According to the World Bank, 43% of the Nigerian population which is about 85 million persons do not have access to grid electricity. This makes Nigeria the country with the largest energy access deficit in the world. In addition to this, there are many Nigerians who are connected to the national grid but still lack access to the power due to lack of basic distribution infrastructure such as meters, transformers, poles, wires, etc. (“Basic Distribution Assets (BDAs))
Many electricity consumers have alleged making several complaints to Distribution Companies (DISCOs) over damaged BDAs to no avail. These consumers are left without power for weeks, months and even years and incur huge costs on alternative power supply. The DISCOs on their part have the peculiar challenge of financial liquidity as they are unable to meet with their payment obligations to other stakeholders (market operator, NBET, TCN and CBN) in the sector let alone purchase BDAs for consumers. The liquidity crisis is not unconnected to the Aggregate Technical, Commercial and Collection (ATC&C) losses that occur throughout the electricity value chain. Thus, DISCOs are financially incapacitated to meet their obligation to timeously provide BDAs to customers when needed.
In a bid to ameliorate the hardship, consumers have now resorted to purchasing BDAs to replace damaged ones within their location. Most common amongst them being the purchase of transformers. A case in hand is the Surulere community in a local government in Akure who experienced power outage for almost 1 (one) year. They were compelled to make contributions towards the purchase of transformers and wires. This is the situation with many communities in Nigeria.
Over the years, the DISCOs have assumed ownership of the BDAs acquired by the electricity consumers on the basis that they are donations by the consumers to the DISCOs. Sometime in December 2021, the Association of Nigerian Electricity Distributors (ANED) stated that the basis for assuming ownership of such assets is that “The Discos take responsibility for any incident that happens with those infrastructure. It is important for Nigerians to understand that Discos have a responsibility to ensure that only good quality equipment duly certified by Nigerian Electricity Management and Safety Agency are installed in our network. After installation, Discos have to take steps to protect such equipment such that it will be safe for use by customers….”
While this appears to be a plausible reason for assuming ownership of these assets, it is worthy of note that the provision of BDAs remains the primary obligations of DISCOs, and the consumers on their part, are not charitable organizations who freely and willingly make donations for a benevolent course. On the contrary, consumers (mostly middle and low class) often stretch themselves to make contributions out of their hard-earned income to purchase the transformer.
This article considers the drawbacks of the current practice, and recommends an approach that will constitute a win-win for both consumers and the DISCOs whilst ultimately contributing to the development of the sector.
Drawbacks of the Current “Donation” Framework for Acquiring BDAs
Clearly, the donation concept is not sustainable as it provides no incentive for the consumers who make contributions. Consumers, at the first instance of damage may able to make contributions towards the replacement of a damaged pole, high tension wire or transformers. What happens when there are subsequent damages? Will consumers be motivated to make such contributions again, and for how long? The DISCOs on their part take benefit from the hard-earned income of consumers who fulfill an obligation which was theirs to meet in the first place. They take value without refunding the said consumers.
Furthermore, the donation concept has no material economic impact on the development of the electricity sector in terms of improving liquidity and diversifying the market.
Hence the need to transform this entire practice into a business model that will motivate consumers to willingly make contributions for purchase of BDCs. The DISCOs on the other hand are able to meet their obligation in a convenient and less burdensome manner.
The Proposed Business Model
This model requires consumers who elect to purchase a replacement for any damaged BDCs to notify the DISCOs of their intention to do so. This is followed by costing of the damaged BDC, say a transformer, and collection of contributions from consumers. The funds raised are paid to a vendor selected by the DISCO and the community. The consumers who made contributions toward the purchase of the BEDC will be refunded by the DISCOs through electricity tokens.
To implement this, the contributions by consumers will be in a structured manner through a local co-operative society or residents’ association who will represent the interest of the contributing consumers throughout the entire process.
Upon consent by the DISCOs, a vendor approved by both parties will be selected and the funds raised will be domiciled with a Fund Administrator who will make payments to the vendor for the purchase and installation of the transformer. The cost of the transformer and the Fund Administrator’s charges will be factored into the total funds to be raised. The fund administrator is to be appointed under a trust deed, and will see to the ensure proper disbursement and utilization of funds, and subsequent repayment to the consumers.
The arrangement will be documented in An Asset Finance & Tokenization Agreement between the DISCO and the co-operative or resident’s association representing the community. The agreement will amongst other key provision, document the payment duration by the DISCOs through the issuance of tokens to contributing consumers. This will be spread out over a period of years in a manner that does not constitute a burden on the DISCOs. The tokens would be valued with an agreed return on investment for financing the BDA.
From the perspective of the DISCOs, this model avails them with a risk-free capital to carry out their obligations at reasonable cost, i.e ROI. The long-term payment plan through tokens eliminates the issue of having to expend huge capital to purchase the assets. This model can be easily integrated into the Nigerian electricity framework given that the structure of refunding consumers with token already exists. The current metering regime allows consumers to self-finance pre-paid meters, and then get a refund from the DISCOs by way of tokens. The metering of consumers is vital to the implementation of this structure as meters will be required to receive repayment tokens
Further, the scope of the proposed model can be tweaked to include a scenario where an impact investor can through the consumer association assume the responsibility of purchasing a damaged transformer on behalf of a local community, and then get a refund through tokens that will be tradeable by the impact investor to recoup the funds expended.
A well thought out regulatory framework can be developed by the Nigerian Electricity Regulatory Commission (NERC) to support this proposed arrangement. In addition to promoting investor confidence, a supporting regulatory framework will provide necessary guidelines to participants.
The diagram below depicts a step-by-step process for the execution of this model.
In sum, financing by consumers can be viable financing mechanism to improve the liquidity of the electricity market, and to cover for the huge infrastructure deficit within the sector. The model promotes inclusiveness as consumers can actively participate in financing electricity infrastructure, and they will not be left helpless in the event of damaged BDCs.
Ultimately, the support of NERC and the willingness of the DISCOs to adopt this arrangement is fundamental to its success.
2 Nigerian Bulk Electricity Trader
3Transmission Company of Nigeria
4 Central Bank of Nigeria (This refers to servicing of the facilities granted to the DISCOs by the CBN)
About the Authors
Chinenye Ajayi, is a solicitor with the Power and Infrastructure Practice of Olaniwun Ajayi LP. Chinenye can be reached via email: [email protected]
Femi Awofala, is a Partner with Brickstone Africa. He can be reached via email: [email protected]