Lack of cost-reflective tarrif likely to upset power sector funding

… NERC insists there are no imminent plans for tariff increase.

Recent funding interventions, including the N701billion guarantee to gas suppliers and moves to pay N59.3bn of verified debts owed by government ministries and departments to electricity distribution companies, may not meet the objectives in the absence of a cost reflective tariff, industry operators say.
Liquidity gaps in the sector were created because operators could not recover costs as economic realities rendered obsolete the assumptions on which tariffs were based.
Since 2013, gas prices have increased from $2.44/mmbtu to over $3/mmbtu, inflation rates have spiked to 18 per cent from 8.8 per cent and foreign exchange rate climbed to $1/450 from $1/198 yet the Nigerian Electricity Regulatory Commission (NERC) says a tariff increase is not imminent.

“While an increase in electricity supply is everyone’s desired objective, such an increase, without the requisite full recovery of costs via the appropriate pricing of power, means a resultant worsening of the market revenue gap,” says Sunday Oduntan, executive secretary of the Association of Nigerian Electricity Distributors (ANED) who speaks for the 11 DisCos.
Last year, NERC sculpted tariffs such that DisCos are required to under-recover now, by charging less than cost reflective tariff which would be recovered in the future.
Operators say the model, while bringing temporary relief on the electricity retail market, created a problem in managing shortfalls from the sculpted tariff from 2016.
Yusuf Abubakar, chairman of Kaduna Disco, highlights a peculiar challenge. “The sculpted average tariff for Kaduna Electric in 2016 was N30/KWH while the actual cost reflective tariff was N48/KWH. This was approved based on economic indicators (inflation, exchange rate, gas prices) prevalent in 2015 and the resulting shortfall from the sculpted tariff in 2016 amounts to more than N25 billion.
“The MYTO model also requires bi-annual review of these economic variables which has not been done since January 2016. By the time the exchange rate variable is adjusted in the model, the average cost reflective tariff for Kaduna Electric will be around N74/KWH.”
The same scenario is true for the other DisCos but it will be difficult to convince consumers who took the DisCos to court over a tariff hike in February 2016 to pay more for power, when the reins are removed on actual prices.
“Charging a cost reflective tariff of more than N70/KWH at this period of economic recession is not only irrational, but detrimental to the growth of the economy,” says Abubakar.
Chuks Nwani, energy lawyer and vice president of PowerHouse International, an energy consultancy, believes a fundamental restructuring is required beyond intervention funding.
“If you solve this present liquidity problem, what happens going forward? Besides, these monies are not gifts, they are loans written in their books, the bank could look at their debt portfolios and say your receivables cannot support this borrowing.”
NERC maintains certain conditions have to be in place before a review can happen.
“NERC’s position remains that in view of the economic recession in Nigeria and poor remittance level by electricity distribution companies (DISCO’s) multiple restraining orders from the courts as a result of litigations by some DISCOS that constrains the Commission, and the Nigerian Bulk Electricity Trading Company from enforcing the Market Rules on Discos and other market operators amongst others, increase in tariff is not imminent at this time,” said a recent statement signed Usman Abba Arabi, the organisation’s head of Public Affairs Department.
Last year, data from the Bureau of Public Enterprises (BPE) indicated that the DisCos have metered only 10 percent of their customers, a condition the Ministry of Power, Works and Housing says is required to make a case for tariff review.
Oduntan further said that funding the transmission network is imperative for the Federal Government’s proposed intervention to work.
“The Transmission Company of Nigeria (TCN) needs to have the required capacity to wheel the additional power being generated for such recovery to occur.
“Increased generation without commensurate wheeling capacity arising from a stable and robust transmission grid, will result in stranded capacity and significant lost revenues,” Odutan said.
Meanwhile, the TCN in a release published March 17 and signed by Seun Olagunju, director of Public Affairs explained that a recent directive to GenCos to reduce generation was due to DisCos rejection of supplied power.
“Due to inexplicable reasons, some DISCOs fail to take more load as generation increases. This has left the System Operator with no other option than to ask the GENCOs to reduce generation, to ensure grid stability. The directive to GENCOs to reduce generation is imperative to maintain the integrity of the grid, as frequency higher than 50HZ could result in system disturbance,” Olagunju said.