ELECTRICITY SUPPLY INDUSTRY- THE BIGGEST PROVIDERS OF CREDIT TO BUSINESSES IN NIGERIA.

Friday, 14th June 2024.

CreditEconomy News Interview

…Over 500,000 people read our news story, number still counting

kaduna

SHARFUDDEEN ZUBAIR MAHMOUD – FCNA, FNIM, FICA

Board Member, Kaduna Electricity Distribution Company, and former General Manager/Head Market Competition and Rates, Nigeria Electricity Regulatory Commission

ELECTRICITY SUPPLY INDUSTRY- THE BIGGEST PROVIDERS OF CREDIT TO BUSINESSES IN NIGERIA.

SHARFUDDEEN ZUBAIR MAHMOUD – FCNA, FNIM, FICA, Board Member, Kaduna Electricity Distribution Company, and former General Manager/Head Market Competition and Rates, Nigeria Electricity Regulatory Commission, speaks on “ELECTRICITY SUPPLY INDUSTRY- THE BIGGEST PROVIDERS OF CREDIT TO BUSINESSES IN NIGERIA”, in the National Institute of Credit Administration’s Credit Economy News.

When Will Electricity Supply Become Stable Throughout Nigeria?

This is a question in the minds of so many Nigerian citizens and of course it is not surprising that Nigerians of all ages always ask this question suffice to say that when Nigerians asked this questions they are not really asking about the stability of supply, with reference to having a predictable situation in terms of their electricity supply. What we all want to hear is when can Nigerians have electricity on demand? That is a situation where the moment you switch on your electricity switch at any time of the day you have the assurance that there will be light at the right voltage to meet your demand.

To do justice to this question we need to look back at the state of the industry prior to the commencement of the Power sector reform instituted by President Obasanjo when he assumed power in 1999. In a paper titled Key Issues and Opportunities for NERC  during Nigerian Power Sector Reform Process, Sharfuddeen Mahmud stated that “The Nigerian Electricity Supply Industry (NESI) witnessed no new investment for over a decade between 1989-1999. Generation capacity remain at a static level of about 6000MW with actual generation most often below 40% /2400MW of the capacity. The youngest generation plant which was Shiroro then was completed in 1990 while the last transmission line was built in 1987. Note that within the period Nigerian population wasn’t stagnant but the population was growing and demand for electricity was increasing yet nothing was planned or implemented by the authorities to support the expansion of the industry. To make matters worse there was total lack of maintenance and replacement of obsolete equipment leading to a progressive drop in supply. Of the 79 generation units in the country then only 19 units were operational. Average daily generation was around 1,750 MW.  The long years of neglect and inadequate investment resulted in dilapidated, weak and absolute transmission network.”

Consumers were at the mercy of reckless utility staff, customer service was none existent and the National Electricity Power Authority (NEPA) which is 100% Government owned, continued to be a monopoly with almost 100% control of Generation, Transmission and Distribution. The only exception being NESCO a private owned Generator located in Jos whose history predates NEPA and its capacity is less than 50MW.

The country did not make much progress in the sector commensurate with the age of the industry nor was it commensurate with the resources available for the development of the industry considering the fact that it holds the world’s 9th largest gas reserves, abundant coal reserves and resources for renewable generation.

It was against this background of clear failure of an industry that began in 1896 or 1886 as some claimed that the Nigerian Government commenced the reform of the electricity sector in 2000.

Today about 24 years since the commencement of the reform process a lot has been achieved taking cognizance of where we began. In its 2023 4th quarter report the Nigerian Electricity Regulatory Commission reported that “There were twenty-seven (27) grid connected power plants in 2023/Q4 consisting of nineteen (19) gas, four (4) hydro, two (2) steam, and two (2) gas/steam-powered plants. The plants’ average available generation capacity during the quarter was 4,922.26MW”. This means within 24 years we have increased average daily generation by 181% and have achieved almost 200% of what was achieved in more than 40 years since independence.

To fully remedy the situation requires huge investment in new plants, adequate and reliable supply of feedstock (gas), new transmission and distribution lines while at the same time rehabilitating existing ones. Although so much has been spent and continues to be spent there is still a wide gap in terms of investment requirement. In the estimation of both the past Minister of Power Prof Bert Nnaji and the current Minister Mr Adebayo Adelabu the sum of N10billion is required on an annual basis for the next 10 years to meet the infrastructural need of the sector.

Stable electricity supply in Nigeria can therefore only be achieved when we are able to make the required investment in the sector, put in place the right policies to protect the investment while ensuring that customers also fulfill their obligations of paying for services rendered.

How has unstable electricity supply impacted on credit business generally?

Access to power is a top constraint to businesses in low-income countries, second major constraint in lower middle-income countries after corruption while in upper-middle income countries it comes third. (CDC)

The credit business like all other businesses in less developed countries of which Nigeria is one, is impacted negatively by the electricity challenges facing the country. Nigerian credit service providers faced the following challenges arising from inadequate supply of electricity from the grid:

Increased Operational Costs: Most businesses both SMEs and Large enterprises are forced to seek for alternative source of electricity supply arising from the inability of the grid to meet their requirements. These alternatives which are usually in the form of fossil fuel powered generators and solar powered solution are always more expensive.  The major fuel source for large enterprises using captive generators in their offices is diesel and the price per kWh of generation using diesel is in excess of N600/kWh. This is aside the procurement cost and that of maintenance. These increased costs impact negatively on the profits of the business by reducing profit margins.

  1. Cash Flow Problems: The performance of credit business is tied to cash flow and an unstable electricity supply situation can disrupt business operations, leading to irregular cash flow. For credit businesses, this means customers may struggle to make timely repayments, impacting the lender’s cash flow and increasing the risk of default.

  2. Reduced Business Confidence: The Nigerian state has lost lots of business investment opportunities arising from the electricity challenge. Our inability to fully mitigate the challenge by ensuring a stable power supply to businesses diminishes business confidence, discourages investment and expansion of existing businesses. In the past   few years, a number of large-scale businesses were said to have relocated from Nigeria to some other W/African countries arising from the electricity challenge and some potential investors coming to the region were dissuaded from siting their businesses in Nigeria partly due to the electricity challenge. All these translates into fewer businesses in the country and lesser number of applicants seeking credits. It is no surprise, going through the credit portfolio of Nigeria’s leading banks the names of same obligors will just be repeating itself and for decades these names have consistently been taking the major chunk of Nigerian banking risk assets with only few new names spring up.

  3. Economic Slowdown: The absence of reliable supply of electricity as witnessed in Nigeria today contributes to an overall slowdown in economic activities. A sluggish economy means less borrowing and lending, directly affecting the credit business.

What Is The Way Out?

In the absence of a stable and reliable supply of electricity from the grid, businesses have no option than to seek for alternatives. Some of the possible way out which have the potential of mitigating the power challenge may include:

  1. State Governments Role: The Nigerian Federal Government have since realised that burden of ensuring that Nigerians received stable, reliable, adequate as well as affordable supply of electricity is a heavy one and can best be handled with the active participation of the sub-national institutions represented by the states of the federation. This new thinking led to the constitutional amendment in 2023 and the subsequent enactment of the new Electricity Act 2023 which repealed EPSAR Act 2005, has now empowered state governments to be more active participants in the electricity business and encouraging the sate governments to provide attractive incentives to private investors in the power sector.

  2. Setting up electricity cooperatives: Setting up cooperative societies, by trade or professional associations that are sited within clusters, with the sole objective of mitigating their electricity challenges either through investment in the network of an existing distribution franchisee, setting up  own generation plant or Independent electricity distribution network (IEDN)  or seeking permit from the national regulator to play in the Eligible customer market and directly contract with a generator or licensed trader for supply.

  • Investment in Alternative Energy: Encouraging businesses either alone or in partnerships to invest in alternative energy sources like solar power thus reducing their reliance on the unstable national grid, ensuring smoother operations and better financial stability.

  1. Government Policies and Incentives: Implementing policies that promote and subsidize alternative energy solutions for businesses and open the market for competition by removing the perception of monopoly that existing Distribution companies tend to have in their franchise areas.

  2. Improvement of Power Infrastructure: Significant investment in the national grid as well as the distribution infrastructure of the various distribution companies to improve their reliability will also go along way in mitigating the current challenge. This is already ongoing through a number of interventions by the CBN and currently another intervention through the world bank will soon commence.

  3. Extension of gas supply infrastructure: Extension gas supply infrastructure to cover the whole 36 states of the federation and ensure availability of an efficient gas supply network will serve as a major attraction to potential investors in the electricity generation business. It will also give distribution Company the opportunity to secure embedded generation within their network thus improving on their supply security and affordability which will translate into greater benefits for businesses.

Do You Give Credit To Your Own Customers? If Yes How?

Yes, the Nigerian Electricity supply industry is one of the biggest providers of credit to businesses and individuals in the Nigerian state. The power supply business in Nigeria has traditionally been a credit business. In fact, the three main utilities (Electricity, Water, and Telecommunication) in Nigeria were for long offering services to their clients strictly on credit basis.

Electricity was probably the first public utility in Nigeria to commence a pre-paid utility service with the introduction of Prepaid meters by NEPA/PHCN in the middle 1990s long before telecommunication came with GSM mobile services that are also mainly pre-paid.  But despite the huge preference by customers of Prepaid meters majority of Nigerian electricity customers are post paid clients and thus enjoy electricity on credit.  They pay for their consumption at least no less than one week after the end of the month upon been served bills by their respective service providers.  The Electricity distribution companies supply most of their Major Demand (MD) customers as well as government ministries, departments and agencies (MDAs) based on credit as most of them have post-paid meters. Bills are issued to post paid customers based on meter readings which at the minimum are carried on a quarterly basis as provided for under the current regulations of the NERC. Reconciliation is then undertaken after subsequent readings.

The biggest challenge facing DisCos in respect of the credit extended to their customers is that of collection.

The table below shows NERC 4th quarter 2023 report on DisCos Billing and Collections. From the table it is only Ikeja DisCo which was able to collect over 90% of its bill from its customers. Overall, DisCos billed customers the sum of N399.6billion during the 4th quarter but were able to only collect about 74%. In some places the collection was less than 40% a clear indication of the poor collection efficiency.

Projection into the Future of Doing Business on Credit in Nigeria

“Credit is the life blood of economic activity in a free-market economy and its growth is a reflection of the economic development of the nation. The future, however, looks bright with the constitutional amendment and the repel of the EPSR Act 2005 and enactment of EA 2023”.

“Short-Term: In the short term, unless significant improvements are made in the power sector, the credit business will likely face continued challenges, including high default rates and limited growth. But we expect that going by the new World Bank intervention in the distribution sector through the Distribution Sector Recovery Program (Disrep)  which will involve metering there will be serious improvement in the power sector’s retail end”.

“Medium-Term: With gradual improvements in infrastructure and a greater adoption of alternative energy sources, as well as the adoption of the new Electricity Act (2023) by states credit businesses may begin to see more stability”.

“Long-Term: In the long term, with the full implementation of the EA (2023) the full objectives of the power sector reform can be achieved and through that credit business can experience robust growth. A stable power supply will boost economic activities, reduce operational costs, and increase the overall demand for credit”.

“Credit business like all economic activities will witness a boom the moment there is an improvement in electricity supply.”

Partnership between Nigerian Electricity Supply Industry (NESI) and National Institute of Credit Administration

The NESI predominantly operates a credit-based market. Aside some of the retail customers of distribution companies who use pre-paid customers the whole of the Nigerian Electricity Market value chain operates on credit basis right from generation to distribution. Generators buy their fuel from gas suppliers on credit and they sold energy and capacity to Nigeria Bulk Electricity Trading company (NBET) under a power purchase agreement (PPA) on credit. NBET sales to Discos through Vesting Contracts on credit. The transmission company also transmits to DisCos and other eligible customers on credit also.

Outside the banking sector which is traditionally known for credit extension probably the Nigerian Electricity sector is the second biggest extender of credit in the country.

The NESI and the institute can benefit

Credit Information Sharing: Establish a system for sharing customer credit information between electricity distribution companies (DisCos) and the National Institute of Credit Administration (NICA). This can help assess the creditworthiness of customers more accurately, assist DisCos in increasing collection efficiency and minimising losses.

Energy Efficiency Loans: Collaborate to create loan products specifically designed for energy efficiency improvements, helping businesses and households invest in energy-saving technologies.

Billing and Payment Innovations: Develop innovative billing and payment solutions that make it easier for customers to manage their electricity bills, reducing the likelihood of defaults.

Customer Education Programs: Jointly run educational programs to improve customers’ understanding of credit management and the importance of timely bill payments.

Credit-Based Incentives: Introduce incentive programs where customers with good credit histories can receive benefits such as discount on tariffs or priority services.

Through the aforementioned DisCos and the National Institute of Credit Administration can foster a more reliable and efficient credit environment, benefiting both the power sector and the broader economy.

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