No Profits for TCN until 15GW of Power is transmitted through its Network

Transmission company Nigeria’s (TCN’s) sole source of revenue is from the tariffs it charges for transmitting power from the generation facilities to distribution companies. This Tariff is also called its Transmission Use of System (TUOS). TCN’s TUOS is set by the Nigerian Electric Regulatory Commission (NERC) and is the same rate everywhere in Nigeria.  For 2013, the TUOS rate is currently set at $7.4/MWhr (N1200/MWhr). It is very clear that TCN’s revenue is directly proportional to how much MWhr power is measured from transmission operations.

Nigeria reached a record generation peak of 4.5GW in December 2012 (Nigerian System Operator report). However, on average this year, GW transmission is much less than the 4.5GW achieved in 2012. However, let’s assume that an average of 4.5GW is transmitted through Nigeria’s transmission network this year. Transmitting 4.5GW for 365days would correspond to earned revenues of $291 million based on a TUOS rate of $7.4/MWhr. From popular news sources, TCN requires revenue estimated at $1 billion (N162 billion) to stay afloat. This revenue is used to cover its operational and maintenance activities, salary payments, repayment of interest and debt from financed projects. Given that TCN will make only approx. $291 million (N47 billion) from its TUOS charges, it will incur a projected loss of over $709 million (N115 billion) for this year based on transmitting only 4.5GW of power through its network. From the TUOS method that TCN uses to generates its revenue, it is clear from the above that the company would have to transmit significantly more GWs through its network to increase its revenues. To do this, it will need to spend billions of dollars to expand its transmission facilities. Also, its revenue creation is also linked to how much power is generated by the generation companies and transmitted through its network.

The ministry of power has forecasted that Nigeria will generate and transmit 10GW of power by 2014. This would mean growing from supplying a peak of 4.5GW to steady supply of about 10GW of power. This corresponds to an annual growth of over 100% in the Nigerian Power Sector. This is a very optimistic goal and if achieved, an annual growth of this magnitude would be the first for a developing country in international history.  Nevertheless, even if the 10GW is achieved by 2014 and transmitted through TCN’s network, this would only equate to revenues of approx. $648 million (N105 billion) but still a loss of about $352 million (N57 billion) and hence does not solve the problem.  As was reported in the news, TCN also owes about $1billion in unpaid taxes and debt. The company’s liabilities will only continue to increase until its revenue can grow to a point where it can cover its operations as well as service its large outstanding liabilities and debts. At a certain point, it would be almost impossible to attract reasonable investments to continue to grow TCN if liabilities keep growing and the company continues for face challenges with generating enough revenue to manage its operations and servicing its debts. If TCN is unattractive to private investors and banks, it will make it close to impossible to successfully raise the planned budget of over $3 billion annually until the country reaches its year 2020 target of 40GW without adequate funding from the government.

 One of Manitoba Hydro International’s goals during its 3 year management term of TCN is to make TCN a profitable enterprise by 2015. Unless other avenues of revenue generation are explored, TCN cannot begin to see any profits until it starts to steadily transmit approximately 15GW of power through its network. How can TCN expand its transmission facilities and network from currently transmitting 4.5GW to reliably transmitting 15GW given the company does not currently generate enough revenue to cover its existing cost and does not get adequate funding from the government? How can they pursue financing for future projects to achieve 10GWs or 15GW when they have challenges generating enough revenue to pay their current debt? How can we expect significant expansion from a company that is destined generate billions of naira in losses annually from its current operations? It should be noted that it is no fault of TCN that they cannot generate sufficient revenue as they do not control the GW generated and supplied to the network. Also, the limited capacity on the transmission network in the country is as a result of neglect in this sector for many years. Don Priestman, TCN’s current CEO under MHI’s management stated the following in an interview:

“..So for many years, TCH has been living a sort or hand to mouth situation, if you like, with minimal operating cost, with only enough money to pay the salaries, but not enough money to pay for the costs. In effect, if now TCN, by strict definition of the word, is insolvent what that means is that we are not getting enough revenue to cover all of our costs.” [Nigerian Guardian]

An option to solve this insolvent state of TCN could be for NERC to revisit TCN’s $7.4/MWhr TUOS rate. However, this would mean an increase of the TUOS rate by about 3 times the current rate to allow the company generate the required revenue to cover all its cost. However, this cost would have to be passed down to electricity consumers. A rate increase of this magnitude will not be welcomed by Nigerians. In other words, TCN still requires funding from FGN until generation companies starts to supply enough power in GWs and the expansion of transmission facilities are funded to a capacity where TCN can generate sufficient revenue from its TUOS tariff to cover all its cost. These costs also include its repayment of interest and debt from financing the expansion of the transmission system.

Note: The writer is not affiliated with either MHI or TCN. The contents of this post and blog are just comments based on news and trends in the Nigerian Power Sector.