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 Why Planned Electricity Tariff Hike Won’t Cure Power Sector Challenges

Why Planned Electricity Tariff Hike Won’t Cure Power Sector Challenges


Considering current realities and many unresolved issues in the Nigerian electricity market, there is need to delay the proposed cost-reflective electricity tariff billed for July 1, writes Peter Uzoho

There has been apprehension lately among electricity consumers over the take-off of the proposed tariff increase, which is billed to commence July 1, according to the Nigerian Electricity Regulatory Commission (NERC). First scheduled to take effect on April 1 following the review of the Multi Year Tariff Order (MYTO) by NERC in line with the power sector privatisation in 2013, the date was shifted to July 1, to enable the power investors, especially the distribution companies (Discos), improve on their performance.

The postponement was also in consideration of the scotching economic effect of COVID-19 on electricity consumers. No doubt, the pandemic has had excruciating effect on the income of households as well as businesses. Even the World Bank last week predicted that this year, the slump in oil prices, coupled with the COVID-19 pandemic, was expected to plunge the Nigerian economy into a severe recession, the worst since the 1980s.

The International Monetary Fund, African Development Bank, some global rating organisations, and the Nigerian government have predicted negative Gross Domestic Product growth for the economy.
This is why as good as the cost-reflective tariff appears, it cannot solve the problems of the power sector all alone at this time. It is just one part of many issues militating against efficiency in the sector, which the Discos, generation companies (Gencos), and other stakeholders have been talking about.

For over six years since the privatisation of the power sector, which paved the way for private entities to take over the distribution and generation arms of the sector, there has been little or no improvement in the sector. Failure to resolve fundamental issues and the inconsistency of the federal government in terms of fulfilling its part of the contract have immensely contributed to the crisis in the sector. As part of solutions to the problems and in consideration of the plight of investors, NERC came up with the cost-reflective tariff.

The new date for the take-off of the cost-reflective tariff was, however, given with certain conditions that should be met by the Discos before its commencement. The federal government, through NERC, had directed the Discos to, within the window provided by the postponement, ensure that they fix their distribution infrastructure, provide electricity meters to customers, and improve power supply. The government said the Discos would be sanctioned if they failed meet the conditions.

But the Discos are also telling the government to look into other fundamental issues consistently raised by the operators in order to solve the problems once and for all. For instance, issues around exchange rate, inflation rate, and lending rates set at the time of the privatisation agreement (which are not in conformity with the present market realities), liquidity crisis arising from mismatched tariff, huge debts by government ministries, departments and agencies (MDAs), Aggregate Commercial and Technical (ATC&C) Losses, among others, have remained a major clog in the wheel of progress of the power sector.

The primary performance measure for Discos is the ATC&C losses, which is higher (48 per cent as at 2019) than the provisions used in calculating retail tariffs and the minimum remittance levels (28 per cent in 2019). A component of the ATC&C losses is the MDAs of government (Federal, State and Local governments), which NERC removed from ATC&C losses in 2016, and non-payment has continued, leading to a total of N98 billion MDAs debts estimate covering 2016 to date.

The federal government, through the Central Bank of Nigeria (CBN), advanced N214 billion to Discos, Gencos, and gas suppliers, which is included in electricity retail tariffs from 2015 to cover tariff shortfalls calculated based on established baseline ATC&C losses, and legacy gas debts of about N14 billion. This is now on Discos balance sheet.

However, since then, the Nigerian Electricity Supply Industry (NESI) has snow-balled into a liquidity crisis that has necessitated a total government intervention of N1.3 trillion to the Gencos that was not allowed go through to retail tariffs process, this still sits on Discos balance sheet as liability yet to be cleared to enable them access finance for investment.

Cause of Liquidity Crisis

Essentially, factors responsible for the liquidity crisis in the NESI, which Discos want resolved, include the mismatch in ATC&C losses, as the one used in determining retail tariffs is much lower than Discos reality of about 48 per cent due largely to wrong application of parameters and indices over the years

There is also the MDA losses removed from ATC&C losses, which were not in line with market process, and this continues with no payments done even for historical debts of N25 billion verified by the Office of the Vice President in 2015. Mismatch in forex used for energy bills (N305/$) versus those charged in retail tariffs (N198/$) and applied in discos operational costs (N360/$) is another factor.

Others include the bills being given to Discos by the Nigeria Bulk Electricity Trader (NBET), including capacity charges that do not generate energy and are not passed to retail tariffs. Fixed charges that would have contributed to the payment of capacity charges have been removed from tariffs since 2015.

Another problem is the delayed minor tariff reviews in line with economic indices, such as forex, inflation, generation, etc. This was not done by NERC for three and a half years (June 2016 – June 2019), though, one was eventually done in June 2019 (covering 2016-2018) and in December 2019.

NERC, in its last two minor reviews, had calculated tariff shortfalls, which created a net negative position for Discos of about N198.2 billion as at December 2019. However, based on Discos’ estimation, the net position should be a positive one estimated at N52 billion. Collection losses have been exacerbated by the COVID-19 pandemic and the order NERC released to cap estimated bills.

Discos collect over 75 per cent of bills issued to metered customers and 25 per cent from unmetered customers. This is an indication that Discos suffer more losses from estimated billing. Therefore, metering is the only means of revenue assurance. With the capping of estimated bills order the financial impact is an average loss of N13.9 billion, which will materially reduce the 25 per cent collection efficiency for unmetered customers.

Additional issues of significance in the power crisis have to do with the operating expense payment, which is far off from Discos’ real monthly OPEX requirements to maintain the network at optimal level and drive the required collection efficiency. The historic level submitted is based on the available collections. Discos have had to support cash payment with vendor-financed arrangements, which they often have to renegotiate to accommodate payments to NESI.

Discos have huge unsettled liabilities to vendors that they keep rolling forward. Discos’ CAPEX expenditure is almost insignificant and they cannot access external funding because of the position of their books. With further devaluations in Naira, Discos’ OPEX is increased compared to their budgets for the period.

Other Prayers

In addition to guaranteeing payment discipline, the Discos are saying that NERC needs to adjust their remittance levels set with MDA debts, including historical MDA debt. They say the revised remittance should be against NBET bills, as the only energy is that which is generated to them.

According to the Discos, the historical MDA debts of N98 billion should be validated and net-off Discos market liabilities with NBET. They want a mechanism to ensure timely payment of bills issued.

The distribution firms have further suggested that the government should take on the forex risk, pointing out that any forex-related cost not allowed to pass through to customers in tariffs should be borne by government.
It is essential for the federal government to address these challenges and also allow the effect of COVID-19 to simmer down before implementing the proposed tariff hike.

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