IS ELECTRICITY A COMMODITY OR A SOCIAL GOOD?
The essence of liberalization in electricity market is that competition is introduced where possible, under the assumption that the pressure from competitors will force market parties to become more efficient, which should benefit consumers.
The government of Nigeria envisioned that partial liberalization through privatization of the power sector will bring about the needed improvement to ensure stable electricity supply to power both homes, businesses and industries, but years after privatization, the government continued to provide subsidies and has at many times provided financial interventions to avoid a collapse of the industry because of illiquidity.
Despite all the financial injections into the sector, consumers have continued to experience epileptic supply, infrastructure are still in bad shape and the expected efficiency has been a mirage.
It wasn’t surprising to the industry stakeholders when the government finally made a very bold statement to discontinue subsidy payments in the power industry. This decision alongside the ongoing stakeholders’ engagements on the novation of NBET’S contracts has spurred some reactions in the industry especially at the distribution segment of the value chain.
The recent attempt by AMCON to take over the assets of a particular distribution company is a pointer to what is coming with the government’s decision to end subsidy payments, and the transition of some Discos’ vesting contracts into bilateral contracts.
Nigeria is at a critical stage where we need to treat electricity as a commodity to ensure commercial viability of the industry.
The debate whether electricity was a social good or a market commodity has been on for several years. The answer lies in the middle, but it has become obvious that countries which deem it as a social good lack investments and suffer power supply quality.
The root of the problem may lie in the fact that society, too often, views electricity as a right that does not need to be paid for, setting off a vicious cycle.
While lifeline electricity is to be provided at affordable cost, it has become a globally accepted policy that electricity is not to be treated as a social good.
Liberalization has separated the value chain of electricity, which before was largely integrated. Different actors now control different parts of the electricity system. These actors are private businesses set up for profit making. The gas producers that invested billions of dollars- mostly borrowed funds for gas production need to recoup their investments. It also costs billions of dollars to set up power generating plants and beyond the capital costs, there are variable costs incurred.
The transmission and system operation arm which are still owned by the FG require massive investments for expansion, and capacity to be able to ensure grid reliability. The distribution companies that supply electricity to the end users are in business strictly for profit making and they can only function very well if they operate in a financially sustainable manner.
It is now a policy issue for our country with a substantial proportion of the population that is poor, vulnerable and lacking the capacity to afford electricity to look for a way to ensure energy access to this segment. This is the essence of enumeration, indexing and proper consumer segmentation.
Nigerians must wake up to the reality that subsidy is gone and no protest or organized labour’s threat of court action will reverse the decision of the government to stop providing liquidity for the ailing power sector. What Nigerians need to demand for is an efficient electricity market where we generate at least costs, and make electricity available to the consumers at costs reflective of service delivery and actual consumption, a market where there is sanctity of contracts and regulation is impartial and independent of any political interference.
Electricity being a commodity must be sourced from a diversified portfolio of power generation technologies to provide the different load of electricity at least cost. In a functional power system, there are plants with high run times that provide cheap power for baseload and there are more expensive quick start plants for peak demands.
In Nigeria, nearly 80% of our generation are from gas while 20% are from hydro. Most of the thermal plants are Steam and Simple cycle gas turbine. These do not represent the best generating assets to provide our grid baseload as they are expensive, less efficient, provide low power output for the amount of gas burned, and their maintance costs are high.
All power plants are designed to operate optimally and efficiently at a base load. Operating these plants outside the base load have negative financial and operational implications that affect the overall efficiency of our generating assets. Our plants are not run optimally and many in presently in bad shape as a result of operating these plants below the required operational levels.
Since generation costs vary with different plants, economies of dispatch- a merit order must be ensured so that our cheaper hydro plants are dispatched first. This will reduce the price at the wholesale market and also the tariffs paid by the customers. We have to discontinue a situation where more expensive gas plants have higher load factors than our hydro plants. Due to concerns about climate change we may not be able to attract investments to build coal plants to provide cheap power, we can upgrade some dormant NIPPs from simple cycle gas plants to combined cycle plants for a more efficient diversified generating portfolio.
There is a need to know the marginal cost of all of our generating assets as this will help in contracts negotiations.
Ideally, generators are to make their plants available and it is at the behest of an offtaker to buy the fuel needed for generation or provides guarantee for the generator to enter into gas contracts. The power generators must be protected to avoid exposures that may impact on the pricing of electricity at wholesale market. Take or pay gas contracts is not good for the generators given the present constraints that prevent them from being dispatched. This is a policy issue the regulator must look into.
A commodity as complex as electricity must have an organized market design for trading. The most common structures in most markets are power exchange and bilateral contracts.
The current trading structure where NBET procures electricity from the generators through long term power purchase agreements PPAs and sells to distribution companies through vesting contracts though discourages price volatility, the counterparty risk inherent in this structure has led to market illiquidity.
One of the errors of NBET was to enter into discretionary PPAs that did not reflect the market realities with assured capacity payments for 13,500MW when the constraints in transmission and distribution networks limit demand to be around 4500MW.
Besides the flawed power purchase agreements-PPAs, NBET’s monopsony also inhibits competitiveness in the wholesale market, and it has been a bane in the success of the eligible customers’ regulation as creditworthy, willing commercial and industrial customers could not participate in the wholesale market to offtake the stranded capacity. This became problematic as the collections from the Discos have been abysmal thereby preventing NBET to meet her monthly obligations to the Gencos. The payment assurance guarantee of 1.3trillion naira provided by the federal government to avoid the collapse of the sector is indicative of the fact that the current trading structure is not sustainable.
Though we are not ready for spot trading of electricity now though it is most efficient in price discovery, the market needs to transit to partial bilateral contracts between the generators and the distribution companies. This will definitely require the recapitalization of the Discos and the need to provide payment securities acceptable by the Gencos. How this will be possible for Discos that are non-bankable is still a major concern.
Eligible customers’ regulation has to be revisited and issues around competition transition charge- CTC, and outstanding debts to Discos owed by industrial customers must be resolved. Allowing the creditworthy industrial customers participate in the wholesale market will bring about more liquidity and reduce stranded generation.
Also the balancing market operated by the system operator must be active to deal with imbalances.
In bilateral trade system, the system operator- SO assumes the most technical coordination functions for balancing of the system, including generation scheduling, commitment and dispatch, transmission scheduling and generation outage coordination, transmission congestion management, international transmission coordination, procurement and scheduling of ancillary services, and long-term planning of the system capacity. The regulator has to ensure the System operator’s neutrality, transparency and a degree of independence in the performance of its role in the NESI.
The transmission requirements of bilateral contracts must be supported. Though simulations done in 2018 confirmed that the national grid can transport 8,100 MW from the generating companies to the 759 trading points, there is a need for a more coordinated planning between TCN and the Discos to avoid the usual blame game of load rejection by Discos.
It is worrisome that the active baseload on our distribution networks is barely 3500MW and peak demands have not exceeded 5200MW many years after privatization. This is not a reflection of the actual demand or the need for power, nor does it capture latent and unfulfilled needs of Nigerian consumers. Investments in distribution capacity to ensure reliability is needed so that many commercial and industrial customers who rely on captive generation can be connected back to the grid. To achieve this, about 4.5b dollars will be needed by the distribution companies to upgrade their network capacities to accommodate 10,000MW.
The Discos have been calling for tariff increase, but this may not be the solution given the aggregate technical, commercial and collection loss- ATC&C in the industry which is about 48%. ATC&C loss reduction must be a top priority for all the Discos.
Tariff cost reflectivity remains a very contentious issue as no study has revealed the actual cost of 1kwh of electricity from generation to the end user. It is better this actual cost is established and analyzed with the operating costs of each Discos to know if they are indeed running a profitable business.
Multi Year Tariff Order- MYTO though appears to be efficient methodology for energy price determination, its applicability in Nigeria Electricity Supply Industry (NESI) is difficult as assumptions and parameters are constantly violated.
The present tariff is at variance with the assumptions in MYTO 2020, and this is a cause for concern as regards tariff cost reflectivity.
There is a need for Discos recapitalization as the market transits to partial bilateral contracts, though their ability to attract long term funds remains a big concern. It will be important that the Discos engage the service of professionals for their electricity procurement so as to avoid the types of flaws in NBET procurement strategies. Adequate study of their load profiles must be carried out and the use of data analytics is important while contracting bilaterally. Discos energy procurement must reflect market realities and different contracts must exist for their baseload, seasonal variations and peak demands.
The Discos must show high degree of responsibility in their billing and treatment of customers’ complaints. The payment apathy and energy theft they are faced with presently are attributable to the improper ways their consumers are treated. The issue of energy theft is concerning and can be solved by installing prepaid meters with distinct service cable connections in places where it will be difficult for tapping.
Sanctity of contracts is a must for an efficient power system and the responsibility lies with the regulator.
Regulatory procedures must be transparent and competitively neutral in order to sustain a level playing field for competition.
A crucial issue in the regulation of power industry is the independence of the regulator. The basic principle is that regulators have to be independent from the regulated otherwise conflicts of interest are unavoidable, and regulation is bound to deteriorate. Careful design of regulatory institutions is needed to ensure effective independence of the regulator from the regulated entities.
Independence from government and political actors will also be beneficial. It helps to ensure stability of regulatory policies to avoid the use of electricity policies to achieve general policy objectives.
The independence of the regulator needs to be differentiated from lack of accountability. Regulatory agencies, like any other public body must be held accountable for their actions and be subject to adequate efficiency controls. For instance, the introduction of Service Reflective Tariff by the regulator without an independent mechanism of monitoring the hours of electricity supply is not a fair policy as most Discos are taking advantage of the consumers by billing them with amounts not reflective of consumption and service delivery.
Lastly, the illiquidity in the power sector must be addressed with urgency. The government must lead by examples in ensuring all the outstanding MDAs debts are paid and subsequently, mechanism are put in place for reconciliation of bills between the Discos and MDAs. Citizens have to realize that payment apathy and energy theft are illegalities that must stop. There are lots of projects misalignments and involvements of many agencies without coordination in the industry; this will not add one megawatt to the power system no matter how much we spend. Power is a complex industry and continuous training is needed for all the stakeholders in the engineering, economics and regulations of electricity. We need to start seeing electricity as a commodity and treat it accordingly so that our unborn children will not chant ‘Up Nepa’.
Electricity Market Analyst
By Mohammed Farouk