A fresh start: Officials are hoping to begin a new chapter in power production

In terms of electricity production, Nigeria’s power sector faces many challenges. According to June 2012 remarks by Bart Nnaji, the former minister of power, the Power Holding Company of Nigeria (PHCN), which is being unbundled, had debts of N400bn ($2.56bn). With its own plants gas-fired, PHCN had been paying just 50% of what it owed for that gas to the international oil companies supplying it. It was also finding it difficult to pay bills to power plants it did not own, such as those run by Shell, Agip, the Ibom Power independent power plant (IPP), or the Niger Delta Holding Company. These debts amounted to N88.7bn ($568m). On the sales side, the distribution companies that have, theoretically, been unbundled from PHCN are owed a great deal by consumers, including some government agencies. As of mid-July 2012, it appeared such debts amounted to N110bn ($704m).

CONSUMER TARIFFS: As of June 1, 2012 the reviewed Multi-Year Tariff Order (MYTO) 2 came into effect and is set to gradually increase electricity tariffs for a five-year period. At current gas prices, the regulator set the average cost of electricity at N24 ($0.15) per KWh. Customers in the poorest areas, or in the Residential 1 (R1) category, have been paying N4 ($0.03) per KWh. R2 customers, or 80% of household consumers, pay N11.50-12.30 ($0.07-0.08). Customers in the Commercial 1 (C1) category, such as artisans and small and medium-sized enterprises, pay N15.64-17 ($0.10-0.11). More affluent R3 and R4 customers are paying more, though the top rate of N22 ($0.14) per KWh is still below the average cost of power. For the first two years of MYTO 2, the state will be pay N50bn ($320m) a year in subsidies, to cover R1 and R2 rates.

MANAGING DEBT: Authorities have taken measures to draw a line under PHCN’s debts, giving successor companies the fresh start needed to make them attractive to potential buyers. The Nigerian Electricity Liability Management Company (NELMCO) was set up in 2011 with the goal of taking over the non-core assets and liabilities of PHCN. By early 2012, NELMCO was calling for creditors to present claims and proof thereof, and payment over a three-year period is expected. Non-core assets are likely to fetch around N60bn ($384m), according to NELMCO officials, and the company will be seeking some discounts from creditors. However, the federal government has accepted ultimate liability and seems certain to do the main work in defraying debts.

N240bn ($1.54bn) was approved for NELMCO in 2012, but appears to have not yet been disbursed.

BULK TRADING: Another company incorporated in September 2011 that could lend a hand is the state-owned Nigerian Bulk Electricity Trading Company (NBET).

Its role will be to act as broker between Nigeria’s 11 distribution companies, currently being privatised, and the generation companies that will supply the power distribution firms will sell to customers. The establishment of a bulk trader recognises the fact that distribution companies presently lack strength and creditworthiness, and that privatisation will not make an immediate difference. Reuben Okeke, the director-general of the National Power Training Institute of Nigeria, told OBG, “The federal government is providing a sovereign guarantee by establishing the bulk trader that will buy the products and deal it out to distribution companies. This is a great incentive for private investment.” Backed by assurances of government and World Bank credit, NBET will act as off-taker instead.

Individual distribution companies will have shares of the power available under given power purchase agreements, and will be rewarded with greater shares to the extent they improve collection and service quality.

All in all, Nigeria’s authorities would appear to be putting transitional mechanisms in place. With distribution companies and PHCN generation facilities attracting interest, it might seem that potential investors agree and do not see the country’s power sector as an intrinsically unfriendly place. The outcry over tariffs is a reminder, however, that it is no easy task being reformist where people are poor, long used to cheap electricity and frustrated by supply that is patchy in the extreme.

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The Report: Nigeria 2012

Utilities chapter from The Report: Nigeria 2012

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