For the power sector to remain viable and for Nigerians to have power, it is necessary to review electricity tariffs to reflect the cost of production of electricity.
The Nigerian Electricity Supply Industry (NESI) is cash strapped with shortfalls estimated above N1.4trillion. Power generation companies routinely get about 30 percent of their market invoice and the Transmission Company of Nigeria (TCN) gets even less. Power plants are owed billions, DisCos barely collect more than 60 percent of invoices and electricity theft is rampant.
Needless to say, these are the perfect conditions for chaos. A key reason this is so is because the regulator is weak and susceptible to government interference. Hence decisions that should be based on market realities are filtered through the prism of political correctness. One example is the regulator’s decision to compel operators to sell electricity below the cost of production.
According to the Multi Year Tariff Order (MYTO) rules, electricity pricing should have been reviewed at least six times. The MYTO is essentially a 15-year tariff path for the NESI with limited minor reviews each year in the light of changes in a limited number of parameters (such as inflation, interest rates, exchange rates and generation capacity) and major reviews every 5 years, when all of the inputs are reviewed with stakeholders but this has not been done since 2015.
The prevailing electricity tariff today was modelled against variables that have become obsolete. MYTO 2015 for Discos was built on 196/$1 exchange rate, 8.3 percent inflation rate, gas prices of $3 and certain available capacity and guarantees from government. The trouble is that while all these variables have changed, tariff has not. It is in the interest of a government with little to show as achievements keeping electricity prices low to appease disgruntled electorates when facing re-election, but markets do not operate along such parochial considerations.
Worse still, the current electricity pricing does not benefit anyone. Operators cannot be compelled to improve service because they are forced to sell power below the cost of production. Customers rely on inefficient diesel generators and pay five times the cost of grid power. The question is, in whose interest is electricity so miserably priced in Nigeria?
This month, NERC initiated a process that will ostensibly lead to tariff review by demanding DisCos to submit Performance Improvement Plans (PIPs). It will cover the 2020- 2024 tariff period but it will be subject to the contractual provisions of the performance agreements executed between the core investors and the Bureau of Public Enterprises (BPE) in respect of the allowances for capital and operating expenditure in the remaining term of the agreement.
NERC will use the PIPs to define performance standards in terms of metering, customer satisfaction, network expansion, safety and social responsibility. It will also be used to check reduction in aggregate technical/commercial losses and overall improvement in service delivery to customers. The PIPs will form the basis for revenue requirement projections and also serve as the companies’ service charter with the consumers to which they will be held accountable by the Commission, according to the guidelines.
As noble as these plans sound, there are many ways it can go wrong starting with aligning it with contractual provisions of the performance agreements executed between the core investors and the Bureau of Public Enterprises with regards to capital and operating expenditure allowances in the remaining term of the agreement. The Federal Government has not completely fulfilled its obligations under the agreement and the DisCos would resist attempts to compel them to meet with any requirement they consider difficult.
Yet, as far as intentions go, this is better than nothing. We think it would be better for the industry in the long run to follow the guidelines in the Power Sector Recovery Programme on periodic tariff review. Babatunde Fashola, minister of Power, Works and Housing likes to talk about incremental power, it is this principle that is now required to help the power sector – an incremental tariff review that will not hurt consumers so much and allow operators to cover costs.