On May 15, 2017, Babatunde Raji Fashola, SAN, the Honourable Minister of Power, Works and Housing, made a declaration that allows certain customers to source electricity directly from Generation Companies (GenCos) and other licensees aside from just Distribution Companies (DisCos). This declaration of Eligible Customers is through the powers of the Honourable Minister as contained in Section 27 of the Electric Power Sector Reform Act 2005 (EPSRA) of 2005. The policy directive effectively removes all restrictions barring customers from liaising directly with GenCos and other licensees.This change in policy stems from government’s assessment of the liquidity challenges threatening the entire Nigeria electricity supply industry. The liquidity squeeze is driven mainly by the failure of the DisCos to collect and remit bills charged to the customers. According to analysis by Nextier Power, DisCos remitted only 26 percent for the period January to December 2016.
Click HERE to view the DisCo Market Performance between Jan-Dec 2016
Liquidity is the lifeblood of the electricity supply industry. While the DisCos are responsible for collecting payments from the customers, they are only entitled to retain 25 percent of the collections, and remit the balance back up the value chain. The GenCos receive 60 percent; Transmission Company of Nigeria (TCN) receives 11 percent, while the balance is used to pay all the other members of the value chain. Any failure to collect the full amount billed means that some party within the value chain will not receive full payment and this will impact the ability of the industry to supply power to Nigerians.
In addition to its impact on the operation of the entire electricity supply value chain; illiquidity also discourages investors (domestic and foreign) from the industry. Despite the robust opportunities in the Nigerian power sector, many investors are unwilling to invest in the industry given that it is estimated to have a deficit of about N809 billion. This liquidity challenge decreases the probability of a return on their investments. However, this declaration of Eligible Customers by the Honourable Minister should address the liquidity challenge because such customers can contract directly with the GenCos and pay for electricity received. The increase in payment should improve the financial positions of the GenCos, gas suppliers, and other players in the value chain, and should improve the attractiveness of the Nigeria electricity supply industry. This should ultimately increase electricity power supply to Nigerians.
Furthermore, this new policy should also improve customer satisfaction. Results from a survey conducted by Nextier Power shows that customers do not believe they get value for the money the pay for electricity. More than 50 percent of the respondents indicated that they pay high electricity bills without getting commensurate amounts of power for daily needs. This results in human and economic redundancy. It is expected that this change in policy direction should resolve this issue by allowing customers to buy power directly from independent licensees. This will be a major step to improve the value customers receive for the money they spend on electricity.
Relying on Section 24(2) of ESPRA 2005, this directive introduces retail competition within the electricity market and limits the stagnancy that comes with monopoly. DisCos will have to improve their effectiveness to compete with the GenCos for customers. This level of competition is what was desired by the architects of the privatisation efforts because it is believed that the increased competition will be in the best interest of the customers. By this directive, the Honourable Minister has taken a bold (almost radical) step to enhance customer satisfaction by improving efficiency in power supply services.
Section 100 of the Electric Power Sector Reform Act 2005 defines an eligible customer as a customer that is eligible, pursuant of a directive or directives from the minister, to purchase power from a licensee other than a distribution licensee. The policy directive issued by the Honourable Minister to the Nigerian Electricity Regulatory Commission (NERC) permits four categories of customers who can buy power directly from licensees and they include:
- The first category of customers consist of a group of end users with a consumption rate of no less than 2MWhr/h and are connected to a metered 11kV or 33kV delivery point, subject to a Distribution Connection and Use of System Agreement for the delivery of electrical energy.
- The second category of customers are those connected to a metered 132kV or 330kV delivery point on the transmission network under a Transmission Use of System Agreement for connection and delivery of energy.
- The third category of customers comprises those consuming an excess of 2MWhr/h on a monthly basis and are connected directly to a metered 33kV delivery point on the transmission network, under the Transmission Use of System Agreement. Such customers must have entered into a bilateral agreement with the distribution licensee licensed to operate in the location, for the construction, installation and operation of a distribution system for connection to the 33kV delivery point.
- The final category are eligible customers with a minimum consumption of more than 2MWhr/h over a period of one month and are directly connected to the metering facility of a generation company. Eligible customers must have entered into a bilateral agreement for the construction and operation of the distribution line with the distribution licensee to operate in the location.
Customers who fall within the aforementioned categories will have unrestricted authority to source power directly from licence holders without relying on Distribution Companies.
Impacts of the Policy Directives
Paying Peter while Robbing Paul?: Distribution Companies (DisCos) have argued that this policy change is tantamount to cherry-picking of their choice customers. It is assumed that a number of the commercial and corporate customers (who fit into the defined categories) would choose this option. This means that the DisCos would lose significant revenue from these customers. While this is favourable to the GenCos and the customers, it may lead to unintended consequences for the rest of Nigerians. This is because the tariff calculation assumes that payment from the R? customers (to which most of the Eligible Customers belong) would be used to subsidise the tariffs for the R? customers.
Solution to Stranded Power: Stranded power is power that is generated but due to system and infrastructure issues the electricity does not make it to end-user. Nigeria has about 4,500 megawatts in stranded power. This is about 65 percent of the total available electricity generating capacity of 7,856.52 megawatts. Total available capacity is at a low 3,959 megawatts. One of the reasons for the stranded power is the limited capacity of Nigeria’s transmission grid, which is able to transmit only about 6,500 megawatts. It is expected that this new policy on Eligible Customers will address the challenge of stranded power as the GenCos can sell electricity directly to distribution companies.
Test run for Competitive Market: The Nigerian electricity supply market needs to move from the Transitional Market (which is where the market pricing is regulated) to a fully competitive market (where the market pricing is unregulated). This new policy should serve as an interim step where the market players can learn how to work within a market that is guided by contracts. The introduction of Eligible Customers will introduce competition on the demand side of the sector, which should drive efficiency improvements and an increase the quality of services provided. The successful implementation of this model should move the industry closed to one that is more competitive and guided by contracts.
Instil Sector Discipline: Although the Nigerian Electricity Regulatory Commission was established as an independent body to regulate the affairs of entities with the Nigeria Electricity Supply Industry, its lack of effective sanctions leaves room for misconduct within the sector. This directive shows the capability and willingness of the Federal Government to intervene in circumstances where entities underperform and this action should help to instil discipline in the sector. Furthermore, the potential relations between Eligible Customers and licensees could create a new code of conduct within the industry. It should help address the sector indiscipline that has led to the poor revenue collection and remittance rate in the sector.
Increasing Economic Growth: The ability to source electricity directly from the GenCos should increase supply to major commercial and corporate customers and should, in turn, result in increased productivity in these businesses. Furthermore, it should lead to significant cost savings for manufacturing businesses that currently rely, to a large extent, on independent power generation that, for the most part is more expensive and lead to increased operating cost. These benefits should invariably lead to economic growth for Nigeria.
Implementation Challenges: Policy analysts in the Nigeria electricity sector await further details from the government on how it intends to implement this policy. For example, it may be logistically difficult for a generating plant in Port Harcourt to sell electricity to a company in Jos. Furthermore, there is need to track the performance of this directive as it will provide insight on its effectiveness and whether (and how) to modify it. In the same vein, it is important to install an effective revenue collection system to ensure all entities in the value chain (and not just the GenCos) are properly remunerated.
Implication for GenCos: In appraising the policy directive, it remains unclear how the Generation Companies can effectively supply electricity directly to eligible customers, as they do not own distribution lines. It has been suggested that they will rely on an agreement with Distribution Companies. Such an agreement will allow Generation Companies use DisCos infrastructure at a charge. It should be noted that the Nigerian Electricity Regulatory Commission (NERC) has not finalised the modalities of this agreement, as such the details of the terms remain unknown.
Nextier Power believes that this policy directive from the Honourable Minister is timely and should restore customer confidence in the Nigeria Electricity Supply Industry. The directive would undoubtedly play a major role in improving competitiveness within the sector as well as provide GenCos with an opportunity to increase financial flow and ease the liquidity squeeze that burdens the sector. Following an improvement in liquidity within the sector, investors would be encouraged to invest funds into the industry. However, it is imperative to ensure that this policy directive is properly implemented if the expected outcomes are to be realised.
**Emeka Okpukpara is a Partner in Nextier Power. Whilst he oversees the entire management of the firm, he is particularly interested in the role of alternative energy in Nigeria’s economic future.
**Alexis Tsegba is a Research Analyst in Nextier Power. She has a bachelors degree in Law and is interested in regulatory and policy issues in the Nigeria Electricity Supply Industry.
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