Businesses Suffocating As Fuel Energy Costs Shoot Skywards

They suggested  decentralization of the grid as well as amendment of the Power Reform Act to remove  encumbrances that deter investors from the power sector.

Increase in energy cost for companies

Financial Vanguard findings from the companies’ financial statements showed that manufacturing firms suffer the most in energy cost. The breakdown shows that while the non-manufacturers recorded 26.4 per cent rise in energy cost, manufacturers recorded 41.8 per cent rise.

Amongst the manufacturers, Livestock Feeds recorded the highest increase in energy cost at 104 per cent followed by BUA Foods Plc with 50 per cent increase, and Dangote Cement rose by 49.8 per cent.

Impact on companies

Commenting on the cost of operations, Graham Hefer, Managing Director, Okomu Oil Palm Plc, said: “The high energy cost can be crippling for all of us. The margin you mentioned, that is, the 30 per cent increase could be more. In most cases, If you have been running a generator set, you will be running your activities up to 80 per cent on self-generated power.

“We started the year at a little above N800 per litre for diesel, but, today, the price went up to more than N1,000 per litre. So, you can see the major cost increase; it impacts hugely on our cost of sales.

”If you run your power generator daily at N300 per kilowatt hour, if you are lucky, when at the beginning of the year you budgeted about N160 per kilowatt per hour, you can imagine the implication for all of us.”

He, however, said that while increases in energy cost, especially diesel and PMS have had an inflationary effect on the company (Okomu Oil) because the tractors, lorries and generating sets need the fuel, “we have managed to buffer ourselves partially by installing a 5MW turbine in our oil mill that uses palm biomass through the boilers to generate steam to run the turbine at a fraction of the cost of fuel.”

BUA Foods Plc in its 2023 earnings release noted that the surge in energy cost resulted in increases in cost of sales, selling and distribution expenses as well as total operating cost. According to the company, “67 per cent increase in cost of sales in 2023 to N477.14 billion was driven by an increase in raw materials cost and energy cost.

“Selling and distribution expenses increased by 98 per cent to N28 billion in full year 2023 from N14.1 billion in 2022 due to huge increase in cost of diesel within the period. ‘Total operating expenses increased by 20% to N39.7 billion in 12 months 2023 (12M 2022: N32.9 billion) on the back of increase in selling and distribution cost along the supply chain to customers.”

Speaking in the same vein, Lolu Alade-Akinyemi, CEO of Lafarge Africa, noted that the company’s performance in 2023 was largely impacted by spiraling inflation and unprecedented Naira devaluation, with  attendant pressure on energy and supply chain costs.

Erodes profitability, impedes competitiveness — Stakeholders

Speaking on the operating environment of businesses, Mr. Muda Yusuf, CEO, Centre for the Promotion of Private Enterprise (CPPE) said that the power supply situation is worrisome as it affects companies’ profitability, competitiveness, sustainability and their ability to reinvest and create new jobs.

He, however, said there’s need for companies to be more innovative to ensure energy efficiency to reduce cost.

He stated: “The high and increasing energy cost is perhaps the second biggest problem facing companies across all sectors, especially in the real sector, next only to forex.

“This is essentially a legacy problem following years of sub-optimal performance of the public electricity sector. Most companies generate their own electricity at very exorbitant cost.

Cost of diesel has been soaring.  Cost of gas is benchmarked against the dollar.  It is really a very difficult situation.

“Yet, these additional costs are difficult to pass on to the consumers. It is a major predicament. At the macro level, there is need to accelerate reforms to boost investment in the power sector.

The high energy cost, according to him, has shot up costs significantly for firms from two perspectives.

“One is the cost of production because we are talking about costs that have practically doubled, if not more. The cost of production has gone up significantly and some small businesses have had to shut down operations because it has become difficult to pass on the cost to the consumers. Consumers purchasing power is already very weak; so, there’s a limit to which these additional costs could be passed to the consumers.

“So for smaller businesses, some of them could no longer continue, but for bigger businesses, the impact on their earnings is quite clear. So, it is eroding their profit margin; it is making their products more expensive; it’s affecting shareholders’ value, it also affects competitiveness. For some companies, it also affects their capacity to create more jobs or even retain existing ones.

“It is also contributing to the issue of competitiveness because all these issues of smuggling are a reflection of the fact that the domestic cost of production is extremely high. So, it makes locally-produced goods more expensive and that creates incentive for smuggling.

“The transportation cost is another thing. When these companies produce, they need to distribute the products around the country. You don’t have the road network to do that. All the trucks they are using are powered by diesel.  So, their distribution cost has also gone up because of the cost of diesel. So, it is a major issue and that is what is reflected in their results. It reflects in dividends, profits and the ability to reinvest.”

The immediate President of the Manufacturers Association of Nigeria (MAN) Engr. Mansur Ahmed, said the numbers are not surprising given the increase in the diesel and petrol prices coupled with constant collapse of the national grid, which affects power generation and distribution across the country.

He called for the resolution of the complexities in the implementation of the Eligible Customer Initiative in the power sector to allow manufacturers take advantage of the stranded electricity.

He stated that full implementation of the initiative will allow more companies key into the initiative, thereby reducing their over dependence on petrol and diesel for power generation and thereby, driving down energy cost for the company.

Way forward

Muda Yusuf of CPPE said that the grid should be decentralized, saying the country is too big to rely on a single grid. “We should have as many grids as possible across the states. The grid should be decentralized and each jurisdiction encouraged to generate power and feed to their local grid. You can use gas; you can use other forms of energy depending on what is available in your location. We should also ensure that tariffs are cost reflective because if tariffs are not cost reflective, investors will not put their money,” he said.

He called on  government to put the right policies in place to attract investors to the space.

“The policy regime has to be right also. There’s the need to review the Power Reform Act. The Act has some rigid provisions which confer some privileges and monopoly on the DisCos, making it difficult for people to generate their own power. So, all these things need to be revisited,” Yusuf stressed.