Here’s How to Finally Solve Nigeria’s Electricity Crisis – Kola Adesina

Kola Adesina, who attributed the problems to "misalignment of vision, policies as well as non-consultation and inclusion of operators and stakeholders before a policy is implemented."

Chairman of the Egbin Power Plc, Kola Adesina, has called on the Federal Government and operators in the power sector to address the challenges currently facing the power sector. Read more...
Kola Adesina - Nigeria News
Kola Adesina - Nigeria News

Mr. Kola Adesina is Group Managing Director of Sahara Power Group, owners and operators of Ikeja Electric and Egbin Power Plc. Adesina says Nigeria’s intractable power problem, which has appeared to defy all solutions, can only be resolved when all relevant stakeholders in the power sector sincerely decide to do the right thing.

He dissects the Nigerian electricity industry, exposing hitherto hidden aspects of the power privatisation process and other critical issues in the sector, in this interview with a team of THISDAY editors, comprising Vincent Obia, Kunle Aderinokun and Bamidele Famoofo. Excerpts:

How would you react to the widespread belief that the power sector privatisation in Nigeria has failed due to irregularities?
The situation in the power sector has been repeatedly stated and all the stakeholders are not happy. Everybody in the sector, as we speak today, is not happy. The reason being that, imagine you preparing to write an exam, and the course is Geography, then you enter the examination hall, and they give you Biology or Physics questions to answer. Will you be able to confront it? Even if you are a brilliant student, you will be destabilised. You won’t be able to do it. That is how we got to where we are today.

Let me go back in time. There were two basic documents that govern what we do in the power sector – the Power Sector Reform Act in 2005 and the Multi Year Tariff Orders (MYTO). Now these two documents put together have statement of intentions, steps, and principles leading to electricity 24/7 to Nigerians. There was a document called the National Energy Policy in 2001, which simply put in place a framework for the privatisation of the sector. It is that particular framework that became the bedrock of the Power Sector Reform Act in 2005.

However, what has been found, as at the day of that privatisation, and please note, and note this deliberately, the RFP to which all lots of companies responded to, was really competitive. It wasn’t as if government just called some private individuals to take all the assets. No!

For the sale of the power asset, which took place in 2013, what happened was that there was an advert put in place by the Bureau of Public Enterprise to the effect that companies with technical capacity, financial wherewithal, operational knowledge came together to form a consortium for the acquisition of these assets. My company, for instance, went to the Korea Electric Power Corporation (KEPCO).

Let me share some background information here. As at that time, when we entered into the relationship with the KEPCO, in 2006, the Koreans were generating about 46,000 megawatts. By the time we went into the bidding process, for the sale that took place in 2013, KEPCO was generating, transmitting and distributing 94,000 MW. As at now, KEPCO is supplying 118,000 MW of electricity. So let’s put that in one bucket. So, that’s the partnership we in Sahara consummated, I’m sure nobody anywhere on planet earth would say we don’t have the technical partnership required to run this power plant or do power business in Nigeria.

All bidders then had to submit bids based on having conducted due diligence through limited site visits and assessments of the to-be privatised electricity companies.

The Multi-Year Tariff Order.

Now, there is a document called the Multi-Year Tariff Order (MYTO). Inherent in the document are certain principles, which ordinarily should govern the sector. The drafters of the policy, the drafters of the Act and those, who created this framework, were working with universal principles that govern the sale of electricity anywhere on planet earth. And among these principles was the fact that there would be cost recovery, financial viability, there will be signals for investments, there would be certainty and stability, there would be efficient use of the network, efficient allocation of risk for every participant in the sector, simplicity and cost effectiveness. It was expected that incentives for improving performance would be put in place by government – transparency and fairness, flexibility and robustness, and lastly social and political objectives. Invariably, we have these 10 principles embedded in the governing framework, which ultimately is the determinant of pricing and rates. These were assumptions in the document and these assumptions are basically what are universally applied for rating and pricing of electricity. Anywhere in the world you go to, these are the assumptions you will naturally find governing the rating and pricing of electricity.

So, on this basis, a model was created, and sent to the BPE (a government agency charged with sale of public assets) and they verified the content of the model to assess the conformity of its content to their expectations and governing framework put in place. It was such that the content of the model were in line with their expectations and in conformity with the framework that has been put in place, which means we were good to go.

On the other side of the equation, access to these assets were denied by the labour union for through due diligence by interested bidders, invariably, we had to rely largely on information provided by BPE as the basis for bids to acquire the power assets.

Now these two documents put together have statement of intentions, steps, and principles leading to electricity 24/7 to Nigerians With regard to generation assets, the critical component in the evaluation criteria were – ability to upgrade and expand the power asset as well as operations and maintenance capability. For distribution companies, the key requirement for a successful bid was the ability to reduce aggregate Technical, Commercial and Collection (ATC&C) losses, to upgrade the network and improve availability of electricity supply to Nigerians. The selected bidders were those with the most ambitious but realistic ATC&C reduction targets. But most importantly, government was to guarantee cost recovery through appropriate pricing and/or intervention arrangement of N100 billion to address the basic question thrown by affordability of cost reflective tariff as against low average income levels.

It is vital for me to state here that the economic and financial assumptions in the MYTO – which is the pricing sector model – are inflation rate, naira exchange rate, interest rate or cost debt, and the required return for the investor. It is to be noted that these assets we acquired were old, obsolete and required significant upgrading and investment

What happened after privatisation?
But what happened post-privatisation is as follow: one, we took over November 1, 2013. And a week or so thereafter, NERC wrote a letter to all the new owners/investors introducing the Interim rule regime, as there were concerns about the liquidity of the sector and there needed to be a transitional period. This simply suspended all the contracts and performance agreements, which were signed, as well as the process list to be followed by the new owners post privatisation.

Thereafter, we realised after gaining access to the assets that they were in worse conditions than stated in the privatisation documents provided in the BPE data-room and this invariably meant that the investment required to achieve agreed targets were significantly more than projected.

Did you not do a proper due diligence of the assets and scenario planning?
We did undertake detailed planning for many scenarios as one would expect in such an acquisition, but the outcome was even worse than our assumed worst case scenario. For instance, we did not anticipate that contracts would be suspended, the N100 billion subsidy/intervention would not be paid, generation capacity charged wouldn’t be paid at all, also the removal of fixed charge in the DISCO cost structure, we also did not anticipate the minor tariff reviews would not be carried out as at when due, and that the exchange rate would double, as well as interest rate all double. So essentially, our key cost index more than double without any corresponding change in the tariff.

In addition, the customer population on which the tariff was based was much less than what was indicated in the Multi Year Tariff Order.

Was there no proper capturing of customer base by government?
Before we took over customer enumeration in the strict sense of the word. However, when we took over we undertook a detailed customer enumeration, technical audit and asset mapping, which took at least 18 months and at a significant customer enumeration was key to establishing the baseline performance of the discos and ascertaining who was our customer or consumer (i.e. free riders). The technical audit was to establish the current state of all the equipment and wires within our network. We had some transformers that were not on any record as well as equipment insWhat happened after privatisation?Did you not do a proper due diligence of the assets and scenario planning?

talled 50 years ago. This enabled us to develop detailed asset maintenance and replacement plan and the cost required to do so.

What is the current position of things?
While we were moving, the following were taking place. The macro environment started moving south, as the exchange rate, which at the time of acquisition was N155 to a dollar, moved to N159 and then to N165 and to N358 in the open market. Inflation moved from about 8.8 per cent to about 10 per cent, then all the way to 18.5 per cent. As such, interest rate moved from 14 per cent to almost 30 per cent.

And while this was going on, regulatory orders were issued stopping fixed charge and freezing tariff increase for certain sets of customers, which invariably mean the cost of supply to our customer is today higher than the tariff charged the customer. Do note that this is a sector that unfortunately depends on a lot of imported materials to function optimally.

Another point I need to quickly stress is that there’s a significant mismatch in the exchange rate used for generation companies – N305 per USD – and the MYTO tariff charge to the customer, which is still around N198. Within the same period, gas price moved from $1.80 to $3.30 without any change in the retail tariffs. Putting all these together, I’m sure you can see the current position of things in the sector.

How are you surviving in business, considering that most of these assets were acquired with bank facilities?
We are incurring losses and can’t meet our obligations to our banks, even to my equipment suppliers and operations and maintenance service providers. However, I give kudos to our banks, who, notwithstanding the loan and conditions attached to them, have shown great understanding, despite the potentially huge exposure of the power assets to them. Also, more kudos to our gas suppliers, who say for Egbin, where 52 per cent of our cost is for gas which we were unable to fully pay for, until recently, had been very understanding of the situation. Our staff have also showed great resilience and professionalism in been able to do quite a whole lot in spite of the liquidity crisis.

But I do believe that if the documents, contracts and agreements underpinning the sector were strictly adhered to, we will not be barely surviving but would have had a sector that is thriving by now.

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Would you say government deceived investors in this sector?
When you look at the list of principles that govern the sector, you find out that the social and political objective was stated last. The drafters of the act and MYTO knew that somehow, somewhat, political office holders would want to still protect the social and political objective of the government. But they made it the last point, because they knew that it is impossible to fulfil the last principle without the first nine. I do not believe government set out to deceive investors, but priority has changed over time, with several blows dealt to the sector by factors beyond our control. I would assume the foundation of a building is far more significant to the strength, resilience and beauty of the structure and, therefore, must be appropriately catered for. So the fundamentals of the sector must be dealt with frontally and sincerely as all stakeholders have accepted to meet the principle of legitimate expectation. Government still owns a 40 per cent stake in all the Discos – except Yola – so I would say government did not deceive investors in the sector

Is government not contributing its quota?
Government is not just a stakeholder, but equity holder. The government sits on the boards of all the Discos and some Gencos. Government’s role as a participant, facilitator and enabler must be clarified and aligned for results to ensue. Time is of essence as the state and cost of replacement of equipment we use are not static.

Is it lack of political will on the part of government or leaders that has brought us to this state?
Let me say this, not necessary to massage the ego of those in charge, the current administration has done well. I would salute this government in terms of, first, maintaining the sanctity of contract, because if government was to listen to the sentiments from those who don’t know, things would have taken a different turn. For the purpose of ensuring predictability and continuity, these present administrations still maintained what it met on ground. Number two is that when the new administration came on board, N213 billion revenue shortfall was to have been paid to the sector, the generating assets, particularly. We were not able to fully access this fund under the last administration. As a matter of fact, N21 billion was due to Egbin, but it got only N5 billion under the last administration. But this government has been able to pay additional N7.8 billion, but we are still being owned N8.2 billion. Remember again, when you consider the time value of money. Even if l collect that money now, depreciation, devaluation, inflation, among other things, have eroded the value. But then l still have to praise government for honouring a contract it did not originate. Recently, government came up with a payment assurance scheme, which is meant to help the business of the generating companies and gas suppliers so that at least those two aspects of the value chain would be properly catered for.

Beyond that, this government has been able to provide far more financial resources to help the Transmission Company of Nigeria (TCN). More transmission projects are being completed. Now, where l would want to encourage government to act and act decidedly are as follows: one, government must consistently see this as a system, and when you see it as a system, things will work better, as resolutions will be unified. Now what is happening is seemingly an incomplete strategy that is not helping the system and there is a need for system analysis. When government does this value /systems analysis, it will be realised that some of the policies being pursued currently are most definitely not going to produce the desired outcomes that government expects. Because we have the same objectives, it is imperative that government should collaborate with us as we have the wherewithal to rapidly expand the network and make it deliver the objective that government wants, if the fundaments are right

Looking at the Korean success in power generation, what can Nigeria learn from them?
It is simple. It’s just system thinking; they have that, we don’t have it. They are systemic in their own behaviour. They are long term in their perspectives. Korea used to be worse than Nigeria, but they have been able to move from where they were to where they are. They must have done certain things right. It means, therefore, that it is not rocket science, it is not difficult. This is not a unique thing that is specialised, but a global thing. Some other people have done it in certain ways, can we please follow the processes and even improve on what they have done so that we can get it better. But what we are doing is not what any of those countries is doing.

What is required is a purpose driven, credible, consistent, coherent and detailed plan of action with a long term view of aligning the technical, commercial, legal, financial and regulatory aspects of operations, which will give cash flow protection and liquidity to the system. We need significant shifts in the accessibility of capital to remedy, revamp, upgrade and improve the network in an integrated manner rather than pursuing fragmented, disjointed or misaligned solutions, which cannot produce reliable power to the public. At the stage we are in Nigeria, we are still struggling; we are still seeking oxygen to survive in the business and, please, no one should reduce the little oxygen we are still using to survive as we don’t want to die.

What do you think is the way forward for the sector?
As I said before, we need to do a value chain analysis in terms of the requirements for success, right from gas through to the customer. We must know what it takes to get light to the customer 24/7. We must know how much it will cost to achieve that. I praise the government for dealing with gas supply, except for issues of vandalism, which still plagues the sector. I also praise the government for the measure of assurance in terms of current generation payments, which is still at 80 per cent but needs to be made full i.e. 100 per cent. Government policy, with regard to electricity supply must engender industrialisation, employment creation, technological innovation and agricultural expansion. Government should not encourage discrimination in the sector in terms of payments, contracts and market rules.

Would you say you have done an effective job in terms of boosting revenue collection in the last five years?
The first thing l need to say is that nobody in the electricity value chain is doing well enough at the moment. That was why l said earlier on that we are involved in the system and therefore have found ourselves in a state of perpetual unhappiness. Now I’m not happy as a customer neither I’m l happy as a provider. I’m not happy as a customer because l would rather prefer to have 24/7 electricity than to self-supply. I still have generator and inverter in my house. That is not right. So, I’m not happy. What we are saying is that, we acknowledge and l want to acknowledge this totally that there are still gaps in all the distribution companies, particularly more than the one that generates. The gaps need to be closed. One of them is that revenue is not being collected as it should be.

But let’s go back to the root cause. The proximate cause of the problem in Nigeria is the deteriorating value system and until we all address that, we are deceiving ourselves. What are issues in the aspect of revenue collection? First, you find consumers who have decided that they don’t want to become customers. Consumers are free riders, who want to just use the power and not pay. The percentage would frighten you. We have in our network today 40 per cent free riders, 40 per cent of our meters have been tampered with. It is important to mention that the percentage of free-riders in the system was over 63 per cent. We have done quite a lot to bring this down, but more still needs to be done. People say they don’t want estimated bill and they want pre-paid meter; that is fair, but where l have current metered customers out of which 40 per cent have bypassed the meters by tampering with them, are those meters useful to the disco? Some just take their loads straight to the poles with their heavy appliances and equipment. They then put minimal appliances into the meters. So when we receive energy and it goes through the system to the consumers, who have taken the loads off the meters, we can’t collect our due revenue.

At Ikeja GRA, for instance, with high net worth users of electricity, we did an exercise recently there thinking they should be able to pay easily. We wanted to give them regular supply to boost revenue, but we recorded71 per cent aggregate commercial and collection losses. This is happening because meters are being bypassed.

Today if you are hypothetically getting12 hours of electricity and you are paying N10, 000 every month, And now we are able to provide you more supply to, say 24/7, invariably, you will be paying N20,000. Now, the corollary to that, more power supply equates to a higher power bill. When this higher bill comes, customers start asking what’s going on here. That is the first reaction. Now you forget that, because you self-regulate your personal generator and you can switch it off after a specific time schedule, you don’t complain, but because it is now grid electricity, guess what happens, the behaviour changes. So you leave it on. You will call your home as you are coming home to instruct that your air conditioner should be put on before your arrival to make your room chill before you get there. What will naturally happen is that your bill will increase.

Now we have internally the problem of a few staffers that connive with consumers, who would rather not want to pay. Because they feel by the time they aggregate the number of consumers, who are willing to pay them, it counts for more than the salary that we pay them. It goes back to value system again. By the time you put together the cumulative effect of this, you see a figure that makes you wonder what is going on here. People will tell me to increase the number of people that we hire for monitoring and vigilance and that means additional cost. They will tell us to introduce technology. But technology can only take you so far. For instance, reason why the mobile network is working effectively and efficiently is because it is wireless with minimal physical assets relative to customers. The model for success in mobile telephony can’t be directly replicated in electricity sector overnight.

What are you now doing to tackle all these challenges to remain profitable?
Some of the solutions we are devising are controllable, while some are not, but let me speak to the controllable ones and then the uncontrollable. Incidentally and unfortunately, the uncontrollable ones largely and eventually will determine the success of the controllable ones. We have people within Ikeja Electric whose job is to monitor our asset, find meter bypasses and illegal connections. Now let me speak to metering. We took over these assets with a long-term view of the business. We brought partners that have done it for years and are successful at it. We introduced the advanced metering infrastructure (smart metering). We say rather than just put prepaid meter, let’s us put a meter than communicates with our offices. For instance, we could detect a faulty meter from our office as well as some types of tampering. That is the kind of mind-set with which we went into this business.

The entire exercise was meant to cost us $106 million, being phase one. We are able to pay about $44 million out of it. But when you are making this kind of investment and there is no commensurate return on that investment, can you please enlighten me on the motivation to continue? Today, the sector requires about 4.1 million meters to cover all electricity customers. At an average price N73,000 per unit, the sector requires approximately N300 billion to cover the metering gap. If you put the capital for the comprehensive metering in the tariff methodology, you would see a significant spike in the retail tariff structure. The regulator smartly recently came up with a metering scheme to achieve this goal, But depending on when this meters are provide, our recommendation is that the estimated billing methodology should be simplified and transparently applied to all customers. But government needs to criminalise energy theft, and meter bypass and then the benefit of metering would be achieved,

The reason for inadequacy of supply in the system is because the fundamentals, enablers, drivers are not right. That is just the simple reality. As a distribution company, we buy the product at a high price and sell cheaper than we bought. How do we make money considering that the money we have is not freebie? Let me tell you how bad it is now. It is really very bad. We did a scenario planning and discovered that if we collect the full revenue for electricity given to us, we will still be at a loss. Simply put, the cost of the commodity is higher than the price.

So why are you still in the business, given all these scenarios you have painted?
It’s because we have entered it. How do we exit? If we declare bankruptcy, who will pay us for all the investments we have made? As we speak today, we are not in a beautiful state, attractive enough to suitors, as the fundamentals of our beauty no longer apply. Until the wrinkles on our faces are removed through proper nourishment, no power can beguile any suitor to come for us.

What l’m advocating is collaboration between all the stakeholders in the power value chain. If you respect me as I respect you, if l regard you the same way you regard me, if l fight for you as you fight for me, if l love you as you love me, then a symbiotic relationship and alignment would be created. You can’t ask to me run fast while you are tying both my hands and legs and yet you are hitting me with the cane and say I shouldn’t cry. Really, my message here is not that of confrontation, but collaboration. We’ve had enough confrontations in the past and blame games that have not produced results. There is fatigue on the part of everybody.

Can you talk about the alleged selectiveness of beneficiaries of the N701 billion intervention fund from the CBN?
The intervention fund was a fantastic, noble gesture, but it is a temporary solution to help resolve the shortfall in the system. It is meant to provide succour, confidence to both the gas suppliers and the generation companies. Government in its wisdom decided for two years, starting January 2017 to December this year, about 33 generation companies and their gas suppliers are to be paid 80 per cent and 90 per cent of their invoices. There is no sentiment or bias in it. It is clear. The only thing that happened was that a new entrant came on stream, who is to be paid a 100 per cent of the invoice with a take-or-pay clause and given first right of power dispatch, which appeared to have distorted the projection and amount due to generation companies. My advice is that government should provide more funding to pay generation companies for full capacity, generation from new entrants and revenue assurance for the period post December 31st, 2018.

What about the intervention fund for the Discos?
Let me make it clear that the intervention fund is not for us but for the customers. The tariff that they have mandated us to charge the customers is not enough; the gap is what the fund is meant to augment. That is why they call it an intervention fund. The N701 billion was not targeted to give succour to the discos.

Government recently alleged that Discos were unable to take up all generated megawatts. What’s the situation now?
We desire to supply everybody electricity because that is the reason we are in business. There is something they call effective demand. Effective demand requires effective supply as they go together. But where you have ineffective demand and you want effective supply, it doesn’t work.

Countries around the world are setting dates to phase out petrol cars for electric cars. Which means the future is bright. The question is, is Nigeria ready for electric cars?
In Sahara, we have a philosophy that guides us as an organisation. The worst form of betrayal is self-betrayal. Self betrayal simply means you are living a lie. A false or fake life. We must quickly come to a choice point in the life of this nation where we can truly bring out the best of us and for the goodness of all. Nigerian are enterprising people and universally acclaimed some of the most brilliant minds that God created.

To that extent, the innovative skills which are currently being negatively used, can be diverted into areas where we can begin to get positive results. As we speak the current situation is not working and cannot work. We must move away from selfish interest and collaborate to move the nation forward. So concerning the electric motor issue, we are not yet ready. But it needs be noted that the world is not waiting for us to catch up with them. We must accelerate the rate of progress and leap frog to our rightful position in the comity of nations.

– This Day

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