Energy Poverty, Household Poverty and Human Rights -By Sam Amadi

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Sam Amadi

Sam Amadi

 

Energy poverty leads to household poverty. This is because those who consume less energy tend to be poorer than those who consume more energy. And, poverty leads to the consumption of less energy. So, it is a two-dimensional relationship. Energy poverty causes household poverty. And household poverty reinforces energy poverty. Energy poverty is measured by per capita wattage. Measuring energy poverty in terms of per capita wattage shows that although Nigeria is the biggest economy in Africa, measured by Gross Domestic Product (GDP) and a frontline economy in Africa in terms of Per Capita income, it is one of the poorest in terms of the consumption of electricity, as measured in wattage. We are poorer in energy terms than our less endowed neighbours like Ghana and the Benin Republic.

The relationship between energy poverty and household poverty has a nexus, perhaps, because poverty is the major challenge of human rights in Africa today.

Nigeria has come a long way in human rights-oriented governance. Our democracy has consolidated its human rights credentials. The electoral defeat of the Peoples Democratic Party (PDP) and peaceful transition of power to the All Progressives Congress (APC) crystallise and cleanse our democracy. Although, our politics remains dysfunctional and deficient of liberal values, we have progressed far away from the depressing period of military dictatorship.

The debate turns on whether we are just considering civil and political rights alone, or are also contemplating social and economic rights too. Otherwise, we are not much out of the woods.

If we use the famous one-dollar a day measure, then we will miss out the magnitude of the poverty in Nigeria. Officially, we are being told that about 60-70 percent of Nigerians fall into the poverty bracket. But, that is if we are looking at the income matrix alone. When this is coupled with the vulnerability matrix, Nigerians begin to look a lot poorer. The vulnerability matrix looks at the vulnerabilities that afflict the people and the prospect of easily mitigating these risks. The complete absence of even the most rudimentary social security means that many Nigerians who may be earning living wages are still poor, because in the event of exposure to those risks there is no effective mitigation.

In the last 16 years since the march of democracy, we have not improved the statistics on poverty. For the millions of Nigerians living in acute poverty, no matter how poverty is defined, the real evidence of progress in human rights is that they can feed well, have access to quality healthcare and have the assurance of fulfilling meaningful life projects. For these millions, the improvement in electoral democracy and civil liberties is a little cheering news.

Poverty is largely a function of how policies are designed and implemented. Poverty is not an act of nature.

So, really it is all about poverty. Then, how poor are Nigerians? If we use the famous one-dollar a day measure, then we will miss out the magnitude of the poverty in Nigeria. Officially, we are being told that about 60-70 percent of Nigerians fall into the poverty bracket. But, that is if we are looking at the income matrix alone. When this is coupled with the vulnerability matrix, Nigerians begin to look a lot poorer. The vulnerability matrix looks at the vulnerabilities that afflict the people and the prospect of easily mitigating these risks. The complete absence of even the most rudimentary social security means that many Nigerians who may be earning living wages are still poor, because in the event of exposure to those risks there is no effective mitigation. So, we are poor as we are exposed to risks. And Nigerians are very much exposed to unmitigated risks.

Poverty is largely a function of how policies are designed and implemented. Poverty is not an act of nature. Poverty is not essentially an accident. Poverty arises from the policy choices that a society and individuals in the society make. Because it is a product of policy, it is also path-dependent. Until we revise policies or implement them differently, poverty outcomes subsist. The linkage between poverty and policy should lead us to the linkage between energy poverty and household poverty.

…the poverty profile of electricity generation is clear. There is little supply available on the grid.

Energy poverty leads to household poverty. This is because those who consume less energy tend to be poorer than those who consume more energy. And, poverty leads to the consumption of less energy. So, it is a two-dimensional relationship. Energy poverty causes household poverty. And household poverty reinforces energy poverty. Energy poverty is measured by per capita wattage. Measuring energy poverty in terms of per capita wattage shows that although Nigeria is the biggest economy in Africa, measured by Gross Domestic Product (GDP) and a frontline economy in Africa in terms of Per Capita income, it is one of the poorest in terms of the consumption of electricity, as measured in wattage. We are poorer in energy terms than our less endowed neighbours like Ghana and the Benin Republic. These countries consumer more electricity than we do on per capita basis (even though we have a slightly larger grid than they do).

Some of the components of energy poverty that create or reinforce household poverty include the question of supply. Nigeria suffers from the gross inadequacy of grid supply of electricity. With a mere daily generation of about 4,000MW for over 170 million people, we are likely to have one of the lowest per capita wattage in the world. This simply means that if electricity comes only from the grid, every Nigerians will suffer acute energy poverty.

But, of course, more than 40,000MW is generated daily off-grid by captive generators. But this is not available to most of the poor. The very poor cannot afford to be captive to generators. So, the poverty profile of electricity generation is clear. There is little supply available on the grid. And even the little electricity will often be distributed towards richer neighbourhoods where the rich are more disposed to pay. And the poor do not have the financial resources to generate their own electricity on any consistent basis, hence their deprivation becomes almost total.

The lack of access to electricity contributes to household poverty by diminishing the prospects of the local economy within which the poor mostly make their living. Take agriculture, as an example. Many poor people who reside in rural communities in Nigeria depend on the proceeds of farming for their livelihoods. Energy supply is critical to their survival. From harvesting, drying, processing to the storage of crops, the lack of electricity is a major contributor to the failure of the policy on food sufficiency…

The second component of energy poverty in Nigeria is the problem of access, with less than 60 percent of citizens connected to the grid. Most of the unconnected 40 percent are the very poor who reside in rural and semi-urban communities. This is a major impediment to energy sufficiency for millions of the Nigerian poor, because if we miraculously generate above 100,000MW, these poor stranded in no-man’s land will still not access grid electricity.

The third component of energy poverty relates to pricing. It is a matter of affordability. Many of the poor can barely afford the cost of energy supply, whether on-grid or off-grid. Electricity tariffs are supposed to be reasonable and affordable, but oftentimes they are not. Where they are not affordable it results in energy poverty, notwithstanding the quantity of supply and network coverage. As long as people cannot afford to pay electricity bills or if making such payments erodes their capacity to purchase other vital items of social and economic welfare, they are caught in the web of energy poverty.

Capabilities in reading and writing in the earlier years of schooling, which is the main indication of educational achievement, will be underdeveloped where schooling is done without electricity, as in many Nigerian villages.

How do these three components of energy poverty impact on household poverty? The lack of access to electricity contributes to household poverty by diminishing the prospects of the local economy within which the poor mostly make their living. Take agriculture, as an example. Many poor people who reside in rural communities in Nigeria depend on the proceeds of farming for their livelihoods. Energy supply is critical to their survival. From harvesting, drying, processing to the storage of crops, the lack of electricity is a major contributor to the failure of the policy on food sufficiency, or even the success of subsistence farming.

In terms of healthcare, access to electricity has a significant impact on health outcomes. These outcomes range from environmental degradation to the spoilage of vaccines. Where there is no light, diseases flourish and effective medical care is inhibited. Nigeria’s high maternal mortality is aided by poor electricity supply that leads to mishaps during child delivery and other medical operations.

Medical emergencies are impaired when there is no electricity. The same with education. Capabilities in reading and writing in the earlier years of schooling, which is the main indication of educational achievement, will be underdeveloped where schooling is done without electricity, as in many Nigerian villages. Using moonlight or all sorts of paraffin lamps would strain the eyes of potential scholars and reduce the amount of learning that can be done. Ultimately, educational outcomes will be poor, even in latter years.

The main reasons why the IPPs have largely failed to supply to the grid since we started licensing them in 2007 is because of the absence of critical market support institutions. Until late 2012, we did not have a commercial tariff that allows a prudent investor to recover its investment. There was no credible off-taker who could provide guarantee of payment to project developers. The PHCN was largely bankrupt and lacked creditworthiness.

Now, these three critical capabilities of food, health and education are the drivers of human development. Their absence underlines what it means to be poor. Their availability also constitute the pathways to escaping poverty. Unfortunately, these pathways are not available, because of inability to consume more electricity.

The Nigerian Electricity Regulatory Commission (NERC) is doing a lot to address the components of energy poverty in Nigeria. First, with scarcity of supply, we just have to increase capacity. Since 2000 when the basic policy framework for the power sector reform, the National Electric Power Policy (NEPP) was established, the focus of the reform has been to enhance access to adequate and reliable electricity through the growth in generation capacity. The major policy for this is the deregulation of generation, by which the regulator was empowered to license new independent power producers (IPPs) who can generate electricity outside the publicly owned monopoly utility, the then National Electric Power Authority (NEPA).

More gas will be supplied to power plants due to the improvement in the commercial arrangements for gas to power. Licensed IPPs are now closing financial deals because the regulatory landscape is now bankable. Late last year, Azure Power, the first project-financed IPP, concluded financing for a 450MW plant. Before we established these critical market institutions, this could not be possible. Today, the embedded generation regulation furthers enables distribution companies to procure additional power through bilateral contracts with modular power developers.

We have licensed many IPPs that could generate up to 30,000MWs. These IPPs cannot generate to the grid today, except the successor companies of the old Power Holding Company of Nigeria (PHCN), the oil companies like Shell and Agip and one or two state government owned power plants supplying to the grid.

The main reasons why the IPPs have largely failed to supply to the grid since we started licensing them in 2007 is because of the absence of critical market support institutions. Until late 2012, we did not have a commercial tariff that allows a prudent investor to recover its investment. There was no credible off-taker who could provide guarantee of payment to project developers. The PHCN was largely bankrupt and lacked creditworthiness. Coupled with these has been the problem of gas supply because of the poor commercial framework for this. But since 2010, after the presentation of the presidential Roadmap on Power, efforts have been ramped up to establish these critical market-support institutions, like a commercial tariff and creditworthy off-taker.

Under NERC guidance, the Nigerian electricity market is moving quickly to commercial viability. Therefore there is clear encouragement for such expansion of services. Each of the distribution companies has its expansion plans that the regulator has approved. The regulatory framework is embedded with incentives for the expansion of services. The regulator would need to do more to incentivise the expansion of connection to unconnected areas.

We are on course to curing acute shortage of capacity in the electricity sector. More gas will be supplied to power plants due to the improvement in the commercial arrangements for gas to power. Licensed IPPs are now closing financial deals because the regulatory landscape is now bankable. Late last year, Azure Power, the first project-financed IPP, concluded financing for a 450MW plant. Before we established these critical market institutions, this could not be possible. Today, the embedded generation regulation furthers enables distribution companies to procure additional power through bilateral contracts with modular power developers. So, we are on course to increasing the available capacity and thereby reducing energy poverty.

Access is a major challenge of the sector. With over 40 percent of Nigerians unconnected to the grid, the problem of energy poverty is compounded. But this can be addressed in two ways. With more electricity available to distribution companies and their revenue improving, the imperative will be for them to also expand their coverage to some hitherto uncovered areas. This will be a natural development as long as the market remains commercially viable and as long as the captive customers in the networked areas are sufficiently served.

The problem of affordability could be compounded in the post-privatisation period as private investors focus on the recovery of investments within a short time span.

Under NERC guidance, the Nigerian electricity market is moving quickly to commercial viability. Therefore there is clear encouragement for such expansion of services. Each of the distribution companies has its expansion plans that the regulator has approved. The regulatory framework is embedded with incentives for the expansion of services. The regulator would need to do more to incentivise the expansion of connection to unconnected areas. Again, our Embedded Generation and Independent Distribution Network regulations will encourage off-grid supply of electricity. With new focus on renewable energy, many communities far afield of distribution networks can have off-grid and island supply of electricity through optimal use of renewables that are abundant in Nigeria

Affordability is also a major challenge. Chronic shortage of power increases the price of available power from the grid. The cost of production of electricity in Nigeria keeps increasing due to the inefficiencies in the system and the low quantity of generation. The average cost of electricity is expensive. This exorbitant cost is further increased by the huge technical, commercial and collection losses in the system arising from years of the inefficiency of state ownership and management. The problem of affordability could be compounded in the post-privatisation period as private investors focus on the recovery of investments within a short time span.

NERC has approved for distribution companies to recover their investment within a longer period of ten years, instead of five years. It enables them to ensure gradual, rather than sharp increases in tariff, to make it affordable.

The regulator’s response to affordability is three-fold. First, we scrutinise the cost profiles of the operators to make sure they are only posting prudent and relevant costs. This is where effective cost recovery is critical. The law mandates NERC to pass through to customers all the costs of an operator. But it must be costs that are prudently incurred by an efficient operator. Where the cost is not prudently incurred and/or the operator is not efficient, the regulator would not allow the operator to recover such cost from the customers. It is in this vein that we reduced the collection losses to zero and put the burden on any operator who want us to pass the collection losses to customers to prove that it could not have avoided that loss through normal efficiency.

The second response to make tariff affordable is for the regulator to encourage operators to recover approved revenue within a longer period. A long period of recovery will smoothen the tariff. NERC has approved for distribution companies to recover their investment within a longer period of ten years, instead of five years. It enables them to ensure gradual, rather than sharp increases in tariff, to make it affordable.

The Electric Power Sector Act recognises the need to subsidise the consumption of electricity for the poor. To this end, it provides for a Power Consumer Assistance Fund (PCAF) where both government grant and cross subsidy from eligible customers are channeled to support more consumption of electricity by poor consumers.

The third response is through cross subsidy, which enables operators to recover less of the cost of serving the poor customer class through slightly increased tariff from the class of richer customers. Cross subsidy distorts the efficiency of the market and should be sparing applied. But in the context of grave household poverty, like in Nigeria, there should be cross subsidy in other to avert rate-shock for the poor customers. The Electric Power Sector Act recognises the need to subsidise the consumption of electricity for the poor. To this end, it provides for a Power Consumer Assistance Fund (PCAF) where both government grant and cross subsidy from eligible customers are channeled to support more consumption of electricity by poor consumers.

The challenge therefore is to institutionalise policies that increase the quantity of energy available to all Nigerians and also ensure that there is equity in access and consumption of energy resources. This calls for creativity, courage and a high sense of social justice.

Because the meagre consumption of electricity is both a cause and result of poverty, it should be an established policy to continuously assist poor citizens to consume more electricity. This is especially so in the period after privatisation when distribution companies will implement pre-paid metering as a form of revenue protection. With pre-paid metering, a poor consumer who does not have money to pay for increased electricity tariff will be automatically denied access to electricity services.

Poverty is not a natural cause. Some of the underlying causes of poverty may relate to natural occurrences like earthquake and hurricane. But, ultimately, these natural calamities result in poverty because of the nature of policies that either prevent or address them. Poverty is a function of policies that define the rules of access to resources. We also know that energy poverty could create and reinforce household poverty. The challenge therefore is to institutionalise policies that increase the quantity of energy available to all Nigerians and also ensure that there is equity in access and consumption of energy resources. This calls for creativity, courage and a high sense of social justice. The Nigerian Electricity Regulatory Commission (NERC) is working on such policicies guided by these values.

Dr. Sam Amadi, the Chairman/CEO of NERC, gave this presentation at the Annual Human Rights Lecture of the Human Rights Writers Association (HURIWA).

 

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