Power supply in Africa’s largest economy may be well on the path of plunging to record lows, as spiralling debt and rising losses hold Electricity Generation Companies (GENCOs) in Africa’s largest economy under water.
Available data indicates that the outstanding payments carried in the books of GENCOs (Egbin, Transcorp, Shiroro, Geregu, Kanji/Jebba and Sapele) sit cumulatively at N145.47, even as they are unable to pass on higher costs of gas and naira devaluation to consumers.
“The combined effect of these would render the GENCOs and their investors incapable of delivering power despite their willingness and readiness to do so,” the GENCOS say. “It is leading to a situation where total seizure of operations is imminent. We now have very limited options: to either shut down operations proactively or be compelled to do so by the current state of affairs in the power sector.”
The rising cases of pipeline vandalism in Nigeria is also taking a toll on the power sector chain, as insecurity around gas producing and transportation assets further diminish the supply of gas to generation plants, thereby crippling the system.
“All the issues surrounding gas infrastructure have resulted in a cumulative stranded capacity of circa 5,000 megawatts (MW) being recorded every day.
The impact of this is better appreciated by the fact that the total power generation capacity as at today should have been close to 8,000MW as opposed to 2,800MW,” the GENCOs say.
According to the Nigeria National Committee of the World Energy Council, planning experts estimate that for the Nigerian economy to grow at a rate of 10 percent, the country’s electricity requirement must reach 30,000 MW by 2020, and 78,000 MW by 2030. The strain on businesses as a result of power shortages in Nigeria was well reflected in the CBN’s Business Expectation Survey (BES) report, which identified insufficient power supply as the major constraining factor to their business activities in the second quarter of 2016.
Analysts say if the power sector continues to be highly risk-laden and cramped by overbearing regulations, it may put a lid to investment inflow and this would be damaging for an economy on the brink of recession.
“Power shortage is also disincentive in itself for businesses who incur so much generating independent power. If supply collapses, the cost of doing business will spiral,” said Tiffany Odugwe, a macro-research analyst at research firm, Cardinal Stone Partners Ltd.
Generating independent power will indeed jerk up the cost of business operations following the price swing in the average cost of diesel, which companies rely on to power generators. Automotive Gasoline Oil (AGO), also known as diesel, jumped 66.6 percent to N200 per litre in the month of July from previous levels of N120, as demand swelled.
The average cost paid for diesel in June leaped 23.6 percent to N183 from N148 in May, according to the Nigerian Bureau of Statistics (NBS).
The banking sector, which saw Non Performing Loan (NPL) ratios of about 6.2 percent at end-March 2016, may also be forced to weather an even tougher storm on account of all of these. Experts are concerned that the prospects of servicing an estimated N300 billion in loans granted to the power sector in 2014 are slimmer following the restriction to charge cost reflective tariffs.
United Bank for Africa Plc’s audited results for 2014 showed that lending to the power sector stood at N83.60 billion, while First City Monument Bank’s full year results revealed that its lending to the power and energy sector in the year was N25 billion.
In the period under review, Fidelity Bank Plc’s lending to the power sector gulped N58 billion while Skye Bank Plc’s loan book showed that it lent N19.35 billion to the power sector. Sterling bank dished out N13.743 billion, while Union Bank Plc and Diamond Bank Plc granted a total of N23 billion and N50.8 billion, respectively.
“The judgement spells doom for banks with high exposure to the power sector as the financial sector grapples with liquidity capital adequacy ratio concerns,” a bank official on condition of anonymity said in response to questions.
The country’s financial services sector was hammered after the Central bank of Nigeria (CBN) dissolved the management team of Skye Bank for failing to meet minimum thresholds in critical prudential and adequacy ratios, and various sources say it the sector may be in worse shape than government is willing to disclose. Other sources tell BusinessDay that banks that hitherto were enthusiastic about investment in the power sector and had secured deals based on the new tariff regime would now shy away from such deals on the tariff hike reversal.
“For instance, the banks that have concluded arrangements to build the Qua Iboe power plant in Akwa Ibom State may no longer proceed with the project as it would no longer be profitable for them to do so,” a source said.
Under the auspices of the Multi-year Tariff Order (MYTO), Nigeria Electricity Regulatory Commission (NERC) had increased electricity rates by a maximum of 45 percent with effect on February 1.
However, it failed to sit well with larger fractions in the country of about 180 million people; and last week a Federal high court in Lagos annulled the tariff, describing it as illegal. “Preventing the Discos from charging a cost reflective tariff is the wrong emphasis,” Etomi said.
“If it is not done, the entire power chain will suffer. Gas producers won’t produce, and as a result, there will be no gas, no generation and no transmission. “The emphasis should be what are the alternatives for generating power when public supply slumps,” said Etomi.
The proposed tariff structure saw residential customer category (R2) in the Federal Capital Territory, Nasarawa, Niger and Kogi states, served by the Abuja Electricity Distribution Company (AEDC) franchise, pay N23.60 per kilowatt/hour from N14 per kilowatt/hour. Also, residential customers in Eko and Ikeja electricity distribution areas got a N10 and N8 increase respectively in their energy charges.
Same applied to residential customers in Kaduna and Benin electricity distribution companies, who experienced an increase of N11.05 and N9.26, respectively, in their energy charges. Justice Mohammed Idris, in his judgement on Wednesday July 13, described the increase as “procedurally ultra vires, irrational, irregular and illegal,” prompting its reverse.