Power: The Issue of Cost Reflective Tariffs

July 13, 2020/Proshare

by CSL Research

According to the Managing Director, Abuja Electricity Distribution Company, Ernest Mupwaya, the power sector loses about N13.9bn revenue monthly as a result of the capping on estimated electricity bills by the Nigerian Electricity Regulatory Commission. This comes after calls by Discos for realistic indices before the implementation of the proposed service reflective tariffs. We believe NGN/USD exchange rate and inflation rate are two key indices that might deter Discos from accepting the proposed service reflective tariffs given the devaluation of NGN in the official market and rising upside risks to inflation. We highlight that the MYTO Review for 2019-2020 was based on an official exchange rate of N310 and inflation rate of 11.3%, which are substantially lower than the current rates of N380 and 12.4% (as at May 2020).

We recall that the Nigerian Electricity Regulatory Commission (NERC) suspended the payment of the new electricity tariffs scheduled to take effect on April 1 for three months because of the impact of the coronavirus pandemic which crippled economic activities in the country. The action of the regulatory body was justified given the headwinds faced by income earners, majority of whom had to grapple with pay cuts, job losses, higher food prices and inability to conduct businesses as usual due to the implementation of social distancing measures. Three months later, the proposed service tariff implementation was halted by members of the National Assembly, who asked that the implementation date be moved to the first quarter of 2021 due to the lingering economic challenges in the country.

Although, the power sector in Nigeria is riddled with several challenges across the different segments of the value chain, the liquidity squeeze in the sector is mainly attributed to the non-cost reflective tariffs charged by the Discos. Accordingly, the need for cost reflective tariffs has been a recurring discourse in repositioning the power sector. The Multi-Year Tariff Order (MYTO) was intended to set electricity tariffs for consumers over a 15-year period, from 2008 to 2023. There were to be minor reviews of the industry’s pricing structure twice a year (announced on 1 December and 1 June) and major reviews every five years. Unfortunately, this has rarely been the case despite multiple devaluations and increased inflationary pressures in the economy.

While we acknowledge that the current macroeconomic landscape may not be best suited for hike in electricity tariffs, we note that the continued adoption of non cost-reflective tariffs will exacerbate the anemic position of Discos, hinder private sector investments and constrain the development of the power sector. With government revenue under significant pressure due to the impact of soft oil prices and reduced economic activities, we think government liquidity injections may prove to be insufficient in sustaining the power sector if the economic crisis becomes prolonged. Based on historical precedence, gradual adjustments to electricity tariffs may be the way to mitigate the impact on households and avert stiff resistance from labour unions.

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