The Biggest Challenge before Electricity Companies in Nigeria

I got a call from a Nigerian politician who wanted some insights to shape his political messaging. I am apolitical; I work for all parties but for no one. This one was on power.  I explained to the client that fixing Nigeria’s power would be hard. I used basic accounting and marginal cost to explain that no business thrives when the best potential customers are not interested in the services offered by the sector.

The very fact that most of the major electricity commercial customers are mini-power generators would remain a big challenge for most discos (distribution companies) in Nigeria. Yes, if companies like BUA and Dangote Group are generating their electricity needs, discos are largely disintermediated [we do not use that a lot in the analog world but if GE can supply power plants to Dangote Group, Dangote Group would not need power from discos].

So, instead of having 10 customers to bring $1 million, the discos have to look for 200,000 customers for the same revenue. And those 200,000 customers may not even want to pay. But those that can pay are not interested in the services offered by discos because they are generating their own power.  For me, this is one of the biggest challenges in the industry: discos do not serve the customers they need to boost revenue and drive investments. They are left with the masses who command higher marginal cost making it tougher for them to break-even.

For this to change, the discos must first have to thrive, showing consistency and reliability before some of these big manufacturers would disinvest their power assets, and move their plants to be powered by national grid. If government does not look at the paralysis posed by the non-participation of the 5% top manufacturers to the revenue base of discos, nothing much will change. Becoming profitable without these top 5% customers would be hard.

The Paralysis

If you look at the numbers, it is extremely troubling: every major business in Nigeria generates its own power. From Dangote Group to makers of Indomie Noodles, these companies are mini-power companies. In short, Dangote Group produces about a fourth of Nigeria’s total distributed power. From Nigerian Breweries to Unilever, you would be shocked that some of our leading manufacturers are not even connected to the national grid.

Power generation: Dangote Group generates at least 1,300MW of power mainly for its business operations (Nigeria’s total distribution capacity is around 4,000MW). He did note though that he sells power to the government of Senegal.

So, as government provides N37bn grant for prepaid meter supply to discos, the discos should thank government. Government has to do what it has to do to help. But that will not amount to much.

The federal government of Nigeria said it has taken advantage of the new Meter Asset Provider (MAP) regulations to give a grant of N37 billion to a private sector operator to supply meters to interested Distribution Companies (DisCos).

The Minister of Power, Works and Housing, Babatunde Fashola, disclosed this at the 28th monthly meeting of power stakeholders in Kaduna.

The minister, who did not mention the name of the company, said the federal government provided the fund based on the demand for meters, given the increasing power generation, transmission and distribution in the country.

All Together

The SMEs need power to run the economy. But discos would need the help of some of the big manufacturers who typically are the cheapest to serve and usually most profitable to link into the network. But for this to happen, those major players would expect the discos to demonstrate reliability before they commit to national grid. If we do not manage this interface, what would happen is to expect discos to become profitable by serving the masses (typically expensive due to higher marginal cost). Most times, that does not happen. The business of power utilities is hard: only two utilities are profitable in Africa.

Yes, market forces can re-balance this when other companies that can tap into a reliable national grid to offer competitive products which are obviously cheaper due to lower power costs arise. When that happens, the companies which generate their own power may be challenged to abandon that practice and then connect to national grid. They would make those decisions based on market forces and nothing more.

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