Like most issues in Nigeria, the issue of electricity theft/non-payment of bills and the severe underperformance of the NPS is a cyclic problem. Until the masses, the biggest victims of the deficiencies of the NPS stop “doing ourselves”, break the cycle by upholding our end of the bargain and paying our bills, the NPS will remain considerably unattractive to private investors, irrespective of governmental initiatives, leaving heat to be the order of the day and darkness, the order of the night.
I remember the first time I realised that for many years under the NEPA/PHCN and early MYTO regimes, electricity tariffs included the loss component. Simply put, the loss component is a charge paid by the relatively few bill-paying customers to cover for the electricity that is stolen or unpaid for. While still trying to recover from the shock of what I thought was absolutely ridiculous, a popular colloquial Nigerian phrase, “you are doing yourself”, sprang to mind.
Since the NEPA days, under-metering has been a grave problem in the Nigerian power sector (NPS). It was as a result of this that estimated billing arose and became the de facto method for calculating consumer bills. While estimates in themselves are not the worst thing, the apparent randomness of the figures that appeared on bills was ludicrous. For example, there are cases where consumers in tiny flats barely had electricity for a whole month but still got bills that were in tens of thousands of naira.
The transfer of the ownership of PHCN’s distribution business to the respective DISCOs as part of the unbundling of the PHCN was seen as a great opportunity to close this metering gap and move away from estimated metering for good. In the sale agreements in September 2013, when the companies were officially handed over, the Nigerian Electricity Regulatory Commission (NERC) had stipulated that DISCOs had to install metres to all their customers within 18 months after taking over, in a bid to put an end to estimated billing for good. For whatever reason and in spite of continued efforts from NERC, currently about 50 percent of consumers either have dysfunctional metres or are not metered at all.
Technically speaking, electricity theft is not restricted to electricity that is stolen by people who are not officially connected to the grid. Another and arguably more rampant form of electricity theft is the non-payment of bills by connected consumers. An executive from one of the DISCOs highlighted the fact that in a given month they send out about 400,000 bills and receive just above 150,000 payments.
NERC is not without blame when it comes to the apparent refusal of people to trust the MYTO, which has not helped their willingness to pay the bills. MYTO is a standardised technique and so NERC should have explained the variables used in the determination of tariffs. Such a move should go a long way in convincing the sceptics that tariffs are not exploitative.
Therefore the important question is, why do consumers not pay their bills? Many Nigerians have been forced to depend on captive generating sets because of the epileptic grid supply. As a result, they are happier to invest their money in buying fuel for their generating units over which they have control. Also, there is a considerable and understandable lack of confidence about the accuracy of the billing system. Therefore, many users are unwilling to pay for the little electricity they get from the grid.
One of the expected impacts of the liberalisation of the electricity market was the shift to cost-reflective tariffing, which would essentially putting an end to countless years of continued government subsidisation of electricity. As a result, most Nigerians are used to paying prices, which most industry observers acknowledge are unsustainably low for the development of the sector. It is therefore no surprise that there is an almost universal rejection of the cost-reflective tariffs developed using MYTO.
NERC is not without blame when it comes to the apparent refusal of people to trust the MYTO, which has not helped their willingness to pay the bills. MYTO is a standardised technique and so NERC should have explained the variables used in the determination of tariffs. Such a move should go a long way in convincing the sceptics that tariffs are not exploitative.
In April 2015, NERC got tough on DISCOs by removing the loss component in the different tariffs under the MYTO 2.1 Amended. In defending its action, NERC argued that DISCOs should have improved the quality of metering to a level where losses would be gone and that “it is inappropriate to transfer to consumers collection losses that are controllable by DISCOs”. Many consumer groups were reported to have seen their tariffs drop by up to 50 percent as a result.
As the privatisation of the PHCN has shown, the government is not planning on being the big investor in the power sector; this has been shifted to the private sector. In a utopian world, we all want these “wealthy” investors to put their money in the NPS and for electricity to come on miraculously.
Rather predictably, the tariff reduction did not go down too well with the DISCOs who said the tariff reduction had made their businesses unsustainable. Some DISCOs filed force majeure in courts in response to the government’s actions. Arguably, the most destructive action taken by the DISCOs was the rejection of their allocations of electricity from the Transmission Company of Nigeria (TCN). Some DISCOs argued that taking the electricity and selling it to consumers at the rates contained in MYTO 2.1 amended would only see them lose money.
While most Nigerians celebrated the tariff cuts, people with good understanding of how the NPS works were noticeably less jubilant. This is because they understand the negative effect such actions can have on the entire electricity supply value chain.
While most Nigerians agree that there is severe under-capacity at the various points in the value chain, comprising generation, transmission and supply, what many do not realise is that it is going to take a huge amount of money, probably from private investors, to remedy the situation. The source of this capital is the key question.
As the privatisation of the PHCN has shown, the government is not planning on being the big investor in the power sector; this has been shifted to the private sector. In a utopian world, we all want these “wealthy” investors to put their money in the NPS and for electricity to come on miraculously.
If DISCOs are making money, potential investors across the entire value chain know that there is money to be made because DISCOs will be in a good financial position to sign and honour long-term power purchase agreements (PPAs). PPAs are important because they assure the potential GENCOs that there is a ready demand for their product and thus it is a low-risk investment; the phrase “low-risk” is something that warms up every investor’s heart.
What we are all forgetting is that these investors did not just all wake up with money, they made money by investing in businesses that they deemed viable to give them good returns on their investments. For this reason, I have often argued that distribution (the lowest stage in the value chain) is arguably the most important. This is because potential investors further up the value chain (generation, transmission and gas distribution companies) will make their decisions based on the signals they get from the economic viability of the DISCOs.
If DISCOs are making money, potential investors across the entire value chain know that there is money to be made because DISCOs will be in a good financial position to sign and honour long-term power purchase agreements (PPAs). PPAs are important because they assure the potential GENCOs that there is a ready demand for their product and thus it is a low-risk investment; the phrase “low-risk” is something that warms up every investor’s heart.
On the generation side especially, the government does not appear to understand what is really needed to guarantee continual investment. The government has repeatedly made attempts to attract investment, especially from foreign companies, by expressing the government’s willingness to enter Joint Ventures (JVs) with them. The government believes this show of good faith will reassure potential investors.
These actions however show that the government does not fully appreciate the fact that private sector investors do not like market distortions. Market distortion is “an economic scenario that occurs when there is an intervention in a given market by a governing body.” From a private investor’s viewpoint, subsidy or JVs or even favourable support programmes are not ideal because they are often unpredictable and add an extra layer of uncertainty to the market.
It is clear that the power to attract investment into the power sector at the considerably large rate required is to a reasonable extent in the hands of the masses because our attitude towards the payment of our electricity bills go a long way in determining the attractiveness of the NPS to potential investors. If the masses are not willing to take responsibility, there are metering solutions that can be adopted that will eliminate electricity theft.
For a private investor, a pure market, where there is consistent customer demand and favourable price flexibility is the ideal case. Perhaps it is high time for the government to change its method of increasing the attractiveness of the NPS to private investors. Channelling some of the reported N55 billion spent annually on subsidies into the installation of smart and robust theft-resistant metres should significantly help in eliminating electricity theft and non-payment of bills, thereby “purifying” the market.
It is clear that the power to attract investment into the power sector at the considerably large rate required is to a reasonable extent in the hands of the masses because our attitude towards the payment of our electricity bills go a long way in determining the attractiveness of the NPS to potential investors. If the masses are not willing to take responsibility, there are metering solutions that can be adopted that will eliminate electricity theft. The problem is: who pays for the installation of these metres? Understandably, private investors will not want to do it because of the uncertainty surrounding the current tariffing system. Also, if current signals are to be believed, the government is trying to fully liberalise the NPS and thus will probably also not want to do it.
Like most issues in Nigeria, the issue of electricity theft/non-payment of bills and the severe underperformance of the NPS is a cyclic problem. Until the masses, the biggest victims of the deficiencies of the NPS stop “doing ourselves”, break the cycle by upholding our end of the bargain and paying our bills, the NPS will remain considerably unattractive to private investors, irrespective of governmental initiatives, leaving heat to be the order of the day and darkness, the order of the night.
Yusuf O. Ali is a doctoral candidate in the Department of Engineering, University of Cambridge; you can reach him on e-mail at: yoa20@cam.ac.uk, and Twitter: @YalyAli
