A Partner in Tax Regulatory & People Services at KPMG, Martins Arogie, has raised concerns about the complexity of the proposed shift as Nigeria explores the decentralisation of its power grid.
Arogie, in an interview with ARISE NEWS on Monday, cautioned that simply transferring regulatory control from the federal government to state authorities may not automatically solve the sector’s deep-rooted challenges.
While decentralisation may offer potential benefits, Arogie stressed the need for a more comprehensive approach to address commercial viability, investment attraction, and fair pricing across regions.
Arogie addressed the challenges, potential benefits, and the broader implications of this shift.
He pointed out that the current focus on decentralisation, particularly the movement of regulatory control away from the centre, might not be as straightforward as it seems. “When you look at how people look at grid decentralisation today, especially how the states have gone about it, the focus has been around taking regulatory control away from the centre, and it looks like that’s a silver bullet,” Arogie said.
However, he cautioned that simply transferring regulatory control to the states does not guarantee an immediate solution to the sector’s problems. “It’s important that people understand the fact that the state taking regulatory control doesn’t necessarily mean that our problems would automatically be solved,” he added.
On the question of power sourcing in a decentralised system, Arogie emphasised that the DisCos (Distribution Companies) would initially get power through existing frameworks and investment contracts, which would likely include bilateral arrangements.
However, he warned that the situation is not that simple. “The problem is not that simple. The prices at which Enbet sells are a function of market regulations crafted by federal agencies,” he explained.
With the National Electric Power Authority (NEPA) no longer in control, Arogie questioned the assumption that the mere creation of a subsidiary and shifting regulatory control would lead to substantial change.
“Everybody just seems to believe that nothing would change—that we would just create a subsidiary, and Enbet would start selling power to that subsidiary at the same price structure, with the federal government carrying the subsidy and assuming Enugu is in control,” he said.
He further elaborated on the challenges that might arise with decentralised power sales. If the model includes multiple entities, Arogie pointed out, “The challenge you would then have with that is the OatCo selling power at cost.
“Because, like it or not, there are two different entities, even if ultimately owned by the same parties.” This could result in discrepancies in pricing between regions.
“If it includes a profit margin, it means people in Enugu would pay higher than people in the state where that regulatory control still rests with NEC,” he explained.
Arogie noted that the real challenge lies in creating a commercially viable energy market. “I think it would be a difficult conversation, free market, because I think that’s where we ought to go.
“The fundamental challenge in the sector today is the commercials, and we need to evolve a free market where it becomes commercially viable,” he remarked.
He also pointed out that while decentralisation could make power more accessible and affordable through economies of scale, it comes with the risk of excluding certain populations from grid access.
“Interestingly, if you look at the economics, it seems to suggest that where there is a lot more activity because of the economics of scale, you probably would be able to get it cheaper.
“And that would be a big challenge because you also don’t want a scenario where you decentralise the grid and then enfranchise certain sections of the population because they can’t afford to move to a separate grid,” Arogie cautioned.
In discussing the financial implications of decentralisation, particularly regarding tax costs, Arogie reiterated that states taking regulatory control would likely face challenges related to taxation. “What most states are doing, those that are taking deregulatory control, are saying that because we can’t regulate you if you operate across various states, we would only have to regulate the entity that operates in our state—the subsidiary dedicated to operating in our state,” he explained.
This would require the transfer of assets to the newly established state-controlled entities, which could lead to significant tax liabilities, particularly on depreciating assets like transformers. “The chances that you would generate a capital gain upon transfer is very low. What you may incur is VAT, and maybe very significant, which might run into billions. That’s money that probably should have gone into investment and upgrading infrastructure. Who is going to bear that cost?” Arogie asked.
Finally, when asked about the timeline for improved power availability, Arogie pointed to the ongoing developments in Lagos State, where a tender has been announced to advance local energy initiatives. “Lagos State has announced a tender, and I think that’s where states need to focus on—not just regulatory control,” he concluded.
Boluwatife Enome
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