Following the succesful completion of the privatisation of the Power Holding Company of Nigeria (PHCN), the electricity industry was left in financial deficit incurred from the long years of inefficient government management of the sector.
Since the debt could not be passed on to the new private owners, who have been under pressure from electricity consumers nationwide, to improve the various networks they took over, finding an alternative measure to address the debt challenge became imperative.
It was against this background that an inter-agency committee, headed by the minister of Petroleum Resources, Mrs Diezani Alison-Madueke, was set up to find an effective and workable solution to the issue.
The N213 billion bailout initiative
After series of brainstorming and deliberations on how to find lasting solutions to power supply challenges and ensuring efficient gas supply for power generation, the inter-agency initiative of the federal government announced a N213 billion facility to help offset the legacy gas debts and address the persistent revenue shortfall in the sector.
The bailout fund was announced by the petroleum minister at a joint press conference which had in attendance the minister of Power, Prof Chinedu Nebo, governor of the Central Bank of Nigeria (CBN), Mr Godwin Emefiele and the chairman of the Nigerian Electricity Regulatory Commission (NERC), Dr Sam Amadi.
The top government functionaries disclosed that the facility was tailored to address the three key challenges facing the power sector. These were identified as inadequate gas supply for power generation, misalignment between electricity tariff and the true cost of running electricity business and the inability of power generation companies to reliably produce the electricity that is needed with reduced volumes of gas.
Madueke explained that having just acquired PHCN, most of the successor generation companies (Genco’s) could hardly afford the reduced income due to the shortfall in revenues.
“The newly privatised companies have borne the brunt of these issues and consequent revenue shortfalls since handover last November. This is hampering the much needed investment in the sector and has slowed down efforts to improve electricity supply.
“This scenario, which existed for several years has now given way to recent reforms by the Goodluck Jonathan administration and, as a country, we can now address these issues with much more confidence that Nigerians will reap the dividends of increased electricity supply,” the minister stated.
Scope Of Intervention
Outlining the scope of the intervention that the N213 billion facility was designed to address, Madueke said the fund would be used to settle the legacy gas debts which stands at N36 billion.
It will also be used for the execution of agreed metering programmes and procurement of transformers by distribution companies as well as for the execution of maintenance programmes and procurement of equipment by generation companies.
The intervention fund which, according to the minister will be provided by the CBN in collaboration with deposit money banks, will be managed by a dedicated fund manager and beneficiary companies will repay loans obtained from the fund with a first-line charge on their revenues over a 10-year period.
“There will be a moratorium on repayment of the credit facility from the banks by Distribution companies (Discos) until electricity supply across the country improves. This will ensure that the cost of electricity for ordinary consumers continues to be at affordable levels,” she pointed out.
On the modalities for the operation of the intervention fund, the minister explained that Discos, Gencos and the Transmission Company of Nigeria (TCN) would give commitments to deploy the funds to address specific challenges as preconditions for accessing the fund.
They are also required to meet commitment to rapidly expand their networks with a view to ensuring that more Nigerians, especially those in rural areas have access to electricity.
Given the scope of the initiative, the minister expressed optimism that the new measures introduced by the inter-agency committee would reset the economics of the electric power sector, boost investor confidence and lead to a rapid increase in electricity supply.
It is envisaged that the measure will result in stabilising output of power at 5,000 megawatts (MW) before year end, a target which is further expected to be surpassed in early 2015.
Many Nigerians may not know that technically, electricity consumers in the country are to repay the N213 billion facility through payment of their electricity tariffs.
Explaining this point, chairman of NERC, Dr Sam Amadi, stated that the repayment period was spread over 10 years to allow for piece-meal repayment and prevent a sharp increase in tariff.
“Without this fund, consumers ought to pay for any shortfall in pricing, so essentially, the shortfall is a function of the price not being cost reflective.
“What we would have done is to put it back into the Multi-Year Tariff Order (MYTO) formula and probably work out the tariff increase that will cover it over five years but the CBN fund gives opportunity for Discos and Gencos to have this money on time and for it to be repaid over 10 years.
“They are giving us a 10-year period instead of five and this further reduces the rate of tariff; it further reduces the amount that consumers will be paying. It is just like getting loan and paying back in 10 years.
“They are giving us 10 years facility that covers the shortfall and what it does is that it gives Discos and Gencos money at hand now that they will be collecting in piece-meal over ten years period and gives them opportunity to use the money for quick investments that will produce quick returns in terms of service improvements and, of course, it reduces incidence of repayment on consumers,” he said.
Speaking further, Amadi added, “Don’t forget that every cost in the industry is ultimately repaid by the consumers and so, it has reduced the incident of burden of repayment by stretching it over a long period of time, perhaps with some moratorium on repayment, and that could result in freezing tariff increase as the case may be.”
Operators’ eligibility to access the Fund
The NERC chairman, who emphasised that the CBN fund would be deployed only to meet established shortfalls in the market, stressed that the commission would undertake a proactive review of operators’ eligibility to benefit from the fund.
He pointed out that operators, whose expenditure in its operations do not match up inprudence with relevance to its obligations in the market, would not benefit from the fund.
The determination of an appropriate expenditure is a test of prudency and relevance to the operations of the company.
Amadi said, “NERC will not reward Discos that misappropriated their money to settle their directors or other things by making them benefit from the intervention fund because it is to be used to address the gap that arose not because of their own funding but because of shortages that arose out of lack of cost reflectivity.”
He explained, however, that shortfalls occasioned by Aggregate Technical Commercial and Collection (ATC&C) losses as well as shortage in gas supply and power, have to be dealt with.
According to him, “NERC will review the shortfall and see that the Discos get what they ought to get because what we are looking for is a real gap. We won’t indemnify the Discos failure to collect revenue once we establish historic losses level for collection.
He maintained that like every other business, the Gencos and Discos are experiencing external shock which is why government is putting measures in place to get them out from the shocks.
Amadi however, noted that contrary to allusions that operators in the market are operating at severe losses, the market still remains profitable and viable especially within the framework of regulated profit and cost.
“There is no doubt that the Nigerian electricity market is profitable, the companies are profitable as long as you understand the concept of profit in a regulated sense. In this market, return on investment is regulated as well as the costs but the shortfalls will be closed as efficiency improves,” he explained.
Meanwhile, as a way towards towards ensuring sustainable gas supply to power plants and guiding against re-accumulation of debt, an industry analyst and former senior technical assistant to former Energy minister, Dan Kunle, advised that indigenous companies operating in the nation’s oil and gas sector be given necessary support to rapidly build capacity in the area of gas mining and supply.
He explained that having freed the industry of the previous deficit, it was imperative to prevent the accumulation of another debt. “When you free the industry of the deficit, how do you now grow the graph without new deficit being accumulated again?” Kunle asked.
In this regard, he said that the federal government should grant incentive to indigenous oil companies for them to accelerate their development. “They should give them incentives such as tax holiday and import duty waiver for all the equipment they are going to bring. They should free them from the various taxes that add up so much cost at the end of the day, because whatever they want to do have bill of quantity so you can minimise the foul play and fraudulent tendencies that may go with such blanket waivers,” he said.
He advised that the companies should be given two pricing mechanisms, one price to power sector, which should be priced as an economic good and another price to the commercial arena from where they can recoup their investments.
He explained that if the electricity generating segment is properly defined, issues of inadequate gas supply to power plants would be a thing of the past.
He said: “The market is scientific, you know how many volume of gas that a 100 megawatt power plant needs per day, you know where it will come from. That is why you have the market operator, the gas aggregator and the bulk trader to resolve issues like this.
“Once you set the framework and the rules, they will abide by it. They know, for instance, that 20 per cent of what they produce goes through a particular pipeline to a particular power plant. Once they fulfil that obligation, they know they have the remaining 80 per cent to sell at commercial price,” he explained.
He further emphasised the need for government not to depend on increase of gas price as the single solution to ensure adequate supply of gas to power plants, noting that other alternatives should be considered as it is impossible to develop the local economy using a commercial gas price.