We have Built a Deep Knowledge of the Power Market Framework

rahila

Rahila Thomas plays a significant role in Nigeria’s power sector as lead driver of EMRC, a global leader in energy regulations and transactions. Since inception; the company previously known as Mercados has provided strategic advice and support to regulators, distributors, investors and operators in the power sector. In this interview Thomas sheds some light on the growth curve that the energy sector is on.

ENERGY Markets & Rates Consultants (EMRC) major in the power sector space, what exactly has been your role since privatization in 2013?
EMRC formerly known as Mercados has worked in Nigeria since 2003. We serve the UK and Ireland from our offices in Edinburgh, and the Nigerian and Sub-Saharan African market from our offices in Abuja. In Nigeria, we have been a major adviser during the restructuring of the power sector to the Bureau of Public Enterprises, NERC and PHCN, and have built a deep understanding and knowledge of the regulatory and power market framework. EMRC has leveraged that knowledge to provide authoritative ongoing advice to a number of the privatized distribution companies DisCos today, the Association of Nigeria Electricity Distributors (ANED), and several power producers and developers.

Contractual commitment

One of the challenging tasks we got involved with right after the handover in November 2013 was our role in establishing the baseline level of losses at the time for six of the eleven DisCos.  The level of losses was very much higher than some anticipated.  Such high losses which are greater than 50% for some DisCos meant that the income of the sector was insufficient and still is. Reducing loss levels to reasonable levels is a contractual commitment for the DisCos under privatization. Unfortunately it cannot be achieved overnight requiring significant capital investments as well as capacity building for employees and sector-wide public relations support.

Another central role we played was in assisting nine out of eleven DisCos in the preparation of their tariff design submissions to NERC to establish their tariffs over ten years, which became effective in February 2016. The tariffs are essentially supposed to provide sufficient income to the sector to ensure adequate investments can be made in generation, transmission, and distribution and supply.

The exercise involved minimizing tariff shock by projecting financial losses in early years that are recovered later in the period when electricity loss levels have been cut to the committed levels in DisCos Performance Agreements with BPE. Unfortunately, a number of factors have worked against this expectation such that the Nigeria Electricity Supply Industry (NESI) is today in a snowballing liquidity crisis.

So what are these factors you reference as leading to the current financial predicament for the industry?

In other words the question is why is there such a cash shortfall in the Power Sector today? The privatization transaction was hinged on the expectation of a lot more generation output which in turn would produce more cash from electricity sales for funding and investment. However, generation output has been held back by constraints in gas availability and transportation capacity, and power transmission capacity. For example generation expected between 2014-2016 was 5000MW-7500MW but on the average has fallen between 2000-3500MW. This was worsened by the acts of vandalism in the Niger Delta region particularly in the months of May through to July when generation fell below NERC’s projections in tariffs by 59%.

The privatization transaction:

The privatization transaction also anticipated that DisCos will undertake a baseline losses study to establish the actual Aggregate Technical, Commercial and Collection (ATC&C) losses within 12 months of takeover. Based on this, electricity tariffs would be adjusted to reflect actual losses and costs to ensure that DisCos could meet their obligations upstream and their Performance Agreements. Adjusting tariffs to reflect actual costs would mean tariffs increasing by over 40%. The regulator disallowed the required hike in tariffs such that tariffs covering all costs in the electricity value chain will only be effective 27 months from February 2016. In view of this, DisCoswill have to finance a monthly shortfall of N11.7 bn in 2016 for business operations.

The tariff regime for the Nigeria electricity market is designed to align costs with reality every six months (in June and December) with adjustments to generation levels, inflation, gas price and forex. Power price and CAPEX in the value chain are indexed to the dollar. So in June NERC was expected to have adjusted forex assumptions in tariffs from N199/$1 to N280-N310/$1, inflation from 8.80% to 16.5%, U.S inflation from 0.20% to 1%, Weighted Average Cost of Capital from 20.74% to 29.33% and generation levels from 5,465MW to 3,632MW.

The resultant average tariff required to cover the shortfall these adjustments would produce will be over N100/kWh making alternative generation (off-grid) very attractive. It is unthinkable that customers will be charged that high so this mismatch in revenues creates shortfalls that someone must pay for to avoid shortage of cash in the system. This illiquid state of NESI is exacerbated by very low cash collection from end customers than expected.

This can be a result of a number of reasons such as low and unstable electricity supply we have experienced in recent times, some customers paying old tariffs, and the frustration from estimated billing and lack of meters. Government agencies are also culpable for failing to pay for electricity consumed and billed. So all these collectively result in a monthly deficit of about N38bn against N62bn/month needed to cover NESI cash waterfall but the income from tariffs is not sufficient. The projected cummulative deficit to end of 2016 if nothing is done is over N800bn, which is net of the funds required for investment plans to be implemented.

What pragmatic solutions would you recommend to address these issues?
Let me start by saying that power sector reform is a painstaking process so these challenges cannot be addressed overnight. The public was promised increased generation and reliability as part of privatization. Unfortunately this has not materialized, costs have gone up, and purchasing powers of the populace has dropped, rightly so there is a lot of frustration among electricity customers. Also important to add is the fact that electricity infrastructure takes significant investment and time to rehabilitate, modernize and build – there are no miracles to avert the time and effort required to update decades of neglect of the power sector.

CBN credit facility
That said everyone has a role to play on the part of the investors, operators, government institutions and customers to take us to the ‘promised land’. There have been attempts at intervention (the CBN credit facility of N213bn) as we all know to ensure that the sector stays afloat but this has not made the sector whole. The underlying issues need to be fully addressed to stop NESI from haemorrhaging as is the case today.

Firstly, industry-wide sector risks such as forex risk, volumetric risk (generation levels), and regulatory (which could be politically induced) need to be properly allocated to the parties that can best bear them. For example, generation dropped by over 50% as a result of the attacks on infrastructure in the Niger Delta; should the cost of the power lost be borne by customers or private sector operators who have no control over such acts? NO. So the liquidity gap of over N800bn must be allocated along these lines to then determine what risks tariffs can bear to customers.

The above leads to the second point, government must support NESI financially. It was in recognition of the high technical and non-technical losses that could lead to high tariffs, which customers may not be able to pay that made government to commit to N100bn spread over two years during the privatization transaction.

Source: Nigeria Today

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