Electrons Are Free but Not Electricity Finding the Right Price for Electricity in Nigeria

There are over 90 million Nigerians with no access to the electricity grid. Could overregulation and irregular pricing be driving this challenge? 

Like a swarm of locusts, the COVID-19 pandemic, is leaving death and destruction in its wake as it eats through the very fabric of humanity. With over 30 million confirmed cases and over 940,000 deaths in over 188 countries and regions according to data from Johns Hopkins Center for Science and Engineering (CSSE), it has been called the most devastating pandemic in modern history.

While there is no accepted cure or vaccine for the virus to date, with modern medicine and medical devices like ventilators and automated IV pumps one can weather the storm if affected. The African continent, specifically Nigeria, has broadly been spared the worst of the virus, with many chalking this development up to Africa’s young population. The median age in Nigeria is 18 years old. As of this writing, Nigeria has had over 64,184 confirmed cases and 1,158 deaths. With the relaxation of lockdown mandates in different states across the country, disregard for physical distancing and comparatively low testing rates and numbers, it is possible that these numbers are unrepresentative of larger trends.

But if someone does get sick and symptomatic, a ventilator could be the difference between life and death. Ventilators require electricity, but in Nigeria, the electricity infrastructure is largely unavailable, and where it is available, such infrastructure is unreliable.

There are over 90 million Nigerians with no access to the electricity grid. 65 per cent of them live in rural communities. These Nigerians are considered to live in energy poverty. Energy poverty is a situation where people lack access to modern energy services like electricity, cooking gas, etc. Energy poverty is a global phenomenon that affects about 800 million people, with the majority resident in sub-Saharan Africa. According to the latest 2020 World Bank report that tracks energy access across the world, ‘it is estimated that about 620 million people will remain without access in 2030, 85 per cent of them in sub-Saharan Africa.’

For Nigerians with a connection to the national electricity grid, there is the issue of reliability. There are on average 32.5 outages a month in Nigeria. And the average duration for an outage is eight hours according to the World Bank. In a 2016 study, it was discovered that the impact of these outages on energy-intensive industries amounted to over $7 billion. It was estimated to be 2.26 per cent of the country’s GDP and 57 per cent of the national budget in 2015.

The generating capacity for electricity in Nigeria is 12,000 megawatts. Due to system losses and operational issues with aging equipment and facilities, a lack of maintenance at generating plants, inadequate capacity in transmission facility and fuel supply chains issues only about 6,000 megawatts are available for supply—to 200 million people. For perspective, Finland, a small Scandinavian country with 5.5 million people has a generating capacity of over 17,000 megawatts.

How then can we create a robust electricity system that would provide electricity in the quantity and quality demanded? A system that can provide electricity to the country’s health systems, to power medical equipment, store vaccines and medicines. Many studies show a relationship between increased access to energy and economic growth and better human development indices. In Nigeria, however, two factors limit the development of the electricity system: prices and a lack of private ownership of the factors of production for electricity. Or more precisely, price controls on electricity prices and government ownership or control of the institutions that provide electricity.

The Formation of Prices

Prices, in general, have three functions. First, prices coordinate resources to sectors of the economy that need them the most, motivating the production of the goods and services demanded by consumers. Secondly, prices allow entrepreneurs to calculate the costs of providing a good or service while estimating what their financial gains or revenues will be based on the price that good or service commands on the market. Based on these calculations, entrepreneurs can calculate profits or losses and justify decisions on whether to provide the good or service.

Finally, prices serve as an incentive mechanism for innovation and discovery. In many cases, when the price of a commodity is high, entrepreneurs are incentivized to develop new ways to produce that commodity at a lower cost, so they can either make more profits or gain more customers by sell at prices lower than the prevailing market price.

Performing all three tasks, prices ensure that goods and services are provided in the quantity and quality consumers demand, avoiding shortages and surpluses or wastage. Prices are determined through the forces of demand and supply, which are determined by the different preferences or values people, both consumers and producers, place on commodities. Above all, the correct price of a good or service that would ensure such a good or service is provided in the quantity and quality demanded at any given point in time cannot be determined without private ownership in the factors of production used to produce the good or service under question. For example, if the farms, cassava, the sifting machine and the bowls used to produce garri are not privately owned the correct price of garri ensures that there are no shortages or surpluses would not be arrived at on the market. To the extent that the government owns any factor of production at any stage in the production process of garri to its final consumable form, the price on the market would be distorted. And if that distorted price is higher than what the correct market price would have been, there would be surplus and eventual wastage of garri, and to the extent that the distorted price is lower than what the correct market price would have been there would be garri shortages.

In an economy, people exchange the things they own for thing they want. For example, consumers exchange an amount of money with producers (sellers) for an amount of groceries or electricity. For this exchange to happen there must be a difference in the valuation the producers and consumers place in the commodities they intend to exchange. The consumer who has the money, must value an amount of electricity offered for sale by the producer, more than the amount of money he is willing to offer, and vice versa. If not exchange will not happen.

This valuation consumers and producers place on their commodities can only be done when they are the owners of these commodities. You cannot effectively value what you do not own, and these personal valuations become very complex and varied once they interact in economic activity. Because different people value different things differently and even the same people value the same things differently at different times. It is through the values we place on the commodities we own, which could be called means and the commodities we want, which could be called ends, in our roles as consumers and producers, that demand and supply of various means and ends arise in economy. This supply and demand lead to the creation of prices for the various ends and means.

Economist Ludwig von Mises, points this out:

Under a system based upon private ownership in the means of production, the scale of values is the outcome of the actions of every independent member of society. Everyone plays a two-fold part in its establishment first as a consumer, secondly as producer. As consumer, he establishes the valuation of goods ready for consumption. As producer, he guides production-goods into those uses in which they yield the highest product. In this way all goods of higher orders also are graded in the way appropriate to them under the existing conditions of production and the demands of society. The interplay of these two processes ensures that the economic principle is observed in both consumption and production. And, in this way, arises the exactly graded system of prices which enables everyone to frame his demand on economic lines.

Whenever private ownership of the means of production for any commodity is non-existent, the process of valuation between potential consumers and producers of the various means they own and the ends they want to achieve is distorted, causing a mismatch in the demand and supply of that commodity in question in the economy. This then leads to a distorted price that can no longer perform the coordination, calculation and incentive functions, causing shortages or wastages. This is the reason why there is a shortage of electricity in Nigeria.

Electricity in Nigeria

In Nigeria, the price of electricity has never been arrived at via the market. Until very recently there was no private ownership in the factors of production for electricity. Whatever price the government set was arbitrary and tantamount to groping in the dark.  Hence shortages abound.

Nigeria’s first power plant, a 60-kilowatt system was installed in 1898 in Marina, Lagos. By 1946, all electricity production and operation were under the Nigerian Government Electricity Undertaking (NGEU), a part of the public works department of the colonial government. By 1950 a vertically integrated state-owned utility called the Electricity Corporation of Nigeria (ECN), was created. The Niger Dam Authority (NDA), was created in 1963 and supervised the construction of the Kainji dam hydropower plant. By 1972, ECN and NDA merged to form the now-defunct National Electric Power Authority (NEPA). NEPA was the country’s only electricity utility and served as its own regulator.

It was estimated that about N2.74 trillion ($7 billion) was spent in the electricity industry between 1999 and 2005 through NEPA. In 2005 NEPA assets and liabilities were transferred to the Power Holding Company of Nigeria (PHCN), as part of the efforts to revitalize the electricity sector enshrined in the Nigerian Electric Power Sector Reform Act (EPSRA). As part of the EPSRA, PHCN would be unbundled, a regulator and bulk electricity trader would be created.

In 2013, PHCN was unbundled into eleven local distribution companies (DisCos), one transmission company (Transco) and six generating companies (GENCOs). There is 100 per cent private participation in the generating arm of the business. The TransCo is 100 per cent government-owned, and the government retains 40 per cent of ownership of the DisCos. All DisCos have government-mandated exclusive service territories. The DisCos also have government ownership and the prices the DisCos charge customers are controlled by NERC, leading to shortages. Since the price of electricity was fixed by the state-owned NEPA and PHCN and NERC after that, a market price for electricity was never established. Thus, the calculation, coordination and incentive functions of the price mechanism were never created, ensuring Nigerians never got the electricity in the quantity and quality demanded.

This lack of private ownership of electricity factors of production and electricity price controls is not just a Nigerian phenomenon. According to a World Bank study, 21 out of 48 sub-Saharan countries have no private participation in their electricity sectors. The countries that have private participation, also have extensive government interventions in the sectors and not just as a regulator, but also as a market participant. This explains, in part, why, according to a 2016 World Bank report, of the 39 sub-Saharan African countries surveyed only two had electric utilities making enough revenue to cover their operational and capital costs; the rest suffer from chronic solvency issues. Small wonder why sub-Saharan Africa is disproportionately represented among the global energy poor.

Fortunately, the new and burgeoning off-grid energy and solar homes systems (SHS) industries may be setting good examples to be followed by other stakeholders of the electricity sector.

The New Off-grid Energy and Solar Homes Systems (SHS) Industry

In the last five years, there has been a rise of entrepreneurs developing new products for electricity, like mini-grids, SHS, solar lamps, in Nigeria. In 2016, NERC released a set of regulations for mini-grid developers. Mini-grids are small electric power systems built close to homes and businesses. Due to their size, they do not have a transmission component, making them less expensive than conventional electric power systems. The best part about them is that they can operate off-grid, making them a near-perfect solution to providing electricity for off-grid rural communities. Though the NERC regulations have some issues, the NERC allows developers to determine whatever price they charge, so long as their host communities are willing to pay. The NERC also gives the developers and the communities considerable autonomy in land negotiations; this is particularly important because land is an important electricity factor of production. Moreover, excluding land vested in the federal government, according to the 1978 Land Use Act, state governments are ultimately in charge of the administration and control of all land.

To a large extent, NERC regulations made it possible for electricity prices to be established based on using market forces in these rural communities. And in many of these communities, you see the three functions of prices in operation.

In these communities, people are willing to pay between N160 and N250 per kilowatt hours for electricity. Some third-party observers may say that these prices are too high, since people who live in rural communities that are off grid are usually of modest income. However, these third-party observers would be wrong. If the prices were too high for the community members to pay, the mini-grid would not be built. Only the community members know how much the value of electricity is to them and know what they would be willing to pay. In some of these communities, some people own a small petrol generator that they run for one to two hours daily and only for business activities like processing garri. And to refuel the generators they must travel between five to seven kilometres to the nearest petrol station. These are operational and transactional costs that disappear once a mini-grid can provide them with electricity. But this is something not obvious to third party observers.  Also, community members are willing to exchange their land for the development of these mini-grid, and since the government, stays out of these transactions, the mini-grid developer and the communities can come to an arrangement that benefits everyone.

These high prices are now coordinating the factors of production for electricity to these communities. They are also incentivizing the use of state-of-the-art technology to produce electricity in these remote communities. It is common for the rural community members to pay for their electricity using their phones; and through such technology their electricity can be regulated (turned on and off) from anywhere in the world. The mini-grids are also designed to operate without personnel and can be monitored remotely. In some cases, routine maintenance can also be performed on the mini-grids remotely. This level of technological innovation is almost unheard of in the electric power systems that make up the national grid.  For example, in Bisanti, in Niger State there is a 34-kilowatt mini-grid that provides 24-hour electricity to 1,600 people in that community. A similar albeit larger system of 50 kilowatts exists in Umon Island, in Cross River State. Systems like these have begun to crop up in many communities across the country.

How to Improve Nigeria’s Electricity Infrastructure

First, repeal the 1978 Land Use Act. This law is not only unjust in the sense that it allows state governments to displace indigenous peoples, abridging their property and human rights while impoverishing them in the process, it also makes the valuation and utilization of land—an important electricity factor of production—more difficult in the energy project development.

Second, extend the best parts of the 2016 mini-grid regulatory framework to the entire electricity industry. Specifically, the sections of the regulation that allows electricity providers charge whatever tariff customers are willing to pay.

Third, repeal aspects of the EPSRA that give the eleven locals DisCo exclusive right to service territories. Any electricity provider should be able to sell electricity to anyone anywhere who is willing to buy. Some may think this may not be feasible given that Nigerians are used to having electric lines coming from distribution transformers into their houses. But this ignores the significant developments in the industry that make this a modern possibility. Arguably, the reason Nigerians do not have an adequate supply of electricity is not a technical one. To the consumer, it is electricity they pay for and not electric poles or transformers. How the electricity gets to them is not that important to the consumer. Just as some people get their internet connection through various means like copper cabling, satellite, fibre optics, microwave radios, hotspot from their mobile phones. Such means are not entirely important to consumers, since what they pay for is the data for internet connectivity.

The Embedded Generation (EG) and Independent Electricity Distribution Network (IEDN) policies of 2014 approved by NERC may be a good step in the right direction. The EG allows private operators to build generation systems where power can be injected into the existing distribution grid and if the existing grid is not capable of evacuating their power the EG can upgrade the system and can include the necessary cost-recovery mechanism into its tariffs. The IEDN is for private operators who want to build a distribution grid not part of the existing one.

The Moral Hazard Challenge

The government owns 40 per cent of all DisCos and can guarantee an injection of cash when there is a shortfall in revenue. This is a dangerous moral hazard for the company and only benefits the 60 per cent private ownership while impoverishing the country whose money is used to bail them out. In the first quarter of 2018, NERC said that the DisCos experienced a shortfall of $310 million. In that same year, the government approved over $200 million for the DisCos to use for infrastructure upgrade. NERC and the federal government are chasing the wrong problem. All they need to do is completely sell the 40 per cent they own to private investors and allow the DisCos to charge the prices they see fit. As discussed above, people value things differently. Electricity is no exception. A single individual who is mostly at work during the weekday, and barely home on the weekends will value electricity differently from a family who have small children who are home a lot and all weekend, it stands to reason they should not be paying the same price for electricity. If the prices were not controlled, the DisCos would have the incentive to search for more load diversity, offering different prices to different categories of consumers within their systems, to increase consumption. And if they cannot be financially sustainable, they should be allowed to go bankrupt without government bailouts. This would allow potentially better entrepreneurs buy the bankrupt DisCos for kobos on the naira and provide better service to Nigerians.

The TransCo is completely 100 per cent government owned. However, this company should be sold to private entities because private entities who rely on revenues and profits and not on an allocation of the national budget know that they must provide a service to survive. If there is little political will to sell the Transmission Company of Nigeria (TCN), the government should allow private TransCos to set up shop in the country.

Electrons Are Free but Not Electricity

Finally, electrons are free but not electricity. This is the same way air is free but not conditioned air. If you want your air to be cool or warm irrespective of the temperature of the environment, you need to condition it, and the process of conditioning it has a cost. If you want electrons to be in the form that you can use to power your phones and laptops, you need to be willing to pay for the process that goes into making that possible. There is a price to be paid for the process that transforms electrons into electricity, a market price.

We do not know what the market price for electricity is in Nigeria today. This is because the prices many of the local distribution companies charge have been decided by acts of regulation and not through the market forces of supply and demand. Without the right price, electricity will never be produced in the quality and quantity demanded. Many of us are afraid that if the prices of electricity were no longer controlled by the government, it would lead to high prices. This is only true in the short-run because of the high demand—200 million people for a meagre 6,000 megawatts. In the long run, market forces will bring down the prices—the evidence? Our telecommunications industry.

When the first mobile phones were sold in Nigeria in 2001, a SIM card cost about N50,000. Today mobile operators sell SIM cards for N50, some give them out for free. In 19 years, the price of a SIM card decreased by nearly 100,000 per cent. This only happened because the prices of SIM cards were not controlled by the government in 2001. Today we can check on our children, friends and loved ones in real-time no matter where they are in the world. This was impossible 20 years ago. The question then is 20 years from now, will the electricity situation remain the same or will Nigerians do something to change it now?

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