I’m very skeptical of single narratives, i.e. arguments that view an issue from just one angle so in writing this I’d like to state that I’m considerably aware of the constraints with gas prices, gas infrastructure, transmission capacity, distribution and transmission losses etc among various other issues that have kept the electricity sector from living up to expectations. Thus, my aim is not to suggest that solving the disco issue automatically resolves all our power sector challenges. However, I firmly believe that resolving the disco challenges could catalyze the entire industry into a state where these other issues can be resolved relatively faster.
First a bit of context
The DISCOs are currently afflicted by a myriad of issues when it comes to collection of revenues. These issues include poor metering of customers, sabotaging of distribution infrastructure, high levels of debts owed by government agencies and certain consumer groups, technical losses due to poor quality of distribution infrastructure and uneconomic tariffs. Debts owed by government ministries, departments and agencies alone as at end of December 2015 stood at N45 billion. The practice of estimated billing also ensured that the DISCOs have significant debtors in the residential user segments but those debts are more difficult to collect due to the estimated nature. Unfortunately due to these issues, the discos are unable to meet their revenue and profit projections, even after running for two years since the assets were handed over and nearly four years since the companies were created to bid for the various assets.
Can’t service loans
Furthermore, the investing companies are unable to service loans taken to acquire the assets. This is really due to the structure of the loans the DISCOs took for the privatization. The loans to the power industry were given as loans to acquire equity. Thus, the investors do not have claims on assets beyond those of the investing companies, most of which were companies created for the purpose of the acquisition. Although the loans were secured with various other collaterals, they really do not give the banks much comfort if things go awry. Thus the revenue collection troubles faced by the DISCOs have made servicing loans a major challenge to these investors. This has limited their ability to access new lending and since most of these loans were borrowed in dollars, there are significant concerns regarding the impact of an imminent devaluation of the official exchange rate on the ability of the industry to pay.
No incentive to take in more power
But that’s less of my worry. As a result of these issues, the DISCOs occasionally have to reduce the amount of power they take from the national grid. This is to reduce the amount of debt they owe to the National Bulk Electricity Trader. Why take power you cannot pay for? Thus, even when power generation capacity hit a high of 4800MW in the second half of 2015, the discos had to manage the distribution of power to only areas where they could extract the most payments. But even that model still creates a challenge because payments to NBET often exceed the total revenues collected for the month. Thus, as at end of August 2015, the DISCOs were said to owe nearly 3 months of payment to the NBET. Some of those debts remain as at time of writing hence the call by most discos for the Central Bank to release the power sector intervention fund of N213billion to enable them payoff some of these debts and service their loans.
Zero returns, zero investments
We have discos that don’t generate enough revenue to pay for the power they get, let alone pay dividends to allow their investors service debts to commercial banks while retaining enough cash for investment in needed equipment and infrastructure. We have investor companies (in the discos) that borrowed in dollars when the exchange rate was N155 per dollar and are battling a 22% devaluation since 2015. But more importantly, could be facing another devaluation which could create repayment issues. There is therefore no way, these set of discos will be able to support the power sector with enough revenues to invest in new transmission capacity, upgrading of the transmission network from the current 330kV lines to the super-grid 770kV lines. Higher up the value chain, providing the right prices to encourage gas producer produce more gas, which will in turn, enable more power generation, is also dependent on the value chain been able to pass the gas prices through down to the end-user. Based on the current structure, this is also not possible. Hence without resolving the issues at the DISCO end of things, the idea of a well-run profitable power industry may remain a mirage, as it continues to depend on government funding.
Saving the DISCOs
These are the major steps in my opinion that need to be taken.
- Government must show a good example of a customer and pay its debts to the discos. The fact is there is a budget every year for electricity bills for the ministries. For instance in the current 2016 budget, the ministry of power, works and housing has been granted a budget of N20.6bn for electricity for its corporate headquarters. The government must ensure it pays its own bills and outstanding debt. These cannot be written off and must be paid, even if restructured into repayment over a year or two.
- The discos need to engage their customer base more. The larger majority of their customer bases do not understand the changes that have happened in the industry and only expect to get better service. They need orientation on what power theft is, why they need to be properly metered and how to report cases of power theft. They need to know the part they play in getting good power supply.
- Criminalize power theft. The companies need to carry out periodic power theft audits. Regularly inspect connections in certain areas and makes arrests for illegal connections and tampering with meters or sabotaging of distribution infrastructure. The typical disconnection of power is not enough as most are able to get some electrician to connect their power back for them or just resort to use of generators, especially offices or organizations.
- CBN should release the intervention fund for the power companies to enable them invest in their operations. The funds should be deployed to upgrading equipment to ensure the companies can push out more power; proper enumeration of their customers and deployment of meters; creating of convenient payment channels for users including mobile money payment channels.
- Increase tariffs. This is not negotiable. To accommodate the level of investments we need in the power sector top to bottom, the tariffs at the bottom end of the chain need to increase significantly. In my opinion, we might need as much as a 55-60% increases in tariffs. However, these increases need to be automated and not legislated. They must kick in at specific periods and should not be subject to policy considerations or debates so that investors can take long term decisions on investment. The current environment is too uncertain for investors to invest with tariff changes based on debates and often reversed or delayed.
Some would say these tariff increases amount to taxing the paying customers for the inefficiencies in the system. While partly true, it doesn’t apply in all cases because if the steps suggested above are taken into account, the system will be better positioned to address some of the issues that warrant the high tariffs. A fully-functioning market with free entry and exit would enable competitive pricing of tariffs in the long run. Think of it in the same light as telecommunications. We couldn’t have set prices for sim cards at N300 and expected the telecoms companies to invest in base stations across the country.
So we start from the discos and then we work our way up.
This article first featured on Nairametrics January 26, 2016
Let them send a bill to the House of Assembly to retrieve all debts from Government Agencies, parastatals, ministries etc.
2. Provide prepaid meters to every consumer whatever category any may belong , residential, industrial, governments etc.
3. Prosecute to logical end power theft, jail a few to make them scape goats in each state and local govt.
4. Make laws that ban the importation and use of generators in cities except as standby for hospitals and industries.
It usually never pays to be among the first set of investors for any venture that has to do with the Nigerian government… It usually goes south… fast
Except If the policy makers have vested interest in your company
Sorry if my comment isnt relevant to the DISCOs
To recover the government debts, the DISCOs should simply disconnect the government offices and buildings. The only exceptions may be sensitive places like hospitals. Nigeria is a very funny place and without people knowing you can and will disconnect them, you will have serious challenges collecting up to 60% of your revenue on time or even at all.
Hard choices need to be made across board to make the industry work.
Well the issues raised by the writter may be so, but it only covers the investors and forgetting the fact that the investors have done a comprehensive study of the system and have found a satisfactory solution to these challenges and the opportunities in the system, we are also aware of the promises they made to invest heavily in infrastructure, labour and the necessary expertise to ensure adequate and stable power supply to the country.
Investment of this nature is supposed to be a long time investment not the one that will yeild immedite dividend ,
waiting fo government fund is admitting failure, the earlier they turn the challenges to their advantage the better for all . otherwise they should hand back to the government to save us from another fail attempt at privatisation of government parastatal.
Nice article, core issues well said. However, I have a different perspective, the privatization experiment was not well executed. The government handed its responsibilities to the private sector and expected miracles to happen post-privatization. The assets should have remained under government ownership, keeping it free of debt and the burden of rent-seeking investors. The objective was clear: get the distribution networks up and running. There are several 1st class operators that the government should have invited to fix the networks on performance-based PPP contracts. This is what serious governments do. I don’t envisage much happening outside a reversal of the sale of some of the DISCOs and bringing the experts to clean things up. In the interim, the only bright spot in the sector is decentralized power supply which has kept the lights on and rewarded its investors, this is where the government should direct its efforts in the short-term while seeking a long-term solution to the mountain of problems facing the grid.
Excellent points Deji I hope you do some writing too. We complain about the privatization too. It was rushed, it should have been phased, the funding structure was all wrong but heck there was a need to achieve it first. Hence we are where we are today.
I like what you mentioned about decentralized power. Care to expand on that?
Dolapo
These so called Disco initially before the privatization had made analysis and business plan on the challenges and resolve to these challenges one wonders why are they complaining now it has become clear that they acquired this industry without proper research being PDP affairs and assets were what they acquired not the liabilities
Imagine that a whole discos cannot afford to meter customers more than a year after takeoff
Ahmad and Deji, you guys are very correct. I’d actually advised a friend of mine who was advising a bank which funded a DISCO that the numbers did not add up: there was no way the investors were going to be profitable considering the low revenues they would receive, their high debt-to-equity ratio structure and the huge incremental costs required to update metering and power delivery infrastructure.
It was while I was wondering why these guys were risking their necks (and the banks’ money), that I was reminded that a good number of the new power asset owners were politically exposed, and had banked on receiving government support via subsidies and intervention funds when they eventually ran into trouble. Unfortunately, the ruling party was beaten at the polls, and the new government is not willing to play ball as they had expected.
It’s going to be very long night for many of these asset owners, and some very tough decisions will need to be taken in the 6 months to a year to keep both them and their financiers out of trouble.
Unfortunately, there were very few high quality deals for the banks out there. Most of them went into these assets and are now facing the music. I just believe we need to rethink the entire thing and reversal may not be unlikely like Jide said. We needed to start from the bottom and work our way up. Let fix collection, then we move on to grid with the money we’re getting, then we move on to generation, all the way expanding distribution network and grid capacity.
Great article however, I believe that our power policy review is very crucial to saving our dying DISCOs. NERC should do more to balance their policy provision such that there is no gap between the demand-side and supply-side of energy. For instance, the NERC’s Multi Year Tariff Order (MYTO) was a good proposition by the power industry’s regulator to encourage investment in the unbundled power sector but most of MYTO’s provisions are aimed to support only the supply side of energy. This provision for timely increment of electricity bills has made most consumer to develop the negative attitude towards discharging their electricity obligations. I am of the opinion that increment in tariff should be driven by energy demand. Peak period charge and off peak charge are much better that increment across board. This concept can drive so much revenue for the DISCO considering that energy user will start venturing to using more electricity during off peak period in order to pay less. The idea is of making more money is simple, electricity generated and supplied in periods like night hours are basically wasted considering the fact that electricity cannot be stored. The night hour supply if maximally utilized c bring financial improvements to DISCOs. Also simple analysis of energy consumption pattern can inform DISCOs to embrace the least expensive option for energy supply.
Options like captive power generation also holds the key to cheap and steady supply of electricity. This concept is working in some developing Asia Pacific countries. Excess generation from self sustaining plants can sustaining many energy users. In the course of my findings, I discovered that excess energy generated by captive power plants are rather buried than sold because our electricity policy on captive generation does not allow sales of electricity above 1MW. Why this limit? I know of many organizations that bury excess power as much as 3MW daily than supply to their environs simply because they don’t want issues. Bonny is a typical example of why captive generation should be encouraged as a major source of cheap electricity supplies. As it is with embedded generation, DISCOs should be made to collaborate with captive power plants to improve power experience in some localities. This can be looked into and all limitations reviewed. Generally, we need robust policies that supports initiatives like energy cooperatives and cluster such that bill collection are driven from clusters and respective cooperatives. This is very essential to fixing collection problems. Our metering technology is also very poor. Smart and sub metering are the way out of electricity theft.
Mfon,nice write up there.
Pls explain “Peak period charge and off peak charge” in detail i am so much interested in this.
Thanks
Hi Idrees, the concept of peak and off-peak energy charge is a standard practice in energy billing. It is aimed at regulating electricity consumption pattern. A peak charge is basically used to discourage high electricity consumption or usage. This billing model allow customers to choose when it’s convenient to utilize electricity. In the peak billing system, customers who opt to use electricity within a given period, especially during period of high demand, are made to pay more. In the real sense of it, high demand/usage of electricity has its attendant cost to the utility value chain. High energy demand might imply construction of more power station, reinforcement of existing transmission lines and other ancillary expenses. Therefore, utility companies use this billing system to influence demand on their network considering the implication of excess demand.
Inversely, energy tariff can as well be used to encourage energy users and usage. Period of less activities like the night hours record minimal energy consumption. This implies that a given generating plant can be underutilized or the existing energy supply contract during that period might not yield remarkable revenue. Thus, having in mind that electricity cannot be stored, utility companies offer night time (off-peak) period charge at a discounted rate to encourage energy users/usage. This incentivized charge during period or season of less energy consumption is called off-peak period charge.
In Nigeria, electricity billing is on a flat rate. Possibly because there is no adequacy of supply and the need to ration. The most popular tariff types in Nigeria are maximum demand (MD) and domestic tariff (private residence customers). The applicable unit for private residence customers is kWh and levied monthly on a standard charge. PHED charges its private residence customers N30.23 per kWh as at date. The tariff for maximum demand is driven by some peculiar factors. For instance, preference of supply, capital cost embedded in cabling, new transformers/substation etc. therefore, their monthly charge per unit consumed is more than the domestic energy user. PHED charges its MD customers N48.39 per kWh and other commercial account holders N46.72 per kWh. Consequently, I believe that the concept of Maximum Demand charge is predicated on ‘penalty’ for high power consumption.
By and large, electricity charge should basically cover cost of electricity production (the larger components of the cost) and other operating cost which include transmission and distribution cost. I am of the opinion that our current billing system should be reviewed to reflect or allow for peak and off-peak energy billing pattern. This system is more cost reflective when compared to flat rate charges. I hope above is sufficient.
Dear Idrees, the concept of peak and off-peak energy charge is a standard practice in energy billing. It is aimed at regulating electricity consumption pattern. A peak charge is basically used to discourage high electricity consumption or usage. This billing model allow customers to choose when it’s convenient to utilize electricity. In the peak billing system, customers who opt to use electricity within a given period, especially during period of high demand, are made to pay more. In the real sense of it, high demand/usage of electricity has its attendant cost to the utility value chain. High energy demand might imply construction of more power station, reinforcement of existing transmission lines and other ancillary expenses. Therefore, utility companies use this billing system to influence demand on their network considering the implication of excess demand.
Inversely, energy tariff can as well be used to encourage energy users and usage. Period of less activities like the night hours record minimal energy consumption. This implies that a given generating plant can be underutilized or the existing energy supply contract during that period might not yield remarkable revenue. Thus, having in mind that electricity cannot be stored, utility companies offer night time (off-peak) period charge at a discounted rate to encourage energy users/usage. This incentivized charge during period or season of less energy consumption is called off-peak period charge.
In Nigeria, electricity billing is on a flat rate. Possibly because there is no adequacy in supply and the need to ration. The most popular tariff types in Nigeria are Maximum Demand (MD) and domestic tariff (private residence customers). The applicable unit for private residence customers is kWh and levied monthly on a standard charge. PHED charges its private residence customers N30.23 per kWh as at date. Maximum demand customer are levied based on some peculiar factors. For instance, preference of supply, capital cost embedded in cabling, new transformers/substation etc therefore, their monthly charge per unit consumed is more than the domestic energy users. PHED charges its MD customers N48.39 per kWh and other commercial account holders N46.72 per kWh. Consequently, I believe that the concept of Maximum Demand charge is predicated on ‘penalty’ for high power consumption.
By and large, electricity charge should basically cover cost of electricity production (the larger components of the cost) and other operating cost which include transmission and distribution cost. I am of the opinion that our current billing system should be reviewed to reflect or allow for peak and off-peak energy billing pattern. This system is more cost reflective compared to flat rate charges. I hope above is sufficient.