Unlocking the power value chain’s potential

The issues around power generation and supply continue to pose challenges on different fronts in Nigeria. The many economic challenges being faced in Nigeria continue to be attributed to the shortcomings in the power sector – especially the generation and distribution of electricity.

However, there continues to be divided opinion on which aspect of the value chain generation, transmission and distribution should be held culpable for the continued failure of the sector.

In the views of industry experts, electricity which “powers” the value chain can only generate revenue for the entire sector from the consumer end of the chain, where the distribution companies operate.

Analysts observe that even the generating companies rely on feedstock (typically gas) and as such even gas producers are quite dependent on consumer electricity prices. Every part of the value chain must be able to generate sufficient revenue from the consumer price for the sector to be sustainable.

Multi Year Tariff Order (MYTO) sets tariffs for all parts of the power value chain specifically the “Gas-to-Power” value chain, as the majority of the electricity generated in Nigeria is as a result of thermal power plants.

When it was first introduced, MYTO provided the electricity tariffs for a five-year path over a 15 year period. It allowed for bi-annual minor reviews for changes in exchange rates and gas prices (subsequently including change in generation capacity), as well as inflation. It also allowed for major reviews every five years for all other assumptions, which include the cost of capital, CAPEX and OPEX. Since it was introduced, electricity tariffs have been on an upward trajectory, with the exception of the MYTO 2.1 (amended) Order of April 2015, which sought to reduce tariffs by removing the collection loss element.

Ayodele Oni, an energy expert posits that a clear path to recovery in the sector is an increase in tariffs. However, it is questionable, whether consumers should be expected to bear the burden of sudden increases, especially when there has been no improvement in power supply and when increase in tariffs would not guarantee (at least in the immediate) improved power supply.

Should tariffs under MYTO be increased to an economically sustainable level (for the DISCOs), without any improvement in the quality and volume of supply, it is likely that the end result will lead to a greater loss of revenue as more people decide to default on payment of their bills.   

Ultimately, these retail tariffs determine the overall profitability of the power sector. Without consumers paying their bills, the DISCOs are unable to pay NBET. In the absence of further capitalisation of NBET, this will eventually lead to NBET’s inability to pay the generating companies (which means they are unable to pay sums owed to gas suppliers). Essentially, failure of consumers to pay retail tariffs will lead to the entire value chain starving for lack of funds.

Analysts are of the view that the retail tariffs are not entirely cost reflective. As such, it is difficult for the distribution companies to generate the necessary revenue to make their activities profitable as well as making the necessary investment. The base tariff structure is one which seeks to have the sector (particularly DISCOs) run at a loss for a number of years before being ultra-profitable much later in time; a structure referred to as sculpting.


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