The electricity tariff tango

Which came first — the chicken or the egg? This is one of the most fascinating debates around. All chickens hatch from eggs and all the chicken eggs are laid by chickens. How then do you determine the cause and the effect? That is the “causality dilemma” we always have to deal with in certain discourses, especially on public policy. If you believe in creationism — as I do — you are more likely to argue that God created the chicken and it started to lay eggs. However, if you are an evolutionist, the Darwinian principle is that species evolve over time. That means chickens had ancestors that were not chickens. Therefore, neither the chicken nor the egg came first.

When the Nigerian Electricity Regulatory Commission (NERC) approved new electricity tariffs, the most common response from Nigerians was: how can we be paying more for darkness? And the chicken-and-egg question came to my mind instantly. Will tariff increase lead to improved power supply or should improved power supply lead to tariff increase? Should power become stable before tariffs are increased or should tariffs be increased before power supply can become stable? These questions may sound academic, but a closer look will reveal that this issue is part of what we need to crack before we can begin to properly discuss stable power supply in Nigeria.

Anybody who is familiar with the Nigerian power supply industry will agree that the problems are far more than tariffs — but tariffs are also at the centre of the crisis. I will be making basic arguments today based on the realities we have on the ground. One basic thing I have observed over time is that many Nigerians do not know that NEPA (the National Electric Power Authority) is dead. They know there is no NEPA again, since 2005, but they think it was replaced by the Power Holding Company of Nigeria (PHCN). They do not know that PHCN too is dead. Making Nigerians understand the “new” power industry is, therefore, critical to policy communication.

In the olden days (I mean before 2013), PHCN was in charge of the three chains in the power supply industry: generation, distribution and transmission. Not anymore. PHCN was broken up and privatised. Out of PHCN came six power generating companies (called GenCos), 11 distribution companies (DisCos) and the one and only transmission company (TransCo). These 18 entities are all independent of each other, owned by different people, although the federal government of Nigeria retains stakes in the GenCos and DisCos, and owns 100 percent of the TransCo — the Transmission Company of Nigeria (TCN). There are many other GenCos connected to the national grid.

Today, when power is restored, shouting “Up NEPA” has become anachronistic. This looks so simple that you can even accuse me of saying the obvious and wasting your time. But until ordinary Nigerians understand what this means in practical terms, we will never come to terms with the new realities in the power sector. All policy communications will fly above our heads and we will never be able to have a productive debate. To enjoy improved and stable power supply, the GenCos, Discos and TransCo must all be at the top of their game. It is a chain. Unfortunately, there are many factors that will make them perform poorly and continue to plunge us into more darkness.

Let’s start with the GenCos. As things stand, Nigeria has the capacity to generate up to 12,000 megawatts — thanks to the power projects started by President Olusegun Obasanjo during his second term and continued or completed by President Goodluck Jonathan. That is enough to meet our critical needs for now. If we can get 12,000mw into the national grid (the TCN transmission lines) and the DisCos are able to take it to our homes and factories, we will cry less about “NEPA”. In fact, most parts of Nigeria will be celebrating uninterrupted power supply. That would be one of the biggest things we ever did for ourselves since the end of colonial rule in 1960.

Now, to generate the power, most of the GenCos use gas. Government had to enter into supply/purchase agreements with gas companies in order to guarantee that whatever they produce will be bought at a particular price under the “take or pay” arrangement. That was the major incentive for private companies to invest their money in building the gas supply infrastructure. The “take or pay” guarantee was the only “collateral” they could use to source for funds abroad. For instance, the federal government pays Accugas about $10 million monthly to guarantee supply gas to Calabar GenCo, owned by the Niger Delta Power Holding Company (NDPHC) Ltd.

Let’s now move to DisCos. They are the face of electricity in Nigeria. Where I live, the DisCo is called Ikeja Electric. They are the ones I see and deal with. The DisCos get power from GenCos via TCN. They collect the revenue from end users on behalf of the entire chain. When you pay a DisCo, the money is shared by DisCo, TCN and GenCo. Because Nigerians are stealing electricity and also failing to pay their bills, it means DisCos are short-paid. If a GenCo sends electricity worth N1 billion to Ikeja Electric but the revenue that comes in is N500 million — because of illegal connections and unpaid bills, among others — the entire economic chain is messed up. That is a big, big problem.

Lest I forget, TCN is a big problem child. It does not have the capacity to take the 12,000mw from the GenCos. It’s like trying to drive a 10-tonne vehicle over a 5-tonne bridge. It will collapse. Even though we can generate 12,000mw, TCN cannot “wheel” more than 5,000mw. Last year alone, we had 10 system collapses. Unfortunately, GenCos cannot produce power and store it, so they have to shut down some turbines to reduce output. But turbines are not designed to be shut down — it will affect performance and manufacturer’s warranty. Until we upgrade the grid, the system will keep collapsing. Thankfully, we have reached an agreement with Siemens to help us out.

Now, to the tariff tango. Government has been subsiding electricity for ages to avoid passing the production costs to the consumers. Under the multi-year tariff order (MYTO) introduced in 2007, the cost of electricity is supposed to be reviewed upward regularly until it finally becomes “cost reflective” — meaning there would be no electricity subsidy again. Good enough, the tariff structure recognises that all fingers are not equal, so residential areas are to pay less under different classifications — R1, R2 and all that. The poorest neighbourhoods, classified as R1, are to pay the least. Since 2007, however, the exigency of politics means MYTO has not been strictly followed.

In 2017, the Nigerian Bulk Electricity Trading Company (NBET) — which buys power from GenCos and sells to Discos — set up the payment assurance guarantee (PAG) scheme to subsidise power and avoid a breakdown. Federal government provided N701 billion to fund the subsidy. The money has finished. Another N600 billion is on the table but it will still finish and something will have to give eventually. That is why the tariffs are being reviewed gradually. Retaining the subsidy means government has to look for money, not excluding borrowing, to fund it; but adjusting the tariffs upwards means Nigerians will be paying more without any assurance of stable power.

Where do I stand? It’s a bit tricky. I live in an estate where, by special arrangement, we pay way above the residential tariff — but we are guaranteed a minimum of 20-hour power supply daily. In reality, we may not experience any outages for days. The outages last for a maximum of two hours. Over 90 percent of the outages are not Ikeja Electric’s fault; rather, TCN lines are always breaking down. I have bought diesel only twice in five months. I control my consumption. What I used to pay for diesel weekly is now what I pay for electricity monthly even with the premium tariff. I’ve serviced my generator only once since August 2019. And, oh, the noise pollution is history.

In the chicken-and-egg case, therefore, I can say we are paying more and seeing the result. Tariff increase has led to stable power supply. On the other hand, our arrangement is special and I cannot categorically say that it can be replicated nationwide. TCN’s handicap is still a big clog in the wheel of progress. More so, low revenue collection by DisCos is a big economic headache. DisCos, trying to play safe, are demanding less power from GenCos. There is also the metering gap which many argue is a business ploy by DisCos to keep giving inflated estimated bills to customers. Beyond tariff hike, therefore, these issues must be well addressed. Tariff hike is definitely not a magic wand.

Above all, government cannot subsidise power endlessly, especially with the revenue crisis pushing us deeper into debt. The proposed tariff hike is just to reduce the subsidy, not eliminate it. Even with a tariff hike, it will still be cheaper to use grid power than generators. Of course, I think government needs to communicate clearly on these tariff issues and stop playing games. Tell Nigerians the home truth. Electricity subsidy was never meant to be forever. The low income residential areas — the people labour unions say they are fighting for — need to be well apprised of the economic dynamics. We have been groaning under fuel subsidy bills. Why compound the headache?

AND FOUR OTHER THINGS…

BOKO BUSINESS

Prof Babagana Zulum, the governor of Borno state, made the headlines on Monday when he confronted soldiers for extorting travellers and creating horrendous traffic in the process. “Boko Haram is attacking people and you are here collecting N1,000 per car,” he said. While Nigerians were clapping for the governor, the army did not find it funny. According to them, Zulum’s “outburst” was capable of derailing the war against Boko Haram. Exactly! Business must continue. If not, the soldiers would be “discouraged”. The war against Boko Haram must not end. Some are making billions sitting in their offices and others are collecting N1,000 at roadblocks. Perverse.

COMICAL GOVERNORS

Two of the most entertaining governors in this dispensation have to be Chief David Umahi of Ebonyi state and Senator Ben Ayade of Cross River. Umahi, the PDP governor who recently said prayers will be offered in all the local government areas of the state to pick his successor, has informed us that he is also an APC member. Meanwhile, Ayade has charged a journalist to court for attempting to overthrow him, and he has followed that up by appointing a commissioner for foreign affairs. At this rate, he will soon appoint a chief of army staff. By the way, he has just signed his ‘Olimpotic Meristemasis’ 2020 budget. Owelle Rochas Okorocha was obviously an amateur. Comical.

IMMUNITY IMPUNITY

One of the most mysterious cases in the history of mankind — starting Adam and Eve — has to be the injunction secured by Dr Peter Odili, former governor of Rivers state, in 2007. It effectively granted him immunity for life. While in office, he could not be prosecuted by EFCC because of constitutional immunity — though he could be investigated, according to a previous Supreme Court ruling. But Odili managed to get a “perpetual injunction” that he could neither be investigated nor prosecuted after office. The EFCC appeal was kept in the morgue. Mr Ibrahim Magu, the EFCC boss, says the case will be resurrected. Immunity in office, immunity out of office. Wonders!

DÉJÀ VU

On July 3, 1988, during the Iran-Iraq war, a passenger flight operated by Iran Air was on its way to Dubai from Tehran when it was shot down with a missile by the US navy. All 290 persons on board died. The Americans said they mistook the aircraft for a fighter jet. On January 8, 2020, a Ukraine International Airlines (UIA) flight was shot down by the Iranian military shortly after take-off in Tehran, killing all 176 on board. Again, it was human error: the Iranians thought it was an American fighter jet on a revenge mission. Iran had just launched missile attacks against an American military base in Iraq. What does this tell us? Let’s make peace not war. War doesn’t pay. Senseless.