House of Rep is clowning around passing bills to criminalize estimated billing of electricity consumers by DisCos without addressing the issues of profitability of the GenCos and DisCos.
Gas suppliers to the GenCos have said they are being owed N1.3trillion for the supply of the fuel to power stations. The GenCos in turn say the government bought electricity from them and have refused to pay to the tune of N361bn. It also says it is costly on its part to have available for instance 500MW and for TCN to nominate to only take 100MW on a given day due to its lack of capacity. In that case, the GenCos will only be paid for the energy and capacity equivalent of 100MW the government buys. The GenCos is then left to bear the capacity cost of making available the remaining 400MW. It is a flawed and lopsided regulation that penalizes/punishes a generator for investing to increase its available capacity.
Every month, the ministries, departments and agencies (MDAs) of states and federal governments together owe the DisCos N5bn. With the way the DisCos are set up, it will be difficult for them to make profit. Since 2013, all the DisCos have steadily reported losses. Not just that, the losses being incurred continue to soar. If we remember that the DisCos (and the GenCos) borrowed in USD (when $ = 199) upon purchase of the power assets circa 2013 and devaluation has made their debt increase by at least 80% ($ = 360 now), then we understand how the business environment continues to be risky to them.
Have you noticed the only party that is not really complaining about the system? Yes, the transmission company. They have access to public and donor funds. What is their track record in judiciously using the funds? You know!
Right now, due to these challenges in the Power industry, investment in the generation and distribution is not attractive. All things being equal, Nigeria should be a vast market that would be the darling of investors.
80 million Nigerians (twice the population of Canada) lack access to electricity, according to the World Bank. Out of those with access, more than 90% of them do not have access to safe, efficient electricity. According to USAID, access in the rural areas is really poor, only 36% and a bulk of the 20 million households without electricity are centered in remote villages.
How do we combat thus? First of all, we need to acknowledge that what we have is not privatization. We don’t need to continue living and parroting this lie. If you want to know what privatization is, look at the Telecommunications industry. If I want, I can today switch from MTN to GLO. Next week, if I want I can switch to Airtel. Privatization provides options to consumers. Follow this link, https://www.uswitch.com/gas-electricity/, and you will be led to a price comparison service that helps UK citizens compare energy prices and switch their electricity suppliers. That is what privatization looks like. Options!
To be honest to ourselves, most of those who bought the GenCos and DisCos have no busy owning them. The structure of ownership is also misguided and reeks of self-interest.
Be that as it may, we have to make do with the hand that has been dealt us, and accept that if any progress is to be made under this system, we would need to accept that paying a competitive electricity rate is non-negotiable. Nigeria has one of the lowest electricity tariffs in Africa. It is a misnomer to have the government subsidize epileptic electricity for Nigerians to the tune of N1.3 trillion in just 18 months. It is a tragedy. Nigeria has spent more money subsidizing inefficient electricity than it spent on education, housing, water, agriculture and health combined. It is a travesty.
This subsidy is a cause for concern especially when you realize that Nigerian businesses spend N5 trillion yearly on power generation in generators, maintenance and fueling. A Bloomberg report shows that Nigerian households spend more than N4 trillion on self-generated power in their homes annually.Even President Muhammadu Buhari budgeted to spend 46 million naira fueling generators in his office this year. In the country’s 2019 budget, there are 1,358 generator-related expenses.
Right now, it is many times more expensive to run a generator than to use the electricity from the national grid. This doesn’t add up. If the DisCos and GenCos don’t break even, they would be unable to invest in infrastructure. If they are unable to invest in infrastructure, they will be unable to extend electricity services to underserved communities in our numerous villages, towns and settlements.
The tariffs may seem high at first (wasn’t tariff in the early days of Telecommunications high?), but with time it will become cheaper due to economy of scale and infrastructural improvement, just like it happened and continues to happen to the Telecoms industry. Truth is, the proposed tariff by the DisCos being stifled by the government is in fact competitive with what Nigerians spend on generators.
The eventual reduction in electricity price may even be faster if competition is allowed through the Independent Power Plants (IPP).
The government will also be able to use the funds being spent on subsidies to tackle infrastructural challenges in the industry Hopefully. To be frank, the government needs to sell off the transmission system too. You already know I’m not a fan of the government running businesses. They never do a good job at it.
The allowance of a competitive tariff will also provide incentives for alternative energy. Investors in independent solar and wind mini-grids will be able to offer a more feasible alternatives.
There is power in competition and our fear of competitive tariff which will lead to price wars is a major hindrance to getting steady accessible and affordable power supply in the long run.
Access to stable electricity is a big deal. The importance of energy cannot be overstated. The Industrial Revolution, which caused living standards in Europe and the US to dwarf other countries, was made possible by a steep increase in energy consumption. China’s miraculous growth was made possible because it increased its energy consumption by more than 200% in the first few years of ‘Opening Up’ and rapidly doubling them in subsequent years. But according to the World Bank, the poor access and unreliability power supply cost African economies an average of 2.1% of their GDP annually. This can’t be sniffed at.
The choice is ours, whether to take this leap of faith or continue to have the government subsidize unsustainably.