Nigeria’s electricity supply industry has consistently failed to perform optimally due to electricity pricing system that makes cost recovery difficult and return on investments uncertain.
The cost of electricity is a major component in the production of goods and services. The Central of Bank of Nigeria (CBN) estimates that businesses spend $14 billion yearly on diesel generators to power their operations because electricity from the national grid is unreliable.
This is believed to be one major cause of the near insolvent state of the power sector, because the prevailing tariffs mean electricity distribution companies (Discos) are unable charge and collect tariffs that cover the cost of distributing power and also assures some fair margin of profit.
The Federal Government of Nigeria pays the difference in the form of electricity consumption subsidy. This amounted to N540 billion last year alone and over N1.70 trillion in the past five years.
The other kind of cost which is often ignored is the alternative use to which the amount the Federal Government pays for subsidy could be put to. This comprises the opportunity cost for close to 100 million Nigerians living on less $2 a day to improve their standard of living through access to electricity for learning at night and standard, functional primary health care centres.
“The Multi-Year Tariff Order (MYTO) was not meant to work because of government’s constant interventions, ruining the sector,” Ogho Okiti, managing director, BusinessDay Media Limited said at Nextier Insights inaugural edition of the “One-on-One” discourse series on Thursday. “Lack of a tariff template that ensures both cost recovery and returns on investments means that investors would stay away from the sector for lack of clarity and predictability.”
Okiti argued that the Discos would have little incentive to bother collecting tariffs when government hands out subsidies. This also means a lack of fresh investments, which implies that the unit costs of producing electricity stays high and excludes millions of Nigeria’s port from accessing electric power.
“If there must be subsidy then it should be targeted at the poor. But the identity problem must first be resolved. And subsidies are best designed for production not consumption,” Okiti said.
The immediate effect of tariff increase would affect consumers, to the extent that it leads to an increase in the prices of goods and services sold. For companies, this would raise the cost of production.
However, the long-term benefits would include investment inflows that could bring in new technology, improve operational efficiency and bring down the cost per unit of producing electricity.
With the service reflective tariffs, Nigeria has for the first time linked the cost of electricity to the quality of service delivered by the Discos.
Bands A to E of the service reflective tariff regime foresees an increase of tariff for bands A-C who receive 20 hours, 16 hours and 12 hours of electricity daily. The other two bands that receive less than 12 hours of light a day would not be affected by tariff increases.
“First pay for what you consume and we will make the investments to reduce unit cost. There have been no tangible investments for 20 years since the days the National Electric Power Authority. New investments will increase access for the millions of poor Nigerians and improve their future prospects,” he added.
Nevertheless, since 2015 Nigeria’s macroeconomic numbers have been unimpressive. From the recession in 2016 that was triggered by the decline in oil prices to an average gross domestic product (GDP) of less than 2.50 percent, below the population growth rate of 2.6 percent, it means that the average Nigerian has become poorer in 2019 than they were in 2017.
A Nigerian slips into extreme poverty every six minutes according to a June 2018 Brookings Institution’s report. Already Nigeria’s second-quarter 2020 GDP growth has turned out negative.
