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Franchising

Franchising — An Emerging Market in NigeriaElectricity Distribution Franchising (EDF) is the delegation of a third party (»Franchisee«) by a utility such as the Electricity Distri-bution Companies (DISCOs), for the purpose of distribution and /or retailing of electricity on its behalf. As a result of technological advancement and improved capabilities of Distributed Energy Resources (DER), the sustainability of a traditional framework of DISCOs solely providing electricity supply, maintenance and a wide range of other services is increasingly becoming difficult. In developing countries, the EDF business model has been implemented to meet the needs for reliable electricity and the improvement of electrification rates. DISCOs licensed by the government are responsible for con-necting and providing electricity to customers, maintaining and installing electricity distribution systems and a variety of other activities included in the distribution licence. The Nigerian electricity supply industry (NESI) is suffering from various challenges as a result of the poor level of liquidity being experienced with the power sector. The sustainability of the tra-ditional regulatory framework, as reflected in the Electric Power Sector Reform Act (EPSRA), is becoming increasingly problem-atic due to continuous technological advances in Distributed Energy Resource capabilities. Moreover, since the beginning of the Electric Power Sector Reform Act in 2005, the DISCOs in Nigeria have not been able to meet the expectations of the relevant stakeholders in terms of providing access to safe and reliable electricity services to all customers in the areas allocated to them, especially in areas considered not economically viable. The liquidity problem in the NESI has also limited the scope of improvements within the sector. This primarily concerns an inadequate distribution infrastructure, inadequate metering equipment and inefficient fee collection. This has primarily affect-ed the quality of service delivery to end users and has led to a delay in reducing overall technical, commercial and collection (ATC&C) losses.

ATC & C Losses (%) by DISCOs in 2019 / Q1   – Q4

DISCOs MYTO Target for 2019 (%)

Average ATC & C

Q1 2019 (%)

Q22019 (%)

Q3 2019 (%)

Q4 2019 (%)

Abuja 24 41.96 40.71 41.91 39.64

Benin 31 56.52 49.67 46.22 47.84

Eko 14 29.79 24.96 24.80 24.65

Enugu 29 53.01 50.09 52.42 49.41

Ibadan 25 50.18 46.23 48.45 45.80

Ikeja 15 28.33 22.51 22.76 21.74

Jos 44 60.13 60.94 60.52 60.15

Kaduna 32 73.45 65.06 63.07 62.37

Kano 29 48.50 45.45 41.64 38.39

Port Harcourt 37 63.14 60.85 61.01 61.30

Yola 28 68.64 69.91 62.11 64.16

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Electricity Distribution Franchising of DISCOs operation is a move to improve the quality of electricity supply to consumers in Nigeria and address the operational challenges experienced within the industry.

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Overall ATC & C Losses (%) in 2019 / Q1   – Q4

Overall DISCOs MYTO Target for 2019 (%)

Average ATC & C

Q1 2019 (%)

Q22019 (%)

Q3 2019 (%)

Q4 2019 (%)

MYTO Level 26 –

Total Technical, Commercial & Collection Losses – 48.72 44.53 43.65 42.63

Technical & Commercial Losses – 20.02 19.81 18.40 17.40

Collection Losses – 35.90 30.84 30.95 30.55

MYTO: Multi-Year Tariff Order; ATC&C Loss: MYTO targets are adjusted for a two-year nonperformance mutually agreed by BPE and DisCos’ Core Investors.

On the 2nd of July 2020, the Nigerian Electricity Regulations Commission (NERC) issued the Guidelines on Distribution Franchising in Nigeria, »The Franchising Guidelines« as a regulatory framework for franchising agreements by DISCOs, with the objective of privatising the DISCOs, thereby tackling technical, commercial and collection losses. The grant of dis-tribution franchises by the commission will foster:

. Stimulation of investments to address the liquidity and infrastructure challenges in the distribution end of the electricity supply value chain;

. Provision of a platform for third parties to invest in the distribution;

. Improvement of quality and reliability of electricity supply to end use customers;

. Introduction and adaptation of advanced technologies.

Market Potential

The Government of Nigeria’s effort to encourage the devel-opment of EDFs, is aimed at closing the gaps experienced in the Nigerian Electricity Supply Industry, which provides a huge market for investors and developers interested in the Franchise market. Energy supply to the Franchisee would still come from the DISCO at a price agreed between the DISCO and the Franchisee, which will be approved by NERC. However due to the intermittency in the supply of electricity from the grid, the DISCO is unable to meet the supply commitment to the Franchisee which provides opportunities for Embedded Generation using renewable energy technologies. In the fourth quarter of 2019, Nigeria had around 10,400,000 registered electricity customers, the total number of customers metered stood at 38 %, with 62 % being unmetered. Additionally, collection efficiency stood at 69.4 % on the total billed electricity

to end users by the 11 DISCOs covering the entire country. This provides a remarkable market opportunity for Franchisees to provide additional values by closing the collection gaps. The following figure shows the billing and collection efficiency of the 11 DISCOs in the country.

FIGURE 1 Billing and Collection Efficiency by DISCOS in 2019 / Q4

All DISCOs

76 %

84 %

75 %

84 %

66 %

88 %

73 %

74 %

93 %

89 %

89 %

83 %

79 %

74 %

67 %

65 %

54 %

59 %

52 %

40 %

55 %

84 %

87 %

69 %

Ikeja

Eko

Abuja

Kano

Enugu

Ibadan

Yola

Benin

Port Harcourt

Kaduna

Jos

Billing Effi ciency in 2019 / Q4 Collection Effi ciency in 2019 / Q4

NERC 4th quarter 2019 Electricity on Demand Report

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Legal FrameworkUnder their licence, the DISCOs have the power, subject to the approval of NERC, to assign any part of their tasks within their coverage area to third parties. Proposals for franchising can be submitted either by the DISCOs or by a community within a certain geographical boundary, subject to the franchising guide-lines. In the case of a community, this is done by a registered association which formally approaches the DISCO responsible to express its interest in joining an EDF. A franchisee who is authorised to operate in a given territory is bound by all the rules to which the DISCO licensing is subject. Therefore, any agreement between the DISCO and the franchisee must take account of the DISCO’s agreement with NERC and the other market stakeholders.The setting of the tariff is an important aspect of the agreement, and it is set in accordance with the tariff methodology approved by NERC. In certain cases, where additional generation has to be purchased from the electricity pool at a higher cost than the applicable wholesale tariff, the disco is allowed to pass on the cost of additional generation to consumers by increasing the tariff: (a) a prior customer consultation; (b) a review of the procurement process by the NERC; and, where appropriate, (c) a public consultation by the NERC. Therefore, a successful franchising is expected to be based on a varying tariff system which also provides incentives for DISCOs and franchisees to invest in distribution infrastructure and to continuously improve the quality of services. Subject to the above-mentioned condition, the franchising agree-ment therefore allows the acquisition of additional generation capacity through bilateral contracts with a generation company.

Investment PromotionThe Bank of Industry currently provides a ₦ 6 billion fund for the development of solar energy projects with a lending ceiling of ₦ 350 million and up to 7 years tenor. This fund which provides debt investment can be accessed by Franchisees seeking to inject additional power from solar energy sources in the Dis-tributed Generation model.Another fund accessible to Franchisees is the Power and Aviation Intervention Fund established by the Central Bank of Nigeria with the primary objectives of improving the power by providing low interest loans with a maximum tenure of 15 years.

Business ModelsThe Franchising of DISCOs is expected to improve the qual-ity and operations of electricity supply within coverage areas through investments in metering, billing, collection and upgrade of the electricity distribution network. The Franchising model is applied by a DISCO who authorises a third party to provide electric distribution utility services on its behalf in a particular area within the DISCOs coverage area. There are 4 business models that have been identified by the NERC in the Franchising Guidelines:

. Metering, Billing and Collection (MBC) — In this model, the DISCO outsources the metering, billing and pay- ment collection of a region under their coverage area to a third party while they retain ownership and control of operations and distribution in the distribution area.

. Total Management of Electricity Distribution (TMED) — In this setting, the Franchisee will be responsible for main- taining the electricity distribution system in the ring-fen-ced area, in addition to MBC functions. The Franchisee is expected to have the technical expertise and capacity to invest resources into the upgrade of the distribution system, recovering its investment through the agreement with the DISCO. NERC sees the Franchisee here as responsible for all DISCO functions and so expectations on the reduction of technical, commercial and collection losses must be met.

. Distributed Generation (DG) — Under this arrangement, the Franchisee is tasked with the procurement of more electricity -where electricity supply from the DISCO is not sufficient- through bilateral arrangements with the Transmission System Operator or embedded gene-ration sources at local distribution level. In this model, the Franchisee has more control and ensures collection of revenue to make up the full cost of procuring additio-nal power through higher tariffs to be approved by NERC as long as the customers are willing and possess the ability to pay.

FIGURE 2 Functions of the Franchisee under the EDF Models

EDF Functions

Electricity Production

(DG)

Electricity Dstribution

(DG or TMED)

Operation & Maintenance

(DG, TMED, MBC)

Upgrade of Distribution Assets(DG, TMED, MBC)

Metering, Billing & Collection

(MBC, TMED,DG)

GIZ-NESP

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Risks Electricity Supply Risk — This risk is linked with reliability of electricity supply from the transmission grid to the distribution licensee and then finally to the Franchisee’s customers. Service level agreements and performance bonds can help transfer the supply risk to the DISCOs as it guarantees that the Franchisee receives a certain amount of supply for a certain period.Electricity Demand Risk — In the case where the demand for electricity in the franchise area is insufficient, Franchisees are affected by revenues that may not be able to cover the costs. In this case, Franchisees can develop incentives for custom-ers (preferably customers with high electricity consumption) to maintain and possibly increase their demand.Payment Risk — The risk associated with this includes late payments, no payment and electricity theft. Franchisees can ensure that they mitigate this risk by working closely with meter suppliers to integrate technologies that prevent theft and enable a prepaid structure. There is also the need for enforcement teams to tackle energy theft through vigilance and electricity demand studies that allow Franchisees the capability to audit demand and identify customer electricity patterns linked to energy theft.Performance Agreement Risk —The Franchisee, being a com-pany working under the license of a DISCO may be at risk if the licensing DISCO breaches the terms of the Performance Agreement with the Bureau of Public Enterprises BPE. A Fran-chisee must have visibility on the terms and conditions of the respective licensee to better understand their exposure and mitigate any breach. As a protective measure, the Franchis-ing Agreement between the Franchisee and the host DISCO must make it clear that the Franchisee will not be liable for any breach of the host DISCO’s performance obligations under its Performance Agreement with the BPE.

Success StoriesKonexa NigeriaThe Nigerian Electricity Regulatory Commission (NERC) has approved the sub-concession agreement between Kaduna Elec-tricity Distribution Company (KAEDCO) and Konexa, an energy Distribution Company (DisCo) registered as ECOF Kaduna Ltd. This will enable Konexa to render electricity services in selected parts of Kaduna Electric’s franchise. Konexa is expected to make investments in network infrastructure that will guarantee 24/7 supply of electricity within the sub-concession area to all customers. It said Konexa’s interventions will also see to the roll-out of new metering technology, the deployment of off-grid solutions such as mini-grids and solar home systems to serve unconnected populations while creating embedded generation capacity. https://www.afrik21.africa/en/nigeria-ustda-subsidises-konexa-for-electrification-project/