June 22, 2021/CSL Research
A Punch report states that the Central Bank of Nigeria (CBN) has introduced another round of loan facility to Electricity Distribution Companies (DisCos) for financing the collection and operational expenditure shortfalls incurred by these firms. We note that this is one of the several interventions made by the federal government to keep the power sector functioning amidst a persistent liquidity crisis.
Despite the privatization of the power sector and the creation of successor generation and distribution companies in the value chain, the sector continues to significantly underperform with very little progress made. Some of the key issues affecting the entire value chain include lack of cost-reflective tariff, low revenue collection, poor metering infrastructure, archaic transmission facilities, power theft, regulatory stranglehold and above all, liquidity crunch. The confluence of poor metering and lack of cost-reflective tariffs have seen the sector plunge into a severe liquidity crisis. The non-cost reflective tariff stems from the MYTO framework used to guide pricing. The cost assumptions of the framework have moved significantly away from current realities and efforts to change the assumptions have been met with criticisms. However, with the plan for a minor review of the MYTO framework in July 2021 by the Nigerian Electricity Regulatory Commission (NERC), we expect to see improvement in assumptions made considering new realities.
The recent mass metering of electricity consumers across the country coupled with a possible hike in electricity tariff should keep the power sector in tune with market realities and drive efficiency. However, another attempt to increase tariffs again will be met with stiff resistance from the populace given the pandemic-induced shocks which many consumers are yet to recover from. Income levels in general, have failed to be in line with the steep rise in living costs arising from the accelerated cost-push inflation in recent times. Therefore, this puts a continued responsibility on the government to provide succour in form of subsidy and loans to keep the power sector afloat.
In our opinion, we consider the government’s financial support for the sector laudable, however, we are concerned about the sustainability of such support amidst the government’s weak revenue position. Available data from the Association of Nigerian Electricity Distributors (ANED) shows an improvement in revenue collection by the DisCos as they reached a new record of N483bn as of Q3 2020, representing a 3.6% y/y increase. Nevertheless, without cost-reflective tariffs, no meaningful progress in the power value chain can be achieved. As such, for the sector to receive a new lease of life, consumers will at some point have to come to terms with an increase in tariffs.
