FG pays N205bn electricity subsidy, as DisCos withhold ₦50bn in Q3 2023 – NERC

The Federal Government paid about ₦205bn as electricity subsidy in the third quarter of last year, according to data obtained from the Nigerian Electricity Regulatory Commission (NERC) latest report.

According to the Commission’s third quarterly market report, the government’s subsidy obligation amounted to approximately ₦205 billion in the third quarter of 2023 (an average of ₦68 billion per month), representing a significant increase from the ₦135 billion incurred in the second quarter of 2023 (an average of ₦45 billion per month).

This surge in subsidy payment, as outlined in the report, was mainly due to the government’s decision to standardize exchange rates, given the absence of cost-reflective tariffs across all electricity distribution companies (DisCos).

In the absence of tariffs that reflect actual costs, the government commits to bridging the resultant gap (between the cost-reflective and approved tariff) by providing tariff shortfall funding. This funding is directed towards settling the Nigerian Bulk Electricity Trading (NBET) invoices, which DisCos are obligated to pay. The amount to be covered by DisCos is determined by the tariff set as their Minimum Remittance Obligation (MRO) in the periodic Tariff Orders issued by the commission.

NERC noted that the increase in the government’s subsidy obligation meant that in the third quarter of 2023, DisCos were only required to cover 45 percent of the total invoice received from the commission.

This development follows a NERC report revealing that DisCos failed to remit about ₦50 billion to the power sector in the third quarter of last year. According to NERC, DisCos neglected to remit approximately ₦50 billion to NBET during this period.

Under the market remittance section of the third quarter of 2023 Quarterly report, NERC disclosed that the cumulative upstream invoice payable by DisCos was around ₦208 billion, including ₦167 billion for generation costs from NBET and ₦41 billion for transmission and administrative services by the Market Operator (MO).

Of this amount, DisCos collectively remitted ₦158 billion, comprising ₦124 billion for NBET and approximately ₦34 billion for MO), leaving an outstanding balance of ₦50 billion. This translates to a remittance performance of about 76 percent in the third quarter of 2023, down by approximately 19 percent compared to the 95 percent recorded in the second quarter of 2023.

In the third quarter of 2023, the MRO-adjusted invoice from NBET to the DisCos amounted to ₦167 billion, while the total remittance made was ₦124 billion, resulting in a 74 percent remittance performance.

The remittance performance of DisCos to NBET in the third quarter of 2023 (74 percent) represented a 25 percent decrease compared to the 99 percent remittance performance recorded in the second quarter of 2023. This notable decline in remittance performance by DisCos is attributed to the 18 percent decrease in remittance in the third quarter of 2023 (₦124.53 billion) compared to the second quarter of 2023 (₦152.48 billion), despite the MRO adjusted invoice in the third quarter of 2023 (₦167 billion) increasing by about 9 percent compared to the second quarter of 2023 (₦154 billion).

The total revenue collected by all DisCos in the third quarter of 2023 was approximately ₦268 billion out of the ₦349 billion billed to customers, resulting in a collection efficiency of 76 percent.

The DisCos’ overall collection efficiency increased by 1 per cent from 75 per cent recorded in 2023/Q2. This is explained by the fact that, although there was a marginal difference in total collections in 2023/Q3 (0.09 per cent) compared to 2023/Q2 (₦268bn), the total billings declined by 1.4 per cent (compared to ₦354.61bn in 2023/Q2).

All DisCos except Eko and Abuja recorded improvements in collection efficiency in 2023/Q3 compared to 2023/Q2. The DisCos with the most significant improvements in collection efficiency were Kaduna, Ikeja and Yola with about 5 per cent, 3 per cent and +2.9 per cent increases in collection efficiency respectively, between 2023/Q2 and 2023/Q3.

Eko and Abuja DisCos had 3.1 per cent and 1.2 per cent decreases respectively in collection efficiencies. The overall increase in collection efficiency in 2023/Q3, NERC said could be attributed to the implementation of various collection campaigns by DisCos, to improve remittance from post-paid customers.

“The most proven method for reducing collection losses is the installation of meters (especially prepaid meters for non-maximum demand customers).

“Therefore, DisCos are expected to utilise one or more metering frameworks provided for in the NERC MAP and NMMP metering regulation (2021) to improve end-use customer metering in their franchise area. This will reduce commercial and collection losses and will ensure the flow of funds to upstream market participants in the sector.

“Furthermore, DisCos must also continue to evaluate options for improving the optimisation of their energy delivery in line with the Service Based Tariff (SBT) regime to ensure that sufficient energy is supplied to customer groups/clusters with the highest collection efficiencies.

“Prompt payment of upstream invoices is critical for securing the availability of generation and transmission capacities. The waterfall regime pushes DisCos to boost their collections because most of their allowed revenues rank low in the waterfall.

In 2013, the Central Bank of Nigeria (CBN) established an escrow mechanism as a requirement for the Nigerian Electricity Market Stabilisation Facility (NEMSF) intervention provided to the Distribution Companies (DisCos). In this setup, all DisCos’ revenues are placed in escrow, and DisCos can only access these funds after deductions have been made to fulfill their loan obligations. This escrow mechanism also offers insight into the financial performance of the DisCos in terms of revenue collection.