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Downstream Inefficiency Weakens Power Sector Viability

Sopuruchi Onwuka

The intricate commercial arrangement that bonds players across the nation’s gas-to-power programme appears to be caving in under full viability pressure from private investors that play key roles in maintaining the industry business circuit. Currently, electricity consumers whose payments for the power supplies services are supposed to form the revenue life support for the commercial relay in the industry are undersupplied, poorly serviced, inefficiently metered and inappropriately billed by the distribution companies. Consequently, billing disputes and poor revenue collection rank tops among the litany of major difficulties that challenge sustainability of the new payment system evolved under the Electric Power Sector Reforms (EPSR) and parallel Nigerian Gas Masterplan (NGMP) to drive the operations of enterprises in the full commercial loop. Under the gas-to-power arrangement, government had floated a package of commercial incentives to encourage investors develop critical infrastructure, facilities and equipment to produce gas, process it and supply to power generating stations that form key demand drivers in the domestic market.

The strategy was to eliminate acute gas supply shortages that compelled suboptimal capacity availability and intractable downtimes at electricity generation stations across the country. To enhance seamless fuel supply to power plants, new thermal power generation plants developed by government and intermittently sold to private firms in the country were localized in the country’s gas province following project economics that put the cost electricity transmission far below the prohibitive gas pipeline development cost. Similarly, hydropower dams and coal fired plants are located in the regions of primary sources of energy.

Thus, the localization of power plants in the zones that host primary forces for turbine propulsion makes the role of transmission grid operators indispensable in wheeling volumes of electricity from the production sites across distances to key demand centres in the country. At the remote load centres, the distribution companies that hold concession rights receive the varying volumes of electricity allocated them by regulators and supply same to homes and businesses that pay for both the services and energy commodity. From payments from hundreds of million discontented customers in the country, commercial regulators balance out bills and payments to power generating companies   the sole transmission company and the generation companies.

From their own income, the generation companies are supposed to defray gas bills. However, concerns are rising among the backstage operators that incur huge bills on power generation over the palpable incapacity of the distribution companies to meet their payment obligations on supplied power. According to a source in the Niger Delta Power Holding Company of Nigeria (NDPHC), the distribution companies appear to owe every other operator in the system despite assurances by the National Bulk Electricity Trading Company (NBET) which underwrites offtakes from the power plants and allocates loads to the distribution companies.

Since 2005 when the sector reforms gained implementation momentum, so many adjustments have been made in the commercial structure to maintain viability balance across all subsectors in the loop, including tariff upgrade; partial deregulation; infrastructure rehabilitation, upgrade and expansion; as well as boost in natural gas supplies to key thermal plants. According to the General Manager in charge of Contracts at NDPHC, Mr Godwin Obikwelu, the company had drawn money from the nation’s Excess Crude Account (ECA) to drive investments in 10 power generation plants, 3000 kilometers of transmission lines, and 150 kilometers of gas pipelines in the past five years.

Under the running plan for privatization and reinvestments, Nigeria’s power generation capacity is expected, by 2020, to hit 20, 000 megawatts (MW) from less than 15000MW in 1999, 2700 MW by 2007 and current 4500 MW. However, little improvement has been recorded in actual power supply to households and enterprises. Nigeria continues to remain the biggest market for microelectric generating sets mass produced in India, China, Korea and Japan. Every year, hundreds of billion Naira is pumped out of the country to import the small generators, more billions of Naira is spent to maintain and fuel them.

Noise and fume pollutions are neither measured nor monitored. The nation’s weak and sub-optimized power sector capacity forms the major bane of the Nigeria’s industrial and economic development. According to Mr. Obikwelu, a country’s economic prosperity and its security depend on the capacity and efficiency of its electric power sector. He stated that low electricity supply accounts for the low industrial development in West Africa which he describes as the darkest region of the continent.

According to a presentation he made at a conference, the whole of West Africa has capacity for paltry 11.4 GW of electricity, a volume Lagos State government alone says is below its requirement. Mr. Obikwelu cited South Africa with 44,000MW and Egypt as leading examples of internal self sufficiency for electricity. Many reasons have been advanced for the failure of the electric power sector to reach operations commerciality. One of them is offtake limitation due to low base capacity of the national grid system.

According to a representative of Manitoba Hydro which operates the Transmission Company of Nigeria (TCN) under management contract, the transmission grid has suffered wear and rust for over two decades of dormancy. He deflated hopes of significant improvement in electricity supply before 2020, saying the transmission grid capacity could not exceed 5500 megawatts of electricity despite the rising generation capacity. He said a 25 year transmission power system survey was underway, adding that current short term measure was to build the grid system capacity to position for the 20, 000 MW generation capacity expected by 2020.

The TCN boss declared that the problem in translating generation capacity to supply improvement does not reside in TCN alone, adding that transmission currently accounts for only eight percent of total technical losses in the industry. Experts explain that technical losses could directly entail commercial losses during value audit. On transmission limitations in the sector, Managing Director of Oando Gas & Power, Mr Bolaji Osunsanya, called for immediate privatization of TCN to enable the operators deploy their full creative energy and investment purse in building wheeling capacity to match the ongoing generation growth in the sector.

“It is even a mistake that we commercialized rather than private the TCN. From the reform process, everything was good but the privatization would have been complete. As it stands now there are two ways we could address the problem. It is either that you privatize or you call for publicprivate partnership (PPP) in managing the transmission grid. He said government should shop for private players to help with management of segments of the grid that require upgrade or outright refurbishment.

“That will be necessary. We need to come up with PPPs that would enable us do more. And please invite those players that have capacity and are looking for market. The best private investor for the transmission grid would be someone that has generation capacity that is stranded and desires a market for his volumes. He is best incentivised to shop funding to strengthen the grid. If I have 500 megawatts and I don’t have market for it, no person will be better incentivised than I to invest in wheeling capacity.

“There are companies that can bring both financial and technical capability to strengthen that.” Also commenting on the transmission capacity deficit in the country, Mr. Victor Okoronkwo of Shell Petroleum Development Company (SPDC), owners of the 650 MW Afam Power Plant in Port Harcourt, blamed the mismatch across the sector on initial planning blunder. He pointed out that there was no integrated plan for the sector before the reform was activated, adding that the National Integrated Power Programme (NIPP) took off without thoughts about fuel supply. He said the planning mistake slowed down growth in the sector and compelled additional investments in costly pipeline channels. This, according to him, caused both gas and electricity sectors to embark on transformation at the same time.

Experts believe that structural correction at the distribution end of the industry to address key problems that hold down the entire sector has become urgent. Such correction, according to them, must address lapses in power delivery processes, customer billing and payment recovery which are key factors needed for commercial viability and sustainable growth. According to regulatory sources, distribution companies account for over 80 percent of all technical losses in the sector and 100 percent commercial losses. Total technical and commercial losses, according to estimates, pull the industry below 50 percent commercial efficiency.

Despite being granted rapid tariff hikes without palpable improvement in supply hours, the distribution companies also fail to guarantee efficient services to their customers and revenue returns to power producers and transporters. A source at NDPHC confided in The UNION that discos individually owe the company billions of Naira in unpaid bills for power delivered to them from the state owned NIPP plants. The same story holds for other generation companies in the country. About 85 percent of the power generation in the country is fired by gas, and debts to generation companies naturally translate to debts to gas companies. Commercial losses in the distribution end of the industry have in turn been blamed on huge unrecoverable debts owed by agencies of local, state and federal governments in the country. Worst culprits, according to the Managing Director of one of the discos, are the military, police and other paramilitary and security forces.

Perhaps the most glaring failure of the discos is dishonest and inefficient billing system that regularly spark off disputes and complaints from underserviced customers across communities. According to a presentation by the Ministry of Power at a conference in Lagos, metering gaps across all the discos have grown very large, requiring immediate deployment of over eight million smart meters to make any appreciable coverage. Immediate past Power Minister, Prof. Chinedu Nebo, blamed the huge metering gaps in the industry on operational inefficiency while many community development associations that throng customer consultative forums (now rarely organized by the discos) attribute the gaps to fraud and deliberate attempt to cheat consumers.

National Electricity Regulatory Commission (NERC) had issued several orders to discos to attain at least 80 percent metering coverage of customers but the directive has come to no avail as while the toothless regulator would only incite consumers to decline payments based on estimated billing. Meanwhile, customers that resist estimated billing are disconnected and are forced to pay same bill and other charges on reconnection. Chairman of NERC, Dr. Sam Amadi, recently disclosed the commission’s intention to exempt unmetered customers from paying electricity bills after 16 months grace period for the discos, accusing the discos of preference to continue with estimated billing in the sector. He explained that the measure was not aimed at hurting stakeholders in the sector, but to get every player in the electricity industry to be alive to their responsibilities.

“There is still abysmally low level of metering in the NESI. As at today, over 50 per cent of all the registered customers are either unmetered or have non-functional meters,” he said, lamenting that customers continue to contest arbitrary bills, thus resulting to revenue loss for the sector. Apart from winning the confidence of their customers through efficient and faultless billing system, according to Shell’s Mr. Okoronkwo, the discos should also be able to guarantee the commerciality of the entire industry chain by plugging all technical losses. He recommended more investments in technology that would enhance availability and efficiency of facilities and equipment. On distribution challenges, Mr. Osunsanya stated in an interview with The UNION that the new operators of the Discos must run and create the quality with which they want to be known for. “As a gas supplier we would always be worried about the quality of the counterparty. Whereas we do not have enough experience with the current holders of the discos, we think we have a better chance under them than with the old PHCN. So I am happy to give these new ones a chance, let them work for a reasonable period and then we would be able to distinguish the good hands from the not so good. Mr. Osunsanya pointed out that “all we need to do is strengthen the revenue structures.

There are dependencies in power. It is not only in Nigeria that there are dependencies, but you must create a structure that ensures that those strategies work together. “You must create Discos that are commercially sound and well capitalized. They must be able to buy from the TCN and the Gencos. Likewise the Gencos must be well capitalized and well structured to be able to meet both their capital expenditure (capex) and linkage fuels. There must be a knockon effect. You don’t just say because there is a knock-on effect you don’t do anything. You have to strengthen them to ensure that all of them are strong. “It is not today that we knew that the Discos won’t earn enough to pay for the power that we wheel to them; and it not today that we knew that there a strengthening that we need to do correct the collection systems. “Technical losses and commercial losses are the banes that gave need for the privatization in the first instance. It was the reason we went for the model that is used to sell the Discos, and those issues have not left us.

They have to be addressed by strengthening the system. “We have not deployed enough metering to curb collection losses, we have not put in enough facilitates in the distribution networks to curb technical losses, so why are we surprised that the collections will fall short of the commitments we made upstream? “I think we just need to do more: further capitalize NBET; we need to put a little more conditions to make sure that the buying and operating companies are better capitalized.” However, a private consultant with vast experience in the operations of the defunct Power Holding Company of Nigeria (PHCN) bluntly declared that the entire set-up cannot be viable at the moment arguing that the privatization would have would have waited until all the gas and power infrastructure and facilities are fixed.

According to the expert, the current level of generation, high technical losses from transmission and distribution ends as well as acute transmission gaps mean that less than half of produced power won’t get to market. He pointed out that Lagos State alone with energy requirement of about 10,000 MW gets about 600 MW allocated to the two Distribution companies in the state. “Then enter commercial losses associated with cash payments, field marketing and bill disputes, then it becomes clear that what is available for sale cannot offset costs across the different segments at the current tariff which is already quite competitive.” How far the entire commercial structure would remain precarious is uncertain, but analysts are certain that the regulators must start with enforcement of mass metering of customers to enhance billing integrity and boost the willingness of consumers to pay their bills regularly. • Transmission substation

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