NERC steers power sector to market contracts with tariff review

The Nigerian Electricity Regulatory Commission (NERC) is steering the power sector towards reactivating contracts based on market pricing with projections for tariff review that will run till 2024, taking into account such variables as change in inflation, exchange rate and gas prices.

According to details published on NERC website, obtained on Wednesday, August 21, NERC has undertaken a minor review of the 2015 Multi Year Tariff Order (MYTO) for each electricity distribution company (DisCo) which will run from 2016-2020 but takes effect from July 1, 2019.

NERC’s projection allowed cost-reflective tariff from 2016 to 2019 and found that DisCos still recorded shortfalls despite the adjustments. Abuja DisCo, for example, still recorded a tariff shortfall of N102 billion after cost-reflective tariffs were modelled by NERC. It also recorded cumulative market shortfalls of N176 billion and would have to repay N73 billion.

If NERC applied the minor review on the MYTO, electricity prices would rise on average between 28 and 32 percent across the various customer classes and across the different DisCos. This means that residential customers who currently pay N10,000 will now pay N13,000, while industries that pay N50,000 could begin to pay at least N63,000 a month.

For example, Abuja DisCo residential customers on R2 will see tariff rise from N24.30 to N31.96 per kilowatt hour, commercial customers on C1 will now pay N48.20 as against N37.39, and industrial customers will pay N46.48 while they hitherto paid N36.07.

The projected electricity tariff review will affect customers on every class except the lowest residential users classified as R1 whose tariffs will remain the same.

Analysts say implementing a cost-reflective tariff is a positive development for the sector as it will open it up for new investments.

“This review is timely and has taken care of some of the concerns for stakeholders. But NERC should ensure that the prices are fully cost-reflective in terms of gas pricing, exchange rate and inflation,” said Chuks Nwani, Lagos-based energy lawyer.

To arrive at a cost-reflective tariff projection, NERC said, “This order has taken into consideration the actual changes in relevant macroeconomic variables and available generation capacity in updating the operation of MYTO -2015 Tariff Order for the period January 1, 2016 to December 31, 2018 in line with the provisions of the MYTO methodology.”

NERC further said it took into consideration all the variables that fed into the MYTO. These are inflation, natural gas prices and exchange rate.

The Commission said it used the actual yearly average inflation rate of 15.6 percent, 16.5 percent and 12.1 percent for the years 2016, 2017 and 2018 sourced from the National Bureau of Statistics (NBS).

It said it used the average exchange rates of N255.90/$1, N308.80/$1 and N309.14/$1 for the years 2016, 2017 and 2018. It also included a transaction cost of 1 percent.

On gas prices, NERC said, “The price of natural gas for the power sector has been regulated since the inception of MYTO in 2008.”

The Commission has maintained a gas price of US$2.50/MMBTU and gas transportation cost of $0.80/MMBTU for the review.

“However, other generating companies had contracted different gas prices outside the regulated rates as provided in their respective individual Gas Sales Agreement (GSA),” NERC said.

Ayodele Oni, partner at Bloomfield law firm, said it was a good development for the sector as no one would invest in a business that is selling at a loss.

“However, the government should ensure that DisCos fulfil all their obligations and improve service delivery,” Oni said.

According to the NERC order, DisCos will be availed the opportunity to earn their revenue requirement only upon meeting repayment to Central Bank loans, settlement of market operator invoice and 45 percent settlement of market invoice. DisCos currently settle about 30 percent of market invoices.

 

ISAAC ANYAOGU