-By Divine-Favour Efemena
…Liquidity is a big challenge in the sector
…After privatization, sector still riddled with policy and regulatory uncertainty
…Slow metering hampering billing and collection goals
The Centre for Petroleum Information (CPI) is one the foremost energy associations in Nigeria with focus on the sector. Recently, CPI had its Energy Finance Forum, webinar edition where the issues on the power sector were reviewed.
In a paper presented by Pedro Omontuemhen, Partner PwC, titled ‘Rethinking Power Financing Options’ he revealed that liquidity in a big challenge for the power sector in Nigeria.
The relationship between power Generating Companies (“GenCos”) and gas producers with suppliers in Nigeria cannot be over emphasized. In Q2 of 2020, gas fired power plants account for 78% of total electricity generated while hydro sources accounted for 23%
Omontuemhen pointed out that seven years after privatization, the power sector is still riddled with challenges such as limited transmission lines and liquidity shortages: inadequate gas supply, limited transmission lines, operational inefficiencies, inadequate and obsolete distribution, infrastructure, policy and regulatory uncertainty.
Essentially, many of the Distribution Companies (DISCOs) have been unable to collect a significant proportion of the total billings to customers as total revenue collected by all the DISCOs for energy distributed still significantly lags. This implies that about N3.3 out of every N10 billed to customers are not paid to DISCOs as at when due.
DISCOs’ remittances to NBET for energy distributed is less than 50%
Omontuemhen said liquidity crunch is the biggest challenge of Nigerian electricity sector. The 11 DISCOs have been struggling to meet their obligations to the Nigerian Bulk Electricity Trading Plc (NBET) with low remittances.
In one year (Q 2 2019 – Q 2 2020) DISCOs’ outstanding remittance to NBET and MO stood at about N 503 billion NBET remittances to GenCos for energy generated is averaging 33%
NBET has in turn been unable to meet its obligation to the GenCos thus creating a liquidity challenge. In one year (Q 3 2019 – Q 3 2020), NBET outstanding remittance to GenCos stood at about N509 billion in January and Febuary 2020 high remittance was due to the disbursement from the Federal Government payment assurance.
Also, slow metering progress has deaccelerated billing and collection goals in the sector. It is believed that metering customers will reduce the liquidity challenges currently grappling the power sector. Only Eko and Ikeja are the DISCOs that currently have more than half of their customers metered. Yola DISCO had the slowest metering progress of 19% of all DISCOs as at Q3 2020. Progress in metering customers will help to reduce ATC&C losses and billing collection inefficiencies in the sector.
The Sector has Experienced Multiple Financial Interventions by the
Federal Government
Omontuemhen stated further that as a result of the challenges bedeviling the power sector ranging from low collection, distribution losses amongst others, DISCOs are unable to meet their obligations to NBET and this in turn spirals to other players in the power value chain such as the Transmission Company of Nigeria (TCN), gas companies and banks
The liquidity crisis which is the most critical challenge of the sector necessitates government’s intervention in three occasions to avoid total collapse of the sector.
The Federal Executive Council (FEC) approved N701 billion Central Bank of Nigeria (CBN) facility in March 2017 as Power Assurance Guarantee for NBET for a period of two years. The Federal Government approves a loan of N213 billion for DISCOs in 2014. This was part of the Nigeria Electricity Market Stabilization Facility (NEMSF) by the CBN. In August, 2019, the Federal Government signed the release of N600bn for the power sector which sources said is meant for the shortfall in the payment of monthly invoices by key stakeholders in the sector.
In recent times, the regulators issued orders, regulations, and initiatives to attempt to resolve some of these liquidity issues and to create an enabling environment which include Minimum Remittance Order.
The framework is aimed to ensure a fair and equitable distribution of market revenues and an intervention towards managing the liquidity and financial challenges of the electricity industry. All DisCos are obligated to settle their market invoices in full as adjusted and netted off by applicable tariff shortfall approved by the Commission, Nigerian Electricity Regulation Company (NERC).
Distribution Franchising
On distribution franchising, Omontuemhen said, it is a newly proposed regulation aims to create multiple and competing sub electricity distribution entities in an electricity distribution market segment within a DISCO franchise area. The regulation proposed three different franchising models: Metering, Billing and Collection (MBC); Total Management of Electricity Distribution Function; and Distributed Generation (DG) based Electricity Distribution Franchisee
Service Based Tariff
He explained that under the service-based principles, Discos are only able to review tariff rates for customers when they consult with customers, commit to increasing the number of hours of supply per day, and quality of service. The SBT framework introduces 5 tariffs “Service Bands” representing the relative quality of service experience as measured by the committed minimum average hour supply.
National Mass Metering
For the national mass metering, Omontuemhen posited that it will put a stop to estimated billing and cushion the effect of the SBT on the end users, the federal government approved a nationwide mass metering programme under the CBN framework for the financing of the National Mass Metering Programme. The Bulk Procurement of 6.5 million meters will cost US$405 million; WBG – US$200 million and CBN – US$205 million.
Solution to Solve Liquidity Crunch
Recapilisation
Omontuemhen was of the view that since Nigeria has challenges in its power sector there is need for recapitilasation. DISCOs should make calls for fresh equity injection by both government and core investors. This will ensure funds are available to meet established capital requirements and support necessary investment for upgrading the network, increasing capacity utilisation, enhancing customer satisfaction and ultimately revenue assurance. Regulators are to oversee the process and developed revised performance agreement with realistic consequence management.
Enforcement of Minimum Remittances Order
The minimum remittance order aimed to ensure a fair and equitable distribution of market revenues and an intervention towards managing the liquidity and financial challenges of the electricity industry hasn’t been complied with. There has to be a revised performance agreement with realistic consequence management.
Debt Conversion Mechanism
A debt conversion mechanism or debt note would bridge the domestic supplier’s gas payables and gas supply invoice receivables
For computational ease, transaction taxes (VAT and WHT) would be charged at the point where the debit notes are used to offset royalties payable, the Department of Petroleum Resources (DPR) would be required to send corresponding tax credit notes to the gas companies.
Where a debt note does not cover the value of royalty payable, the shortfall will be paid by gas companies in line with existing practice. Whilst excess royalty due would be carried forward, in anticipation of future royalty payments.
The proposed solution does not constitute any form of sovereign risk or accumulation of public debt. It is simply a conversion of an existing debt of a government parastatal to a government backed instrument that can be used in offsetting payment obligation to DPR.
There is possibility for currency differential between US$ denominated royalties and Naira based gas invoices. A mutually agreeable exchange rate determination framework would be required to address currency mismatch in the proposed solution.
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