COVID-19 and the Power Sector

Introduction
The prevalence of COVID-19 has affected productivity around the world. The pandemic is likely to adversely affect
macroeconomic factors, consumer purchasing power and demand for electricity in Nigeria even though the decreased
gas price may lead to reduced generation cost for the sector.

This report will discuss the short and long-term considerations for power industry players given the likely impact of the
pandemic on the sector, the liquidity challenges faced by the industry and the implementation of cost-reflective tariffs.

Macro-economic Outlook
i. Increasing unemployment rate
• Nigeria has one of the highest unemployment rates (ranked #21) in the
world, about 23.1%.
• Before the Pandemic, the unemployment rate was projected to rise to
as high as 33.5% in 2020.

ii. Decreased consumer purchasing power

• Over 55% of household income is spent on food and beverages,
leaving 45% for other expenses such as housing, transport, security
etc.
• Only about 2% of household income is spent on energy (Africa’s
average is 5%).
• Movement restrictions have not only reduced the consumption of non-
essential commodities in general but have affected the generating
capacity of households.
• Low expectations of future income.

iii. Reduced government revenue from oil

• The price of crude oil has dropped from $57 per barrel in January 2019
to $15 a barrel as of 28 April 2020.
• The impact is substantial because oil accounts for 90% of Nigeria’s
export proceeds.
• The Minister of Budget announced a N1.5 trillion ($4.17 billion) cut in
non-essential spending primarily due to the reduced demand for oil
and major dip in oil prices.

iv. Reduced economic activity

• There has been an unanticipated rise in healthcare expenditures.
Nigerian health care expenditure is 4% of GDP, which is lower than the
global average of 9% to GDP.
• Declining net exports is due to:
− Disruption in supply chain trade,
− Border closure to non-essential trade, and
− Limited markets for export due to the fall in global demand.

The power industry in Nigeria is run by market economics: interest rates, exchange rate, inflation rate etc. There are
however other critical issues people should be concerned with, and that includes what the customer wants. A
thorough consideration of the peculiar needs of the customers would enable the market recover effectively from the
effects of COVID-19.

2 Covid-19 and the power sector

 a) Impact of COVID-19 on the Nigerian Power Sector
The Nigerian power sector is not immune to the global impact of COVID-19.
Under the current Power Load of about 3,375MW, 64% is consumed by
residential customers, 19% for commercial use, 9% utilised by industrial
consumers and the remaining 8% goes to special and lighting. The COVID-19
lockdown has led to shut down of all but essential commercial activities across
the country. Consequently, the electricity demand from industrial and
commercial customers has reduced significantly while the residential market is
expected to have increased. This has led to a distortion in the cost subsidy
quality of the tariff and reduces the cashflows to operators.

Distribution companies (DISCOs) have a lower tariff for Residential

customers, sometimes even below the average cost of supply, as compared to
that for commercial and industrial consumers. The lower tariff-paying
consumers are cross-subsidized by commercial and industrial consumers.

A noticeable impact of the current situation on DISCOs arises from the loss of
revenues due to the reduction in demand from commercial and industrial
customers. The reduction of demand affects the ability of the tariff to
effectively cross-subsidise the lower-tariff paying consumers. The full long-
term impact of the current situation would only become apparent with time.

Some early impacts of COVID-19 on the Nigeria power sector are already
being felt. These include:

NERC suspends Electricity Tariff increase amidst COVID-19

NERC eventually approved the much anticipated tariff increase effective from 1 September 2020 using service-based
principles. This is a tariff regime which only affects customers that live in areas where the DISCOs promise to provide
them electricity for at least 12 hours. Customers who receive under 12 hours will continue paying their current tariff.
NERC further maintained that the new guidelines will provide a path to full transition to full service-based cost
reflective tariff by July 2021.

The Minimum Remittance Order remains in force for the year 2020
In Q3 2018, the total remitance in the sector was 30% which is a reduction in the 54% target set for the regulators.
The Minimum Remittance Order is a step towards resolving the liquidity and financial challenges of the electricity
market. The order stipulates minimum remittance obligation for each DISCOs with due consideration to the current
tariff shortfall. The DISCOs earn the revenue stated in the Minimum Remittance Order only upon meeting certain
obligations and subject to efficient operations. The remittances will be adversely affected by the pandemic thus
placing further financial strain on the value chain.
Impact on the availability of meters
The recent order of the commission on estimated billing methodology and capping the energy billed for unmetered
customers was issued as a measure to address customers’ complaints on overbilling.

The Meter Asset Providers (MAP) Regulation of 2018 was created to close the metering gap through an accelerated
meter rollout. The current situation has significantly impacted the rollout of meters by the MAPs due to availability of
Foreign Exchange (FX) and FX devaluation, slower demand and port congestions.

High Aggregate Technical Collection and Commercial (ATC&C) losses

The high ATC&C losses in some DISCOs is due to a combination of customers’ behaviours regarding the use of
electricity. These include energy theft and unwillingness to pay, estimated billing and low metering, affordability issues,
and a deficient transmission and distribution network.

In the face of the current economic realities, DISCOs need to be more aggressive with their performance improvement

3 Covid-19 and the power sector

 plans, strengthen their revenue assurance and embark on strict monitoring and protection activities of their
infrastructures.

b) Liquidity Challenges Faced by the Power Industry

The liquidity challenges have led to series of government interventions between 2014 – 2019 in the form of bailouts.
The resulting effect of the liquidity issues in the Power Industry is attributable to the following:

• Low collection
• Non-cost reflective tariffs
• Distribution losses
• The inability for DISCOs to meet Nigerian Bulk Electricity Trading (NBET) obligations.

Energy sector subsidy

The Federal Government has expended about N2.3 trillion as petroleum subsidy for the five years, that is between
2014 to 2019. The tariff shortfall in the electricity sector, which in substance is an electricity subsidy payable by the
FG, stood at N1.63 trillion between the same period. Both subsidies alone amount to N3.9 trillion, which represents
about 31% of current foreign reserves and 37% of the 2020 budget.

c) Business Case for Implementation of Cost Reflective Tariffs

Considering Macroeconomics Reduction In Purchasing Power
COVID-19 pandemic has adversely impacted the wages and earning ability of practically all Nigerians – with the most
significant impact on daily wage earners. They constitute the largest sub-segment of the adult working population.

Due to the closure or scale-down in operations, there is reduced energy consumption by commercial and industrial
customers (who cross-subsidize the power industry with their higher tariff) resulting in reducing revenues from these
customers who have the highest ability to pay.

On the other hand, there is increased energy available to and consumed by residential customers. This is largely
non-utilized power from commercial and industrial customers now given to residential customers. The resulting effect
is likely increase in non-payment, consumer electricity theft arising from meter bypass and illegal connections.

Cost reflective tariff is ensuring that the tariff covers the cost of producing electricity starting from the pricing of gas
input to the generation of power, transmission and distribution of electricity to customers. This will ensure the
continuous flow of electricity and the sustenance of the entire value chain, thereby ensuring that financiers and
investors continue to be interested in producing, distributing and selling power. No business, including producing and
distributing electricity, can sustain if its cost is higher than its sales price – this is the business case.

The approval and implementation of the service-based cost reflective tariff in September 2020, with the eventual
transition to full service-based cost reflective tariff by July 2021, seeks to ensure that the increased prices are fair to
customers and that DISCOs can efficiently fully recover their cost of operation, including realise a reasonable return
on capital invested in the business.

COVID-19 impacts the cost of delivery of electricity as well as the revenues of the entire value-chain

The power sector in Nigerian already had issues that predate COVID-19. The pandemic has however made these
issues more glaring. Stakeholders would have to rethink strategies to reason how to move the industry forward.

Impact of COVID-19 is most felt by electricity distribution companies, in terms of the inability of customers to pay
their bills and the resultant reduction in revenue collections. This can affect the continuous availability of the
increased and improved power to residential customers if not managed.

4 Covid-19 and the power sector

 Other COVID-19 related challenges include:

• Disruption to the materials supply chains.

• Increase in operational complexities and cost of operations.
• Specific capital investment tailored to ensure that there is consistent electricity supply for the stay-at-home
restriction.
• The significant negative impact of increased foreign exchange rate will further affect the tariff due to the high
FX component in the cost of energy.

Practical Ways of Responding to COVID-19 by Market Participants In The

Short and Medium Term

Discos are now rearranging the commercial part of their operations to be more contactless with focus
on efficiency by:

1. Telemarketing - Calling customers on their experience of the service delivery and following up on non-payments.
2. Encouraging all payments through contactless channels- E-payments, i.e. online electronic transfers, ATMs, POS.
3. Innovative billing process- customers self-reading of postpaid meters, applications for reading, billing and
distribution of postpaid bills.
4. Distribution of bills through text messages, WhatsApp, emails, etc. i.e. move to paperless distribution.
5. More active call centre operations to receive customer complaints and sort out service issues.
6. The technical part of operations continues to be physically driven, though with an increase in logistics and materials
costs.
7. Metering under MAP is continuing although at very slow response rate from customers.
8. Physical enforcement activities are have been hamperred and will be recommenced after the lockdown period is
over. This will be targeted mainly at long term chronic debtors.

Other short and medium-term adjustments

Customers
• With an increase in power availability to residencies and expected increase in billing, energy consumption
savings is essential– at least 30% of electricity is wasted. Energy management through using only essential
appliance when needed as well as energy-saving appliances.
• Embrace MAP prepaid metering to be conscious of the cost of service- cheaper in the long run even with initial
capital outlay in the cost of metering- can save 15% to 20% cost.

Government support
• The expectation is that payment of all existing outstanding bills at Federal, State and Local government levels
would have a significant impact on market liquidity and sustainability.
• Pass on the current reduced international gas price and fix into Naira the cost of gas to power producers with
Federal Government absorbing all exchange fluctuations going forward. This will significantly reduce the impact
of fluctuation in gas price on customers’ tariff.
• Provide moratorium (minimum of 12 months) on payments of Central Bank of Nigeria and Federal Government
related facilities in the power sector to cover for the COVID-19 adjustment period.
• Government support in changing public’s mindset/culture that power should be a free social service venture.
This will encourage prompt payment for electricity supplied to ensure improved service delivery and more
electricity supplied.
• The Nigerian government should ensure that they have a full scale, united, joined-up electricity market in which
all the players of that market are actually working for each other and therefore delivering to the customers.

5 Covid-19 and the power sector

 Regulator

• A suspension and review of regulations that hurt the market and DISCO operations and are specific to the ability
of the DISCOs to remit monies upstream, e.g. The Minimum Remittance Order.
• A review of MAP metering pricing to allow MAP to continue metering at prices that is not negative.
• Consideration and implementation of an intervention fund for The Nigerian Electricity Supply Industry (NESI),
similar to that which has been implemented in other sectors by the Federal Government.
• A coordinated and aligned policy and regulatory environment, with stakeholders’ collaboration, that recognizes
the required enabling framework that is critical to attracting private sector capital and investment into NESI, given
the crucial role of electricity as a significant catalyst to economic growth.
• Ensure the full activation of differentiated energy consumption tariffs, which takes into consideration energy
provided, service and retail customer types with peak and off-peak price differentials.

Conclusion

All stakeholders need to readjust, innovate, become energy and cost-efficient while driving the entire end-to-end
value chain (gas supplier, generation, transmission, distribution, consumers) to breakeven sustainable levels.

A coordinated and aligned policy and regulatory environment with stakeholders’ input and collaboration is
critical.

A functional, improved and efficient power industry is key to a sustainable recovery from COVID-19 for the
overall economy. This is a market where rules, policies and governance mechanisms work effectively thus
energy invested is translated into returns on investments for investors.

There is an urgent need to recapitalise the industry by putting proper structures in place to make the power
sector industry more attractive and bankable to finances from private sector players.

The Nigerian government should ensure that they have a full scale, united and joined-up electricity market in
which all the players of that market are actually working for each other and therefore delivering to the
customers.

We must focus on the alternative market which generates most of the power consumed by Nigerians which
includes generators, off-grid solutions, solar-to-home solutions etc. This market is significantly larger and
more critical to our society than the current 4,000 MW/day market.

Gas suppliers are not directly regulated by electricity regulators however there is a lot of scope for bringing
them into the frame of discussion and in the setting of policy in the electricity sector. Incentivisation of the
domestic gas market supply would attract investors in the current dispensation where export is down and oil
market collapsing. This will ensure continuous flow of gas supply.

6 Covid-19 and the power sector

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Covid-19 and the power sector