President Bola Tinubu has approved removal of electricity subsidy in the country.
This development, coming barely three weeks after he removed fuel subsidy on assumption of office as president, aims to eliminate electricity subsidy and bring about a new tariff regime.
The new tariff is to take effect from July 1, this year.
This aligns with the on-going reforms implemented by the government in the energy sector.
According to the Guardian, there will be more than 40 percent increase in electricity tariffs in the coming days, which could potentially lead to the discontinuation of all energy subsidies in the country.
Due to a revenue shortfall, the electricity sector still receives a monthly subsidy of approximately N50 billion.
The tariff hike scheduled for July 1 will serve as another test for the market reform efforts of President Bola Ahmed Tinubu’s administration.
The administration has already removed subsidies on Premium Motor Spirit (PMS) and allowed the naira to float freely.
These decisions have complicated the price-setting process of the Nigerian Electricity Regulatory Commission (NERC) for the 2022 Multi-Year Tariff Order (MYTO).
Despite power sector players failing to meet the target of supplying at least 5,000 megawatts per year after signing contracts with NERC, the current Service-Based Tariff (SBT) of NERC was based on an exchange rate of N441/$ and an inflation rate of 16.97 percent.
In 2015, according to NERC’s orders, the average tariff for distribution companies (DisCos) and different classes of end-users was N25 per kilowatt. This tariff increased to N60 per kilowatt in the MYTO for 2020 and further to N64 per kilowatt in the MYTO for 2022.
The foreign exchange rate used to determine the 2015 tariff was N198.97/$, which increased to N383.80/$ in 2020, and further to N441.78/$ in 2022. The inflation rate used in the 2015 MYTO was 8.3 percent, which rose to 12 percent in 2020 and 16.97 percent in 2022.
Currently, the inflation rate stands at 22.41 per cent, and experts project it may reach 30 percent by the end of June due to the floating of the naira and the removal of subsidies on PMS.
In addition to the metering gap of over seven million, other factors such as gas prices, losses, and actual generation capacity contribute to determining the tariff.
NERC’s projected tariff for July 2023 is expected to eliminate subsidies and increase the previously frozen tariff for 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, with an overall average increase across all bands to N67/kilowatt.
However, due to the floating of the naira and the spike in inflation, the new average tariff for the sector is projected to be around N88/kilowatt in order to recover costs.
Most stakeholders, speaking to The Guardian, believe that while the tariff increase is unavoidable due to changes in parameters, households and small businesses described as vital for the economy, may face significant challenges as energy costs alone increases by over 70 percent. This comes at a time when purchasing power is already hampered by unemployment and poverty.
As of the time of reporting, the available electricity on the grid was 3,057.7MW from 17 power plants.
The average load intake of all distribution companies (DisCos) over the past four months has been around 3,000MW, as efforts continue to ensure that DisCos meet 100 percent of their remittance orders.
With affordability becoming a major concern due to the unreliable grid, which results in financial losses, stakeholders express concerns that the Nigerian Electricity Supply Market may face even greater challenges.
“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 insisted that as long as there remained many unmetered consumers and many others not connected to the grid at all, the few consumers on the grid would continue to be subjected to unjust tariffs, which are not reflective of the quality of service delivered.
Ameh hoped that the signing into law of the new Electricity Act would mark “the beginning of light at the end of the long tunnel of inefficient and epileptic power supply in Nigeria.”
President of Nigeria Consumer Protection Network, Kunle Olubiyo stated that while the last major review of electricity tariff was benchmarked at $1/N400, the floating of Naira and harmonisation of the exchange rate put the exchange rate at about N750/$.
“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 sides 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.
He asked the government to look into gas pricing and align it with domestic gas obligations.
“Gas to power generation plants/ thermal plants should be allowed to access gas which should be traded in local currency,” Olubiyo said.
Electricity Market Analyst, Lanre Elatuyi said the new tariff rate would have an impact on the tariff, stressing that the “naira devaluation is a big challenge to companies with dollar loans to pay,” a development, which he said, would affect the power generators who have dollar loans repayment obligations.
“They will need more naira today to buy a dollar. They need to manage their exposure to foreign exchange risk. Even operators of hydro plants pay their concession fees in dollars. So, wholesale electricity price will be adjusted upward and this will get to the end users’ tariffs too,” Elatuyi said.
Executive Director at PowerUp Initiatives For Electricity Rights (PowerUp Nigeria) Adetayo Adegbemle said while increasing tariff appears normal, due to the prevailing situation, there is a need to review the whole process and encourage basing the electricity tariff against the naira going forward.
“We have seen changes in the review yardstick before, and this could be an opportunity to review our tariff process,” he stated.
Former President of the Chartered Institute of Bankers of Nigeria (CIBN) and professor of Economics at Babcock University, Segun Ajibola, said there is still a disconnect between the cost of electricity and the value exchange.
“Nigerians are still struggling to keep pace with the cost of energy for business and household use. If the electricity tariff goes up as envisaged, the question remains if there will be value for the quantum of electricity so paid for.
“The truth remains that if electricity supply is constant, of the right quantity and quality, the envisaged upward review in the tariff will be gladly absorbed by the populace,” he said.
Ajibola disclosed that the positive multiplier effects of a regular power supply in a country like Nigeria would more than compensate for the anticipated increase in electricity tariff when the increase is compared with the cost of alternative sources of energy to SMES, other businesses and households.
He noted that in the long run, the costs of some of the public infrastructure to the populace are expected to, in the short run, rise to the peak, then flatten and decline subsequently.
“I believe the short-run pains of the higher cost of hitherto subsidized public infrastructure will turn to long-run joy for the generality of Nigerians with improved quality of management and accountability in our government-owned suppliers of those services.
“The move to open up the production and supply of those items and services such as fuel, electricity and transportation is designed, I believe, to promote economic efficiency and accountability in making the products and services available for the generality of Nigerians.
And if the current efforts at driving such public sector accountability are sustained, which I believe the new administration has the wherewithal to do, then Nigeria is on the march towards greater greatness,” Ajibola said
