The Nigerian Electricity Regulatory Commission (NERC) has approved a new electricity tariff which comes into effect on June 1.
The new tariff has reduced the fixed charge component of an earlier tariff that would also have taken effect on the same date.
The Multi Year Tariff Order (MYTO) provides for bi-annual reviews on every June 1 and December to ensure that some critical and financial variables underlying electricity tariff in Nigeria are both realistic and current.
The variables in focus are rate of inflation, the exchange rate, gas price, and available generation capacity. To ensure that the Nigerian electricity market remains viable and stable to attract investment to improve capacity and reliability, electricity prices have been indexed to changes in these variables.
The current tariff plan also provides that where the review shows that the aggregate of these variables have changed by plus or minus 5 percent of the MYTO figures, the changes are significant and would result in a review of the tariff. The present review shows significant changes.
For instance, while MYTO had projected an inflation rate of 13 percent, the inflation as at March 30, 2014, the cut-off date for the reviews is 7.8 percent which is 5.2 percent less than projected.
Similarly, MYTO also projected an exchange rate of $1 to N178, but the March 30 data from the Central Bank of Nigeria (CBN) show a rate of N157.30 to $1, which is 11.6 percent less than projected.
The result of the review indicates a reduction of the wholesale tariff that would be paid to Gencos as from June 1, 2014. But the wholesale tariff paid to Gencos is only one of the three components that make up the total tariff paid by consumers. The other two parts are transmission and distribution components.
One of the major indices for the minor review is “available generation capacity.” The gross available capacity from the grid as at 31st March, 2014 review date is 4,306MW, well below the 9,061MW that NERC had projected on the basis of all information available to it when MYTO2 was set-up in June 2012, and this reflects 52 percent shortfall in projected capacity.”
The direct consequence or the Nigerian Electricity Supply Industry (NESI) is that the significant fixed costs incurred by all three sectors of NESI have to be spread over a much lower quantity of energy projected to be sold to consumers, for which reason NERC affirmed that the end-user or customer tariff will have to be increased, citing section 5.76(2)(a) of the Electric Power Sector Reform (EPSR) Act of 2005, which mandates the commission to set a tariff methodology that allows “a licence that generates efficiently to recover the full costs of its business activities, including a reasonable return on the capital invested in the business.”
In his remarks on the new tariff methodology, Sam Amadi, chairman/CEO of NERC, referred to MYTO as “a critical assurance mechanism of the financial viability and regulatory certainty of the new Nigerian electricity market.”
