• Thursday, December 07, 2023
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Explainer: Electricity tariff will rise from August 1, but shouldn’t NERC be transparent about this?


Nigerians are expecting the regulator of the electricity sector, NERC to sanction the planned jump in power tariff from Tuesday August 1 as distribution companies seek to align their charges for power with inflation and other elements including the recent adjustment in the foreign exchange rate. Some analysts have suggested that the tariff could rise by as much as 40% next month.

Each Disco calculates its tariff based on a certain set of assumptions about various factors including the maximum aggregate losses it will incur, macroeconomic factors including Nigerian and US inflation (considering that its key input, energy, is fully dollarized), USD-Naira FX rate.

In addition to these are Nigerian interest rates, distribution costs transmission costs, generation costs, all spread over a certain amount of electrical energy expected to be received during the tariff period measured in megawatt-hours per hour or in megawatt- hours for the entire period.

Each of these cost buckets is further broken down into various fixed and variable costs that are also meant to be transparent to NERC. Including a return on investment based on a weighted average cost of capital, the result is a cost-reflective tariff that the Disco expects to collect.

After being collected, on each settlement day in each month, the Disco makes a remittance to its sellers of a specific sum that covers all costs included in the tariff except its own (Disco’s) share of the tariff that is retained and goes towards meeting all costs and making distributions to capital providers.

Two things are apparent from this narrative. First, is the importance of Discos and full revenue collection to the viability of the electricity supply ecosystem; and, second, the importance of efficiency in managing each cost bucket and the collection of revenues.

Ensuring the first is wholly and exclusively the Discos responsibility. Ensuring the second is wholly and exclusively NERC’s responsibility as the entity that simulates the competitive pressure that compels each company in the regulated electricity value chain – Gencos, Discos and TCN – to operate optimally and efficiently.

Nigerians would appreciate, therefore, that the causes of the grid-connected electricity market’s gross infirmity and the damage this has inflicted on Nigeria are grounded in NERC’s failure to compel efficient behaviour by licensees in the electricity value chain, the Discos’ failure to be far more efficient in collecting revenues and, most egregious of all, the continued payment of consumption subsidies by the FGN to the Discos, the Gencos and TCN.

Why? Because as long as subsidies continue to flow into the sector, no licensee has an incentive to be more efficient and, bizarrely, none has an incentive to grow its regulatory asset base. A vicious circle if ever there was one.

Disco owners and managers have learnt to game the now 16-year old MYTO (multi-year tariff order) electricity tariff methodology established by NERC and play on the inordinate and completely illogical fear of tariff increases harboured by that politicians and regulators have for tariff increases.

Various interest groups – organised labour, employer’s groups, industrial users, CSOs and even the media – have all learnt the game too and regularly stoke citizens’ anger over electricity tariffs that are “too high”, deliberately or unwittingly ignoring the reality that electricity like any other consumer good is a manufactured product. Alongside this, we never forget that Nigerians pay much higher costs for electricity supply from backup generators than from the national grid.

It therefore stands to reason that policy makers and regulators need to focus on how to make the cost of electricity supply not only more efficient but also more abundant and more economical, it being obvious that self-generation is most unlikely to be more economical than grid-connected energy.

It is no exaggeration to estimate that during the past 35 years, particularly the last 23, over $15bn has been spent on these various programmes. In return for this spending, service quality is dubious, well-founded stories of corruption in administering these subsidy schemes by owners and managers of Discos and their public sector counterparts alike have made the rounds of the industry, customer dissatisfaction has never been higher and above all capacity delivered to the national grid has stagnated at a maximum daily average of approximately 4Gigawatts or 4,000Megawatts (4GW or 4,000MW) daily since 2015 and customer numbers and number of metered customers (which, unfortunately, are not the same thing with the latter heavily lagging the former) have crept up at a pace that is very significantly less than the rate of population growth.

During the past 10 years since privatisation on 1st November 2013, the Federal Government through the CBN and the Federal Ministry of Finance, has provided no less than $6bn in various subsidies to the 11 Discos, mostly labelled as loans that have not been repaid till date and should be presumed unrepayable. During the period, none of the 11 Discos has met a single key performance indicator, whether in metering, loss reduction, increased energy volumes, increased customer numbers, fault repair, reduced faults or financial performance ratios.

Now, as with all sugar daddy relationships, the money has run out, the bills are now due for payment and Nigerians have created the classic Catch-22 by angrily demanding that the federal government dare not end the subsidies or increase electricity tariffs.

The politicisation of tariffs by politicians of all parties is compounded by the constant gaming of the tariff setting mechanism since privatisation by both the Discos and NERC and by their joint failure to be transparent about the actual costs incurred by each component of the tariff and efficiencies of these costs. Section 76(2) of the now repealed Electric Power Sector Reform Act, 2005 mandates that NERC shall establish a tariff methodology for electricity activity (generation, transmission, distribution and trading) that “allows a licensee that operates efficiently to recover the full costs of its business activities, including a reasonable return on capital invested in the business…”

What is inexplicable, indeed unjustifiable, is NERC allowing Discos to include a 40% ATCC (Aggregate Technical Commercial & Collection losses) in the tariff. This means that the Discos are allowed to assume that 40% of the energy sent to them via the grid by Gencos will be lost to engineering loss (energy lost naturally due to travel over long distances), commercial loss (mainly theft by illegal or unmetered connections) and collection loss (inability to collect revenue from connected customers for some good reason).

After almost a decade of supposed investment into the reduction of these losses, particularly at distribution level with regard to commercial (theft) and collection (metering) losses, via the application of funds from the CBN and the World Bank, and in spite of core investors in the Discos committing to reducing these losses significantly within 5 years of taking over, it is shocking to find these losses have not reduced at all and NERC is proposing to The Presidency to allow Discos to add these losses to the tariff without first asking the Discos and TCN to account for the billions of Dollars supposedly invested into their networks since so-called core investors took over the Discos in November 2013.

Read also: NERC seeks public opinion on electricity tariff increases

So, what is to be done? While we acknowledge that customers must pay a tariff that covers the cost of doing business, we must also recognise that it is long past time for NERC to enforce the letter of the law and firmly establish the practice of interrogating EVERY cost item in the tariff build up to ensure that every cost incurred by the Discos is the most efficient possible. This has not been the case up to now.

Similarly, the time has come for NERC to start pushing the thermal Gencos to be more efficient in the use of natural gas fuel. Gencos running open (or simple) cycle (OCGT), rather than combined cycle, gas turbines, should be given notice that no OCGT machine will be permitted to connect with the national grid after a certain transition period.

Furthermore, the current system whereby NERC initiates a discussion of tariffs with Discos by undertaking a tariff review should change because it promotes the wrong impression that tariffs are determined by NERC. The truth is that tariffs are proposed and justified by the Discos for approval by NERC. The difference is not merely semantic.