Cost Reflective Tariff good for Nigeria

On February 1, 2016, the new electricity tariff regime, approved by the Nigerian Electricity Regulation Commission (NERC) under the Multi-Year Tariff Order (MYTO) 2015 came into effect. Under the new tariff regime, residential customer category (R2) in the Federal Capital Territory, Niger, Nasarawa and Kogi states, served by the Abuja Electricity Distribution Company (AEDC) franchise, who previously paid N14 per kilowatt/hour, will now pay N23.60. Similarly, residential customers in Ikeja and Eko distribution areas got a N8 and N10 increase respectively. Ditto for customers in Kaduna and Benin who got increases of N11.05 and N9.26 respectively.

In an endorsement of the new tariff plan, the government through the Minister of Power, Babatunde Fashola appealed for the understanding of Nigerians protesting against the increase in the tariff while urging the distribution companies to improve service delivery especially as it concerns the roll out of metres to avoid estimated billing.

The cost reflective is good for Nigeria on several fronts. The obvious advantage is that it will enhance power delivery as it will enable distribution companies (discos) pay the generation companies (gencos) for power generated. Gencos too will be able to pay gas suppliers to enable them generate more power. Besides it will also enable both the discos and gencos to make more investments in their networks and in power generation. Gas suppliers also will be able to invest in more gas production. Similarly, it will enable the Transmission Company of Nigeria (TCN) to strengthen their weak transmission lines so that they can be able to evacuate more power.

We understand the misgivings of many Nigerians and especially the labour unions who are arguing that there should be an improvement in power supply before the tariff increases take effect. In fact, in a normal market economy, that should be the order. Payments are made for services delivered and not promises. However, the unique problem with the power sector is that without a cost reflective tariff plan, it is difficult to secure funding with which the needed investments that will guarantee regular power supply can be made. The banks are generally not willing to fund projects without a clear cut recovery price. As Fashola noted at the monthly sectoral meeting of major stakeholders in the power sector in Lagos recently, “power business is funded from finance from banks… This is the reasons why we cannot have power first before tariff, because it has to be paid for…The supplier of gas is not going supply unless he sees his cash. This is a painful thing. This is the difference about this business, the gas has to be put there, and it can’t even be stored”.

The situation in the power sector mirrors the situation in the oil and gas sector where several dozen licences have been issued for the construction of refineries since 2003 and yet no refinery has been built. The simple reason was that banks – who are the major financiers of the projects – refused to finance the building of refineries without a proper pricing of petrol and diesel. Nigerians, on their part, refused to allow for the removal of subsidy and for petrol to be sold at market price. The effect was that for more than 16 years after the return of civil democratic governance and the determination of the government to make Nigeria self-sufficient in refined petrol, the country still continues to import almost all its refined petrol spending billions of dollars in the process. What is more, billions of dollars – monies that could have built several refineries many times over – have been spent on subsidising of petrol. For instance, Nigeria’s spent over N1.5 trillion naira ($9.3 billion) in 2011 on petrol subsidy while its budget for education, health and works/roads were $2.2 billion, $1.32 billion and $680 million respectively

Persuaded by the sheer irrationality of maintaining subsidy payments and the obvious unavailability of funds to fund such frivolities in the context of rapidly declining oil revenues, the government was forced to shave it off and pass the burden directly to consumers of the product.

Nigerians must not allow the same thing to happen again with the electricity sector. The need for regular power supply cannot be over-emphasised. The multiplier effect on the economy – job creation, businesses and improvement in the quality of life of the people – are too obvious to ignore. With the privatisation of the distribution and generation companies, a progressive tariff plan that adequately reflects the cost of generation of electricity is required to get banks to finance the massive investments in generation and transmission of electricity that Nigerians demand.

We therefore urge Nigerians and the labour unions to show understanding and allow this tariff plan to stand. We also call on the gencos and discos to brace up to the challenge of effective service delivery.