Eligible Customers in NESI – Part 2 SWOT Analysis

By Idowu Oyebanjo

Opportunities

The expectation is that large industrial consumers of electricity, Manufacturers Association of Nigeria (MAN), Industrial clusters, Business and Energy parks, Distributed Generators including renewable generation from solar, tidal and wind energy will be the immediate beneficiaries of the proposed scheme. More production firms can now opt for procurement of electricity directly from independent power plants (IPPs) in industrial clusters. Ultimately, this will lead to the creation of more jobs for Nigerians and the reduction of wholesale electricity prices, and other goods and services. The manufacturing industry is expected to pick-up as we witness the return of most companies that left our shores, abandoning Nigeria for neighbouring countries due to intermittent supply of electricity. In addition, domestic customers who live in the neighbourhood of customers that meet the eligibility criterion will benefit, hopefully, from the improved quality of electricity supply that should result from this move.

Where applicable, DisCos to a large extent will still have to design, install, maintain and operate the network through which eligible customers in relevant categories procure electricity from generators. This means customers who can afford it will pay DisCos for direct connection to the electricity grid. This will inevitably gravitate towards the independent electricity distribution networks ownership already provided for by the EPSR Act. Opportunity now exists for interested investors to set up independent distribution network companies, obtain licencees from NERC and provide efficient and reliable customer-centric service within NESI.

The main income stream of DisCos are from connection and distribution network use of system charges. As both still apply the way the scheme is designed for certain categories of customers, there is potentially no significant loss in revenue to DisCos as power still flows through their networks. DisCos will suffer loss of revenue where independent networks are installed. To this end, the declaration already provided for financial incentives to DisCos if they experience any drop in income as a result of implementing the scheme is apt. This has the potential for disagreement as it will be difficult to determine, inter-alia, the value of income that would have accrued to DisCos but for the declaration.

From service provision point of view, there will be opportunities for competent independent connections providers, consultancy services, and companies that can handle the delivery of turn-key Engineering, Procurement and Construction (EPC) power projects. In this regard, the compilation of a register of certified providers of services in a national electricity register is necessary. This is an opportunity to strengthen the Nigerian Content act of the power sector as enshrined in NERC regulations to ensure the targeted localization of the industry. The mistake of the oil industry must not be repeated in the power sector.

Opportunity now exists for GenCos to sell more power from their hitherto constrained capacity and obtain better return on investment in NESI at lower financial risk as power will be supplied to credit-worthy off-takers at a much higher economies of scale through bulk purchase of electricity. This has the potential to enhance their long-term business development strategies. They will also be able to make up their dwindling revenues and hopefully be in a better position to make payments to gas suppliers as and when due.

As the power network becomes more complex, so does the importance of Health and Safety within NESI. With a poor history of safety, there is an urgent need for a Health and Safety Executive body which will have the powers to investigate and prosecute licensees in NESI found to be culpable of neglect for not putting in place measures so far as is reasonably practicable to prevent danger of electrical hazards to its staff and to the general public. Technocrats with demonstrable knowledge and experience in power system planning, design, operation, control, protection and management will be most invaluable in helping to ensure the effective implementation of this policy directive and stable development of NESI.

Threats

The threats emanating from the declaration of eligible customers depend on which hat one wears. For example, the scheme, when fully implemented will create competition in the distribution of electricity. The DisCos will argue against the timing of the declaration quoting section 24, sub-sections 2 and 3 of EPSRA that the pre-requisites for the declaration of eligible customers have not been met. These pre-conditions have regards to the degree of privatisation that has occurred, the existence of sufficiently large number of competitive entities, adequate metering of all consumers, availability of communication and information technology infrastructure required for the smooth operation of a modern electricity market. The maximum demand customers, many of whom constitute the bulk of eligible customers, represent the main sources of revenue to the DisCos. If such large consumers such as industrial, commercial and clusters of both within the DisCos’ franchise area sign up to bilateral arrangement for the procurement of electricity via the transmission network and or directly from generators, DisCos will lose a reliable source of steady income stream. Congruent to this is the fact that the reduced tariffs paid by residential consumers is as a result of the higher income stream DisCos derive from these same larger power consumers. Thus, this declaration may lead to an increase in tariff regimes for residential consumers, who are already disenfranchised and frustrated by the goings on in the electricity sector. The potential for protests and rejection of hikes in tariffs by residential consumers, organised labour and members of the National Assembly is very high.

The transmission and distribution networks as they are today will not be able to deliver on this policy except significant investment is made towards their upgrade. Significant network losses mean that eligible customers in certain categories will suffer from poor service delivery and this has the potential for illiquidity since power supplied by generators will not reach eligible consumers. Also, the transmission and distribution network operators may collapse under the weight of financial penalty for failure to meet service level guarantees when imposed.

GenCos in supplying eligible customers will face further competition from existing captive power plants, independent power producers and DisCos that encourage the connection of distributed generators to their network, the stiff competition of which consumers will be the ultimate beneficiaries.

Absence of infrastructure for revenue collection and transparent disbursement to relevant stakeholders in a way different from the status quo will spell doom for this policy directive and therefore, a more sophisticated and technology dependent approach is required. If generators are unable to secure payment guarantees from eligible customers or service level delivery is not attained, the potential for illiquidity will persist.

In view of antecedents, potential investors will be seeking to understand how NERC will go about the actual implementation of this policy with regards to sacrosanctity of contracts with DisCos, the establishment of new bilateral contracts between eligible customers and generators, mechanisms for revenue collection, tariffs and pricing of electricity supply to eligible customers, the impact of policy on the revenue stream of DisCos, potential policy summersault due to unforeseen reaction of DisCos, the creation of service level agreements that incentivise good performance but at the same time punish failures to honour guarantees.

Other issues requiring attention include matters of route through which new electricity infrastructure will travel and the attendant way leaves, easement or land use, the cost of building the network connecting eligible customers especially directly to generators, safety issues when running parallel networks with possibility of multiple earthing and increase in electrocution, ability to manage, operate, maintain, and protect the network, Interactivity issues and customer apportionment factor for relevant categories of eligible customers etc.

There is also the possibility to frustrate the scheme if the same DisCos with their ineptitude and inefficiency are asked to develop the infrastructure for the direct connection of eligible customers to GenCos and or distributed generators since the core of skills and expertise in-country resides with them. It would be better to allow new but qualified investors to create competition with the DisCos in building required network capacity for eligible customers where applicable.

…concluded.

Idowu Oyebanjo MNSE CEng MIET

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