Agusto & Co., a pan-African credit rating agency and provider of industry research, has called for reforms in Nigeria’s ailing power industry.
The firm urged the Nigerian government to strengthen the current industry regulator, the Nigerian Electricity Regulatory Agency (NERC), arguing that a strong regulatory environment remained a prerequisite for a viable power sector.
In a report titled: “The State of the Nigerian Electric Power Industry-is there Any Light at the End of the Tunnel,” the Lagos-based agency maintained that it remained cautious about the capacity of the new tariff regime to transform the industry.
However, the firm noted that even with the current NERC, if the decisions taken by the regulator are consistently enforced, they have the potential to move the industry forward in the right direction.
“In August 2020, the Central Bank of Nigeria (CBN) issued a circular that all deposit money banks are expected to warehouse and manage collection inflows from all Distribution Companies (Discos) under specific guidelines as contained in the document. The objective of this ‘ring fencing’ is to secure cash collected from the Discos and ensure that these distribution companies meet their mandatory obligations.
“While operators are generally optimistic that the new tariffs and accompanying regulations would enhance efficiency and position the industry on the trajectory towards achieving financial independence and ultimately improvements in the volume and quality of electricity supply, Agusto & Co remains cautious.
“In our view, to truly achieve the objectives of privatisation, reforms need to be accompanied by a strong and enabling regulatory environment. Furthermore, improved access to finance, efficiency in billing and metering as well as consistent and secure gas supply are vital to reap the benefits of privatisation in the long run,” the report stated.
It explained that while the journey to constant electric power supply remained far and long-winded, it believed the initiatives undertaken by the primary regulator – NERC– if consistently enforced have the potential to move the industry forward in the right direction.
According to the firm, since the privatisation exercise that commenced in 2013, the Nigerian electric power industry has been fraught with many of the same challenges ranging from unreflective tariffs to high loss levels, obsolete infrastructure, weak policy implementation and gas shortages.
All of these, it stated, culminated in weak and erratic power supply and dependence on self-generation by many businesses and households.
Furthermore, Agusto noted that electricity distribution in Nigeria remained plagued by high technical, operational and commercial inefficiencies, stressing that for instance in 2020, the country’s 11 Discos only billed for 74 per cent of the energy received from the transmission company, below the 81 per cent reported in the prior year.
The report added that billing efficiency which had historically been impaired by a low metering rate and energy theft, with only 37 per cent of registered electricity customers metered in 2020, was severely impacted by the Covid-19 pandemic.
“Agusto & Co believes the impact of the pandemic was more visible amongst consumer groups with post-paid meters and estimated bills given that the social distancing rules and movement restrictions established to curb the spread of the virus impaired the physical billing process.
“Collection efficiency also fell marginally to 66 per cent from 68 per cent one year prior. Consequently, the aggregate technical, commercial and collection (ATC&C) losses for the 11 Discos rose to 51 per cent in 2020 from 45 per cent in 2019.
“This high loss level remains one of the many reasons for the kickback from electricity consumers on tariff increases, especially in the absence of a significant and immediate improvement in power supply,” it maintained.
The report noted that these challenges have not only weakened the ability of operators to meet electricity demand but also threatened their financial viability, with significant implications for the fiscal health of the country.
Despite the series of amendments to the tariff structure, the company argued that cash flows from the Multi-Year Tariff Order (MYTO), have remained insufficient to fully cover the costs of electricity supplied.
“The fear of the impact of a ‘rate shock’ on consumers and the accompanying loss of ‘political capital’ has prevented the effective implementation of necessary amendments that will align the MYTO’s assumptions with economic realities.
“Electricity has thus consistently been sold at a discount, with end-user electricity tariffs much lower than the cost of electricity supplied. The shortfall from unreflective tariffs has been borne in large parts by the Federal Government of Nigeria (FGN) through multiple intervention funds and payment assurance facilities from the Central Bank of Nigeria (CBN) totalling close to N2 trillion country (US$4.9 billion) as at the end of 2020, equivalent to 6 per cent of CBN’s balance sheet.
“Despite this level of intervention, the generating companies had estimated receivables of over N400 billion in World Bank and Industry Operators at the official exchange rate as at 30 June 2020 US$1=N410 2020 alone.
“Whilst the interventions have been central in ensuring the profitability of operators along the Industry’s value chain, they remain insufficient and unsustainable,” it stated.
However, it stated that recently there have been notable efforts by the primary regulator, NERC, to minimise the challenges faced by operators in the industry, while tariffs have been raised to near cost-reflective levels and adjusted to match consumption via an initiative dubbed Service Reflective Tariffs (SRT).
Ultimately, Agusto and Co, stated that tariff shortfalls (the difference between end-user tariffs and cost-reflective tariffs) were expected to taper off by the end of 2022, with tariffs fully reflective and sufficient to cover the cost of production.
“Whilst a number of the assumptions align with market realities, we note that the inflation and electricity generation estimates in the SRT model are much higher than the actual entries reported for the corresponding periods.
“In our view, these disparities have the potential to impair the attainment of cost reflectiveness. Agusto & Co believes adopting scenario analysis and modelling will provide a more robust framework to determine an appropriate tariff structure for the Industry in a dynamic macroeconomic environment such as Nigeria’s,” it argued.
