Can The Factors Responsible For The Recent Improvement In Electricity Supply In Nigeria Sustainably Keep The Light On?1
Inadequate supply of electricity in Nigeria has been rightly regarded as the singular most pervasive and debilitating cause of lack of adequate economic growth of the most populous African nation and biggest economy. Over the years, commentators, and analysts of the Nigerian Electricity Industry (“NESI”) have been unanimous in their prediction that if the supply of electricity can be improved then the small and medium scale businesses, which are the drivers of economic growth anywhere in the world, can actually take their pride of place in Nigeria and drive productivity that can, in turn, engender economic growth befitting of this potentially giant country.
Within the last few months, there has been a significant measure of improvement and stability in the supply of electricity in the economic cities of Nigeria. This development has raised the hopes or dreams of the stakeholders, who are beginning to look forward to a day when consumers of electricity can have a guaranteed supply of electricity for, at least, 15 hours a day, to their homes and businesses. This short market review and commentary on the recent significant improvement of electricity supply to the final consumers in Nigeria focuses on the factors that have contributed to this development and suggests that it is possible to sustain the improvement in electricity supply, especially if all stakeholders pull in the same direction.
FACTORS RESPONSIBLE FOR THE RECENT IMPROVEMENT OF ELECTRICITY SUPPLY IN NIGERIA.
Below are some of the factors that we consider as contributors to the recent improvement of electricity supply to the end-use consumers in Nigeria.
- The Multiyear Tariff (MYTO) implementation and Review - The implementation of the methodology established for regulating the electricity prices in Nigeria called Multi-year Tariff Order (“MYTO”) – a 15-year pathway (for the period 1st January 2015 to December 2024) for the NESI with limited minor review each year. Established pursuant to Section 76(6) of the Electric Power Sector Reform Act (“EPSRA”) 2005, MYTO generally uses a building blocks approach in setting Transmission and Distribution tariffs which provides the benefits of both price cap and incentive-based regulation. The last end-user tariff yearly review for the Distribution Companies (“DISCOs”) which took effect on 1st May 2022 was a significant one. This review was built on the gains of the Nigerian Electricity Regulatory Commission (“NERC's”) order on transition to cost-reflective system in the NESI adopted in 2020. The 2020 order had earlier categorized the end-users into service bands described by the number of kilowatt hours of electricity that must be supplied to the end-use customers by the Discos and the tariff to be paid by such customers per such bands. For instance, a customer on Service Band B Non-Maximum Demand level in Yaba Business Unit, Onike District under the Order No: NERC/297/2021 for EKEDC, who was placed on minimum duration of supply of 16 hours a day, was by virtue of the review now obliged to pay N51.81 per kilowatt hour of supply for the said 16 hours a day expected supply. Along with other measures put in place by NERC, this has resulted in some improvement in tariff collections, and ultimately improving liquidity in the NESI.
- The activation of the PPAs/GSAs/Service Levels Agreements – As widely reported, the activation of Power Purchase Agreements (“PPAs”), the Gas Sales Agreements (“GSAs”) for thermal stations and Service Levels Agreements in the NESI with enforcement mechanisms put in place by NERC and agreed upon by the operators is a major factor in the recent improvement of electricity supply to the end-use customers. Under this arrangement, the take or pay principle, among others, in the negotiated PPAs became operational. It has thus become imperative, unlike before now, for every operator to pay a significant percentage of their bills across the value chain of the NESI. In other words, the generation stations must pay for the gas to generate electricity, the transmission and system operator must pay and be paid for their services while the DISCOs must pay for the electricity supplied to them. The end-use customer must ultimately pay for electricity used by them. It is our belief that this has huge potential to make more funds available for generation, transmission and distribution and supply businesses in the NESI.
- Improving Security Situation in the Niger Delta and surveillance contract with a former Niger-Delta Agitator – On 23rd August 2022, Mr. Mele Kyari, the Group Chief Executive Officer, of Nigerian National Petroleum Company Limited (“NNPC Ltd”) announced an award of a Forty-Eight Billion Naira (N48bn) contract annually to an ex-militant Mr. Government Ekpemupolo, alias Tompolo, for the purposes of surveillance on the national pipeline facilities.2 While there are some negative perspectives on the rationale behind this move by government, it is our view that the award of this contract to one time kingpin of the agitators of the Nigeria Delta region sends a positive message across the energy industry. This has the potential to generate some stability in getting the oil and gas, which are feed stocks for the gas-powered electricity generating stations to ensure the power generation can be significantly improved.
- The Sessional impact of full dams for hydro power generation – About 20 percent of Nigeria's electricity generation comes from hydro and other renewable power stations, and seasonally during the rainy season the dams are known to be full and thus the hydro power stations operate with increased capacity. The concomitant effect of improved generation is that the final consumers tend to have improved supply of electricity. We believe that this year is no exception.
- The involvement of fund owners/banks/administrators in the management of some of the Discos – The government along with a few of the banks who have invested in some of the Discos took over about 3 Discos who could no longer service their respective loans in July 2022.3 It would seem that the measures being put in place by these set of new managers in collaboration with other stakeholders may be yielding the desired results in view of the improvement in supply. The final consumers have not been treated to the usual story of down-time in service as the Discos appear to attend to faulty distributions equipment faster than before with a view to ensuring that more money is generated from their operations to service the PPAs.
HOW TO SUSTAIN THESE MEASURES AND KEEP THE ELECTRICITY ON
Given the increased cost of energy in recent times with the war in Ukraine and the effects on the global price of crude oil and refined petroleum products, it is self-evident to state that the Nigeria electricity consumers are happier than ever with the current improved supply, and we hope that this new supply level can be sustained. To sustain the improvements however, all hands must be on deck. Some of the steps that must be taken, in our view, include the following:
- Metering the customers:4 Provision of Prepaid Meters to the end use customers cannot be overemphasized. Until the NESI gets to the point that the customers can pay for the cost of supply across the value chain with healthy profit for the investors, there cannot be consistent and sustainable electricity supply.
- Cost reflective Tariff through the MYTO: It is important that customers pay due and cost reflective tariffs to ensure liquidity in the NESI and encourage new investors to bring in their funds to invest. There is still massive room for investments across the value chain of the NESI and investors will come in once they are sure of the good returns on their investments. It is thus imperative that the NERC continues to guide this process through the statutory and regulatory instruments.
- The Electricity Bill 2021: The Electricity bill passed by the Senate of the Federal Republic of Nigeria on 20th July 2022 and awaiting concurrence of the House of Representative and signature of Mr. President has been described as one ambitious bill that can transform the NESI.5 The bill seeks to consolidate the laws relating to NESI, repeal the Electricity and Power Sector Reform Act, 2005 and enact a new Electricity Act. With provisions made for operations across the entire gamut of the industry, when the bill becomes a law, it will definitely contribute to keeping the light on. A more coordinated approach to policy matters from all ministries and agencies of government, involvement of state, local governments and private firms in the business of electricity, devolution of the national grid-system by allowing mini-grids to co-exist, increased investment in new technologies, more robust renewable energy mix, creation of the National Power Training Institute of Nigeria and the Power Training Fund (Power Fund) and provisions addressing electricity theft and better management of the Discos' relationship with the end use consumers are some of the provisions that have been described as making this bill potentially beneficial to the NESI.6
- Continuous Improvement of Security Situation in the Niger Delta: A sizeable percentage (about 80%) of the electric power stations are thermal stations and the gas to power the stations comes from the Niger Delta. It is therefore obvious that improved security in the Niger Delta will facilitate continuous supply of gas to generate electricity. The oil and gas industry has taken some hit in recent time in terms of oil theft and force majeure declarations on damaged or faulty equipment, and it is important that governments do all within their powers to ensure that gas supply to the thermal stations is consistent and not disrupted by insecurity or vandalization among others.
- Privatizing the Transmission Company of Nigeria and Continuous operation of the PPAs/GSAs/Service Levels Agreements: We make a case for transmission and operation systems to be fully privatized. A situation where the Federal Government holds on to the Transmission Company of Nigeria (“TCN”) is slowing down progress. While government needs to continue to provide some subsidy in critical areas like the rural electrification and renewable energy subsectors, it is also important that companies in the NESI begins to operate as businesses without subsidy. Consequently, the full market operation should commence and businesses within the ecosystem should run on their own and without depending on subsidies.
The privatization journey of the NESI has been a long-drawn-out process, but it has undoubtedly been with some gains, which we contend can be sustained. Some of the factors responsible for the current improvement in electricity supply and the suggestions as highlighted above, if well consolidated and managed, can sustainably keep the light on.
1 Peter Olaoye Olalere, Associate Partner and Head of Energy & Natural Resources Practice, SPA Ajibade & Co., Lagos, Nigeria.
2 See media coverage of this development at https://thenationonlineng.net/government-tompolos-return/ , and at https://www.sunnewsonline.com/tompolo-fg-promoting-criminality-with-n48bn-surveillance-contract-cislac-boss/ accessed on 29th September 2022.
3 See media coverage of this development at https://nairametrics.com/2022/07/06/fg-restructures-5-indebted-discos-banks-take-over-shares/; at https://pmnewsnigeria.com/2022/07/06/fg-fidelity-bank-amcon-take-over-5-discos-over-debts/ and at https://www.thisdaylive.com/index.php/2022/07/07/fg-backs-fidelity-banks-takeover-of-benin-kano-kaduna-discos-over-insolvency/ accessed on 24th September 2022.
4 See our previous article on this titled: ‘How Has The National Mass Metering Programme Impacted The Estimated Billing System Of The Unmetered End-Use Customers In The Nigerian Electricity Supply Industry' at https://www.mondaq.com/nigeria/oil-gas-electricity/1080048/how-has-the-national-mass-metering-programme-impacted-the-estimated-billing-system-of-the-unmetered-end-use-customers-in-the-nigerian-electricity-supply-industry or https://spaajibade.com/how-has-the-national-mass-metering-programme-impacted-the-estimated-billing-system-of-the-unmetered-end-use-customers-in-the-nigerian-electricity-supply-industry-peter-olaoye-olalere/ accessed on 20th September 2022.
5 See Legist by Policy and Legal Advocacy Center at https://placng.org/Legist/senates-electricity-bill-2022-ambitiously-aims-to-transform-nigerias-power-sector/ accessed on 21st September 2022.
6 See the Brickstone report at https://brickstone.africa/10-key-facts-about-the-nigeria-electricity-bill/ accessed on 21st September 2022.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.