The Case for Electricity Clusters

Guest columnist: Rumundaka WonodiÂ

My primary poser here is that our electricity Distribution Companiesâ€™ (DisCos) footprints or franchise areas are rather large, with diverse populations and even more varied economic realities. Under the current customer classification, electricity consumers within a customer class are expected to the pay the same rate for electric service regardless of their financial abilities or willingness to pay more for better service.

If you consider, for instance, a DisCo catchment area as diverse as that of Abuja DisCo, you will agree that consumers in Abuja FCT in general, have different economic power from those in Kogi or Nassarawa State; and even within Abuja FCT, consumers in Maitama, Asokoro, Wuse or Garki have different means from those in Nyanya or DeiDei. You have the same situation in Lagos where consumers in Ikoyi or Victoria Island differ significantly from those in Okokomaiko or Iyana Ipaja.Â

On the back of this, I am proposing that DisCos organise their footprints into â€œclustersâ€ better described as â€œElectricity Tariff Jurisdictionsâ€ or ETJs whereby beyond the requirements of the universal service, they can offer different supply solutions, different services at different tariff levels. This has become relevant with the recent declaration of eligible customers regime by the government. Â

The kernel of the ETJ proposal is that universal services remain, and all customers regardless of their financial abilities or location, will not be denied services already provided by the DisCos. However, the creation of tariff Jurisdictions is necessary to first, ensure the provision of better services and second, and more importantly, to systematically drive Discos to procure new power efficiently.Â

It is important to state that DisCos should not be allowed to sell power contracted from the Nigerian Bulk Electricity Trading company (NBET) at higher prices and should also not discriminate unless people are not paying their bills. At any rate, a tariff jurisdiction can be created for an industrial; commercial; highbrow residential or lower income neighborhoods depending on their needs.Â

Indeed, there are neighborhoods where the majority of the consumers, due to economic considerations, may prefer power just for lighting and ironing and therefore will be open to regimented supply. These are mainly lower income families who tend to live on the fringes of major cities. So, their DisCos could apply for them as an ETJ based on service levels

Currently, the on-grid power that DisCos distribute is from NBET at an average tariff that is significantly cheaper than what most embedded or captive power projects offer DisCos and other captive customers. It will be wrong and unfair for DisCos to channel th is grid power from NBET to a few willing and able consumers at a higher price. It will be equally unacceptable to sell grid power at the current tariff to ETJs given that the tariff calculations have already made provisions for losses assuming a fair spread in distribution. What ETJ proposal says is that increase in reliability and service level should rest on new power procurement from independent power producers (IPPs).

One pathway to incremental progress on 24 hour supply can be found within homogeneous income clusters, where consumers are willing and able to pay a premium for 24 hour electricity supply, if the price is more competitive than what they currently pay running their generators for a similar service. DisCos have what it takes to solicit for new power from power plants, and they can leverage their economies of scale to negotiate for cheaper power. With competitive pricing, a DisCo can then offer consumers within a cluster, improved power supply solutions that represent a clear pathway to 24/7 reliable power over a specified period. If the consumers accept the proposal, the DisCo then goes ahead to file a special tariff with the Regulator – Nigerian Electricity Regulatory Commission (NERC). The cluster is thus marked as an Electricity Tariff Jurisdiction.

As straight forward as it sounds, tariff jurisdiction is not just about tariffs and service levels but also about transparency and building consumer trust. In the ETJ regimes, consumers should be able to know what their money buys them and be able to track tariffs with associated service levels. Currently, we have tariffs without defined service levels. People donâ€™t know how many hours of service in a day to expect from their DisCos, nor the time period during which they will be supplied with power. Contrast that with communities or estates where residents pay for standby power supplied by their estate managers. In most cases, residents know how much they are charged for service fees and how much power to expect â€“ be it 24 hours power service or guaranteed power during specified hours of the day. Most DisCos have yet to rise to this level of transparency and service predictability.

Beyond better customer service, the ETJ proposal is really about catalyzing investments in power generation and distribution. It makes generation projects much more bankable and will give fillip to the embedded generation regulation. Observers of the sector may recall that some DisCos had in the past tried to procure embedded generation, but faced challenges concluding the transactions because of issue of tariffs. This is in addition to the liquidity challenges and required guarantees. ETJ potentially eliminates these creditworthy issues.Â

Lenders are more likely to take interest in funding new generation and associated distribution upgrades in well delineated and profitable jurisdictions. ETJ does two critical things: first, because it is a bankable investment, it quickly mobilizes capital without the usual recourse to FGN guarantees; and second, it compels and guarantees higher consumer satisfaction by providing trackable service levels.

Concerns will be rightly raised about the risk that ETJs will heighten inequities in power access between the haves and the have-nots. This is where the Regulator should play a critical role to address that. I expect that during the approval process for an ETJ tariff, NERC could, or should, rule that while the tariff on the average is acceptable to the proposed ETJ consumers, if a sizeable number of vulnerable consumers exist in the jurisdiction, there should be mechanisms to make the majority to subsidize power for the few. Alternatively, the DisCo may continue to â€œuseâ€ grid power to supply those low-income consumers. In principle, I expect that where there is a case for cross-subsidization, the load to be subsidized should not be more than five percent of the ETJ demand.

Under ETJ, â€œclusterisationâ€ has to be physical, that is, within a geographically defined area. If a number of large users of any categories in different locations want to be grouped under a special tariff from the DisCo, a special tariff provision already exists under MYTO (Multi-year Tariff Order) for supply from a specific source.

The debate and agitation by state governments for electricity self-determination with respect to power generation and distribution reflects the frustration everyoneÂ feels with the failures in the power sector. While sympathizing with the states, I will quickly add that on the average, the FGN is a more efficient operator than the states save for a few. So the idea of states setting up respective electricity regulatory commissions makes little economic sense as it will lead to more costs to the consumers and confusion for the investors.

I do however believe that with tariff jurisdictions, we can assuage some concerns of the states. For example, if a state, some key cities or industrial clusters within a state are declared ETJs, the state could invest in generation and have its generation output sold to the DisCo at a discount that must be passed on to the customer, thus subsidizing the tariff within the stateâ€™s ETJ.Â

Similarly, a state could position itself to attract investments as an energy competitive state, or invest in distribution assets with the understanding that the investment is captured in the friendly tariff within the jurisdiction.Â

The foregoing considered, one could say that time is now the only thing standing between states and and energy self-reliance. Depending on how you calibrate time, you may find areas where ETJs can be very quickly implemented. Again, this answers the question of whether the idea of ETJ is amenable to only affluent consumers.

The government recently declared the Eligible Customers (ECs) criteria, which allows large consumers of power especially industrial and large commercial users to buy power directly from GenCos. Put another way, the declaration allows GenCos to sell directly to end users without going through the DisCos, essentially decentralizing power purchase from generators. The ETJ on the other hand is geared towards centralizing power purchase by aggregating customers in residential or industrial clusters or local government areas or states into jurisdictions. The declaration of eligible customers makes it imperative for DisCos to use the ETJ proposal to provide better services to their customers, otherwise, consumers who qualify as ECs may opt for a different service provider. I will conclude by saying that ETJ and eligible customers deepen the market and should lead to a competitive tension that will benefit the consumers.Â

Yes, of course. We must talk about metering, but that is a discussion for another day.

â€¢ Wonodi is the pioneer Managing Director of the Nigerian Bulk Electricity Trading (NBET) and Founder/CEO, ZKJ Energy Partners Ltd, an Energy advisory and investment firm