Power: Understanding the Funding Challenges

By Musa Mohammed Biu

“Access to electricity is fundamental to opportunity in this age. It’s the light that children study by; the energy that allows an idea to be transformed into a real business. And it’s the connection that’s needed to plug Africa into the grid of the global economy. You’ve got to have power.” – Barack Obama – 2015.

Currently rated as Africa’s largest economy, Nigeria has an installed electricity generation capacity estimated at 12,522MW but has an available capacity of only approximately 4,500 – 5,000MW, to meet the needs of a population of more than 170 million and a country with a GDP growth rate of 2.11%, as of January, 2016.

South Africa, which Nigeria overtook as the largest economy, relatively, has an installed electricity generation capacity of approximately 50,000 MW, with a population of about 53 million – a little over one third of Nigeria’s.

The situation is best expressed through a 2009 study which found out that over 97% of Nigeria’s firms experience over 196 hours of power outage per month. This is equivalent to eight full days of lack of productivity. For firms that depend on power, it means they have to service their power needs for one third of the month, using very expensive self-generated power. It is important to highlight that, even with the new tariffs, on-grid power is still cheaper than all self-generated power. Industrial and Commercial electricity tariffs are N40.70 and N35.80 per kWh, respectively and averagely. Self-generated electricity is estimated to cost between N59 and N83/kWh.

Thus, whether we like to admit it or not, the deficiency of the lack of constant power supply will continue to remain a significant draw-back to the growth of our domestic economy and its attractiveness to investors. Prices of goods and services from those who take the risk to go into business in this environment will remain relatively high compared to the same in business environments that are not burdened with this challenge, thereby rendering our products and services uncompetitive. This is because the cost of power remains a significant part of the total cost of production and is transferred to the end-user of the products and services.

Price competitiveness of local products will therefore always be negative and foreign imports of similar or better quality will beat local products at the sales counter every day. As the fight to arrest the drain of foreign exchange continues, the chances of its being won by Nigeria remains slim, as long as local production cannot be stimulated to provide a replacement, in terms of quantity, quality and price, comparatively.

Our rapidly growing population means that there is a rapidly growing need for electricity for residential and industrial use. Thus, our electrification objective as a nation should, therefore, be beyond meeting the estimated need of those currently connected to the grid but also address those who will need power in five years’ time, due to the population increase.

Experts have projected that for our economy to grow at a rate of 10%, our power requirement must reach 30,000MW by 2020. An objective that seems to be so out of sight and maybe unrealistic, when we remember that we barely manage to generate 5,000MW today. This figure will also need to move considerably upwards to 78,000MW by 2030, less than 14 years from now. The United Nations estimates that our population is expected to exceed 258 million by then, a 52% increase from 2012. Our electricity power needs will continue to grow exponentially and we cannot expect to address it on the back of a broken model or on government funds.

Very few sectors are as capital intensive as the power sector globally. To give a fair idea of how capital intensive it is, Nigeria spent approximately $30bn, between the period of 1999 and 2013, to bring generation from about 2,000MW to the current levels.

A more conservative estimate that will see Nigerians who are currently connected to the grid receiving approximately 18 hours of uninterrupted power by 2020 is for our generating capacity to be boosted to 20,000MW, with the requisite gas supply and transmission infrastructure in place and complimented by an expansive and reliable distribution network.

The power sector reform process in Nigeria has recorded successes on many levels but this is not easily evident, because the final product, power in homes and businesses, still remains as elusive as ever. The frustration of Nigerians is therefore understandable. This, however, does not subtract from the fact that the critical foundations for the reform, that will translate to power for this populous nation and this large economy, which have laid. As a matter of fact, that is where the main attention ought to be

To attain even the conservative 20,000MW by 2020, it is estimated that the sector will need investments to the tune of $40bn. Of course, since this is now a privatized sector, the funds have to come from private investors who, as a reasonable expectation, need to see where the value lies for them, in terms of the recovery of, and recovery on their investment.

So what is the role of the new tariff in all this?

For many Nigerians, the perception surrounding the new tariff has largely been driven by a view that it is to help fund the business of the current new owners who did not have enough funds before buying up the assets or who seek to exploit the consumers. It is, however, important to point out that electricity is no different from any other commodity that we purchase. Nor is its production and commercial principles different from the other sectors of the economy. To produce electricity requires investment in infrastructure and operating expenses. Such investment is typically and universally driven by the operator’s access to debt funding (because equity funding is typically more expensive and would drive the tariff higher). For lenders to provide such financing, the underlying transaction must be bankable. In other words, the lender must see the cashflow projection that would provide the assurance that the operator can pay back the borrowed funds. Thus, if there is no cost-reflective or market-priced tariff that realistically captures the cost of production, it would be virtually impossible for operators to access financing. Furthermore, healthy revenue recovery is a fundamental requisite for any equity investors. It is no different for the electricity business.

Even more important is that the requirement for a market-priced tariff is not specific to only the distribution companies. Indeed, only twenty-four percent (24%) of the market revenues go to the distribution companies. The balance of the revenues go upstream to the other market participants in the value chain – transmission, generators (who take the lion share), gas suppliers, the regulator, etc. In stark terms, an inadequate or non-market-priced tariff means that the commercial sustainability of the value chain is jeopardized. The transmission company is unable to wheel the supplied power, due to limitations of an unstable grid that is beset with either obsolete infrastructure or limited lines; the generator is limited in producing power, as a result of either failed turbines or lack of gas supply that is tied to its inability to meet its obligations to the gas supplier; the gas supplier is unable to supply gas, because there are no revenues forthcoming from the generator, to enable the exploration for new wells or maintenance of the gas processing plants, etc. Other sector players such as the regulator, the Market Operator, NBET’s sustainability are also tied to the revenues that are generated from a market-priced tariff.

As long as the market continues to suffer liquidity issues that are tied to whether or not the tariff is one that will commercially sustain the value chain, it is difficult to see how the sorely needed investment that is needed to rectify the decades old negligence of electricity infrastructure; the increased generation that will lead to both improved supply and lower tariffs; increased gas supply that will drive the increase in electricity generation, etc. will come to pass.

From the information above, it should be easy to reach the conclusion that tariff is not just for the existing players in the sector or just for the distribution companies. If we desire to create an environment that will attract others that will increase the supply of electricity power to our economy, it is simple business logic that they have to know that the price of the product they will be selling is realistic and will allow them to recover their investment.

The electricity market in Nigeria has so much potential for investors and for consumers too. For the win-win that we all need to be created, however, we need to look beyond the teething problems currently being experienced as part of exiting an old inefficient and corrupt system, to one that will eventually take us to the goal of increased 24/7 uninterrupted power supply.