What may frustrate states’ capacity to generate, distribute electricity despite move to end subsidy

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There are strong indications that the efforts by some state governments to take advantage of the country’s new Electricity Act in generating and distributing power in the country may face daunting hurdles.

Although the increase in the band A tariff as well as the proposed phase out of subsidies from the sector by 2027 could have been a leeway to attract investors, experts said that most states in the country are indebted and may not be attractive to investors.

Already, 12 states have applied to the Nigerian Electricity Regulatory Commission (NERC) in a move to generate and distribute electricity. However, many stakeholders are of the view that the prevailing challenges, which have bedevilled the power sector in the country more than 10 years after privatisation may impede the progress at the state level.

Although the Federal Government had hinted on foreign exchange availability to power firms through the Central Bank of Nigeria (CBN), the debt profile of the power sector to commercial banks currently stands at over $2 billion while loans granted by the CBN to electricity firms, which are reeling under a N5.8 trillion tariff shortfall, stand at N2.3 trillion.

With the passage of the Electricity Act 2023 and its subsequent amendment through the 2024 Amendment Bill, state governments now have the opportunity to contribute to the electricity sector, create employment, stimulate private investment, promote balanced economic portfolio and drive development of their states.

Lagos, Ekiti, Abia, Osun, Kano, Kaduna, Nasarawa and other states have already moved to domesticate the Electricity Act.

But many concerns of stakeholders include the challenges of the fiscal framework in the power sector, cost-reflective tariff, additional expenses imposed on the generation companies through the five per cent community tax, foreign direct investment outlook of the states, dependence on Federal Government, among other challenges.

Since Nigeria privatised the electricity sector in 2013, the improvement in power supply is barely noticeable. Although generation companies moved their capacity to 13,000 megawatts, the actual output on the grid yesterday was a meagre 3,400MW, a development which makes the sector to perpetually struggle with liquidity crisis.

Between 2015 and 2022, the intervention of the government in the power sector included the Nigerian Electricity Market Stabilisation Facility intervention, which gulped N555 billion. The companies were only able to pay back N160 billion. The mass metering programme loan stands at N53.3 billion, with N3.4 billion paid. Under the Power and Aviation Intervention Fund (PAIF), the Federal Government injected N317 billion into the sector. The companies paid back N266 billion. The Nigerian Bulk Electricity Trading Payment Guarantee Facility stands at N1.3 trillion for gas and GenCos.

While most states are heavily indebted and their financial viability is critically weak amid dwindling Internally Generated Revenue (IGR), most stakeholders worry that state governments with limited financial strength may find it difficult to run electricity companies sustainably.

With the current economic situation and grid challenges, the capacity of power companies to charge accurate tariff and recover revenue is also worrisome and may require the state to provide financial intervention as the Federal Government has been doing.

According to the capital importation data for the third quarter of 2023 by the National Bureau of Statistics (NBS), about 28 states had zero Foreign Direct Investment (FDI) even as the value of capital importation into Nigeria fell by 30 per cent to $2.16 billion in the first half of 2023, from $3.11 billion in the same period in 2022.

With the volume of capital needed for investment in the electricity sector, most stakeholders believe that investors may not be willing to invest in a lot of states except a few like Lagos. While Lagos alone attracted $1.48 billion, representing 69 per cent of the total capital inflow into Nigeria, the Federal Capital Territory (FCT) emerged as the second top investment destination with $604.55 million — representing 28 per cent. Akwa Ibom was on the list with $39.1 million, Adamawa $4.5 million, Anambra $4 million, Ogun $26.1 million, Niger $1.50 million, Ondo $200,000 and Ekiti $25,500.

Earlier this week, the Minister of Power, Chief Adebayo Adelabu, urged state governments to key into the vision behind the Electricity Act 2023 signed into law by President Bola Tinubu, stressing that the move is the only way Nigeria could achieve economic growth and development.

But an electricity market analyst, Lanre Elatuyi, believes that the Electricity Act is “very controversial,” adding that the market model in the states would determine if investors in generation, transmission and distribution would come to risk their borrowed funds without relying on government guarantees.

He noted that many states are not viable enough to provide guarantees like the Federal Government has done over the years, adding that the Nigerian Electricity Supply Industry (NESI) with all the government interventions and liquidity has not been able to transit to a competitive electricity market.

“Those advising the states believe that they can introduce competition in state electricity markets with the subsidiaries of the same players who are not viable in the current market structure.

“It is no big deal to write laws on electricity market, but it is going to be a bit difficult to create a market where manpower is lacking, and where investors will not get comfort from host governments. Some of these states hardly offtake and pay for 100MW; so, I wonder if there are any economies of scale in their goals,” he said.

Elatuyi, who noted that while the Electricity Act also provided for market transition to a wholesale competitive market, and the creation of system operators, navigating the contradicting provisions of the Act remains a big question.

“I am not sure states with no significant FDIs in the last 10 years should mull the idea of creating an electricity market. No investor will come and risk borrowed funds in a sector known for bad debts.

“The willing investors will compensate for country risk in the tariffs that will be too high for end users to pay, and it will be hard for broke states that depend on Abuja for monthly allocations to provide subsidies for consumers,” Elatuyi said.

Former President of the Chartered Institute of Bankers of Nigeria (CIBN) and Professor of Economics at Babcock University, Segun Ajibola, while acknowledging the capital requirements of power projects, said states could think in the direction of long-term bonds.

“But they must put a strong template in place to collect revenue from the project and account for it transparently, to enable repayment of such loan/bond,” he said.

He noted that the law that empowers states to generate, transmit and distribute electricity was a well thought out one, but called for proper metering.

Renowned Energy Professor, Wunmi Iledare, said empowering the states in Nigeria to take responsibility to offer incentives to power its economy is laudable but the governments must avoid creating another ‘NEPA’ type of situation.

According to him, while funding challenges for optimal power investment may be apparent, resolving it with public private partnership approach could be a leeway.

He noted that issuing licences to power a particular state need to be thoroughly vetted.

“The power industry is capital intensive, so government must encourage the bigger the better mentality without discouraging small players to complete vertically integrated power business.

“Of course, there can be cooperation with bordering states to expand the customer base to enhance profit margins to low tariff,” Iledare said.

According to him, each state doing its best to create a business environment conducive to power sector investment is sacrosanct even as the Federal Government may consider a single digit loan to assist the states.

To the Managing Director of Mainstream Energy Solutions, Lamu Audu, the recent amendment to the Act that introduced payment of five per cent of the operating expenses for the previous year by the generation companies will deter investment.

Audu said there have been every indication that the Electricity Act was designed to struggle, adding that being a capital intensive business, most states may not thrive even if they are to rely mainly on off grid.

“Most of them are barely managing to pay salaries. From their end, they may not be able to fund power projects or provide counterpart funding for public private partnership,” Audu said.

Beyond generating electricity, he noted that most investors would be worried about off-taking, stressing that no investors would partner with the states when there are no off-taker to guarantee the return for the investment.

Speaking further on the five per cent imposed on generation companies, Audu said: “If this is enforced, it will kill investment in the generation sub-sector because this will be in addition to the concession fee, royalty, water use fee and all the taxes you can think of which we are already paying.

“This is overkill for any potential and existing investor. It has to be reversed otherwise we may be saying bye to attracting investment in the sector which would compound our current situation.”

Partner at Kreston Pedabo, Olufemi Idowu, had earlier kicked against the five per cent imposition, stressing that the move would affect the sector negatively.

On his part, Energy Consultant, Dan D Kunle, noted that it was good to try the democratisation of power generation and distribution with the states.

According to him, if states engage with the private sector, they may record some marginal improvements.

“The challenges are enormous. Capital is needed. Industries to use the power must be built as ordinary people like you and I cannot pay the economic price to make the business viable. Demand is weak and capital expenditure and operating expenditure are high.

Some states can cluster to be more robust enough for market shares. South East and South West with Lagos are the most viable clusters if they can agree,” Kunle noted.