There is no doubt that in the electricity value chain, the most hard hit by the effect of the quagmire in the Nigerian Electricity Supply Industry (NESI) are the Generation Companies (GenCos). As private concerns, they invested in power generation in anticipation of a developing power sector in Nigeria. Unfortunately, the privatisation process was designed to fail, and is now beset with myriads of interwoven and complex web of problems. One of these problems is the ever growing liquidity deficit in the NESI.
The total installed generation capacity far exceeds the wheeling capacities of both the transmission and distribution networks in a misalignment that describes the chaotic power sector in Nigeria.
One of the major problems thrown up by the power sector reform is the nature of contract signed by the thermal GenCos and gas suppliers. The agreement is a take or pay agreement.
Within the gas contracting sub-sector, take or pay is the minimum volume of gas that a buyer must take or pay for notwithstanding the volume of gas the buyer was supplied due to constraints outside their control. By this is meant, if the GenCos fail to take the agreed quantity of gas in a given year (assuming that suppliers were able to deliver the gas) for reasons other than force majeure, they shall pay gas suppliers for that quantity as if the gas had been taken.
This arrangement is required to enable investors in gas infrastructure to secure the necessary private financing based on a clear projected revenue and repayment plan. However, the electricity value chain has a number of other physical constraints that may, other than force majeure, prevent GenCos to “take” or “pay”. On several occasions, GenCos cannot “take” gas when gas pipelines have been vandalised and are undergoing repairs. At other times, gas pipelines are undergoing routine maintenance by the Nigerian Gas Company (NGC) during which GenCos cannot similarly “take” gas. More disturbingly, GenCos more often than not are in a position to generate electricity having received gas from suppliers but the transmission and distribution networks are unavailable due to different constraints including but not limited to load rejection, network faults, system collapses and so on. This represents a huge financial burden to the GenCos under this take or pay arrangement. More worryingly, for electricity generated and supplied through the power networks, the distribution companies (DisCos) cannot account for almost 50 percent for various reasons including but not limited to high value of aggregate technical, commercial and collection (ATC&C) losses, lack of metering, electricity abstraction, inaccurate energy accounting and so on. The DisCos have over the years been only able to remit an average of 30% of the total cost of energy they have been supplied. This represents a bigger financial burden to the GenCos who as a result struggle to honour their gas supply agreements with suppliers. The suppliers in turn refuse to sell gas to GenCos and the vicious circle continues.
Finance is the lifeblood of any business. In generating electricity, there are so many capital intensive inputs or components required in the production process. Once produced, electricity cannot be stored in large quantities, apart from in battery storage, technologies of which is now in development. Hence, the revenue from the DisCos should be consistent and sufficient to cater for the continuous production of energy. Unfortunately, this is not the situation in the NESI. The poor revenue collection of the DisCos earlier mentioned has given rise to a liquidity squeeze in the electricity market. As a result, the Nigerian Bulk Electricity Trading company (NBET), the off-taker and guarantor of energy supplied to the DisCos, is unable to settle the GenCos’ market invoice 100% in accordance with their Power Purchase Agreements (PPAs) even as GenCos cannot honour their gas supply agreements (GSAs). This shortfall creates a deficit in the financial accounting of the NESI.
Yet, the GenCos are not out of business. The reason is because the Federal Government (FG) bails out the power sector by paying for the tariff shortfall. With improper data, metering and accounting, this can be a source of easy revenue for the investors in the generation companies. Tax payers and the generality of consumers are footing the bill caused by ineptitude and inefficiency in the system as was the case pre- privatization.
Despite FG intervention payments such as the N213b, N600bn and lately, the N701bn payment assurance guarantee, GenCos claim they are currently owed over a trillion naira for power generated and consumed. This, they claim, has inhibited their ability to meet their obligations to lenders, carry on with operations and maintenance activities, procurement of spares and the payment of salaries. In summary, the operations of the generation companies has remained unprofitable with the attendant negative impact on infrastructural growth and operational reliability.
This has an even more ominous impact on the NESI. Potential investors are quick to see that the NESI is not financially healthy and are reluctant to invest in the Nigerian Power Sector.
To keep the Nigerian electricity market as a going concern, the government keeps on subsidising it, even as the tariff shortfall keeps increasing and stakeholders smile to their Banks.
Thus, the main objective of privatization, that government should have no business in managing the electric power sector, has been defeated. The government has once again remained the investor by mandate rather than by choice in the power sector.
In a normal electricity market, the primary responsibility of a generator is to ensure its plants, machinery and equipment are available and a call to generate power is at the behest of the off-taker (in this case NBET). The off-taker is expected to provide the gas or could mandate the GenCos to enter into gas contracts that the off-taker guarantees. Today, the Nigerian Electricity Market is much distorted as NBET pushes thermal generators to sign gas contracts without providing the under-guarding PPA that takes the risk of the gas contract. Some GenCos who have entered into gas contracts are in a financial mess as they are left to figure out payments for the contracted gas. As a result of this, GenCos are unwilling to enter into a firm gas contract, which has led to the current quasi arrangement; supply based on best endeavour and on a cash and carry basis. Hence, in the NESI today, there is no commitment to ensuring a thermal generator that does not pay money in advance gets gas supply.
All those who mediated the power sector Privatization have no knowledge of power systems. Also, they did not include power engineers, who by training, have analytical minds. Thus, they treated the matters theoretically without any concrete realism.
With the global coronavirus pandemic and the attendant fall in oil prices, additional strain will come on the NESI if government finances make it uneasy to subsidise the power sector. On the flip side, the cost of oil affects the cost of gas because they are inextricably linked. This is all the more so because 60% of gas for domestic use in Nigeria are from associate gas sources. Hence, it is expected that gas cost should drop considerably given the dwindling global cost of oil. The gas-to-power cost in the NESI is currently at a regulated price of $3.30 ($2.50/mmscf and c80). It is expected that this will reduce to ease the financial burden of the GenCos. Unfortunately in Nigeria, we haven’t heard any discussions around the reduction of gas cost dedpite the reduction in the price of petrol from N145 to N125 per litre. GenCos are now forced to operate on “cash and carry” basis; prioritizing sales to paying-customers as against debtors.
To address this problem, the FG will need to step in and ensure that gas is made available to thermal power plants in Nigeria. The government owns the Nigerian National Petroleum Corporation (NNPC) which is in joint venture (JV) partnership with multi-national oil companies who are the major gas suppliers to the electricity market. The government can control the volume of gas available domestically. Rather than exporting most of the gas produced in Nigeria as liquefied natural gas (LNG), a sufficient percentage should be allocated for domestic utilisation using the domestic gas supply agreements for gas-to-power plants.
At the moment, GenCos are dealing with gas suppliers on best endeavour basis just as DisCos are dealing with premium customers under the willing seller-willing buyer scheme due to the liquidity crisis staring us all in the face. This is not sustainable.
To change the narrative, and since gas accounts for over 60% of thermal power generation cost, the FG, through NNPC and the ministry of petroleum resources, should undertake the responsibility of paying for gas under a gas-to-power intervention scheme for thermal power plants. This will drastically reduce the current tariff shortfall and make the provision of electricity more reliable, sustainable and affordable for consumers if the power networks are fixed.
In February 2014, just few months after I saw a Privatization exercise (November 1, 2013) which was designed to fail, I advised the administrators of the NESI not to declare an electricity market. Please see the article below
NIGERIA RUSHES TO DECLARE ELECTRICITY MARKET
There is “no electricity market” in the NESI today as the conditions precedent to the declaration of the transitional market stage in the NESI did not take place. Consumers bear the bill of keeping the Nigerian Bulk Electricity Trader (NBET) in position. Ideally, NBET should be scrapped and its members of staff transferred to other government ministries, departments and agencies (MDAs).
The Nigerian Government has once again remained the investor by mandate rather than by choice in the Nigerian Power Sector because it designed the Privatization to fail.
Lesson: Ineptitude & the celebration of mediocrity over merit brings sadder consequences.
As the journey of the power sector reform in Nigeria continues, may it not be the case of a dog which has returned to its vomit; the end (post-privatization) being worse than the beginning (pre-privatization).
Idowu Oyebanjo is a UK trained power system professional.
