[Communique] February 2017 Nextier Power Dialogue on Electricity Tariffs

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  1. Tariff payments are the lifeline of the electricity supply industry without which the various parties in the sector cannot meet their financial obligations. All parties in the sector agree that Nigeria’s electricity tariffs are not cost-reflective. Furthermore, delays in the full implementation of the tariff have impacted consumer payments which in turn have exacerbated the current liquidity challenges in the sector.
  2. On Wednesday, February 15, 2017, Nextier Power organised its monthly Nextier Power Dialogue to deliberate on the feasibility of increasing the current electricity tariff. The dialogue was held at the Thought Pyramid Art Centre in Wuse 2, Abuja.
  3. The guest speakers included Mr AbdulKadir Shettima (Head of Finance and Management Services Department, Nigerian Electricity Regulatory Commission), Kola Adesina (Chairman, Egbin Power PLC & Board Director, Ikeja Electric and Dr. Ogho Okiti (President and Chief Executive Officer, Time Economics). Patrick O. Okigbo III (Principal Partner, Nextier Advisory) moderated the discourse.

OBJECTIVES

  1. The core objective of the dialogue was to convene sector leaders and knowledgeable stakeholders in the sector to seek an understanding behind the current electricity tariff as well as to examine and discuss the potential impact of an increased electricity tariff on the broader economy.

OPENING REMARKS

Abdulkadir Shettima “We will not get it right if we flout, or ignore the rules”

  1. Mr Shetima disclaimed that any statements made by him during the event was his personal opinion and not the official policy position of the commission. He started his speech by outlining the factors that put the power sector in its current predicament.
  2. He explained that although the market had been designed well, it was not implemented as designed. Furthermore, he explained that the first condition out of the 12 -13 market conditions put in place was a cost reflective tariff as every other factor was contingent on the tariff. He also stated that the mistakes made were twofold:
  • There wasn’t sufficient understanding or communication in terms of the reforms adopted and how the tariffs would influence them
  • The government institutions did not fully understand the reform models as far as the tariffs were concerned; this includes even the regulators. He reiterated that while the Bureau of Public Enterprise (BPE) had a clear understanding of the model, not everyone at NERC, and not everyone in the government understood the model.
  1. He gave the instance where the common assumption is that DisCos were supposed to have prepared the adequate capital required to make their investments. The policy adopted clearly addresses this statement. The loss reduction formula clearly provided that all the inefficiencies (the aggregate losses) would be calculated at the point of handover and considered in the tariff calculation.
  1. Mr. Shettima explained that the policy should have been communicated clearly. The law provided that a methodology be adopted and the methodology was that at the beginning, the inefficiencies would be included in the tariffs. The advantage for the customer was that a reduction of inefficiencies in the industry is almost guaranteed, due to the fact that in the fifth year, the DisCo would be required to forego their investment in the event of poor performance, and no rational investor would want to lose his investment.
  2. He revealed that the reform model originated from Nepal; they had face similar challenges in their power sector and successfully adopted the model. He explained that in Nepal’s case, when the inefficiencies were factored into the tariff calculation and the tariff went up, the government intervened and provided subsidies for five years. When the sector stabilised, efficiency increased and consequently, consumers were willing to pay more.
  1. He suggested the following solutions as possible ways forward out of the tariff dilemma:
  • The rules have been stated clearly and have to be followed: ’we will not get it right if we flout the rules, or ignore the rules”. The rules provide for a 15-year tariff plan, with five year major reviews and biannual micro reviews. One of the major reasons the multiyear model was adopted was to give certainty to investors that the tariffs will not fluctuate too often, and will only fluctuate for necessary variables such as interest rates and exchange rates. This certainty allows the investors to plan appropriately.
  • There can be no successful tariff increase without the introduction of subsidy. While it is noted that the government does not at this time have the funding for such an undertaking, creative solutions such as using their 60% stake in gas to influence the gas prices, or retaining ownership of the NIPP power plant should be considered.

Kola Adesina; Tariff Review from an Investor’s Perspective

  1. Kola Adesina started by stating that although the general public consensus is that electricity is a necessity, actions are diametrically opposite to that position.

12. He explained that at the point of acquiring the distribution and generation assets, there were enablers which the government was supposed to have put in place in order for the sector to run seamlessly. One of the main challenges first encountered, was that the data reported by the government was significantly different from what was seen on the field. In their documents, the government stated that the Aggregate Technical, Commercial and Collection (ATC&C) losses in the system average was  25%. On that basis, the various entities that bid for the assets drew out aggressive business plans to bring down the inefficiencies to an estimated 12% at the end of 5 years. The reality of the situation was however, that losses and inefficiencies in the system were as high as 60%.

  1. One of issues that was reported is that the government was to provide a ₦100 billion subsidy in order to bridge the gap of what the tariff was to be and what the tariff was in 2013 unfortunately only 5% has been remitted to date. At the date of acquisition of assets, exchange rate was ₦157/$1. At the first tariff review, the Nigerian Electricity Regulatory Commission took it to ₦167/$1, and at the second review, ₦198/$1.
  2. Mr. Adesina further noted that power is not a local business. Turbines are not produced locally, thus their purchases are dollar denominated. He emphasised that if the current approach to policy making continues, production of these infrastructure locally will remain an impossibility.
  3. He explained that if the tariff methodology, which is the pricing mechanism adopted by the system, is based off a ₦198/$1 rate and the reality of the situation is that the rate is at ₦315/$1, there would be a disparity between the DisCos books and that of the regulatory bodies. He pointed out that in the event he tries to adopt official rate, the cash is not available.
  4. He summarised by stating that electricity is a value chain and denounced the suggestion to bring down gas prices on the basis that gas is an international market, and thus the prices set by the global market forces. He said that the electricity issues cannot be rectified until a cost analysis of the value chain is performed.

Dr. Ogho Okiti; Financial Implications of the Tariffs

  1. Dr. Okiti started off by explaining that the essence of the market model is such that all the parameters must be in place for the model to work. If the parameters shift, the market will start to shift. He noted that all the parameters set in place at the time of privatisation have collapsed, be it interest rate, exchange rate or even gas prices.
  2. He further explained that the general consensus that the privatisation process was driven due to corruption is incorrect; the actual issue with the power sector at that point was that there were no significant investments for 20 years. Thus, privatisation was a tool adopted to get investors to buy assets and as said investors got their cost reflective tariff, to make further investments. This would have improved the overall productive capacity on not only the sector, but the economy at large.
  3. He observed that there have not been major investments in the power sector as expected due to the fact that the structure for which the assets were privatised did not hold. He summarised the current situation as follows: at the moment, everybody pays too much for power, power from the grid is not adequate, and the power companies do not get enough money for overhead costs, not to talk of extra for further investments.
  4. He concluded by emphasising that there is no doubt that an intervention in the form of a subsidy is required. If tariffs are increased, consumers will be unwilling and unable to pay for the electricity provided. Until the conundrum of how the investments cost can be paid is solved, the issues in the sector will persist. Considering the economy as a whole, if the conundrum is not addressed, investors will continue to shun the sector.

MODERATED DISCUSSION

The moderated panel discussion raised a number of issues including the following:

  1. Actual Cost of Electricity: Taking an average of the systematic costs, it is found that actual figure should be ₦44/kWh, however, the utilized tariff value is ₦33/kWh. Thus, the differential is ₦11/kWh (25%).
  2. Declaring Eligible Consumers: An accurate description would be that the sector is trying to run when it cannot walk. The privatisation process was designed concisely; electricity privatisation was supposed to be a gradual process. Furthermore, DisCos need to show improvement in performance. On the other hand, the government also need to do their duty and fulfil their own end of the contract. The DisCos are only entitled to 24% of the collections from the consumers. Furthermore, the DisCos collect on behalf of NBET, NERC and every other party in the value chain. The 24% represents what they have to spend to upgrade the system, pay for their overhead and every other cost. The following recommendations were suggested;
  • That the government cover the gas cost: as the revenue profile of Nigerians has decreased substantially, the gas risk should be carried by the government. Nonetheless, it should be noted that the government cannot be everything to everybody.
  • The Federal Government budget should be reviewed and amended to cover the shortfall to address power issues. The exchange rate is the most critical component for the tariff to spike up and go beyond what the common man can afford. If falls on government to set a tariff that is sustainable.
  1. Power as a social vs. market good: The thinking of the general public can be best described as being penny wise, pound foolish. People are spending much more on generating electricity outside the grid (generators, inverters etc.) but, refuse to pay for the electricity grids. It is two ways. First of all, the public needs to be educated on their responsibilities to meet their obligations. Secondly, the tariff needs to go up and those that need to pay up need to pay up. Whatever the price, we need to let the price get there.
  2. Vandalism: The government needs to protect the pipelines. Even if the tariff issue is addressed via a subsidy, the sector will still face challenges in terms of gas production if vandalism is not addressed.
  3. Macroeconomic effect of suggested solutions: There needs to be an understanding that each sector in the macroeconomy cannot be considered in isolation. If the government reduces the price of gas, the gas sellers will be affected, which will in turn affect the economy overall. While transference of debt seems like the easy solution (from the DisCos to the gas companies). The economic philosophy seems to be that the government owns everything, and so no one is obligated or interested in paying for anything. The public view almost all public goods and services as welfare, and thus their right. Another consideration is for government actors and the fact that political considerations affect their policy decisions. Until the market adjusts, government intervention will always lead to instabilities.
  4. Transparency in the System: In response to a question from the moderator about a single (transparent) payment system, Mr. Adesina noted that the sector is already designed to have just one payment system in which the DisCos, GenCos and all other entities are supposed to tap into. The banking system is such that all accounts opened by DisCos are available to CBN.

AUDIENCE PARTICIPATION

The audience participation (question and answer) session raised a number of issues including the following:

  1. Raising capital through investments from the public: Chiemelie Ikegbunam, an Economist, inquired as to how companies in power sector could go public as a means to raise much needed capital. The panel explained that with regards to raising funds through selling equity on a public exchange, the human behaviour is to invest in that which they are guaranteed to get their money back. Kola explained that the entities that had already invested in the sector were stranded and looking to recoup their losses as their balance sheets were negative. He explained that investors would question if the enablers for loss recoupment were in place. He however stated that investors were actively welcome.
  2. Alternative Energy: Mr. Ikegbunam also inquired as to why hydropower and gas were the only sources of energy utilised for electricity generation in Nigeria. He noted that these energy sources are not sustainable. He went on to point out that developed countries utilise alternative sources of energy in greater proportion. Mr. Adesina responded by explaining that the limiting factor with alternative sources of energy is prices. He noted that the estimated tariff from capitalising on the available alternative sources of energy is higher than that of gas. Furthermore, he noted that the level of natural gas available in Nigeria makes natural gas a more rational energy source than the alternative sources. Nigeria has an abundance of natural gas, however, its generation is affected by a human factor, and this human factor needs to be addressed.
  3. Efficient tariff collection by DisCos: Adesina Adedamilola inquired about the capacity of DisCos to collect tariffs, and suggested innovative solutions such as franchise revenue collection be considered. He suggested the ‘agbero’ model, which involves employing local youth as collection agents.

Additionally, Mr. Adedamilola noted that when exchange rates, inflation, and interest rates increase, consumers lose their income as purchasing power declines. We need to recognise that the middle class is gone and people cannot afford to pay for electricity. The man on the street does not have the capacity to pay. He argued that some consumers pay electricians to bypass the transformers. He appealed to the public to stop this.

  1. Sustainability of the proposed subsidy: Isaac Oluwadiya from the audience agreed that some of the gas costs be carried by the government through subsidies, however, he was concerned about the sustainability of subsidies. He also expressed worry about how the DisCos would be mandated to repatriate revenue upstream. He suggested metering as a means to mitigate this concern. He concluded by insisting the challenges be tackled holistically and the average Nigerian thinking be reoriented.

31.Metering Gap: Emmanuel Chukwudi from the Ministry of Power suggested that most of the problems in the sector are from the DisCos. He gave the example of transformers in estates that had not been improved. The panel responded thus: considering the value chain, for electricity to flow in one direction, enablers of tariff must be present. However, in the current value chain the resources to make value chain whole (the tariff required) to make these entities whole is not available. Metering gaps will remain if the tariff gap is not addressed.

  1. Viability gap funding: Waje Ejendere, with Zuma Energy emphasised that a cost reflective tariff is imperative and then suggested that viability gap funding be adopted. He finally suggested that Nigerians be educated on how to utilise power efficiently.
  2. Multi Year Tariff Order (MYTO) Methodology: The bulk trader calculates the tariff with a methodology based on an interest rate of ₦308.6/$1. Meanwhile, the ₦308.6/$1 has not been integrated to the tariff yet, so the collector is using a system based on ₦198/$1, while the generator is using the ₦308.6/$1 system, which leads to a disparity of figures. Issues also abound in terms of the validity of data.

CONCLUSION

Tariff reviews should be automatic; if exchange rates, interest rates and all the other macroeconomic variables that affect tariffs change, then the tariffs should adjust to reflect those changes. The speakers urged Nigerians to change their outlook on payment of their electricity bills. They also urged the government to make the tariffs cost reflective, with the consideration that the new tariffs be applied with a subsidy in place to ensure that the average man can afford the electricity.

 

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