Re-thinking tariff methodology amid imminent collapse of Nigeria’s electricity industry
The recent ‘Save our Soul’ alter call from the investors and operators of electricity generation and distribution companies has failed to attract the required national attention in our print media and government corridor. The Electricity regulators, Federal Government of Nigeria and members of the public as usual have ignored this important call and like ostrich, the Nigerian Electricity Regulatory Commission highly seized of the attendance consequences of this crisis has busied itself with other mundane regulatory issues waiting for the problems to disappear by way of self correction. The problem is real, palpably real and if not urgently tackled will ground the economic activities of Nigerian and deepened the already ‘technical recession’ that our economy is presently experiencing.
The present crisis is a bye product of the floating of the Naira and its attendant consequences. One had expected that at the time the Central Bank of Nigeria was taking the decision to float the Naira, various federal government ministries and agencies would have submitted to the CBN the significant effect of the policy in the business value chain within their ministry and departments. Regrettably, it would appear that it was only the Ministry of Petroleum whose ministry was under pressure as a result of perennial fuel scarcity in the country that modulated the pricing structure of refined product to have some level of alignment with the target foreign exchange rate. Other sectors of the economy that are being heavily regulated by the government were never taken into contemplation during this exercise and no structure was put in place to address the negative effect of this policy other regulated business. Today the chicken has come home to roast and the electricity industry that is already suffering liquidity crisis now has its revenue completely eroded as a result of this policy.
The Multi Year Tariff Order (MYTO) regulating electricity generation bulk prices was among other things modeled against the following assumptions: (1) Rate of Inflation = 13 percent; (2) Gas Price $2.44/mmbtu; (3) Foreign Exchange Rate = $1 @N198. This Tariff Order (MYTO 2) according to NERC is based on a set of principles designed to provide tariffs for each of the generation, transmission, and distribution and designed to achieve cost recovery/financial viability; Certainty and stability in the electricity market; efficient use of the network; proper allocation or risk; cost recovery and financial viability; Flexibility and robustness; Transparency and fairness and social and political objective.
Today these assumptions have changed while the regulatory agency is yet to reflect the new pricing based on the changed assumptions. While MYTO recognizes changes in the tariff whenever the relevant assumption changes, it does not grant automatic change in tariff and still allows the regulator to micro manage the tariff setting and operations by doing a minor review every 6 months to reflect the changes in the assumptions. In practice, although a minor review should be done every 6 months to reflect changes in the business assumption, the process of the review usually commence after 6 months and usually take another 6 months before the completion of the review and by the time a new tariff will become effective, it may have gone through one and half a year cycle.
Within this period of review, the debt on the value chain of the electricity business will be accumulating and when eventually concluded by the regulatory authority and appropriate pricing reflected in the tariff, it becomes an accumulated debt which obviously would seed an economic shock to the electricity consumers. This no doubt has been the bane of several protests that welcomes every tariff increase announcement by Nigeria Electricity Regulatory Commission.
Presently, the operating MYTO regime is still on assumption of $1 to N198 while the dollar has risen to over $1 to N310 in inter-bank market. The price of the feedstock (gas) to most of the power plant is denominated in dollars and the exchange rate has greatly affected the price in such a manner that Disco’s collections can no longer pay for the current value of gas used in generation of power.
While the Nigeria Bulk Electricity Trading Company (NBET) has adjusted their bill to reflect the current gas pricing, Nigerian Electricity Regulatory Commission is yet to reflect same in its tariff as it is still battling in court with the consumers on the earlier tariff increase.
Although electricity distribution companies has been hit by all time low collections as a result of low load allocations and general disaffection of customers occasioned by poor service (No thanks to Niger Delta Avengers vandalization of pipeline) but even if they are to achieve an impossible hundred percent (100%) collection and commit all collections to payment of their energy bill to the generation company without making reservation for operational cost, it will still not be enough to pay fully for energy received because the cost of energy generation has not been reflected in their tariff.
The power generation companies and the gas suppliers have continued to groaned in financial starvation and can no longer maintain their daily operations as a result of this deficit. If this dangerous trend continued unattended, we will wake up to discover that the entire value chain of Nigerian power sector has finally collapsed.
The government should immediately take proactive steps to engage the Nigerian people to understand that electricity is a business that has a cost and until that cost can be paid for by the users of the services, the business cannot be sustainable and the dream of having a reliable power supply will become a mirage.
I agree absolutely, that increasing electricity tariff at this point in time is obviously not an option as the electricity consumers are still engaging the government and the distribution companies in an ongoing protracted legal battle. Any increase or sign of increase of electricity tariff will no doubt meet a stiff resistance from the consumers. But it is time that the electricity consumers are provided with facts and figures on the pricing of electricity so as to repel their age long belief that electricity is a form of government social security welfare package.
Secondly, federal ministry of power, Nigeria Electricity Regulatory Commission, Nigerian Bulk Electricity Trading Company and other relevant agencies in charge of electricity should as a matter of urgency commence engagement of the Gas Suppliers, the operators of the electricity generation and distribution companies to find a short term solution to manage the crisis in the industry. A pragmatic approach would be to allow the prevailing gas pricing at the old exchange rate of $1/198 while the government through CBN intervention fund make up the exchange rate differential to the gas supplier. However, this must be a short term intervention as it is not gas alone that has foreign currency component but the application will provide the relevant shock absorber in the market to such time our economy is able to improve.
It must be acknowledged that the electricity consumer’s resistance to higher tariff is arose from the fact that they are paying high tariff for electricity but not getting enough power to sustain them and therefore had to resort to self generation at a very exorbitant cost to augment the electricity they are receiving from the grid.
I am of the view that if customers can be availed of stable and reliable electricity supply such that they will no longer invests in self power generation; they will be willing to pay the right tariff. Most of the distribution companies understood this fact and are already making effort through embedded powers to provide power to certain zone where the embedded generator is located. A case in point is Ikeja Disco, Eko Disco and Ibadan Disco that have completed their energy procurement process but are yet to sign a single Power Purchase Agreement with the Generators. This is not because they do not want to sign but they require the approval of Nigeria Electricity Regulatory Commission to reflect the agreed tariff in the distribution tariff.
To this extent, the Ministry of Power and Nigerian Electricity Regulatory Commission must as a matter of urgency provides required support to various Discos that have completed the embedded power generation process to commence its immediate implementation. The Ministry of Power and NERC must support their zonal tariff review so as to enable the application of the tariff to only commence upon the commission of the relevant plant in that zone. This is a quick win opportunity which the Minister of Power must cash in on to replicate his achievements at the federal level.
The Nigeria Electricity Regulatory Commission should take urgent step to amend the Multi Year Tariff Order and allow automated tariff changes upon the change of the assumptions to enable the market reflect its real time market value.
I am also making a case that NERC should reclassify the tariff class to give commercial and industrial customers lower tariff. A situation where NERC provides a lower tariff to residential customers and imposes higher tariff to commercial and industrial customers appears to me not to be in sync with the federal government policy on diversification of Nigeria economy.
Giving a lower tariff to residential customers to me appears to be subsidizing luxury while production that the tariff should help to reduce their cost of production viz-a-viz the cost of final product are meant to pay higher which ultimately affects the price of finished products and automatically robs our local company the opportunity to compete effectively with foreign produce. Already the commercial and industrial customers are groaning under a punitive commercial bank interest rate which is already having negative impact in their production cost and a high tariff on electricity will definitely balloon the cost of their final products.
I wish to add that the effect of this monetary policy on the Nigerian electricity market is a wakeup call to all governmental agencies and parastatals to evaluate relevant fiscal and monetary policies and how it will impact on various business under their ministry and prepare ahead of time to combat its negative effect.
Electricity tariff across globe
| Country/Territory | US cents/kWh |
| American Samoa | 38.3 to 40.4 |
| Argentina (Concordia) | 19.13[a] |
| Australia | varies by state anywhere from 15-22 per kWh
mans a service fee of 70 cents a day |
| Bangladesh | 2.95 to 9.24 |
| Belgium | 29.08 |
| Bulgaria | 13.38 day (between 7:00-23:00 DST); 9.13 night |
| Brazil | 25.00 |
| Cambodia | 15.63 to 21.00 in Phnom Penh |
| Canada, Ontario | 14.6 |
| China | 10 |
| Chile | 23.11 |
| Colombia (Bogota) | 18.05 |
| Cook Islands | 34.6 to 50.2 |
| Croatia | 17.55 |
| Denmark | 33 |
| United Arab Emirates | 6.26 to 10.35 (plus 1.63 fuel surcharge) |
| Fiji | 12 to 14.2 |
| Finland | 20.65 |
| France | 19.39 |
| Germany | 32.04 |
| Romania | 18.40 |
| Guyana | 26.80 |
| Switzerland | 25.00 |
| Hungary | 23.44 |
| Hong Kong | 12.04 to 24.05 |
| Indonesia | 11 |
| Iran | 2 to 19 |
| Iraq | Residential pricing per kWh used, subsidized[a]
2.5 @ 0-500 kWh/M |
| Ireland | 28.36 |
| Israel | 16[a] |
| Italy | 28.39 |
| Jamaica | 44.7 |
| Japan | 20 to 24 |
| Jordan | 5[a] to 33 |
| Kiribati | 32.7 |
| South Korea | Priced into a sliding scale at a kWh/Month, residential service (low-voltage)[a]
5.1 @ 0-100 kWh/M |
| Laos | 11.95 for >150kWh, 4.86 for 26-150 kWh, 4.08 for 0-25 kWh |
| Latvia | 18.25 |
| Lithuania | 12 |
| Macedonia | 7 to 10
industrial-14 |
| Malaysia | 7.09 to 14.76 |
| Marshall Islands | 32.6 to 41.6 |
| Mexico | 19.28[b] |
| Netherlands | 28.89 |
| New Caledonia | 26.2 to 62.7 |
| New Zealand | 19.15 |
| Nicaragua | Priced into a sliding scale at a kWh/Month,[a] Residential T-0
10 @ 0-25 kWh/M |
| Niue | 44.3 |
| Nigeria | 1.2 to 12.55 |
| Norway | 15.9 |
| Pakistan | General Supply Tariff – Residential
2 < 50 kWh/M |
| Palau | 22.83 |
| Papua New Guinea | 19.6 to 38.8 |
| Peru | 10.44 |
| Philippines | 18.22 |
| Portugal | 25.25 |
| Singapore | 25.28 |
| Spain | 15 |
| Sri Lanka | Priced into sections at a kWh/Month, subsidized[a]
1.91 @ 0-30 kWh/M |
| Solomon Islands | 88 to 99 |
| South Africa | 13 |
| Surinam | 3.90 to 4.84 |
| Tahiti | 25 to 33.1 |
| Taiwan | 7 to 17 |
| Thailand | 6 to 13 |
| Tonga | 47 |
| Turkey | 13 |
| Turks and Caicos Islands | 35.39 |
| Tuvalu | 36.55 |
| United Kingdom | 22 |
| Electricity sector of the United States | 8 to 17 ; 37[c] 43[c] |
| United States Virgin Islands | 48.9 to 51.9 |
| Uruguay | 17.07 to 26.48 |
| Vanuatu | 60 |
| Venezuela | 3.1 at Official exchange rate ( 13.50 Bs/US$) or 0.48 cents at unofficial exchange rate (1.095 Bs/US$) |
| Western Samoa | 30.5 to 34.7 |
CHUKS NWANI