Nigerians should prepare for challenging times ahead as the cost of electricity is set to increase by more than 40 percent in the coming days.
This development may lead to the end of all forms of energy subsidies in the country. Currently, there is a monthly subsidy of about N50 billion in the electricity sector due to revenue shortfalls. The tariff hike, scheduled to take effect on July 1, will be a significant test for the Bola Ahmed Tinubu administration’s market reform efforts.
The government has already eliminated subsidies on Premium Motor Spirit (PMS) and floated the naira, which has complicated the price-setting process of the Nigerian Electricity Regulatory Commission (NERC) 2022 Multi-Year Tariff Order (MYTO).
Despite signing contracts with NERC, the power sector players have been unable to meet the target of supplying at least 5,000 megawatts annually. NERC’s current Service Based Tariff (SBT) was based on an exchange rate of N441/$ and an inflation rate of 16.97 percent.
According to NERC’s orders, the average tariff for distribution companies (DisCos) and end-users in 2015 was N25 per kilowatt. This average tariff increased to N60 per kilowatt in the 2020 MYTO and further to N64 per kilowatt in the 2022 MYTO across different customer classes.
The foreign exchange rates used for determining the tariffs were N198.97/$ in 2015, N383.80/$ in 2020, and N441.78/$ in 2022. The inflation rates used were 8.3 percent in 2015, 12 percent in 2020, and 16.97 percent in 2022. Currently, the inflation rate is 22.41 percent, and experts project it to reach 30 percent by the end of June due to the floating of the naira and the removal of PMS subsidies.
The tariff calculation also takes into account factors such as the metering gap, gas prices, losses, and actual generation capacity.
The projected tariff for July 2023 aims to remove subsidies and increase the previously frozen tariff bands D and E. This would raise the bands from N54.59/kilowatt to N62.16 for band D and from N48.37/kilowatt to N61.16 on average. The average increase across the bands would move to N67/kilowatt. However, due to the floating of the naira and the spike in inflation, experts predict that the new average tariff for the sector to recover its costs would be around N88/kilowatt.
Most stakeholders believe that while the tariff increase is inevitable due to changes in the parameters, households and small businesses, which are vital for powering the economy, may face serious challenges as energy costs alone rise by over 70 percent. This situation is exacerbated by the existing issues of unemployment and poverty, which limit purchasing power.
Currently, the available electricity on the grid stands at 3,057.7MW from 17 power plants. The average load intake of all the DisCos in the last four months has been around 3,000MW. This persistent shortfall is putting pressure on the DisCos to meet 100 percent of their remittance orders.
As the Nigerian Electricity Supply Market continues to grapple with an unreliable grid and financial losses, the issue of affordability has become a significant concern.
Stakeholders are now expressing apprehension about the future outlook, as consumers who have lost faith in the system are increasingly turning to alternative energy sources. This growing apathy among consumers poses a formidable challenge for the management of the Nigerian Electricity Supply Market.
According to Professor Wunmi Iledare, an energy expert, the recent restructuring of the forex market has raised concerns due to its perceived devaluation of the naira. He expressed discomfort in solely attributing this devaluation to the removal of subsidies and the need to pay the appropriate tariffs, emphasizing the necessity of decoupling Nigeria’s economy from forex instability.
Professor Iledare emphasized the importance of public support for the government’s efforts to prevent the dollarization of the economy, even if it means accepting higher electricity tariffs and petroleum product prices that may not be entirely comfortable but align with market dynamics.
However, he raised doubts about the current energy pricing in the country. He specifically pointed out that the pricing of Premium Motor Spirit (PMS), which remained unchanged following the announcement by the Nigerian National Petroleum Corporation (NNPC), is anticompetitive based on the dominant firm market structure.
“Price hike cannot just depend on forex in the electricity market. Market fundamentals are key to rate determination in a decreasing cost industry producing essential commodities, like power,” Iledare noted.
Energy lawyer, Madaki Ameh, said the never-ending upward reviews of power tariffs have become some sort of blackmail on electricity consumers and should be addressed through the Consumer Protection Council or an organized body of electricity consumers.
“Indexing the cost of electricity on the dollar is a huge mistake because most of the inputs for electricity supply are local. The DisCos are also holding Nigerians to ransom by failing to increase the supply base, thereby spreading the tariffs across a broader spectrum of consumers to reduce the unit cost of electricity,” Ameh said.
He strongly asserted that as long as there are numerous consumers without electricity meters and many others who are not connected to the power grid at all, the small number of consumers who are connected would continue to face unjust tariffs that do not reflect the quality of service they receive.
Ameh expressed his hope that the enactment of the new Electricity Act into law would signify “the beginning of a ray of hope amidst the prolonged period of inefficient and inconsistent power supply in Nigeria.”
Kunle Olubiyo, the President of Nigeria Consumer Protection Network, pointed out that during the last major review of electricity tariffs, the exchange rate was set at $1/N400. However, due to the fluctuation of the Naira and the harmonization of the exchange rate, the current exchange rate stands at approximately N750/$.
“It will affect the tariff template and result in an upward review of electricity tariff.
“As important as this may be, two things are quite imperative to help in achieving a win-win for the demand and supply side of the coin.
Moving forward, governments through relevant regulatory institutions should liberalize end users’ customers ‘ access to effective metering and mass metering to help in drastically closing the ever-increasing huge metering gaps,” Olubiyo said.
Affordability is a major concern as the grid remains unreliable, leading to financial losses. Stakeholders fear that the Nigerian Electricity Supply Market may face even more challenges as consumers lose hope in the system and turn to alternative energy sources.
Energy experts and analysts have raised various points regarding the tariff increase. Some argue that the restructuring of the forex market, although necessary, creates concerns about devaluing the naira. Others emphasize the need to consider market fundamentals in determining price hikes, including the decreasing cost industry producing essential commodities like power.
Lawyers and consumer advocates call for addressing the upward reviews of power tariffs, suggesting involvement of the Consumer Protection Council or an organized body of electricity consumers. They argue that as long as there are unmetered consumers and insufficient grid connections, the few consumers on the grid will continue to bear unjust tariffs that do not reflect the quality of service provided.
Suggestions are made to prioritize effective metering and close the metering gaps, as well as align gas pricing with domestic obligations and trade gas in local currency.
Experts point out that the new tariff rate will have an impact on wholesale electricity prices, affecting both power generators and end-user tariffs. They also highlight the need to review the tariff process and consider basing it on the naira.
Despite concerns about the anticipated increase in electricity tariffs, some economists believe that if the electricity supply is consistent, of the right quantity and quality, the positive multiplier effects of regular power supply will compensate for the higher costs. They emphasize the importance of improved management and accountability in the government-owned suppliers of public infrastructures.
Overall, while the upcoming electricity tariff increase poses challenges for Nigerian households, businesses, and the economy, there is hope that proper reforms, including enhanced accountability and improved service quality, will lead to long-term benefits for the country.