Addressing the Metering Gap in the Power Sector, By Odion Omonfoman
…the proposed power sector recovery programme should focus on creating a deregulated and competitive metering industry, and the entry of third party specialist meter asset financing and management companies, rather than provide direct funding to DISCOs to implement their metering programmes.
The Nigerian power sector is bedeviled with a myriad of challenges. But none is more controversial and impedes its growth more than the issue of customer metering.
The power sector suffers from poor metering infrastructure. Over 50 percent of electricity customers are unmetered, while a significant proportion of installed meters are faulty, non-functional electronic and analogue meters. Additionally, there is a high rate of energy theft due to by-passed pre-paid and post-paid meters.
The importance of electricity meters in the power sector value chain cannot be over-emphasised; it is the cashbox of the power sector industry. While GENCOs produce the electrons that are transmitted and distributed to homes, offices and industries, the revenue generation process starts from the meters installed at these locations. Thus the metering gap, coupled with an inefficient and obsolete metering infrastructure, pose serious challenges to the liquidity, efficiency and survival of the power sector.
The State of Metering Today
Using latest data provided by NERC for 2016 shown in the table below, only 3.39 million customers nationwide, representing 45 percent of total electricity customers, have electricity meters. While the DISCOs made commitments to provide and install 1.7 million meters in 2016, they were able to provide and install only 215,424 meters to their customers for the entire year.
The table below summarises the state of metering as at the end of 2016.
|Total Customer Base||7.47 million customers|
|Total Metered Customers||3.39 million customers|
|Unmetered Customers||4.08 million customers|
|% Number of unmetered customers||55%|
|Total Meters Added in 2016||215, 424 meters|
|Disco Meter Commitment||1.754 million meters|
|% Meter Commitment Achieved||12%|
*Data obtained from NERC
Of the 3.39 million customers that are metered, more than half of these meters are either faulty, non-functional or are completely obsolete electro-mechanical devices that have outlived their useful lives. The true metering gap, in reality, is far higher than 4.08 million unmetered customers recorded by NERC, if you factor in the faulty, non-functional and obsolete meters.
Furthermore, the average annual new customer growth is forecasted at about nine percent per year (under the MYTO tariff structure), meaning an additional 300,000 to 500,000 meters are required every year. This growth forecast is extremely conservative in our opinion, given the population currently without access to electricity.
Past Government Initiatives to Address the Metering Gap
Prior to the privatisation of the power sector, the Federal Government implemented a mass metering programme under the National Prepaid Metering Programme (NPPMP) to address the metering gap. The NPPMP was focused on the adoption of the pre-paid metering technology.
Under the NPPMP, the Federal Government appointed Revenue Cycle Management (RCM) contractors to procure and install pre-paid meters at “no cost” to electricity customers. From our research, the NPPMP was not sustainable and successful due to a number of reasons such as – the huge funding cost for the meters which the FG was unable to provide, the lack of transparency in the appointment of RCMs, the short duration of the RCM contracts, uncoordinated meter procurement processes, proliferation of sub-standard meters, non-standardisation of meter technology, corruption and massive fraud, etc.
…the key challenge for DISCOs, NERC and other stakeholders in the power sector is developing and implementing sustainable, long-term meter financing initiatives to fund the huge capital outlay necessary to address the metering gap.
In 2012, NERC introduced a new meter intervention programme called the Credited Advance Payment for Metering Implementation (CAPMI) to bridge the metering gap and address the funding issues under the NPPMP/RCM model. Under the CAPMI scheme, the customer was expected to self-finance the meter, with the meter cost amortised over a period from his/her energy charge at a 12 percent interest rate per annum. Interestingly, despite customers paying in advance for meters, there were complaints about the lengthy delays by DISCOs in providing these meters to customers. In some cases, the DISCOs never supplied the meters paid for by customers. There were also claims that DISCOs deliberately sabotaged the CAPMI scheme as it affected their revenues. By April 2016, the minister for Power, Works and Housing announced the stoppage of the CAPMI scheme.
Impact of Privatisation on the Metering Gap
One of the objectives of privatising the power sector was to address the metering gap. Thus core investors in DISCOs were required to explicitly commit to a firm meter rollout plan over a five-year period. Today, given the liquidity challenges in the industry, DISCOs and their core investors are financially constrained to fund the metering gap and meet their metering obligations under the Performance Agreements with the Bureau of Public Enterprise (BPE).
Another constraining factor is the size of allowable CAPEX under the MYTO tariff model. As an example, Ibadan DISCO, the largest by customer number, has an allowable CAPEX provision of less than ₦8 billion. The allowable CAPEX provision for each DISCO is a function of its Regulatory Asset Base (RAB). Meters form part of a DISCO’s RAB and the tariff structure should allow for the full recovery of the RAB. If the RAB increases, through addition of new network asset, electricity tariffs should increase as well. This is a catch 22 situation – i.e. if NERC increases DISCO allowable CAPEX to factor meter rollout, electricity tariffs will have to go up!
In our view, the key challenge for DISCOs, NERC and other stakeholders in the power sector is developing and implementing sustainable, long-term meter financing initiatives to fund the huge capital outlay necessary to address the metering gap.
Deregulating Meter Ownership
Under existing regulations, DISCOs have an obligation to provide meters to their customers and own the electricity meters regardless of who financed the meters. Part of the solution to address the metering gap is for NERC to deregulate meter ownership and financing. In a deregulated meter market, electricity customers and/or third parties should be able to finance and own electricity meters. Home and business owners would then be able to move their meters when they move premises or relocate their businesses, the same way customers move with their DSTV decoders when relocating. Implementation would require regulations guiding the procurement and ownership of meters by third parties and customers.
Deregulating meter ownership would free up the balance sheets of DISCOs to absorb more liabilities, reduce electricity tariffs as the RAB of DISCOs become lower, while also allowing them utilise their allowable CAPEX more efficiently to finance critical network infrastructure.
Financing and installing a meter is one half of the equation. The other, perhaps more important, half is meter management. Management of electricity meters involves the reading, inspection, routine parts replacement, testing, emergency repair of meters and generally all such actions required to ensure the meter is functional at all times. This is necessary for revenue assurance for the distribution companies. Meter management has its own costs as well. In other jurisdictions where there is a competitive metering industry, electricity customers usually bear this cost. Thus, we advocate that NERC should consider re-introducing a meter management fee component of electricity tariffs, solely applicable to managing electricity meters.
Metering as an Investment Opportunity
While DISCOs are financially constrained to fund both the metering gap and other investments to improve the network, NERC is constrained to increase tariffs to cover an increased RAB. Therefore, DISCOs would need to develop creative, off-balance sheet funding structures suitable for financing the metering gap, in line with extant regulatory constraints on their CAPEX. One such solution is for DISCOs to outsource metering to more competent and financially capable third parties.
…there are significant investment opportunities in metering waiting to be tapped. The sheer size of the metering gap and financing requirements provide an investment opportunity for private sector investors to provide off-balance sheet, long term meter financing and management for DISCOs.
Not many people consider financing and operating meter asset as an investment opportunity. However, there are significant investment opportunities in metering waiting to be tapped. The sheer size of the metering gap and financing requirements provide an investment opportunity for private sector investors to provide off-balance sheet, long term meter financing and management for DISCOs.
However, there are a number of challenges to investing in meter financing. These can be attributable to the non-existence of a sensible business model for meter financing, as well as the absence of a deregulated, competitive metering industry. Deregulating the meter industry will potentially unlock these investment opportunities.
Should Government Finance DISCOs to Implement Their Metering Programmes?
The recently approved power sector recovery plan by the FG seeks to set the power sector on the path of recovery and recognises inadequate metering infrastructure as one of its intervention areas that require financing. The FG and the World Bank are certainly working out the implementation details of the metering intervention, and funding the metering gap.
Without pre-empting the specific implementation details of how the power sector recovery plan would intervene in metering, there are a number of reasons why we are of the view that the direct provision of funding to DISCOs via long term, low cost loans or direct equity investment, by either government and/or Development Finance Institutions (DFIs), to implement their metering programme would be unrealistic as it may create a moral hazard on the part of DISCOs. Other reasons for our position are as follows:
● Funding the metering gap requires a significant amount of debt and any such funding would most likely be debt capital. DISCOs are in no shape financially to take up additional debt on their balance sheets;
● Previous interventions in metering, such as the CAPMI scheme did not record significant success. Prior to the minister’s directive to wind down the CAPMI scheme, NERC had sanctioned a number of DISCOs for infractions on the CAPMI scheme, ranging from the non-provision of meters within the stipulated timeframe and outright diversion of the CAPMI funds;
● There is the possibility of “bad behavior” by DISCOs – i.e. DISCOs may divert such funds meant for their metering programmes, or inflate the meter prices in seeking to make some form of profit on each meter. Such practices and infractions would negate the objectives of the power sector recovery programme.
In our view, the proposed power sector recovery programme should focus on creating a deregulated and competitive metering industry, and the entry of third party specialist meter asset financing and management companies, rather than provide direct funding to DISCOs to implement their metering programmes.
Odion Omonfoman is an energy consultant and the CEO of New Hampshire Capital Ltd. He can be reached on email@example.com.