[Communiqué] Nextier Power Distribution Roundtable: Unravelling Liquidity Issues in Nigeria’s Electricity Supply Industry

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PREAMBLE

Nigeria’s electricity supply market is in a liquidity crisis and is currently cash flow insolvent.  The shortfall in the market could be about N1 trillion by December 2016.  These shortfalls affect the entire market and pose the risk of a complete shutdown of the electricity supply market.  On Wednesday, October 5, 2016, Nextier Power convened a roundtable discussion with power sector leaders to achieve a shared understand of the liquidity and market shortfall challenges and agree on pragmatic solutions.

Participants at the roundtable discussion included sector leaders in the Nigeria electricity supply market from various government agencies, electricity distribution companies, electricity generating companies, development agencies, legal firms, energy consultants, and others. The roundtable was held at The Den in Wuse II, Abuja.

OBJECTIVES

The core objective of the discourse was to convene sector and thought leaders to agree on the root causes of the liquidity issue in the electricity market, proffer pragmatic solutions, and agree roles for each of the market participants.

The roundtable discussion is also a precursor to a three-part Nextier Power Dialogue series focused on the distribution value chain.  The Dialogue series will be held on from October to December 2016.  Nextier Power – a leading power consulting firm in Nigeria – organises monthly power sector discourse sessions focused on seeking solutions to challenges in the Nigerian Electricity Market.

OPENING REMARKS

Nextier advocates that the myriad challenges in the electricity market can be resolved when the various parties work together to achieve consensus and cooperation. In his opening remarks, Patrick O. Okigbo III (Principal Partner, Nextier) invited participants to be open and frank without resorting to casting blames. Chatham House Rules were invoked.

Rahila Thomas, Country Director EMRC delivered a background presentation titled, “The Crisis Situation in Nigerian Electricity Supply Industry and the Way Forward”. EMRC (formerly known as Mercados EMI) has been a lead adviser to many of the electricity distribution companies as well other market participants since the sector privatisation.  Click HERE to see photos from the roundtable discussion.

SECTOR PROBLEMS

The roundtable discussion agreed that the Nigeria Electricity Supply Industry is in a liquidity crisis and is cash flow insolvent.  The sector losses about N1.3 billion daily and it is estimated that the sector would have a shortfall of almost N1 trillion by December 2016. This is a result of a number of causes and failures attributable to both the government and the private sector operators of the privatised companies.

  • Generation level is incorporated in the calculation of electricity tariffs. The tariff calculations expected that generation levels would be at 5,000MW to 7,5000MW between 2014 and 2016. The reality is that actual generation levels have been at about 3,500MW.
  • Tariff calculations expected revenue collection level to be above 70 percent (which was the pre-privatisation level); however, actual collection has hovered around 29 percent.
  • Government Ministries, Departments and Agencies (MDAs) have failed to pay for the power consumed. Likewise, Manufacturers Association of Nigeria has refused to pay the revised power tariffs.
  • The tariff recognises that the Distribution Companies (DisCos) will run some losses in the to increase gradually over time until such a point when increased efficiency will drive the tariff down. The DisCos were supposed to have clean balance sheets to enable them borrow the funds to finance the calculated losses in the short run. However, the reality is that most of the DisCos have been operating at a loss for past 2.5 years. Furthermore, government interventions to address the market shortfall (such as Nigeria Electricity Market Stabilization Facility “NEMSF”) are booked as liabilities on their books of the DisCos further limiting their ability to borrow.
  • Electricity tariffs are now unrealistic, as the shortfall has widened as a result of several issues such as shortfall in generation due to pipeline vandalism, aggregate technical, commercial and collection (ATC&C) losses, etc.
  • The wheeling capacity of the transmission grid is constrained at about 5,000MW due to several issues such as mismanagement of assets and funding constraints.
  • The ATC&C losses are much higher than the original tariff accounted for. Many disgruntled customers are not willing to pay the new tariff especially because there has not been any remarkable increase in power supply. The MDAs has also refused to pay their tariffs. In the current market place collections loses are hovering at about 50 percent rather than the 20 percent loss factor used in the tariff calculations.
  • The current dynamics in the foreign exchange market have worsened the situation. The tariff calculations were done at an exchange rate of N160 to a US$1. The resultant difference in cost was passed on to the Distribution Companies who are not able to adjust the tariff to pass the same on to the customers. Furthermore, part of the sector invoices are paid in foreign currency and the financial position of the DisCos worsen with as the exchange rate worsens.
  • The DisCo claim that the calculations for the NEMSF I should have been 30 percent higher than the approved N213 billion. Furthermore, about N90 billion from the facility is yet to be disbursed to the DisCos – although it has been booked against the companies’ balances sheets – further reducing their ability to borrow.
  • There is need to improve the ability of the government agencies to supervise and regulate the sector. Sector players are not being held to account for commitments they made during the purchase of the privatised assets.
  • There are weak legal processes to pursue violators especially those who refuse to pay their bills. The DisCos are not able to collect their money from the military and other MDAs that are currently not paying their bills.
  • There are strong allegations that the DisCos are not remitting a significant portion of their collections. The government has not implemented an effective protocol for ensuring that the DisCos remit due payments from collections.
  • The Nigeria Bulk Electricity Trading (NBET) Plc. could be facing significant financial challenges, as a number of the DisCos have not paid their security deposit. As a result, NBET does not have the tool to draw down when a DisCo has not paid the GenCo.

Suggested Solutions

There are myriad suggestions that need to be considered and sequenced. Participants at the event committed to openness to seek lasting solutions and proposed continued dialogue and interaction to find these practical solutions.  Nextier committed to continue to provide the forum for such interactions.

The following solutions were proposed at the session:

  • Ensure clear and direct communication lines between all party participants in the market – especially the DisCo and GenCos – as no group can succeed at the expenses of the other
  • Facilitate the disbursement of the remaining NEMSF funding to the appropriate distribution companies
  • Enforce market discipline by all participants in order to promote transparency. The DisCos should open their books so the regulator and supervisors can see how much is being collected and how much is being disbursed
  • Ensure the various MDAs pay their outstanding bills and facilitate the installation of prepaid meters in all government offices
  • Consider extending the recovery period in the tariff calculations to ease the pressure on the entire electricity power supply market
  • Align FOREX and inflation assumptions to the power purchase agreements that are currently in place in order to reduce FOREX risks
  • Propose private sector bonds to cover future financial shortfalls
  • Create a fund directly focused on managing FOREX risk. This could be a FOREX stabilisation fund to manage currency fluctuations in the market
  • Create an integrated system for proper communication between the DisCo, GenCo, TCN, NERC, NBET, BPE, etc.
  • Create a Tariff Equalization Fund to help adjust to the realities of TCN’s capacity
  • Improve project management for TCN in funding the critical projects that will increase the wheeling capacity of the national grid
  • Introduce more bilateral agreements between the GenCos and off-takers
  • Improve metering assistance for the end user as that is how the market recovers the funds put in for the entire value chain
  • Review meter pricing (in the tariff structure) that is still benchmarked to a foreign currency exchange rate of N160. This is one of the reasons why there is a shortage of meters in the market
  • Educate the consumers on the relationship between paying bills and power availability
  • Emphasize the use of technology by DisCos to collect debt from market participants
  • Enforce stringent penalties for offenders who steal electricity power equipment or destroy electricity infrastructure
  • Implement NEMSF II Fund to assist with the shortfall that is nearing N1 trillion
  • Improve gas supply by focusing on non-associated gas and provide some support for the gas purchase
  • Rework tariff structure to include generation at minimum level that is achievable

CONCLUSION

Participants at the session resolved that Nextier Power would convene a small team to review the issues raised and agree on a sequencing of the solutions.  The team would draw participation from across the sector.

The output of this exercise would be shared with the relevant government institutions charged with policy, regulation, and supervision. Nextier’s overriding goal is to facilitate a solution for the industry and forestall the impending doom.

Please Click HERE to See Photos

 

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