It’s Time to Review Electricity Tariffs

THIS REPUBLIC By Shaka Momodu, Email: shaka.momodu@thisdaylive.com, SMS Only: 0811 266 1654

It’s about time we stopped burying our heads in the sand, pretending that all is well with the power sector in Nigeria. Successive governments have been doing just that, and the result? Reality has always come to bite us harder. Nigerians are hoping that the problems they are facing will one day just disappear or angels will come down from heaven to fix those challenges for them. Without mincing words, I say it isn’t gonna happen. Supplications to God won’t work either because He will not fix for you what he has given you the power to fix. It’s either we summon the courage to rise to the challenges and tackle them head on or continue to suffer the pain and consequences of our failure to do the right thing – which is typically, one step forward, ten steps back. There is no miracle that can turn the tide if we as a people fail to accept that there has to be cost-reflective power tariffs.

I am at a loss to understand why those in leadership positions would sacrifice long-term gains for short-term adulation. Political posturing won’t provide electric power. Revocation of licences granted to Gencos and Discos won’t change the situation. At the core of the issue here is pricing – cost-reflective tariffs to use the terminology of the sector. I am unimpressed by the buck-passing, the rigmarole and the propaganda. The Minister of Power, Saleh Mamman does not appreciate what a business venture is. He thinks people invested their money, time and energy for charity purposes. He would prefer the Discos to distribute electricity for free. He has failed to understand that the overpowering motivation for entrepreneurship is profit. When you force a business to sell its product less than the cost price, then you kill the motivational element of doing business. It is worse when you promised to pay the differential and fail, thereby exposing those businesses to too many risks that can discourage such investment models.

Watching a video clip of the minister’s media briefing recently, once again tells the story of Nigeria in painful prose. This man is a total misfit for the position he occupies. He could barely express himself or articulate the issues plaguing the sector. Now, tell me, how do you expect such a man without clarity of thought to understand the technical complexities of electricity generation, transmission and distribution? And yet he superintends over that critical Ministry. This is the tragedy of our country. The person that appointed this guy to head the ministry of power, an area so central to the economic progress of this country has done Nigeria a grave disservice. It is indeed a shame that competence is not a consideration for getting appointment in this government, rather all you need to be considered for a position is which part of the country you come from. Otherwise, how can any well-meaning person appoint Mamman to ministerial position? How much more to get to head the all-important Ministry of Power? The recommendations he claimed to have made to the federal cabinet cannot be a product of informed thinking and understanding of the contours of the power sector.

The problem is, there is a fundamental misalignment between the vision/goal of the power sector reform and the immediate political exigencies of decision makers. There is no need to pretend that the laudable objectives of the reform programme, if properly implemented, are not in sync with the bunch of narrow-minded, incompetent and visionless supervisory heads that this country has unfortunately been saddled with in the power ministry.

For the reform of the last few years to achieve the ultimate objectives that inspired it in the first place, the political leadership has to be bold and audacious, with the will power to take the painful but necessary steps to cure the system of the malaise that has bogged it down and by extension, impeded the country’s industrialisation efforts. When you embark on reforms, it is a commitment to change the narrative for the better. Not plant landmines and needless obstacles on the paths of companies and then sit back and watch them struggle almost to the brink of failure and then latch on to that to score baseless political points – that the previous government sold the power assets to its allies. As if that isn’t bad enough, the noose around the power companies is being tightened by the fact that the government has not allowed the conditions precedent to those acquisitions six odd years ago, to drive the trajectory of the entire process.

Nigeria is not a socialist country, nor is it a welfare state. Our business model is rooted in a market-based economy that rewards entrepreneurs/investors for the risks that they take. Now, if an investor borrows money from the bank to invest in a business, two things are possible: it’s either that business succeeds or it fails. Should it succeed, the investor earns the glory and accolades that accompany success and should it fail, the person suffers the consequences in equal measure. This intervention, I am sure as hell is not a popular position to take. But this is not a popularity contest and I am not about to pretend it is. I am not ready to play to the gallery like the current minister of power is doing.

The truth is, wherever we may be, whether at work or at home, we all want the light to come on at the flick of a switch. If at home, we would want to put on the air-conditioner, relax and spend quality time with family. I am really tired of coming home every day, I mean every day to be welcomed by the noise and fumes emitting from the noisy power generators in the entire neighbourhood. The health risk of constantly inhaling toxic fumes is also better imagined. We are inflicting a lot of damage on the environment, and working at cross-purposes with the rest of the world which is going carbon neutral to save the planet. Lets even for a moment imagine the quantum of resources spent to self-generate electricity to power our homes and businesses. We end up spending far more than we would pay the Discos if they were allowed to charge cost-reflective tariffs and recover the cost that would enable them upgrade and improve their distribution infrastructure.

My colleague, Ijeoma Nwogwugwu put it so succinctly in a private WhatsApp chat recently. I couldn’t agree more and she has graciously permitted me to use excerpts here: “What we need is a system reset. You cannot privatise a sector and agree to conditions precedent which you (government) fail to meet. That is the main crux of the electricity sector not the garbage (Babatunde) Fashola was fond of spewing. The allegations of corruption have been baseless and used by politicians to whip up sentiments among a gullible public. Fashola failed to take on the issues and address them head on. That is not to say that the Discos have been blameless. In fact, as the last mile in the delivery of electricity to consumers, it is the distribution system that has always been the feeblest link in the power sector value chain, and the most open to the critical observation of its users. But the crux of the matter is the pricing structure which must be addressed. You cannot bake a loaf of bread for N100 at cost and a regulator tells you to sell it at N50. There is no way that the baker will remain in business if the components he needs for baking the bread cost more than the price at which he can sell it. It is as simple as that.

“What we have is a situation whereby the entire value chain is in a state of flux. We have generation companies (with installed capacity of over 13,000MW) that cannot produce electricity because of gas supply shortages. We have gas producers that would rather export gas because your domestic pricing for their gas falls below cost of production. We have a transmission grid that is not being expanded and cannot wheel out more than, at best, 5,300MW of electricity, which I must add must be allocated to all states based on the federal character principle instead of on a commercial basis. We have a distribution system that cannot distribute more than 6,800MW of electricity to consumers because it has liquidity constraints caused by a tariff shortfall and its remittance obligations to the Gencos, Market Operator, TCN, the CBN and other creditors. Mind you, it is only after the Discos have met these obligations, as required by NERC, that they are left with the balance for network expansion and upgrade, metering, etc.”

Added to the failure of government and its regulatory body NERC to adequately implement the Muti-Year Tariff Order, is the federal government’s indebtedness to the Discos, in terms of tariff shortfall, put at a total of N1.728 trillion as of December 31, 2019, according to the Association of Nigerian Electricity Distributors (ANED) in its presentation to the National Economic Council (NEC) subcommittee in February. This is just as the association put the total amount of debt owed by the Ministries, Departments and Agencies (MDAs) to the Discos as of December 31, 2019, at N116.487 billion.

Again, I couldn’t agree more with Ijeoma Nwogwugwu’s insightful analysis of Nigeria’s power conundrum on the back page of this paper on Monday wherein it was stated inter alia that the “preference by Discos to resort to unscrupulous estimated billing, rather than metering end-customers on their networks, has also made them extremely unpopular. This along with power surges that have led to fire outbreaks, in many instances, the loss of lives, and the complete destruction of people’s electrical appliance, homes and business, has made them the bashing boys of the electricity supply chain.

“The revenue shortfall, notwithstanding, the Discos are expected to pay for the electricity that they take from the Gencos, which in turn pay the gas suppliers. Under the transition arrangement for the Power Sector Recovery Programme (PSRP), that payment is made through the Nigeria Bulk Electricity Trader (NBET), which operates as the bulk off-taker or buyer of electricity from the Gencos. However, because the Discos are unable to recover fully the cost of electricity generated, transmitted and distributed, the industry regulator stipulates to them the minimum remittance requirement that they must make to NBET monthly to partly pay for the electricity that they have bought or that they have been invoiced by NBET. Note that at about N30 per KWh, what the Discos collect from end-customers is well below the price that the Gencos pay for their gas needs, much less covering the cost of operations of the Gencos and the profit margin that the power plants are expected to make.

“In addition to paying NBET, the regulator determines what the Discos should pay to the TCN and Market Operator to partly cover the cost of electricity transmission. Added to this is the first line charge that the Central Bank of Nigeria (CBN) presently has on the Discos’ revenue in order to recover the loans it has made available to industry operators under the Nigerian Electricity Market Stabilisation Facility (NEMSF) and Power and Airline Intervention Fund (PAIF).” What a grim picture! It shows that the Discos are in chains.

In all honesty, how many businesses can survive under such constraints and suffocating debt? The government’s breach of the agreement with the power investors obscures the future of investments, makes planning difficult and destroys business confidence. It is plain lunacy for government to think that the solution to the crisis bedeviling the power sector, for which it shares significant blame, is by revoking licences of the Discos. Such a move can only make matters worse with the attendant recourse to litigation. Anyway, which investors are going to buy the power assets from a government that does not keep to an agreement it freely entered into?

Now, we are being once again hoodwinked into believing that Siemens holds the key to solving our power generation, transmission and distribution challenges. For those who may have forgotten, let me refresh your memories: in 2007, Siemens was indicted for bribery and corruption. It was found guilty of bribing top government officials in this country, among whom were a serving senator and a minister. A court in Germany convicted Siemens and sentenced its top executives to various terms of imprisonment for bribing Nigerian officials to facilitate contract awards that were usually overpriced.

Then President Olusegun Obasanjo took action by revoking the Siemens contract that had ensured it enjoyed a near-total monopoly of NITEL contracts and blacklisted the company over the bribery scandal. Siemens was also fined for the bribery scandal. As usual with the way we do things here, the company has since found its way back into the country. And it is now being presented by powerful forces in the Presidency as the cure for all the challenges in the power sector.

Now, can anybody tell us what value Siemens added to NITEL when it had a strangulating monopolistic control of the telecoms giant? The last time I checked, NITEL was a colossal failure. Now it’s the turn of the power sector?