DEVELOPMENT - 16 JUN 2020

An impossible squeeze - unravelling Nigeria’s electricity challenges

An impossible squeeze - unravelling Nigeria’s electricity challenges
Electricity transmission grids. Source: Fré Sonneveld via Unsplash

Nigeria has many problems, and one of its most notorious is the lack of stable electricity. The issue is not an easy one to understand because it has several layers with many different sides.

The initial diagnosis was that government control was the culprit, but that started to change a few years ago. 

 

The beginning; after NEPA 

In 2005 Nigeria’s government decided to reduce its responsibilities of providing electricity to the people. It embraced privatisation to manage power more efficiently and completed the process by 2013.

There are three main areas. After divesting a 90% interests in energy Generating Companies (GenCos), the government retained 40% ownership in all 11 Distribution companies (Discos). However, it maintained sole ownership of the Transmission Company of Nigeria (TCN).

There have been some gains from these changes. Installed generating capacity in the country grew from 5048 megawatts (MW) by seven companies to approximately 12,522 MW by 23 Gencos currently. 

While the country’s electricity-generating sector has achieved relative growth, some bottlenecks are preventing it from reflecting in the entire electricity industry. 

Available data shows that the transmission lines could only handle 4,500 MW of generated energy in 2014; this has grown to a current capacity of  5,300 MW for onward distribution to consumers. At the same time, the distributing companies have grown their assets from 1,700 MW in 2013. Still, they can only absorb  4,600 MW of electricity as at date.  


Limited transmission and distribution line capacity 

This situation pressures electricity generators to either operate below their installed capacity or lose the surplus energy generated, during transmission. 

When they supply above the available capacity of the transmission and distribution lines, this often leads to a collapse of the power grid. This happened ten times in 2019 and four times already this year, thereby limiting the onward supply of generated power to individual homes, businesses and institutions. 

Thankfully the government who solely owns Nigeria’s transmission company has taken steps to rectify this problem. It recently signed an agreement with Siemens AG to upgrade the transmission and distribution lines under the Presidential Power Initiative (PPI). 

The project should kick-off in three phases: the first phase is to increase the national grid capacity for transmission from about 5,000 MW currently to 7,000 MW in 2021, then 11,000 MW by 2023. 

The final stage is to reach 25,000 MW in 2025 after fixing the transmission and distribution bottlenecks.

Although the timing of implementation comes with mixed feelings, for some Nigerians, it couldn’t have come earlier. But for others, the ability to find funding sources in a period where the coronavirus pandemic has squeezed out most economical and financial resources casts a shadow of concern on its successful execution. 

The government, however, has a three-year moratorium plan with twelve-year repayment at concessionary interest rates for financiers of the deal.

 

Liquidity challenges persist 

Collecting payment from consumers has also negatively impacted the profitability of distribution companies.

Financial reports of Discos, following their 60% private ownership in 2013 till 2017 (latest), revealed most of them recorded losses in some or throughout these periods. 

These losses are due to the difficulty in charging tariffs that reflect the full cost of electricity.

This problem arises as a result of distribution challenges as well as the huge metering gap and the government’s tariff regulation. They offer to pay the shortfall of actual charges; but this has remained unpaid since the privatisation, thereby hindering the interest of investors and the profitability of Discos.

In 2019, the total electricity billings for all the Discos was ₦744 billion. They were only able to remit 34% representing ₦267 billion due to these issues. 

About 3.9 million people have been metered, representing 38% out of the total 10.4 million electricity users in 2019. This implies that the remaining 62% is subject to the estimated billing system. Here, the DisCos tend to arbitrarily determine the amount of electricity consumed, resulting in bills that consumers often disagree with.

This has resulted in apathy towards electricity payment by these end-users. As of 2019, the total billing to electricity consumers by the Discos was ₦718 billion out of which ₦487 billion was collected, representing 68% collection rates.  

Some Discos can achieve a measure of headway with the tariff increment within Lagos suburbs, as consumers are willing to pay reflective rates if power is available, stable and reasonably priced.

In Magodo Estate and pockets of Ikeja GRA in Lagos, residents currently enjoy constant power supply. This was made possible via the Premium Power Agreement, which allows willing buyers and sellers to agree on electricity tariffs rate. They pay around ₦47 per kilowatt-hour compared to the regulated price of ₦23.10. 

 

Way forward? 

Fair or cost-reflective pricing is a sure way to get investors to tackle the capacity problems of the electricity sector. It will also remove the bottlenecks on revenue generation of the DisCos, which in turn negatively affects Gencos and hinders project expansion in the sector. 

Taking a cue from Singapore, the bedrock of their privatisation success in the electricity sector includes deregulation of the generation and retail electricity market to drive competition.

The Asian country also created an appropriate regulatory framework and exposure of the distribution companies to full competition via its Open Electricity Market reform. This is an arrangement where the consumers can sieve through price plans offered by as many approved retailers as against sourcing solely from one licensed company (SP Group) at the quarterly-reviewed regulated tariff.  

A similar sutuation is happening in Magodo and Ikeja GRA, hopefully, the combination of more competitive pricing and capacity upgrades via the Siemens deal can be the start of ending Nigeria's electricity nightmare.  

 

Follow this writer on Twitter @tundeeogun

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Babatunde Ogunleye

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