Wonodi: How Nigeria’s Electricity Market Slipped into the Current Mess

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Rumundaka Wonodi was the pioneer head of the Nigerian Bulk Electricity Trading Plc (NBET). He shared with Chineme Okafor how Nigeria’s electricity market began its current trajectory into financial distress, pointing out that certain participants took advantage of the situation to further its troubles. Excerpts

The difficulties with the market financials were pretty obvious before you left office in 2016, are you able to tell how this started?

Before I left in June, we have had issues with liquidity in the market and payments or remittances by distribution companies (Discos) to the market that would allow payments to the generation companies (Gencos). One of the issues then was having a tariff everybody thought was cost reflective and if the Discos would be able to pay in full for services, but we could not ascertain if that was possible.

 One thing we knew then was that the regulator, NBET and Market Operator could apply sanctions because at least the commercial frameworks which we worked on would apply to everybody.

We were able to finish the commercial and security frameworks that would compel people to play by rules in the market, and there was excitement especially from the upstream Gencos and gas suppliers. We were also able to assign the letters of credits (LCs) from the Discos to the Gencos, which meant that the usual reticence of government acting was taken off and most Discos that believed they would perform welcomed this, but the ones that could struggle to meet the terms felt the pressure because it was now time to perform.

Indeed, everybody were beginning to look at an industry that had changed in its form of commitment and level of obligation, but then some ill-informed ruling came out from the court reversing the tariff and stating that the regulator had not done all that it needed to do before the tariff review.

Once that was done, the underpinning legislation and foundation for all the work we did went loose, and the Discos sensing an opportunity to relieve themselves from their obligations also went to court and got an injunction that without cost reflective tariff the NERC cannot enforce compliance and NBET cannot call on their LCs.

That was granted them, and after that everything in the market happened on best endeavour basis and a coupled industry suddenly became loosened and decoupled. From then until now, it became a basic challenge that included the generation levels, and macroeconomics.

  So, the market was beginning to self-solve its problems then with these interventions?

Yes, and if we had the contract and work we did in May 2016 that caused the CBN to begin to disburse its stabilisation funds to operators, and continued along on that line, we would have seen the Discos buckled up and Gencos which have Power Purchase Agreements (PPAs) that guarantee them revenue, would have been working harder to get more capacities.

There would have been firmer commitments and standards that would have allowed everybody to operate. We were also working on a parallel bond to support the revenues of the Discos in the short-term because the tariff was sculptured in a way that there was under-recovery in the early years and then over-recovery. So, the Discos would have required additional capital, but then, we would have seen better performance and there would have been an uptake in revenue mobilisation. But, without the tariff, and firm commitments, the incentives became loosened.

 We see the government now making moves to reset this, what really needs to be done?

There are other things that could help the market, there is a big gap now, first, you need to normalise the exchange rates, and address the tariff. We always say we cannot transfer the tariff and that it is not yet time, but when will it be time to get the consumers to pay for what they consume?

It is time the Discos make sure that the consumers that are subsidised for each distribution network do not constitute more than 10 per cent of the load they get. When these cadre of customers are about 60 to 70 percent in a distribution zone then there is trouble because you can’t have only 30 per cent subsidising that number. It is also time the government found a way to make sure that people pay for services fairly.

 With the country’s unfriendly macroeconomic conditions, can the sector get out of this?

First, we need to identify and dimension the current issues. The very first thing would be to see what the fair tariff or market price would be for now, and then identify what to do with it, whether to transfer to the consumer or not.

The government by the way will not find money from anywhere to subsidise power consumption, and so the fairness of service will mean that the Discos would have to do more to raise the standard of service they render, that way people will find out that power from the grid is extremely competitive and cheap once the Discos can put some reliability premium on their supplies.

 Do you share in the recent narrative that the sector could collapse on these challenges?

 I think that you cannot overemphasise the fact that so much money is being owed to the Gencos. For some, what they are being owed is actually more than what they paid for these companies and when you look at it that way, they face imminent troubles.

The people who bought the Gencos seem to be of deeper pockets that the Discos, and have somehow managed to make investments, recover capacities, being owed and continue to generate but I don’t know how long they can hold out and that is why when you hear the chairman of Transcorp say that, then it is imminent, and so yes, it is possible that if nothing is done, they might go under.

 From your perspective, are the Discos really responsible participants in the market?

The truth of the matter is that when it comes to trust, it is totally broken in the industry and the Discos have not helped themselves in this. From my view, the Discos are monopolies and running them as private business where they feel that they are not required to share information is faulty.

It behoves the Discos to be as transparent as possible and the regulator should demand that from them. Where the Discos have refused to be open, they have attracted condemnation and to a large extent, some of that are self-inflicted, but I cannot say if they are fair or all true. The only thing I advise is that they should be open.

If there are claims that they receive revenues and hold on to some of them, there is only one thing to do – agree to an escrowing or a full transparent mechanism that hold together the industry finance and that way everybody sees your books, but to the extent that they do not want that, they cannot claim it is an unfair allegation.

The Bulk Trader and others do not want to know how much you are making as long as you are paying your bills, but if you are unable to pay and seeking some interventions from the market, then participants need to know what you are doing.

Are these issues enough to result to investment apathy in the market?

Your question would seem as if investments were coming and then stopped. Under this climate, it is difficult to attract new investments except for an investor that is already in and wants to increase his investments.

This is a matter of policy and regulation because the sector has too much opportunities to ignore. Where the tariff is today is so low compared to the alternatives, but you need to put policies around that because it is not the problem. Something needs to be done around macro policies and regulation and let us see how that will play out now that the regulator has been reconstituted.

 

 For the NERC that just got its board reconstituted, what would you expect of it?

I think that this industry has stagnated in the past four years. It is an industry that requires finance. NERC has to keep its eyes on investment in regulations they make. They have to think about what opens the market, what type of regulations should drive this and not close it or make people comfortable.

It is an industry that requires financing and therefore, the instinct of the commissioners should be, does this make market sense? It is not a welfare industry or at the social level where you start thinking about people not paying or being subsidised. And so, regulations that open up the market should be their focus.

  

Is this market due for eligibility customers’ regulation?

I think it is overdue and important. The Gencos are pushing for this as an alternative to selling to the Discos who are reluctant because they think it would mean the Gencos would poach their best of customers but the Discos still reserve a pathway to revenue in this.

Within the market there is Distribution Use of System Agreement (DUOS), and if you want to push power through a local distribution network, you have to pay a wheeling charge and so as a Genco or load aggregator, NERC should approve the DUOS fee that would allow the Discos make some revenue on that.

Gencos should also not expect to take from their current capacity and sell to eligible customers because they would be breaking the sales contract they already signed with NBET which buys their power. The eligible customer regulation will actually drive new capacities in embedded generations.

Another aspect of it is that the Discos would also look for extra capacities and sell to premium customers. This comes hand-in-hand with clusterisation and limits cross-subsidisation.

Source: ThisDay

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