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Fixing Nigerian Electricity Sector through Decentralization

Fixing Nigerian Electricity Sector through Decentralization

A professor from Nigerian Electricity Regulatory Commission (NERC) gave a speech in Owerri last week. In that talk, he broke down all the problems with the Nigerian electricity sector. He explained the near-impossible seamless interface between the distribution companies (Discos) and the generating companies (Gencos) despite the presence of the NBET (Nigerian Bulk Electricity Trading Plc) and the Transmission Company of Nigeria (TCN).

The Discos are not motivated to carry all the available electricity sent to them because the tariff to sell them to the consumers is below market price. According to the professor, the Discos devised a way to manage that problem by stalling the implementation of the smart meter, giving them the opening to do estimated billing. Through that, Discos could rip-off customers, making money, even when not delivering any electricity. The Discos are not fully privatized: government retains about 49% in each of the Discos.

The Gencos are not happy because since electricity through the Nigerian grid cannot be stored, and Discos cannot accept all that Gencos are capable of generating, Gencos are not energized to operate at their maximum capacities. So, Gencos cut capacity, idling plants and losing on economies of scale. Most of the assets by Gencos are fully privatized.

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The TCN, wholly owned by the Nigerian government but on contracted management, has its own problem. Its transmission system cannot carry more than 8,000 MW of electricity which means that even if Gencos generate above that amount, Discos will never get them.

NBET was designed to help to smooth these relationships, removing the friction which may exist between Gencos and Discos so that even if Discos cannot accept the electricity, Gencos will not lose money badly. Most times, it is irrelevant if the end customers have electricity. NBET is in intermediary role to make sure that an equilibrium point is maintained and the markets function well.

Nigeria needs to modernize its power systems (source: fosuji)

As the don spoke, I saw a clear ceiling in the whole problem: Nigerian problem is centralization  of our energy policy. This is what I think we can do:

  • Dismantle the whole nexus of national grid. Nigeria will never have enough money to beef up TCN to provide the transmission capacity we need to have 50,000 MW we need in this country. With that knowledge and TCN capacity stunted below 8,000 MW, a simple decision can be made. Do away with national grid and allow private sector to come in and run this business.
  • More capacity from Gencos is not the answer: Our problem is not more capacity. Even if Gencos produce 50,000MW, only 8,000 MW can reach the Discos through TCN pipelines. My suggestion will be for the Gencos to have the capacity to sell their power directly to customers, without going through Discos. They can find a way to do that through their partners and investors
  • Discos should lose exclusivity on meters: Government should make it possible for any company that can generate at least 50MW to have the capacity to sell meters and install same for customers under defined supervision for quality and fairness. Our fuel stations use meters and government regulates them, making sure they are fair as they dispense the petrol; we can do same on smart meters for electricity.
  • Absolute and total decentralization: From generation to distribution through transmission, allow competition. Simply, decentralize the whole aspects but with requirement that no LGA can have more than two Gencos (above 50MW capacity) and two Discos and where those institutions operate they must share meters and transmission lines. If we do that, we will solve the problem of the national grid. That will also take out the problems the Gencos are experiencing of not operating on full capacity. This will also push Discos to innovate and function better through competition.
  • Government should allow reflective tariff: As naira loses value, it makes sense to allow electricity to be optimally priced. Nigerian government should allow that to happen.

I understand that the Gencos who are used to producing massive power to transmit regionally  and nationally will not be happy with decentralization. The fact remains that they can fund such infrastructures to reach new markets, if they decide.

Generally, if we decentralize and deal with the issues of national grid and meter, we will get closer to having constant power. The structure we have today will not work, because even in ten years, I don’t see where Nigerian government will find money to improve the capacity of the transmission lines. In a system, a weak link renders everything useless: the transmission system is the permanent weakest link here. Because TCN is still Nigeria’s issue, Gencos and Discos cannot reach real equilibrium based on market forces. We need a real market dynamics to have electricity in Nigeria: decentralization will get us closer to that.


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20 THOUGHTS ON Fixing Nigerian Electricity Sector through Decentralization

  1. Ndubuisi i follow you and your comments quite religiously because everything you put out there is based on informed data, experience and exposure to a variance of business and socio-economic environments.

    As a consultant with some exposure (nowhere near your talent though), the troubling question I have posed to myself in recent months is how I can channel this insight and exposure that I have been privileged to have into tangible changes and quantifiable impact to the masses in Nigeria.

    I have a few idea’s, not going to be easy, but we are posed with a challenging and peculiar situation in Nigeria, but I am willing to give it a shot.

    The pleasure will be all mine if we could have a chat sometime in your very busy schedule.

    All the best.

    • That will be awesome – please connect by sending email to team. We can skype. We are building companies. I have two gen sets in Owerri with national grid my second backup. I hate that as it scares me to open new offices in Nigeria. Let us talk – hopefully we can add value.

      • Prof, great piece. Have you ever thought of off-grid solar solution for your businesses in Nigeria? That way, you spend less on diesel and save a lot long term.

        • Yes, but I do not want to own any solar asset. If there is a solar company that is ready to offer me a service so that I pay what I consume, I am open. By not owning the asset, the company will have to deal with breakdown and maintenance. I just pay for light supplied. That is the only business model that I will buy in the solar business in Nigeria.

  2. I really don’t accept all the econometrics deep shots been dished out here. How long would it take to decentralised a system that was already privatized for optimal utility, productivity and service delivery? I don’t think the new scale of recommendation will bring about any desirable change more than the sector has witnessed in the past beyond shoring high the profit margin of the owners and investors in the energy sector. They cannot continue to eat their cake and have it. The best approach on decentralised operation is not whether energy is wasted but how the generated power can be effectively distributed through enhancing the capacity of the transmission network and then ensuring effective monitoring of power distribution from the transmission network to the end users while ensuring equally that the metering system is fair and free from abuse. We can also attract huge investment into power generation sector so that the power transmission base can be expanded to be able to meet our demand for energy consumption. There is no two ways to dealing with the issues other than to take the bull by the horns. Enough of rhetoric and stakeholders arbitration when we are demanding for optimal service and distribution of available capacity to be able to keep Nigeria working and developed once and for all. What is the conspiracy or international politics surrounding our energy sector? There is definitely a way out if we think outside the box.

  3. My questions are:

    1. What happens if TCN is fully privatised and the matrix of discos is enlarged by allowing more entrants?

    2. When you say Nigeria would never have enough money to to beef up the transmission capacity of TCN do you mean that she can’t or won’t?

    • 1. It is a workable idea and close to what I propose. TCN should be forced to compete for attention and not sit down knowing that Gencos have it as only option. If you take out the national grid, TCN will work to make itself relevant because Gencos can work alternative ways to sell their power. It goes beyond privatization to removing regulations that hinder efficiency
      2. Maybe in 100 years. There is nothing like NEVER but within 10 years, I do not see how we can upgrade to 50,000 MW capacity.

  4. I agree with the decentralisation of the power sector. Although i want to ask, is decentralisation of power regional? Will it work? Also, we need to see how to integrate sustainable forms of energy for each region.

    • Not just regional but fully decentralized up to ward level. No one knows if it work but what we have now is not working. So, we need to try new ideas. Sure, alternative energy needs to be part of the puzzle. That can only happen in a decentralized power setup

  5. I agree with your suggestion of operational decentralization as the problem to our electricity supply problems. But in my opinion, what government should do at short and medium term is to introduce and enforce usage of prepaid meter by every consumer of electricity so that the DISCOs will only generate revenue based on their actual distribution, which will definitely increase their demand from GENCOs; hence enable the GENCOs maximize their potential.

    As long as the DISCOs are still charging consumers using estimated billing, which gives them income regardless of whether or not billed services are actually provided, I do not see any improvement whatsoever. As long as estimated billing is not totally stopped by the government, DISCOs will never be obliged to maximize distribution because they are making free funds anyway.

    In summary, every means of making any income that has no direct derivation from what customers actually consumed or used must be completely eradicated. This, in my opinion, is the solution to our power generation and distribution problems in Nigeria.

  6. I totally agree with your recommendation. There is the need for decentralisation of the power sector which will give room to competitiveness in the sector. As long as it’s only TCN saddled with the responsibility of transmission we are going nowhere. A typical example is the Telco sector. Government should seat down and act as an umpire/regulator and allow private investors to run the business. Also the upward review of the tariff is long overdue for sustainability. GOD bless Nigeria.

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