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Without cost reflective tariff, Nigerians won’t have stable power, says Nestoil Group COO Dr. Umeh

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Dr Chukwueloka Umeh

Years after unbundling the power sector, teething problems still exist making it impede economic growth. Government recently said it will allow for a cost reflective tariff but agitations made it back out.

This according to Dr Chukwueloka Umeh, the Chief Operating Officer of Nestoil Group and the Managing Director/Chief Executive Officer of Century Power Group Limited is not the way to go if Nigerians are to have stable power.

He dissects other issues militating against growth of the sector in this interview with ICT and Energy Editor with Peter Oluka of TechEconomy.ng in attendance. Excerpt.

NESTOIL TOWERS Lagos

NESTOIL TOWERS Lagos

Q: Nigeria’s power sector, with all the investments sunk in still remains at the same stage like before. There have been issues especially around the recent postponed tariff increment with some users saying there should be improved power supply before tariff increment. Where is the sector today and you were once a rocket scientist, is it a rocket science that cannot be solved?  

Dr. Umeh: I think you’ve given a very good introduction to the power sector and what we’re dealing with in Nigeria. And yes, I am a rocket scientist by training and by my trade before. And so I said to people, the problems in the Nigeria power sector is not rocket science and if it’s rocket science, you have rocket scientists that are able to deal with it. So there’s no reason why we shouldn’t get it right. Well, there are several factors that I think a lot of folks don’t understand about our sector. You know, there’s a lot of conversation in the sector where we will say, yes, we’re willing to pay more money for electricity as long as we are sure we’ll get power 24/7 coming to our homes, our offices, our factories and whatever you have.

However, it’s a little bit of a chicken and egg situation. If you don’t pay enough, the power sector doesn’t get fixed. OK. If the power sector gets fixed and you don’t pay enough, it can’t be sustained. So there’s a little bit of dance to do around there. Before I jump into that, I want people to understand what we’re talking about, the power sector. We have a value chain that we speak of. If we focus right now only on gas fired power plants, we’re talking about gas production, gas transportation through pipelines or whatever means you have and the power generation companies, GENCOS, and then you transmit the power through transmission lines and finally get to distribution networks.

The distributors now take the power and distribute it to their customers’ homes, factories, and offices. This is the entire value chain. So gas flows from one site, all the way to the GENCOs to generate the power and then it flows all the way to the customers. Then the money flows from the customers all the way back to pay everyone along the value chain. So if any of these pieces is broken, the power sector doesn’t work. And it sounds very simple.

However, the amount of investment needed to make this value chain work is humongous. Let me pick one, for example. If you want to produce enough gas to fire a 495 megawatt power plant, you need to invest at least, if you are building a brand new processing plant, you need to invest at least $250 million in that plant to make it work. Now, I’m not even talking about the investment that the gas producer makes to drill in his fields to bring out the gas.

This is just the processing facility and then you need to run pipelines. So depending on where the plant is situated. If it is situated right next to the gas processing plant, it could cost anywhere from a couple of million dollars to get the gas to the GENCOs or hundreds of millions of dollars to build a long pipeline to get it where it’s going. Currently, the AKK pipeline is about to be built.

The AKK pipeline is over 600 kilometres long, and it costs several billions to build a pipeline. Someone is making that investment. Beyond that, someone is also going to make the investments to upgrade our transmission lines in the country.

That’s a whole lot of money. We’re talking about hundreds of millions of dollars, to build. And then finally, we get to the DISCOs. The DISCOs, when they were sold, what we were told was that the Discos have ATCL losses around 45 percent. That is the Aggregated Technical Commercial Collection (ATCL) losses.

Now, what we’re finding is that those DISCOs, some of them have ATCL losses above 60 percent. What that means is for example, if you give them 10 megawatts of power, for example, and they sell, they are able to collect only 40 percent money for the power that they’ve given.  Everything else is gone and lost.

How can the DISCO survive? Imagine this in Naira and Kobo, Dollars and Cents. It’s not a business like that.  Now that these guys are having to work on the regime where they are told how much they can sell their gas for, how much a GENCO can sell the power that it produces for, how much it can collect for willing charges over the transmission lines and then how much a DISCO can sell the power. It doesn’t work!

GENCO

A typical GENCO plant

Q: That means it is an issue with the tariff system. Is the MYTO still working as at today, is it still relevant till now? 

Dr. Umeh: Within the tariff structure that we have today, what we’re working with, the Multi-Year Tariff Order (MYTO). The MYTO was set up by Nigerian Electricity Regulatory Commission (NERC) to encourage investment and to make sure that customers are not getting price gouges. It’s a nice system in theory, but in practice it’s not working.

It was inside the MYTO that about 38 percent of the whole tariff goes to GENCOs, about eight percent goes to the transmission line, about 47, 48 percent goes to the DISCOs. And then there’s another six to seven percent that goes to the VAT, to the government and then services. When you break that down, the question is, how much is actually available for the entire value chain to work? It is quite small.

Today, residents are charged, I think maybe N26 now to N29 per kilowatts-hour. Businesses are charged anywhere from N30 to N46 depending on the Discos.

On paper, it sounds good, however, in reality, that’s not enough money for these businesses to run the value chain and make it work. So we need to go back to the drawing board and my argument has always been, let’s look at a sector that has worked in Nigeria, what a privatized sector has actually worked and the only example I have right now is the telecoms industry.

What did we do differently? The government completely divested from telecoms. What happened after that? MTN came to Nigeria and they put down infrastructure. I can argue that the tariff that MTN was charging that year was more expensive than the tariff that they are charging anywhere else in Africa. But what happened thereafter? Other businesses started coming to invest in telecoms.

So today, you have GLO, you have Airtel, and you have 9mobile and so on and so forth. And because they are competing, the tariff has gone way down because of competition between these different telcos. You can constantly see that they are driving to give better service, they are driving to give better tariffs to the end user. So the competition has made the price stay competitive so people can actually get a good service at a price that makes sense to them. It’s not the government telling them what to charge.

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Are the businesses within the value chain charging what they need to charge to be able to provide good service? Are they charging the tariffs that made sense to be able to make the investment needed to have the infrastructure value?

But they also have competitors. And it is the competition that drives pricing. So if the same were to happen to the telecoms, companies will come to make required investments across the entire value chain to make it work. But this is not the case that is being put forward by the different regulators that the government has set up. The right reason is that they are stifling growth in the country. They are stifling growth across the energy industry.

telcos in Nigeria

telcos in Nigeria

Q: Can you throw more light on that area? How are the regulators stifling the sector?

Dr. Umeh: It is important we keep talking about it. Some years ago, NERC put out some regulations that were supposed to help renewable energy sources come up. So the estimation was that by 2020, this year, we will have about 2000 megawatts running mostly from solar. How many megawatts have we put in solar? So if we pull one over and over and we are not seeing the result, isn’t it time for us to start thinking completely differently? You can’t keep doing the same thing and expecting a different result.

It does not work. It’s never worked. And it will never work. So I say to Nigerians, to the government, it’s time for us to take a very different approach. I know the government has the best interests at heart. Yes. However, it’s time for us to look in a different way. Stop looking at what they did in India or what they did in London or what they did in Argentina.  We know what they did. The experts have come to tell us; we have written regulations by experts. A lot has been spent yet no solution in sight.

Q: What can be done to really revamp the sector and make it work?? 

Dr. Umeh: We spent millions and millions of dollars in this country. That’s why it’s still not the right way to get it done. We’ve created a power sector recovery program, PSRP. It’s not working. I argue that it’s time for us to do it differently, very differently. And within that argument, I say, guys, we need to completely, deregulate the sector. I’m not telling the government to close down all the regulators, you can keep them there.

They have created some nice regulations that we can actually use. Don’t scrap all of them because we can use them. However, we need to understand that it’s the brand new market that we’re trying to allow to grow. So put the horse before the cart.

Allow the sector to grow, then you can regulate it. In allowing the sector to grow, allow the private companies that are willing to make the investment to make their investments, charge what they need to charge, and then let competition drive the prices down.

Q: Let’s talk about regulations and regulators. How are they preventing the sector from growing and can you kindly give us an example of how they impede the sector?

Dr. Umeh: I am in generation and we have the plan that we designed from scratch from 2012 and 2015. We initiated a power purchase agreement with Nigerian Bulk Electricity Trading plc. (NBET), the bulk trader at a certain tariff. Well, guess what? From 2015 till now, nothing has happened. Several of the regulations that we worked under have been changed, several of the agreements that we have initially have been changed. How do we invest money in an uncertain environment? You can’t.

The investor will not give you one dollar to invest but the money is there ready to be invested but nobody is going to give it to you in the uncertain environment that we are in.

You sign an agreement today, in two years it is obsolete and you can’t even enforce it. So the rule of law to enforce the agreements is not there. How can you invest? You borrow money on a certain day, when a dollar was N360 but today, a dollar is N460. So the investment you made has completely gone. The expected returns completely eroded. How can you plan? The MYTO however, is still at the same level. We were told that on July 1st, we were supposed to see a new tariff. Just before that day, what happened? The National Assembly supposedly got together with the DISCOs and said, oh, we’re not ready for that, let’s move into next year. So the increase that we were supposed to see in tariff has gone away.

But Nigerians still expect power to come, it is not going to come. I said this year in, year out, as long as we keep doing this, the way we are doing it now, we would never see any additions, any meaningful action to the power industry. That’s what we see today.

So every year, I can say the same thing, and every year, you’re going to see the same result. A new minister came in and said by the end of the year we will see 10,000 megawatts added to the grid, it hasn’t happened and it’s never going to happen unless we change the way we do things.

Q: Thank you for that incisive presentation, but it gets one worried that a couple of these issues that you have raised, that they keep reoccurring because the last time we had an interaction in Abuja, during the Nigeria Oil & Gas (NOG) conference, a couple of the issues you raise now are still partly or largely some of the issues still plaguing the sector. But away from that, in all of this, do you still see the relevance of NBET to the power sector because you discovered that there are still underpayments to GENCOs when they collect. That is a major issue because when you reconcile the figures, you will see a lot of difference between what they collect and disburse to GENCOs. Would it rather not have a situation where the payments are made directly to GENCOs rather than being routed through NBET?

Dr. Umeh: Thank you for that question. What I said now, I did say the same at last year’s NOG.  If we don’t start doing things differently, we are going to come again this year and have the same problems. So it’s almost like I had a crystal ball and it’s happening again. And I’m saying to you, this is going to happen next year, too, unless we start doing things differently.

Now, the government comes up and creates certain regulations. NBET, when it was created was to be a transitional organization. And when the transition happens, supposedly happens, then NBET will be dissolved. Transition hasn’t happened as it hasn’t been dissolved. I wouldn’t blame NBET for underpaying the GENCOs, you know, because the reality is this, NBET is supposed to pay the GENCOs with the money it collects from the DISCOs.

So when the GENCOs send out electricity and it goes to the DISCOs, the DISCOs are not able to collect money for all the power that was sent to them, so the GENCOs can’t be completely paid. And a lot of this power is lost, technical losses. A lot of it is lost in collections. So the DISCOs are collecting money from the people that they metered. There are some people that are unmetered who are not paying. Some are paying bill on estimated billings, and also a lot of people are not metered. So guess what, that is power that is lost and they call that power theft. However, think about this situation, if a GENCO is allowed to deal directly with the DISCO, two private companies dealing with each other. If GENCO supplies power to Eko Disco, for example, 10 megawatts and Eko disco is not able to pay for 10 megawatts of power. However, Benin disco can pay, guess what, next month that GENCO will rout the power directly to Benin Disco and collect its money. So Eko Disco will be forced to go and make whatever investment it needs to make to be sure if they get power the following month, they will be able to pay for the entire power deployment, they’ll be able to pay for them and get power from this particular GENCO.

DISCOS

DISCOS in Nigeria – Image Credit:
THISDAYLIVE

So it’s really business. And this is where the industry needs to move to. Well, within that, the DISCO will also argue that some of the power that it collects, it is not able to collect all the money because there’s power theft going on, some of the infrastructures that were sold under the privatization has become obsolete that they need to spend a lot of money to update them. And guess what? The rate of the dollar has got so high that the money that they had before is not enough anymore.

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And the customs are charging them so much for anything they import and so forth. So because of that, instead of charging a resident a predictable N20, N26 per kilowatt-hour, they want to charge them what, N40 per kilowatt-hour to make sure that everything was ok, power is available. Guess what? That becomes a business discussion. And when, if they’re allowed to charge for that N46 per kilowatt hour to make sure that the residents or the house gets 24/7 power. Guess what happens next? It’s now up to that resident.

When you get the power, what do you do? You make sure you have what we call power responsibility. Today, you’ll find some houses that might have ten or 15 air conditioning units in them. All the ACs will be on, there’s only one person in the house.

You know why? Because they’re not paying a cost-reflective tariff. So if you are paying, instead of N26, you are paying N46, you will make sure that you put off all the ACs that you are actually not using so that you pay for what you’re actually using. If you have 3 refrigerators in your house and one freezer, that’s a lot of power and you don’t use all of them, guess what you do? You will use only one freezer and refrigerator.

You will make sure that they are energy efficient so that you will only pay for what you will use. It you use bulbs in your house that cost you a lot of money, you will install energy efficient bulbs.

So you are now energy responsible, even though you’re paying N46, which is the high tariff compared to what you’re paying today. You’re using less electricity. So the Disco can charge you what they need to charge you to make sure you get energy 24/7. The DISCO can also, for only the power it collected from the GENCO. So if the GENCO was planning to supply 10 megawatts to Eko Disco for example and Eko disco knows that it need sell only 5 megawatts of power, the additional 5 megawatts of power will be taken and given to another DISCO that needs it and can actually pay for it.

So we see it’s strictly business. Think about it again, I’m going to bring you back to the telecoms industry. Today if you are on the phone. You only talk as much as what you can afford. You don’t stay on phone for 3 hours if you cannot afford it that is why you flash someone. When you’re browsing your phone, you want to watch a movie but you know if you do, your data will go and you can’t afford it now, you will not watch it, so you say you want to send important text messages.

That is responsibility. So we now push it back to the end-user, take only what you can afford. It is money, so power is not a social responsibility, but in Nigeria, we are dealing with it like it is a social responsibility.

The government is jumping to set tariff, it is not government’s job to set tariff.  It is government’s job to set regulations that encourage investment. It is government job to make sure that people don’t come in and make the investments that they can’t recoup and then turn back to the government to try and bail them out.

So, set the right conditions. And guess what happens then? The NBET of this world will eventually be dissolved. So that, like the government planned, it will now become strictly business – willing Buyer, willing seller. Between the gas generator to the gas transporter, the guy doing the power generation, whoever owns the transmission online and then the distribution and end optical, that is the way it should be.

Q: It is difficult for the telecom sectors to go to the hinterlands to set up 4G networks. In fact, there are about 114 cities in Nigeria where we don’t have connectivity at all. So if we cast our minds back to 2001 when  the sector was liberated, the MTN, Econet of this world, what they did, it was in 2003 that the customers started to feel the impact, when Glo came on board. So looking at what you’re proposing about the total deregulation of the sector; your projections, if government wakes up today and do this, when should people start seeing the cost effectiveness on the customer’s side?? By 2015, 2030 when will the impact be felt if government decides to deregulate today?

Secondly, metering is one of the issues that DISCOs are facing. What do you think can be done to kind of make it work so that people will be metered and when they do that people can come into the electricity net?

Dr. Umeh: These are very good questions. Let me start from the telecom’s comment. You know, I sit on the board of one of the telecoms company. I’m a director of one of the telecoms companies in Nigeria. So I get to say modestly, a company going to provide services in an area is strictly a business decision. You won’t make your infrastructure available in a place where you won’t see your returns. So when the telco’s came into the country, when, MTN came on board, they never thought they could get more than 500,000 subscribers, so they planned for the 500,000 across the country.

Guess what, they have millions across the country and are constantly looking for ways to service them. Some of the telcos not going to the hinterland is because they don’t have a lot of customers from there. Also, the power they are using is diesel generators. That contributes to the charges people are paying for. So if we have stable power, the telecom charges will first of all go down because the money spent to run the towers will also go down.

Electric bulb, NERC and Discos on tariff 2

When will power happen in Nigeria? That’s a never ending situation and l can’t say if its 2030, or even 2050 because it all depends at the direction the government goes. So people are going to clamour to government that the tariff is too high, they can’t afford it and government will say let’s hold it. It is a chicken and egg situation. If the tariff is not increased then the companies cannot make the investment that is needed to provide 24/7 power. So guess what, the power remains as it is,

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I did a poll recently where the people were asked if a GENCO working with a DISCO can provide you or assure you of 24/7 power today if you pay a tariff of N46 to N70 per kilowatt hour, will they pay? Everybody from the poll said yes.  If the people are willing to pay, then why are some people or someone saying they don’t want to pay?

Q: What’s the issue, why are people not realising the importance of paying cost reflective tariff?

Dr. Umeh: It is a matter of education and information. People are not properly informed of what it takes to make the power sector works and as long that government is inside the mix, this is going to continue to happen. I don’t want the government to go away when I asked for deregulation, government should let private business run the sector and deal with each other as businesses so they can provide the service. In the telecoms sector, government sells bandwidth and company pays to get it. It should also be same in the power sector.

So government should stay in. Make it strictly business. Let businesses charge what they need to do the business. I mean, you don’t tell a taxi man what he should collect. You also don’t tell the tomato seller what it should sell the products. Why can’t we do the same thing? So it should be the same here. You don’t see the government telling the aviation companies how much they can charge for airlines ticket. Here in Nigeria, BA charge what it feels its right to make their money and if you fly Emirate, which would charge a fragment, so it’s up to the consumer. So that’s the answer

Q: Has it not occur once to the government that the way it is going is not the right way for the sector?

Dr. Umeh: There have been situations where when the country was going towards the right direction, having the right conversations then some persons or issues came up to disrupt the flow.

Several years ago, when there was a clear set of regulations that were running, someone came in and said that they went to Brazil and they had this technology that we can install in Nigeria which will add 10,000 megawatts at once on one plant within two years.

That completely distracted everything that was going on and distracted the entire industry and that kept us where we are. So when you have people trying to distract the conversations like that, you remove them, that’s what we need to do in this sector.

Q: What will be the implications of the postponement of the cost reflective tariff to this quarter of 2021, what do you think will be the implications of this on the sector and Nigeria? Secondly, the recent unbundling of TCN. What are the implications? Is it the right step to take at this time?

Dr. Umeh: So let me start with the second question. Unbundling the power sector was the right thing to do. We need to complete it. You know, you cannot decide you want to go from Lagos to Abuja, where, I mean, to drive with your car or drive to get there. We provide the car that we will use to drive there. We fuel the car; we provide service to the people really driving the bill. I mean. But then we start on our journey and along the journey, we suddenly say, you know what, we not going to Abuja anymore, let’s get to somewhere else. Meanwhile we had a timeline. We need to get there.

And guess what happens? We don’t know where we are, we don’t know where we are going, and we don’t know what to do next. It is the same situation here. We have agreed that we will unbundle the sector, we have done it.

We agreed on what the process will be and how to do the unbundling and we have started and halfway, we have been going back and forth. That is the problem that we see today. We said we are going to increase tariff by 2021 but we earlier said we were going to do it in July 2020 but we haven’t done it. So what makes you think we will do it in 2021? If you ask me, I don’t believe it, based on history.

Q: It’s an open secret that many of the DISCOs are all insolvent because of false valuations at the time of purchase. Will complete autonomy not lead to exploitation?

Dr. Umeh: Well, this is the way I look at it. If you’re worried about people getting exploited by the Discos, and because of that, we don’t allow the Discos to do what they need to do. The power is never going to come. Again, it is deciding which one comes first, is it the horse or the cart?

Which one is going to come first? Since we decided that the horse to come before the cart, allow the horse to come before the cart, there’s a right to own the horse before the cart.  People are worried about that exploitation and I say that competition will ensure that this exploitation didn’t happen. While we are at this, look at the telecoms industry from what I said before. Competition is what drives pricing, correct pricing.

So once you believe the competition is going to set the price, then you need to let the people that will compete work. If we allow free markets to run, what it means down the line, in Lagos, for example, if we take Ikeja and areas like Ikeja for example, if there are several people that can provide part of the power in Ikeja at a price and it is too high, you will have another company selling at a favourable price to you or you keep going to someone till you get to someone that suits you.

And these companies that are competing against each other, they’ll encouraged, will be incentivized to make sure that they provide the right pricing. This is the way it works. Now, the question is going to be, how do we make this happen? How can we actually make sure that these companies can be created to compete against each other? That’s the question that we need to be discussing. And there’s already a model that can be used to make it happen.

Some of us already know that model. So these people that know it should be able to help the regulators that already exist, to put it in practice. And that’s what we need to be doing.

Q: Why can’t the GENCOs and DISCOs invest in the power themselves with sufficient metered power for everyone before talking about cost reflective tariff? I believe this should be available first.

Dr. Umeh: It is a good one, however, I ask you this, have you ever gone to a bank to try to borrow money? If you go to try and borrow money from the bank, the bank wants to see what you are going to use that money for, and how are you going to pay back. Where are you going to pay the money back from? Is it from the money that you make from that business that you’re trying to build?

So you need to show your business model first of all and be sure that the business can actually pay that money back. Without that no bank will give you N1. It is the same way for a GENCO to build the plant. For example, a 500 megawatts plant, they need to spend about $700 million dollars, not Naira, dollars. So they need to see that the money that they are going to make, they can pay it back. If a Disco is going to invest to provide infrastructure, transformers, lines and so on and so forth.

Century Power Group Limited advocates for total deregulation of the Nigeria power sector

Guess what, that Disco also needs to show that it can collect enough money back to pay back for the investment that they’re going to make. So it comes back to that same thing. They need to show a viable business. Without showing it, they cannot raise the money they need to invest.

This money is not coming from our pockets, it is coming from loans. So they can’t give you power first and then try to show that it can make money. They need to show that they can make money before they get the power to make the investments. In the same way you don’t ask someone in an airline company to bring planes first before they know that they can charge a high price or whatever price they need to be able to pay for the plane and pay the salaries of all workers. It doesn’t happen that way.

This is business.

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