Kola Adesina, Chairman, Egbin Plc

ADESINA: APPROPRIATE ELECTRICITY PRICING WILL UNLOCK INVESTMENTS IN POWER SECTOR

March 9, 2020,

Lagos, Nigeria.

The Chairman of Ikeja Electric, Mr Kola Adesina, in this interview, calls for coordination among stakeholders in the electricity value chain. This, he believes will help address the challenges in the sector. Adesina also stresses that persistent blame game by the stakeholders is not good for the sector. He also emphasises the need to introduce a cost-reflective tariff regime in the sector, saying if appropriate tariff is allowed, necessary investments will be unlocked as return on investments is assured. Obinna Chima provides the excerpts:

Can you tell us what you think can be the common ground for stakeholders in the power sector?

The common ground is simply this: When you call something a value chain, what it simply means is that it starts with the customer, the person that is consuming the electricity, what level of power does he need to function as a human being? What quality of power does he need to exist in a manner that makes sense? That is the issue here. That’s the first place to start. Now, having dimension your residential customers’ requirement for good life, for healthy living and for a productive life, then you take the next set of customers into consideration as well; that is the commercial and industrial users. How do you make a nation great? It is through your productivity level and the level of your economic activities that can truly propel the nation. Now, in Nigeria for everybody to have electricity in a stable, regular and productive manner, we require to generate, transmit and distribute 26,000 megawatts of electricity.

Now, you go into the different alternatives of generating electricity, it is either you want to use renewables e.g. are the hydros, solar, wind or to use the thermal sources. These are different sources are readily available to you as options. So, in that dimension, the level of hydro you have, what quantum of energy can that hydro generate? What can the thermal plant generate? How many thermal units do you have presently in the nation? What is inhibiting them from generating their full capacity? How can you fix those things that need to be fixed in order for them to generate that 26,000 megawatts that you require? If our current capacity isn’t up to 26,000MW, how do we intend to expand capacity by adding more units to existing power plants or building new plants to augment the gap. Then you move to transmission, do you have a transmission infrastructure to evacuate 26,000 megawatts? Today, the answer of course is no.

So, the question is how do you rapidly build a transmission infrastructure to be able to take 26,000 megawatts from the various generating plants and ultimately take it to the distribution companies? And once you get it to the distribution company, what is it that they require to take it to our various customers some of these are feeder lines and transformers.? From the above, you can see the systematic and concentric nature of the requirement for success in the sector. It starts with the customers; and ends with the customers. The lubricant that oils the chain from gas to distribution is tariff; appropriate tariff. The customer must pay for services charged for that chain to continue to work in an unbroken manner.

Egbin Power Plant
Egbin Power Plant

That is the way it works anywhere else in the world. So, there is a need for an integrated solution where everybody in the value chain truly comes up with their own revenue requirement for success in order to make it work. Government role really for us should just be, to be a facilitator and an enabler, that is all. Once a government steps into the pricing of a commodity that is required for the success of that nation, for the prosperity of the nation, from an intervention or subsidy perspective, you introduce a distortion into the system. Now, to cure that distortion, requires a lot of work and sacrifices. Price distortion is the reason why we are all arguing and blaming one another for absence of reliable, stable and quality supply. To cure this anomaly, desperate but logical and long-term sustainable measures and solutions are required.

Now, when you look at the United Kingdom (UK), they had exactly the same public sector driven like structure like Nigeria. Until Margaret Thatcher stepped if you recall from history when she pushed the reform agenda, it was a bit of a problem. The same uproar, the same noise was made by the British, but the woman insisted, that she was going to fix it, using the plants of reform and privatization as the cornerstone. Today, electricity supply is better and reliable in the UK, nobody is talking about supply of power anymore. That is because they went through that transition, it was rough, it was challenging, but they were able to overcome those teething problems

Are you saying Nigeria needs to have 26,000MW now for us to enjoy power supply 24 hours every day?

Let me take a step backward, for any nation that truly has the desire to generate, transmit and distribute 26,000 megawatts, what you should actually be producing about 30,000 megawatts. The global best practice is to build redundancies into your plan. That is to build more than the required capacity to cater for breakdown, repairs, exigencies of gas infrastructure, turbines, lines, breakers, sub-stations, feeders and transformers. Invariably, you recognize real and potential losses and make provisions for this in your master, here is something we call the aggregate technical commercial and collection loses.

When you generate electricity and you take it from one point to another, you lose some quantity in between. So invariably, if you don’t generate more than what the system requires, it means that some customer will still suffer lack in that nation. So, what you typically would do from a gas perspective is to ensure that you produce enough gas, daily consumption, daily production of 30,000 megawatts. And through the chain you lose different percentages based on the transmission and distribution infrastructure that is there. With that, at the end of the day, everybody, every home, business, industry has stable electricity in Nigeria.

With what you have explained, if there is a segment in the society that can’t pay the existing charges what do you suggest?

The key question that needs answers is whether the cost of services in the value chain is captured by the set tariff in the regulated model. As we speak today, the answer is no. One logical consequences of inappropriate pricing of any commodity is the low quality of service production.

In order to deal with the issue relating the ability/capacity to pay, the regulator crafted a model, with which has different tariff for different categories of customers classified, lightening, residential and industrial. The cornerstone of this model is that large end users pays more by cross-subsidizing for those in another category. Unfortunately, despite their noble intentions, the tariff aimed at neither sufficient, to meet the cost of energy, is neither sufficient hospital cost of energy/service change. Investment required to secure cure the defects in the network. The net of electricity (value chain) is not working because the revenue required can’t be met by the current tariff.

Because of social and public interest, it was deemed necessary that a Consumer Protection fund of N100 billion be set aside to cater for end-users. The customer with low per capital income where consumption is basic. Sadly, the sector didn’t access the fund in 2013 nor all data, to the best of my knowledge. Cost of energy is based on rate structure which can be sub divided into customer loss (N per kilo), energy cost per kilowatt/hour, deemed cost per kilowatt per month, taxes, fuel, adjustments. If the outcomes of this exercise produced a figure of say N50 per kilowatt/hour for a unit of energy but the tariff is set at N27 per kilowatt hour. It will be impossible for such service providers to guarantee quality service. Let me quickly say the tariff is usually high when the initial capital expenditure required to build and enhance the network is being built.

Ikeja Electric
Ikeja Electric

After a number of years, the model recognises reduction in tariff as the investment would have begun to yield fruits. Also let me quickly share with you some facts that may be eluding the public in this debate. Have we ever calculated the cost of self-generation? Using candles for a month is more expensive than the DisCo bills. A stick of candle is N50. Assuming you use two sticks a day, it will cost you N3,100. For a household with cost of minimum of N2,000 a month, DisCos bill is still cheaper, more efficient and environmentally. When you blend today with self-generation through diesel, petrol etc, cost reflective tariff is still cheaper. The average cost of self-generation is N80/kwh, while the highest DisCo bill today is approximately N47 average. The current tariff structure is scaring away investors as the numbers doesn’t just add up. In the telecoms, the sim card was originally sold for as high as N30,000at inception, but today is it free.

Some telecoms investors lost of lot of money at inception but still found their way back into the market because the fundamentals of the sector are sound. In the pricing of electricity, we have a mix of hydro and thermal generation. Thermal energy is more expensive than hydro but has higher availability ration than the latter. The Hydos are often available in full capacity during the rainy season, whilst the thermals are usually all year round. Thus, there are different schools of thought in how to blend the two. One school opines that the Hydros should be sold to low income consumers whilst the thermal should be for the mid to high income consumers.

But because we run a grid system with a radial technology, it is difficult to distinguish one electron from the other. Nigeria has the largest power market in Africa with the largest potential and opportunities. Fix the fundamentals, electron will flow ceaselessly and investment will certainly follow. The Magodo and Ikeja GRA examples demonstrate service improvements when appropriate tariff is allowed.

You have a situation where over 50 per cent of your customers are not metered and so what they get is estimated billing. How does that estimated billing, for instance, take account of the period they have not had power supply? And you are talking about cost-reflective tariff, what exactly is fair to the man who does not have a meter and you want to put on him the tariff which at the end of the day will not be fair?

This is a catch question. Do we enable 24/7 electricity supply first then charge the right price later? Or we allow the right tariff to unlock the right investments that produces the right supply situation leading to happiness for all. My take is as a nation like all other nations, when electricity supply is stable, we should take the bull by the horn by reconstructing the tariff to stimulate investment. Metering is a measuring device that is enshrined in the capital expenditure plan of all DisCos. When the appropriate tariff is allowed, necessary investments will be unlocked as return on investments is assured. A square of expectations, obligations, responsibility and confidence is built when the input and output are directly correlated. Government is keen on building this bridge of trust with aggressive metering programs of different types being tuned and pushed.

I admonish our dissatisfied customers to kindly tilt towards supporting appropriate pricing of electricity and see whether there wouldn’t be improved services. The regulators are doing a yeoman’s job in trying to maintain standard, fairness, equity, balance and ensure that there is no profiteering with the DisCos being held accountable. We all can then set relevant and well dimensioned performance agreement on which we will all be judged. Metering is a valuable tool in the hands of the DisCos for the purpose of energy accounting. We align with the need to meter all.

Recently the Federal Government unveiled an intervention for the power sector by Siemen, which is being run from the Chief of Staff’ Office. Did they get the buy-in of the Discos before that intervention was rolled out? Where are we on that intervention and what are your thoughts on the intervention and its ability to make a difference to some of the issues you are having?

We are very much aligned with the government in the Siemens intervention arrangement. Government is fully aware that there is a huge infrastructure gap and resources are required. Now, government part-own all these assets because government has 40 per cent stake in the DisCos. So, the solution government has come up with is a very fantastic one –Secondly, there has been ongoing conversation around it, government signed a memorandum of understanding (MoU) and that MoU is what we are trying to activate.

We were meant to be going for a meeting with the Germans on how to close the technical gap, the requirement for equipment and the total end-to- end solution they are offering. So, our own view is that an end-to-end solution makes sense. We are fully aligned with it, but the conversation is ongoing as we speak. The DisCos are engaged with the government to dimension the critical success factors, cast the end to end solution Siemens are offering and ultimately agree to a financing plan. The truth was that we had ample gas supply and the grid took this power and consumer experience was beautiful. The value chain held to deliver, but thereafter, the network has had to face either gas shortages, grid restrictions arising from sundry reasons. To us, the biggest obstacles to the power sector development is lack of alignment. The system is misaligned in planning, coordination and execution.

To site a perfect DisCo example in terms of achievement: At Ikeja DisCo, we started our journey with Aggregate, Technical Commercial and Collection losses of 49.6 per cent, but today we have brought this as low to a historical record of 24.9 per cent! This is the most aggressive reduction in Africa and probably beyond. Also, we deployed $44 million on advanced metering infrastructure into the system by way of technology to make metering and energy management more efficient and accurate.

We were deploying approximately about 300MW to 350MW at inception at Ikeja DisCo but today, we have been able to dispatch between 600MW – 700MW. Invariably, we have doubled our output to our customers and consumers alike. The revenue profile has quadrupled while the corresponding population have gone up scientifically too. Whilst we celebrate this achievement, all we care to give as a company is customer experience that brings energy to life and happiness to all parties concerned.

Are you also going work with government to hand over the discos to Siemens?

Government never said that. The government of Nigeria is responsible; they know the implication of such very strange decision. So, I can say without a doubt that government intention is for us to partner with Siemens in closing the technical gap in the system, it is not to hand over. Siemens doesn’t own, neither do they manage any generation, transmission, or distribution asset anywhere in the world. And it is not in their plan, we have had meetings with them. It is not in their plan either to come and take over.

Can you confidently say that the discos have risen up to the challenge given the population explosion?
I will revert to my value chain comment earlier made. The performance of one is dependent on the performance of the other. The gas supplier can’t lay claim to success without the generation companies readily taking the has to convert to power which the Transmission company must evacuate to the DisCos. Should anyone drop the baton in this perpetual relay race, there would be light.

I will give you examples that will depict the daily realities of the sector. At Egbin, we met about 400MW to 450MW and available and operable capacity. We aggressively invested to recover the full capacity of 1,320MW. If you recall, at the onset of this administration, we were generating and supplying to the grid 1,100MW (which euphemistically was ascribed to body language of President Buhari. When we took over this asset, what was the number of customers? What level of energy were we receiving as an organisation? How many meters did we inherit? What was the gap? What have we done to close the gap? Now, there is something I need to stress here, which I will want to resonate to everybody. Electricity supply is a value chain and that value chain is not just grammar, it is actually symbolic of what really happens in that chain.

What is it I am speaking to here? If the gas man shuts his valve and he is supplying no gas, as I am currently experiencing in my generation side today in Port Harcourt; If the gas man says he is not going to give you gas today, everybody in the value chain, either as a Genco, as a transmission company, or Disco, can’t get power. You probably would have observed in the last three weeks or so that the electricity has been bad. You know why? It is simply because of the gas constraint. So, when you have gas supply constraint, or you have transmission, having high frequency, energy, for it to flow in an uninterrupted manner, there is a level it needs to operate, which is the equilibrium.

The moment any generation company shuts down, like Egbin that is meant to be doing 1320 megawatt but is currently doing about 700MW or 600MW and something, the moment there is a trip in any of the machine and we lose 220MW, the entire system feels it. You won’t have that equilibrium any more. Now you are going to have a spike in frequency, once you have a spike in frequency, it means that they have to find a way to quickly rebalance the system to ensure that stability is maintained. And that is why you hear of system collapse. When I am ready to generate 6,000MW, and the transmission infrastructure couldn’t take it, there is wrong movement in the system, the system goes down. Now, it is because of the fact that two things have happened:

You have social media now, that is making you hear of the system collapse. Nigeria has not really operated at the full level we should energy wise from time immemorial. It is not a recent thing; it is not us. Under our management, with private sector coming in, Nigeria moved from 3,000MW to 5,700MW. And it is the same private sector that is being vilified. When we took over Ikeja Disco, we were receiving 280MW and 300MW of power. Today, we are receiving close to 700MW of power. So, invariably we are selling more power than we were selling in 2013.

So, we are deploying more energy, but because of the fact that the population is increasing as well and the infrastructure is decaying arising from the fact that the investment required to make the system work has not been triggered, arising from inappropriate pricing. So, everybody needs to understand how holistic and how joined together this entire thing is. You cannot remove your liver from your kidney and expect to function optimally, it is impossible.

But, what we are trying to do is to dismember the heart, the kidney and the liver and still expect optimal performance from the individual, it is not going to happen. So, that is why I have recommended timelessly that everybody must speak from an integrated perspective without vilification, without ego trips, without insulting anybody, but just stepping back to say, can we truly audit how we got to where we are and what we need to do to fix it.

Talking about fixing it, I am aware that the Disco model was brought in from New Delhi. What are those things they have done there that made it to succeed that we are not doing here?

At the point in time when you plant a seed, you don’t see a tree, you don’t even see anything. So, it takes a while. The first thing I am imploring is please understand and be patient with us, empathize with us. Nigerians we are, we are not foreigners, few people can love this country the way we love this country. We truly paid for these assets, we paid $135 million to acquire these assets. That is not a free money.

Talking about fixing it, I am aware that the Disco model was brought in from New Delhi. What are those things they have done there that made it to succeed that we are not doing here?

At the point in time when you plant a seed, you don’t see a tree, you don’t even see anything. So, it takes a while. The first thing I am imploring is please understand and be patient with us, empathize with us. Nigerians we are, we are not foreigners, few people can love this country the way we love this country. We truly paid for these assets, we paid $135 million to acquire these assets. That is not a free money.

If we had fixed that money in 2013, we will not have $135 million now. You and I know that we would be richer. So, out of trust, out of faith, out of confidence and believe in the system, we made investment. Now, the New Delhi model is not a model that just happened over night, it took 13 years for the New Delhi model to transform the society and now it is being celebrated. If you give birth to a child, the child is not going to make first class in year one. You have to train that child, expose that child to the elements of excellence and expect and hope that he will turn out well. That is where we are. In the last couple of months, government, World Bank, AfDB etc.

have been having meetings on the Power Sector Recovery Plan and Performance Improvement Plan with each of the DisCos. The essence of the plan is to close the infrastructure gap to ensure steady supply of energy. It’s all encompassing with regards to the technical, commercial, financial, regulatory/legal and corporate governance structure. Metering is a critical component of this plan. It is instructive to note that renewable/alternatives, Risks Profile and allocation are in this plan.

So, all that we want is an alignment. We want an integrated arrangement; we want a unified approach in solving this problem. We are deeply sorry to all our customers in Nigeria for the level of service that they have received yet, it is a journey and not a destination but we are promising that we will most definitely stand on our honour, we will make power available to all those that can pay and those who will pay. So, for our consumers, we are pleading with them to pay for this power. To the gas supplier, we appeal to them to give us more gas, the generation company want to generate more power. To the government please empathise and align with us, we want to succeed, help us to succeed. To the regulator don’t let us die before our time, our intention is to be in business forever and it is to improve the system. We appreciate the President of the federal republic of Nigeria, the Vice president, the National Assembly that they would not promulgate laws that will be inimical to our business survival.

But the way consumers see it that discos are deliberately spurning on the prepaid meter just so that they can continue with the estimated billing to recover cost since you talked about appropriate pricing?

Let me tell you something that our businesses universally work with by way of principle, it is called the going concern principle. As a going concern would, you wouldn’t want to be earning revenue you didn’t work for. No! That is because really what it does is that it exposes your organisation to the vagaries of staff going against you to steal from your consumer. I want to be able to truly account for the energy I have given you as against the meter I have read and the payment you have made. When all of them align, then I am in business. But if I am using estimated billing long-term then I am stealing from you. I cannot meter you when the price of the commodity I am selling to you is not covering my cost

Have you considered the option of allowing these household pay for the meters upfront just like some Discos do? And secondly you talked about funding, what happened to all the interventions from the Central Bank of Nigeria to the power sector?

I need to speak to something very quickly here. A meter is just a calibrator. Now if somebody has a value system issue, he has no integrity, the person can bypass that meter. Part of the challenges I need to bring to you, we suffer significant energy bypass and energy theft, it is about 41 per cent. Now, you acquire an infrastructure that you deemed would solve your problem of revenue and assure revenue to you. So, you now have 41 per cent of your customers who are consumers, so they are free riders, they are consuming your power but they are not paying for it.

And yet you have meters given to them, but the clever ones have been able to bypass the meter or they are conniving with whoever that gives them the access to electricity. That simply means that in the pricing of that commodity because of the vigilance and monitoring is required for me to ensure that people that bypass don’t bypass, this is a cost to you the consumer must pay. You see, there is a cost structure associated with electricity supply, in that cost structure you find gas, generation, transmission and distribution. Now, the distribution side of it which is what you want me to speak to is that the cost there includes but not limited to metering, bill, monitoring, cash collection, transformer, lines, the feeder, the substation, all those represent the cost.

Now, if we have built this huge humongous infrastructure, for us to validate the energy you have received and the revenue we are receiving, when my revenue is not commensurate with the energy we have dispatched, there is a problem. What that simply means is that there is an additional cost required of me to be able to get it right. At the point of takeover, we did what we call smart metering. What was that smart metering? This is an intelligent meter that is linked to a software where we can remotely monitor and observe the operations of the meter. But some of the problem that we now have to face is this – and this is the crux of the matter.

You have a consumer who is consuming just N2,000 worth of energy every month. What is the cost of meter? N36,000 for a single Phase from the regulator. So, for the man that is paying N2,000 every month, how long will it take for us to recover that N36,000 meter we have given him? That’s one. we need to install that meter, there is a cost associated with it. When you do the mathematics, you are now asking yourself a question, should we actually meter everybody? Or can we find a middle of the road approach to the customer who can’t pay cost reflective tariff and whose bill every month is so low that buying a meter for that single customer may not make sense? So hence what do we do? We go to the regulator.

So, from the economic point, we can meter everybody and we collect our money. But the social man in us will say okay, am we being fair to somebody who is paying N2,000? Bulk metering may be the solution. Whilst others might advocate cheap meters, we advocate for quality material to give quality service sustainably. Long term us, we will always start trainings, immediate and short-term gains. Let’s cure the ailment permanently, rather than kick the can down line. All things considered, given our commitment to the power sector and our resolve to bring energy to life in Nigeria, Ikeja Electric plans to inject N15 billion into our metering project towards realising our target of metering 250,000 customers by 2021. We are highly committed to this project.

We are told that the country has installed and available capacity of 13,000MW, can transmit 7,000MW, but that the Discos are only able to transmit 3,000MW, why the gap?

Simply, why can’t we transmit the 13,000MW? Have you seen any electricity system in the world with 45 per cent losses between generation and transmission before? My point is that we have fundamental challenges we are not addressing, but continually looking for scapegoats to blame. Root cause analysis will show us the missing links rather than reducing the argument to numbers which don’t add up. As investors, we naturally will like to sell more to make more. If we are not selling more, as alluded to by different commentators, does that not tell you that there exist a mismatch that needs to be addressed? You sometimes hear of briefcase companies, e.t.c, that took over the assets. Before closing out on this question, I need to commend the efforts of the current Managing Director and leadership of Transmission Company of Nigeria, as we have witnessed positive trajectory in transmission projects. But alignment is required across the value chain for there to be light. All that Nigerians want is light, not excuses or stories. We should be allowed to give light to the people.

Finally, what is the way forward?

We can achieve far much as a nation if we apply intelligent coordination of skillsets, experience, expertise, feedback and resources rather crippling what we have.

We must process the vast stores of data and meaningfully analyze them to make decisions rather than relying on emotional knee jerk solutions which over time will waste valuable time and resources. There should be an advocacy for behavioral economics to be used to improve policy

Regulatory interventions should be focused on improving the customers access to energy and suppliers’ access to liquidity and sustainability.
We must explore the critical strategic drivers that will create value for everybody. Imagine if all homes in Nigeria have access to affordable energy. Our role as market participants is to convert that imagination to reality. We have a duty to man and our God to make impactful energy a legacy beyond our time. Nigeria must be electrified.