Anyone living in Nigeria can testify that insufficient electricity production/distribution is the biggest infrastructural challenge facing the country. This problem has lingered for many years, adversely affecting the country’s economy. In the meantime, countless attempts have been made to resolve the problem. These attempts have, however, failed to yield any result. Now, PwC Nigeria is joining the effort with a recently published white paper titled, ‘Solving the liquidity crunch in the Nigeria Power Sector’.
The key observations
The report by PwC Nigeria noted that the situation in Nigeria’s power sector is rather abysmal. The country’s operational capacity of less than 4,000MW is far less than the set target prior to the privatisation of the power sector in the early 2000s. The report also noted that only 60% of Nigeria’s population has access to electricity, meaning that the remaining 40% are completely cut off. Interestingly, even the 60% do not get quality service because electricity supply is epileptic.
The main challenges
As one can expect, there are many problems facing the Nigerian power sector. A lot of these problems bother on inadequate production. Also, the means via which generated electricity is transmitted also presents another major challenge. See the problems highlighted below:
- Inadequate gas supply
- Limited transmission lines
- Operational inefficiencies
- Poor water management at hydropower plants
- Inadequate and obsolete distribution infrastructure
“Gas-fired power plants account for more than 77% of total electricity generated (Q4’2018: 71%) while hydro sources accounted for 23% (Q2’2018: 29%). Insufficient gas supply and variability in rainfall and water level at hydro plants, among other challenges, continue impact power generation in Nigeria.”
Besides these problems, PwC Nigeria noted that liquidity crunch is the most worrisome challenge facing the power sector. According to the company, the tariff framework (I.e., the electricity pricing structure in Nigeria) is non-cost reflective. This is because “industry participants often complain that electricity charges to customers do not reflect the cost of generation, transmission, and distribution…” As such, this predisposes the operators to liquidity constraints.
“Liquidity crunch is the biggest challenge of the Nigerian electricity sector today. The 11 DISCOs have been struggling to meet their obligations to the Nigerian Bulk Electricity Trading Plc (NBET) and Market Operators (MO) as evidenced in their low remittances to NBET and MO.
“In Q1’2019, only about 28% of the N190 billion invoice (comprising invoice of 161.4 billion for energy purchased from NBET and an invoice of N28.8 billion for administrative services from MO) of DISCOs were remitted.”
The ripple effect of these challenges
Electricity is a vital component of the industrialisation process. Any country that wishes to industrialise without first sorting out its electricity challenges will keep on going around the same circle without accomplishing its set agenda. This is the situation Nigeria has found itself in – a situation whereby companies are struggling to remain in operation because the cost of production is unusually high, execrated by the high costs they incur from powering their generators because electricity supply from national grids is epileptic. Unfortunately, the DisCos cannot perform optimally because they too are grappling with the challenges highlighted above.
What’s the forward?
According to PwC Nigeria, a possible solution to the problem of liquidity crunch facing the DisCos is to start supplying 50% of distributable electricity to Nigerian companies. This, the white paper suggests, should be done provided these companies are willing to pay N80 per kilowatt. The remaining 50% can then be shared among residential consumers.
The paper went further to explain that doing this will help solve the liquidity problem facing the sector. This suggestion is based on the assumption that Nigerian companies would be willing to pay for stable electricity supplied by DisCos instead of expending more to generate electricity for themselves. And if these companies pay N80 per kilowatt for a collective 50% of Nigeria’s generated electricity, they would eventually be paying an estimated N400 billion to the DisCos. This would go a long way towards solving the main problem highlighted above.
“To revitalize liquidity in DISCOs, we consider 50% of energy received by DISCOs is transmitted to industries at a cost-reflective rate of N80/Kwh… At N80/Kwh charged to industries, an estimated N400 billion will be injected into the power sector annually.”