Generation gap: An employee walks past electricity pylons at the Egbin power station in Lagos. Picture: GEORGE OSODI/BLOOMBERG
Generation gap: An employee walks past electricity pylons at the Egbin power station in Lagos. Picture: GEORGE OSODI/BLOOMBERG

Mounting debt, fuelled by the absence of a fair price for electricity, has forced Nigeria’s government to intervene in a crisis that threatens the gains achieved in the reformation of its power sector.

Landmark reforms passed in 2014 permitted private sector players to engage in power generation and distribution. But this has not completely resolved Nigeria’s power supply problems.

The government has failed to keep its end of the bargain it agreed with operators. The problem is compounded by the poor state of Nigeria’s power infrastructure and market, which investors did not seem to appreciate fully before taking over the assets.

A key pillar of the privatisation agreement was the commitment by the government to set a price that would allow operators to earn a fair return on their investment. However, it has failed to set a tariff that reflects the cost of production.

The government has moved twice to increase the tariff, but neither attempt was successful. It backtracked on the first rate hike it announced, and the second increase was halted by a court ruling stating that the legal procedure for increasing the tariff had not been followed.

This means operators have been forced to sell electricity at below cost. This caused a debt crisis for companies that generate and supply electricity, to the tune of N234bn (R10bn) in unpaid invoices in 2016 alone.

The federal government is the regulator of the Nigerian power industry, which makes it responsible for setting rules and brokering the sale of power between generators and distributors.

All the power that is generated is placed in a pool that is managed by a government agency, Nigerian Bulk Electricity Trading (NBET), and then sold to distributors.

But the absence of an appropriate tariff has meant that distributors have failed to pay NBET for the electricity they sell. This has threatened the viability of the sector.

Recently the government stepped in and announced a raft of measures that aim to restore the health of the sector. The highlight was the allocation of a payment guarantee of N702bn (R30bn) to NBET to enable it to pay electricity generators. But scant detail was provided of a planned fair tariff for making it profitable for operators to sell power.

The Association of Nigerian Electricity Distributors admits that its members have been unable to pay fully for the electricity they buy. Sunday Oduntan, the association’s executive director of research & advocacy, says: "It is true that we have not been able to remit 100% of our obligations, but that is because our ability to meet our commitments was contingent on the government meeting its own commitments to the sector."

Oduntan says it was agreed with the government that power generation would be expanded to 5,000MW and a cost-reflective tariff would be put in place at the same time. But neither of these goals has been achieved.

"Today, I am buying electricity at N68/kWh, but we are not allowed to pass [this cost] to the end user. I am allowed to sell it at N31.50/kWh. Even if I did not deduct my operating expenses, how could I meet 100% of my obligations?"

In its statement announcing the measures, the government said it remained committed to "tariffs that ensure a self-sustaining power sector". It did not explain how it intended to implement the adjustment other than to say it would pursue consultation to implement a simplified tariff that would take the cost of production into consideration.

The agency responsible for tariffs did not respond to questions.

Measures announced by the government include strengthening financial transparency in the management of revenue in the industry, reducing technical and commercial losses and securing capital to boost the sector. But these are not new to the conversation, and it remains to be seen what the government will do, and whether it will be enough to fix a problem that is believed to be the single-biggest hindrance to Nigeria’s
development.

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