Power, Insights

Covid-19: A Critical Analysis of the Federal Government’s Proposal to Supply Free Electricity

Recently, the House of Representatives proposed a stimulus bill to facilitate the free distribution of electricity to Nigerians for two months as part of the Federal Government (FG)’s socio-economic response to limit and alleviate the human and economic impact of the Covid-19 pandemic. Other countries such as Ghana and the Democratic Republic of Congo have adopted similar measures. However, the Nigerian Electricity Supply Industry (NESI) is peculiar and such proposals would naturally raise numerous questions, the most obvious ones being; who would bear the cost? Would the free electricity be enjoyed by all Nigerians or just a particular group? What quantum of electricity would be supplied to the beneficiaries: same as other Nigerians? How would this be measured bearing in mind that most households and businesses are yet to be metered? When would the measure become effective? After expressing support for the measure on the condition that the FG foots the bill, the Distribution Companies (Discos) through the Association of Nigerian Electricity Distributors (ANED) later announced an agreement with the FG to provide free electricity to Nigerians for  two months. However, the details of implementation are to be determined subsequently. The Discos are not the only players in the electricity supply value chain. Any agreement to suspend tariff collection must necessarily involve all stakeholders from generation to distribution to transmission. Also, the proposal must be creatively structured to navigate the liquidity problems currently plaguing the Nigerian power sector. As they say, the devil is always in the details.

CURRENT INDUSTRY CHALLENGES  
The most obvious challenge to the proposal is the liquidity crunch in the power sector. Today, the Generation Companies (Gencos) claim over N1 trillion in accumulated debts from the Nigerian Bulk Electricity Trading Company (NBET).  The Discos on their part are unable to fulfill their financial obligations to NBET due to very high aggregate technical and commercial losses (ATC&C) and tariff shortfalls. To put things in perspective, Discos and Gencos have consistently declared huge losses since the privatization exercise in 2013 despite the introduction of a supposed cost reflective tariff system through the Multi Year Tariff Order (MYTO). Also, the NESI has huge outstanding loan obligations to the Central Bank of Nigeria (CBN) under the Nigeria Electricity Market Stabilization Facility programme and to numerous other financial institutions. As things stand with the effect of Covid-19 on the financial capacity of Nigerians, the NESI will undoubtedly face financial challenges related to greater difficulties by the Discos in tariff collection for unmetered customers particularly considering the fact that many Discos are suspending disconnection of owing customers during this period and at the same time striving to supply stable electricity to make the lockdown more bearable for citizens. The effect of this will become more obvious once the lockdown is over and life goes back to some level of normalcy. No doubt the Discos are bound to record very high collection losses.

When all is put together, the difficulty faced by the NESI in conceding to a two-month hiatus on tariff payments becomes apparent. Beyond the Discos and Gencos, other interests to be considered are those of the respective creditors and unpaid contractors.  It is doubtful whether the Discos can solely enter into an agreement with the FG to suspend tariff payments without the concurrence of other stakeholders in the NESI value chain and a clear program of how the FG would disburse timely payments across board. Of particular concern is payment for gas supplied to the Gencos for power generation. It does appear that the FG is taking steps to address this situation as we understand that pursuant to the FG’s recent approval of about N200 billion to boost supply of gas to the power sector for the next few months, a gas supply agreement has been entered into among the Nigerian National Petroleum Corporation (NNPC), TCN and the Gencos with the NNPC disbursing N220 billion to gas suppliers in order to ensure consistent gas supply to the Gencos during this period. Beyond the few months’ payment, for how long would the FG be able to keep this up especially if the palliative measure does not kick in until another couple of months down the line? Electricity consumption is already heavily subsidized by the FG. Under the Power Sector Recovery Plan (PSRP) the FG pays the shortfalls in tariff to the Discos.  As at 2017, the tariff shortfall owed to the Discos was estimated to be about N458 billion,  today it is estimated to be over N500 billion. The Discos have maintained that the government’s failing in this regard is partly responsible for the cashflow and liquidity difficulties they face…

 

 

 

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