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The political and regulatory problems with tariffs in Nigeria

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Over five years since Nigeria privatized its power sector, electricity tariffs are still not cost-reflective. An uncommercial tariff regime, worsened by losses across the value chain, has inhibited improvements in power supply.

Electricity is currently sold at a deficit of nearly 50%. While the true cost of producing and distributing electricity is estimated to be N51 to N68 per kWh, the Distribution Companies (DisCos) are only allowed to sell at a regulated price of N31 to N36 per kWh. For this reason, the financial shortfall in the power sector reached N348.50 billionas at October 2018, according to data from the Nigeria Bulk Electricity Trading Plc (NBET).

Starved of private investment, Nigeria sought to increase liquidity via donor finance, but the power sector has not been able to effectively leverage donor financing (such as the $5.2bn World Bank facility) due to the government’s unwillingness to establish cost-reflective tariffs.
In Nigeria’s privatized electricity sector, it is expected costs of power production and distribution should largely determine tariffs charged to consumers. That way, power companies are able to recover their cost and further invest in the sector.

This has not happened one main reason – electricity tariffs in Nigeria do not reflect market conditions; instead, tariffs are reviewed in a manner that is not consistent with realities of power production and supply in the country. Tariffs have remained the same since February 2016, going against the government’s Multi-Year Tariff Order, that stipulates bi-annual tariff increases.

To keep the sector running, the government expends significant public funds to support power generation and distribution companies. Substantial government “interventions” and a slow transition to a private-sector-driven electricity market has come with two key consequences for Nigerians. On one hand, power supply has not improved and is only likely to worsen as DisCos are cash-strapped. Secondly, the government is expending significantfinancial resources to support a sector that should be funded by consumers. Exemplifying sectoral inefficiencies and under investment, Nigeria dispatches only about 4000 MWon average over the past three years, despite have having an installed capacity of about 13,000 MW, largely due to constraints in gas supply and distributions capacities.

This shows that improvements in generation would not translate to improvements in power delivered without investment in transmission (which is still government-owned) and distribution.
Despite the significant market shortfall, the government has maintained that it would not increase electricity tariffs in the near term. While the economics of electricity generation and supply is usually far removed from consumers, electricity prices are easily monitored by many. Therefore, keeping electricity tariffs low could be a visible way to deliver benefits to a wide range of electorates in exchange for political support, given the 2018-2019 political climate. Such political motivations are aided by the fact that many Nigerians still view electricity as a government service (or public good).


Why inconsistent tariff policies hinder the viability of Nigeria’s power sector

Liquidity crisis and significant government expenditure
Given the current tariff regime, even with zero collection losses, there would still be payment shortfalls across the value chain. For this reason, Nigeria has a power sector that is only viable through substantial financial support from the government, the lender of last resort.

For example, the between 2015 and 2016, the World Bank calculated that Nigeria’s electricity tariff shortfall amounted to N458 billion. Going by the current tariff trajectory, the highly indebted power companies are expected to incur more debts in 2019, reaching a tariff shortfall of N2.4 trillion by July 2019.


Poor service delivery

Investments in Nigeria’s electricity value chain are hindered because the sector’s cash deficits have eliminated incentives for owners of DisCos to invest in improving power supply to consumers. On the demand side, lack of stable power has made customers unwilling to pay, and pushed industries to seek alternative sources of power outside the grid network. These trends further contribute to tariff shortfalls and reduces capital available for further investments.


What can be done to improve the situation?

Implement policies to improve management and regulation.

Establish a clear and predictable tariff policy that protects the interest of customers and investors, outlining a clear trajectory for cost recovery.

Implement communication programs to create awareness that electricity is a commercial service with a price (not a public good).

Improve governance of the power sector by ensuring that rules and policies are effectively enforced
Implement data-driven processes for decision-making across the power value chain by deploying information systems management tools to analyze billing, metering, collection and measure performance of electricity companies.

Conduct periodic energy audits to establish a realistic estimate of technical, commercial and collection losses.

Implement programs to regularize debts owed by customers and integrate management of metering, billing, collection, disconnection-reconnection, among others.

Reduce vulnerability of distribution networks and meters to tampering and illegal connections, and conduct field assessments to identify and fix irregular connections.

Enforce stringent penalties for electricity theft, while making energy theft a recognizable offense.

Conclusion

Nigeria’s potential for growth, prosperity, and development is undermined by lack of access to reliable power. It is estimated that 90% of businesses in Nigeria own a back-up generator. According to the World Bank, nearly seven out of ten businesses identify power as their main business constraint. This shows that the negative effects of a non-performing electricity sector go beyond households; electricity deficiencies have a bearing on commercial sectors, which are critical to transforming Nigeria’s economy.
It is critical for stakeholders to understand that public policies supporting tariffs that are not cost-reflective will not deliver quality power supply to Nigerians. That said, ensuring an incremental tariff policy is only a part of the solution to Nigeria’s electricity challenges – limited gas availability and significant collection losses remain critical bottlenecks.

However, the other challenges do not affect the viability of the sector as a whole, unlike the way non-cost reflective tariffs have impacted viability of the sector. Inconsistent and unpredictable tariff policies, as witnessed in the five years since privatization, would only worsen the existing liquidity crisis, increase pressure on public finance, and prolong the journey to steady power for Nigerians.

(This article is authored by Zira John Quaghe, a researcher at the Natural Resource Governance Institute (NRGI) and Barka Sajou, an energy infrastructure expert at the Nigeria Electricity Supply Industry (NESI))

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