Whither goes the Nigerian electricity sector? That is the biggest uncertainty hanging over the country now. And it reflects the foremost worry for millions of electricity consumers in the country, who are heavy with expectations following the birth of a new power sector last year. They should prepare themselves for a long, hard ride.
Many had thought the most wrenching periods had simply disappeared. But the realities – too powerful to ignore- are beginning to manifest and in overwhelming ways. Power supply remains hugely erratic and seems to be stuck somewhere similar since. Gas supply to the new electricity companies slumped after temporary measures to fix the gas issues, particularly, evacuation and availability produced no dramatic effect. The new owners are coming to terms with enormous wrought they inherited and are realising the intensity of the type of finance they require to make the early desired impact they hoped for. Fears are now growing that the seeming deceleration being experienced now would likely mutate into a crisis for the sector and for the owners of the electricity companies and in particular, for the distribution companies (Discos).
But part of the new hope is that technocrats in government have spotted the grey areas and at the same time acknowledged that the sector is in for such a long ride, slow haul, and are preparing for the consequences. At the same time, the uncertainties are equally throwing up debate about suggesting imaginative ways to give more oomph to boast confidence.
The first major suggestion so far is to persuade the federal government to let go of the remaining 40 percent share it retained during the sale of the companies and that holding on to the shares is a bad idea.
The second one is the need for the electricity companies to find a new strategic approach to managing the risk around revenue by both the lenders and borrowers.
Analysts argue that faulty asset acquisition models employed by electricity companies explains the sector’s current weakness, and that acquiring those assets with more debt than equity was a very bad idea. In fact, most of the new owners have no more money to put into their assets because most of the financing loans sourced were short tenured loans instead of sovereign loans. The political uncertainty in the country today is not helping to source the required loans off-shore either.
The electricity companies themselves have their own class-warfare version of the blame game, in which gas scarcity caused the problem and new tariff regime on consumers will be the solution.
This takes an unnecessary risk with the tariff focus. Nigeria’s experience over the years are powerful evidence that ill-timed increases in charges can tip the weak revenue collection strategy into deeper mess with more consumer migrating towards by-passing the metering system. Less noticed is that the plan could also worsen the medium term budget mess and making more consumers, including those initially willing to pay for power, go under ground.
It would be recalled that shortly after the new investors took over most of the successor electricity generation and distribution companies carved out of the defunct Power Holding Company of Nigeria (PHCN), the state of electricity supply in the country took a turn for the worse, dampening the optimism that greeted their entry.
Now four months after the downturn in electricity supply in many parts of the country, consumers have yet to heave a sigh of relief as the private investors are still struggling to remedy decades of rot in the power sector.
Those four months were originally given to the new operators to assess critical aspects of their operations and identify possible challenges that could affect their profitability, after which the Transitional Electricity Market (TEM), the second phase of the privatisation would be declared on March 1. But the declaration of the TEM has been put on hold pending when all the expected conditions precedent would have been satisfied.
What was expected after privatisation
Lack of access to stable electricity has long been one of Nigeria’s biggest infrastructural bottlenecks, hampering the growth and development of many vital industries in the country. A large number of businesses and households rely more on self-generation through the use of generators, inverters and captive power plants to meet their electricity needs.
When on November 1, 2013, Nigeria’s power sector, which had operated for several decades as a state monopoly, with the federal government having the exclusive rights to own electricity generation, transmission and distribution facilities, saw the entry of private investors, it elicited hopes of better things to come in many quarters.
The government has so far transferred to private investors ownership of five power generation companies (Shiroro Hydro Power, Sapele Power Plant, Kainji Hydro Electric, Ughelli Power and Egbin Power) and 10 Discos (Abuja, Kaduna, Kano, Jos, Yola, Enugu, Benin, Eko, Ikeja, Ibadan and Port Harcourt). Afam Power and Kaduna Disco are expected to be handed over to new investors.
Electricity transmission, which links distribution and generation companies (Gencos), remains government-owned, with the management outsourced to Canada’s Manitoba Hydro International in 2012.
At the dawn of the private sector era, there was widespread expectation that the privatisation would bring about sudden improvement in production, efficiency and customer service.
Chinedu Nebo, minister of power had recently noted the new investors could not correct the anomaly that has existed for decades overnight. “It is not wrong for people to have expectations. But sometimes those expectations could be too high, too ambitious or not quite realistic. It is not possible for the private sector to correct these things overnight.”
What the new buyers are seeing on ground
When the buyers took over the assets, they quickly launched into the arduous task of carrying out comprehensive evaluation of the acquired assets to ascertain the level of upgrade and investment that would be required, going forward, to improve power supply in the country.
Apparently, the new investors are faced with more than what they bargained for, and have seen the massive investment required for maintenance, repair and overall of the infrastructure to achieve significant improvement in power supply.
“You cannot improve on something you don’t understand. The entire process, the entire chain, the entire service that is being provided currently will be evaluated by us because we have never had the privilege of a shadow management. So we did not have the access into the building to evaluate the assets,” Kola Adesina, chairman of the core investor group, New Electricity Distribution Company/KEPCO, buyer of Ikeja Electricity Distribution Company (Ikeja Disco) said on November 1, 2013 when the company was handed over to them.
The power sector before now was fraught with lack of maintenance and investment from government, with power facilities that have been in use for over 40 years without major overhaul done on them. Both the Gencos and the Discos have dilapidated equipment that need to be completely overhauled.
Also, the issue of by-passing and electricity theft by consumers is a major challenge. “A lot of the customers are not connected to the grid and are just consuming power without paying. That will change as we make more investment,” Samaila Zubairu, transaction advisor to West Power & Gas Limited, buyer of Eko Disco, told BDSUNDAY on the sidelines of the ALP Seminar Series last Wednesday.
Mike Uzoigwe, managing director and chief executive officer, Egbin Power Plc, the biggest single power plant in the country, at a lecture in November 27, said, “There is a huge generation gap that needs to be closed to ensure steady power supply in the country.”
Also, the transmission network and gas supply to power plants remain major setbacks to the new investors. “There were issues on hand when the private sector took over the generation and the distribution companies. One of such is the problem of getting enough gas supply. If you don’t generate enough gas supply, you cannot generate enough electricity,” said Nebo.
The Discos, who are the closest to the customers on the electricity value chain, have a lot to do to reduce the revenue losses resulting from technical challenges, inadequate equipment and poor collections – a combination of losses referred to as Aggregate Technical Commercial and Collection (AGC&C) losses.
“We are not overwhelmed by the challenges. We came in here knowing that there would be issues, but we also came in with the capacity to solve those issues. And we came in with the knowledge that all the stakeholders – the investors, the regulators, the financial institutions and all other relevant stakeholders – will have to come together to make the industry work,” said Zubairu.
What analysts are saying after privatisation
FBN Capital in its 2014 Outlook Report on January 20, 2014, noted that electricity generation in the month stood below 3,500 megawatts (MW), compared with 4,520 MW in December 2012. “The new owners have quickly become acquainted with the old challenges. The transmission remains state-owned and underfunded although managed by Canada’s Manitoba Hydro. The supply of gas to power plants is inadequate due to the age of much of the network as well as sabotage.”
As a larger portion of the electricity consumption market is yet to be connected with the new prepaid meters, collection efficiency is likely to remain low and periodically undermined by power theft. This could result in slower payments by the distribution companies to the bulk trader, Ecobank said in its note on November 29.
“Capacity expansion will be gradual and will remain subject to considerable risks and delays. While significant demand for electricity undoubtedly exists, disputes over tariffs, gas shortages and concerns about the country’s business environment could all weigh on investment,” said Business Monitor International in its Nigeria Power Report Q1 2014.
Investors see light ahead.
Executives of the Discos and Gencos agree that in general they face very big challenges from all sides that require different approach depending on whether it is on the distribution side or from the generation side. The challenges are both technical and commercial. The first involves finding the best ways to distribute electricity received and retain loss reduction level at the expected 2-5 percent band. The second is about making the required investments in prepaid meter to reduce lose. Financing this investment is a big constraint now because the companies can’t bring in new owners until after five years.
Against this backdrop, it will be important to find the right blend of policies and incentives to stay on course, says a close source to BDSUNDAY who is also a financial adviser to one of the distribution companies. “The strategy depends on your business plan,” he adds.
For Sam Amadi, chairman, Nigeria Electricity Regulatory Commission (NERC), the option for financially weak distribution companies is to look for the money. If a Disco cannot borrow to finance improvement, it will be required to divest some shares to new financiers who will help fund the expected improvement.
This to some analysts sends out some strong signals that the companies are still open to new arrivals, especially of richer kinds despite the 5-year wait period.
BDSUNDAY investigation shows that the companies are equally looking at a broader set of policies to help work off the hangover faster. One priority is to encourage hawkers who are already pitching for short-term supplementation measures through “bridge power”. Some of them are already in talks and they are looking at their financials already.
“We see the light,” says Clement Ofuani, a former presidential adviser on policy. “It will also require the understanding of the public that the government has taken the best step in letting go the Power Holding Company of Nigeria (PHCN).”
Gas economy
Recent investment activities in gas infrastructure by the federal government mean the electricity companies now see their paths towards fulfilling consumers expectations cleared. It has also sent out strong political signals that it remains open to committing to the success of the sector.
David Ige, group executive director, gas and power of the NNPC is even more optimistic about Nigeria’s gas future than before after he saw real work begin at the massive Ogidingbe Gas Industrial Park in Delta state.
The Ogidingbe project is a massive $16 billion infrastructure that Ige says has thrown up huge investment opportunities in the gas sector. “Opportunities for investments exist in the areas of financial services, gas transmission pipelines, pipe milling and fabrication yards, upstream gas development, LNG and LPG plants and gas processing facility/gas based manufacturing industries,’’ he said shortly after the plan was unveiled early last year.
Gas supply to power plants has been a challenge largely due to the low pricing of gas in the power sector, compared to other buyers such as the petrochemical and fertilizer industries, coupled with the low investment in gas development in the country.
The increase in domestic gas demand, driven by the power sector, has highlighted the need for more investment to increase gas production and supply to the domestic market.
Gas suppliers such as Seplat Petroleum Development Company are now more willing to increase their investment in gas production to meet the growing demand.
Analysts have said that the move towards real cost-reflective gas tariff that ensures investment cost recovery and reasonable return on investment must now be put on the fast track to give more confidence for private sector investment.
The quest for stable power supply in the country, say analysts, is a long-term sustainable plan that will gradually materialise as investment continue to flow towards the maintenance, repair and overhaul of the dilapidated power infrastructure in the country.
