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Nigeria misses 6 electricity tariff reviews as current prices become obsolete

Since the power sector privatisation in 2013, the Nigerian Electricity Regulatory Commission (NERC) has failed to review electricity pricing six times under the Multi Year Tariff Order (MYTO) it instituted to price electricity, a failure that has fuelled illiquidity in the sector and caused shortfalls of nearly N1.4 trillion.

According to the MYTO Rules, there would be a 15-year tariff path for the Nigerian Electricity Supply Industry (NERSI) with limited minor reviews each year in light of changes in a limited number of parameters (such as inflation, interest rates, exchange rates and generation capacity) and major reviews every five years, when all of the inputs are reviewed with stakeholders, but this has not been done since 2016.

The current electricity pricing does not benefit the customers who cannot enjoy quality service because they are compelled to pay a tariff that is less than the cost of production and so are forced to rely on generators where they pay five times the current tariff.

It does not also benefit the operators who are compelled to charge below their cost of production and lack motivation to invest and improve service.

“Today, electricity pricing is wrong. The model is not fair. The average today is N27.30. What will be reasonable to sustain the industry is N57.40. This includes the debates around gas pricing too,” Kola Adeshina, chairman of Sahara Group, told BusinessDay.

“We are suffering from lack of six tariff reviews. Whereas the consumers are agitated and worried, the reality of our life is, the power generator gives invoices to the bulk trader at an exchange rate of N360/$, the distribution companies are made to charge the customer using an exchange rate of N199/$,” Adeshina said.

Power generation companies bear the biggest pain in this warped pricing system.
Egbin Power, Nigeria’s biggest generation company, is owed over N160bn. Other GenCos complain of large debts because invoices are not fully settled by the Nigerian Bulk Electricity Trading Company which can only pay about 30 percent of invoice. The Transmission Company of Nigeria recently said it gets paid only 25 percent of its market invoice.

“The solution to the problem is to pay the true cost of power,” said Sunday Odutan, executive secretary, Association of Nigerian Electricity Distribution Companies (ANED), in a meeting with Eko DisCo customers in Lagos.

In addition, operators are calling for a fund to cushion the temporary impact of a tariff increase on the most vulnerable members of the society.

Analysts say the prevailing tariff will only worsen liquidity gaps in the sector as the variables that went into costing electricity have changed since 2015.

“The prevailing DisCo tariff today was modelled against variables that have been overtaken by time and events and therefore does not reflect the true pricing of electricity. MYTO 2015 for DisCos was built on 196/$1, 8.3 percent inflation rate, certain available capacity and therefore the final tariff was a product of these variables. While they have all moved higher, tariff has not,” Chuks Nwani, energy lawyer, said.

NERC’s failure to implement MYTO Rules led to media reports that it has jettisoned MYTO, but the regulator insisted it was keeping its rules.

In a press release issued in June last year, NERC said, “Following recent inaccurate reports in the media, the Nigerian Electricity Regulatory Commission hereby reaffirms that there are no plans to dump the Multi Year Tariff Order (MYTO) framework used in determining end-user tariffs based on revenue requirement of the electricity industry.

“As part of the periodic evaluation of software models utilized by the Commission, the Commission plans to review the MYTO financial model to ensure its integrity and consistency of the platform with approved tariff principles pursuant to the numerous updates undertaken since inception of the methodology in 2008.

“The holistic review of the MYTO model also includes aligning the basic assumptions and parameters with the underlying principles of the tariff methodology and ascertaining the full workability of the macros and other formulae. This is an important initiative of the Commission as we prepare to commence review of Performance Improvement Plans (PIP) to be submitted by utilities for the tariff period 2019-2023.”

Under the Power Sector Recovery Programme, failure to review tariffs has slowed full implementation of the programme and threatened the capacity of the sector to benefit from loans from international institutions such as the World Bank.

Operators are now calling on the regulator to implement its own rules to make the sector viable.


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