Could We Reform The Retail End Of The Power Sector?, By Uddin Ifeanyi
It would matter a lot what financial engineering schemes would be included in the reforms to address this problem — short of declaring the distribution companies bankrupt and inviting new bids for their asset. But by far the most important aspect of any reform to the sector, given its impact on consumers, is the possible effects of alterations to electricity tariffs.
Of the many housekeeping arrangements I must make every weekend, none is more unpleasant, and yet as necessary, as having to make provision for the forthcoming week’s supply of fuel for the generating set. Part of the problem is that the supply of electricity from the mains is so unpredictable that a fair bet involves buying fuel as if the house will run all day (and night) on the generator. Then, there’s the problem of freighting the fuel. Petrol, in any quantity, leaves your car reeking like a leaking refinery for days. Even when storage is properly taken care of, decanting fuel into the generating set, just before it comes on, is a no less icky process. Finally, one must factor in the myriad externalities, largely all negative, especially the smoke from the exhaust and the noise as the machine chugs along.
Does it matter, therefore, the rumours making the rounds that it is proposed as one of the first reforms of the second term of the Buhari administration to address the ills of the nation’s power sector? There is no question but that the process by which the current crop of managers of electricity distribution companies in the country got to own these companies was flawed. A paucity of means meant that without exception, none has the wherewithal to drive the much-needed investment in capacity needed to push up productivity improvements in the sector. And because nearly all the current investors in the electric power distribution sub-sector had to resort to high levels of leverage to fund their acquisitions, the poor returns on these investments (one consequence of the decrepit infrastructure they inherited) means that they are now one of the financial services industries’ main credit risks.
It would matter a lot what financial engineering schemes would be included in the reforms to address this problem — short of declaring the distribution companies bankrupt and inviting new bids for their asset. But by far the most important aspect of any reform to the sector, given its impact on consumers, is the possible effects of alterations to electricity tariffs. Electricity distribution companies have long argued that the current tariff structure is too low to support the levels of investment in new capacity needed to return the power sector to sustainable growth. The rumours being bruited about suggest that the government is finally sold on this argument.
Along, therefore, with the planned increase in the rate of the value added tax (VAT), and expected reduction, this year, of the subsidy on the pump-station price of petrol, would an increase in electricity tariffs not drive the consumer price index up? Of course, we all are aware now that rising prices do not just hurt the poor in relative terms. It hurts them any which way that garment is divvied up. Besides, would the incidence of higher electricity charges not fall disproportionately on the “poor and vulnerable”?
It would matter over the medium-term that better revenue streams to the distribution companies will see them invest in metering platforms that make “non-revenue” electricity that less feasible. But even this possibility only means that there is enough time to design supports for the poor and vulnerable that will make the incidence of higher tariffs that much easier to bear.
A qualified “No” and “Yes” answer both these questions. First the “No”. True, both the increase in petrol prices and VAT rate should nudge domestic prices up a smidgen. But because most businesses are already decoupled from the national grid, an electricity tariff hike is unlikely to hurt as much, i.e. in the extent to which it pushes prices up generally. Indeed, it is a fair wager that the per unit cost of electricity that will result from any such hike will still deliver electricity far cheaper than the battery of diesel generators on which our businesses run and would be way better than the cost structure imposed on households by the 1.1 kva generators most Nigerian homes and small businesses run on.
By the way, quite a lot of households in gated communities in parts of the country already pay a premium on current electricity tariffs to private providers of electricity. For these households, a slightly more expensive supply of electricity from the distribution companies would be still lower than their current outlay on power. This does not, though, help explain the incidence of higher tariffs on the poorer sections of our society. And this is the “Yes” to the earlier set of questions. Yet, a large part of power consumed in the country at the bottom of the pyramid is “non-revenue” electricity. That is the consequence of sundry non-legal connections to the mains in most marginal communities.
It would matter over the medium-term that better revenue streams to the distribution companies will see them invest in metering platforms that make “non-revenue” electricity that less feasible. But even this possibility only means that there is enough time to design supports for the poor and vulnerable that will make the incidence of higher tariffs that much easier to bear. One option is to set a base consumption rate above which tariffs kick-in. These should accommodate the poorer section of our economy’s need for power, mitigate the burden from higher tariffs, and dampen incentives to filch power.
The means, in other words, of bringing about a sea-change in the power sector are available. What has been missing to date, has been the will to bring this change about.