Cost-reflective tariff will unlock potentials in Nigerian power sector – Stakeholders

Oredola Adeola

Cost-reflective and service-reflective tariffs, have been identified as critical reforms needed to guarantee sustainable electricity in Nigeria. The tariff review which is expected to commence by December 2021 is seen as one of the measures that would attract investment flows into the power sector.

This was one of the issues discussed by stakeholders who participated at the 12th edition of PwC Nigeria’s Annual Power and Utilities Roundtable, with focus on the theme: “Sustainable power supply in Nigeria – What next? Gaining perspectives from Ghana and South Africa”

According to the discussants at the panel session of the roundtable, the Nigerian power sector value chain has been held back by a lack of investments since, the privatization of the power sector in 2013, due to absence of cost-reflective tariffs which could have helped to address the financing constraint of infrastructure facing the distribution and transmission sub-sector.

The stakeholders expressed optimism in the Federal Government’s plan to carry out Extraordinary Review of Transmission Company of Nigeria’s Loss Factor (TLF) in the Multi-Year Tariff Order (MYTO), and the processes for the review of MYTO by December, 2021.

Ahmad Zakari, Special Adviser to the Nigerian President Muhammadu Buhari on Infrastructure, revealed that Nigeria had got to a point when it needed to optimise the potentials in the power sector through an effective and transparent cost-reflective regime.

He said, “With cost-reflective tariff everything will fall in place in the power sector. From the Government’s perspective as we migrated towards this, we have understanding that more needs to be done. For instance, our cost reflective tariff (CRT) versus allowable tariff(AT) gap reached a peak of N28 gap in 2019, at that rate, between that period and 2021 alone, we would have recorded N1 trillion in tariff shortfall or subsidy.

“As at 2015, at the take-off of the power sector privatization, the gap between CRT and AT was about N15. That figure has reduced to N6.

“The gap has closed from N28, N15 and now N6. Essentially, after the last MYTO, cost reflective tariff became N55 and defective tariff that the Disco are allowed to charged was N49.

“By January next year, after the review of the MYTO, that tariff gap will be eliminated completely. That elimination of the tariff gap will ensure that we optimise and get all of our installed 12Giggawatt of electricity generation capacity delivered.

“We need a holistic review, the first thing is regulatory and policy alignment. Through this measure by the government, we can eliminate the gap in service based tariff.

“At this time, DisCos with the revised economic models, will be faced with incentives and penalties that would allow them to be able to achieve optimisation. The second phase will now be infrastructure alignment. If the economics of tariff-base works, then infrastructure will be improved.

“In our latest assessment, generation companies have 18,000 MW (Ongrid, off-grid and embedded) captive electricity within the system.

“On-grid is 13,000MW, embedded with NLNG, Dangote other industrial based-load industrial users was 5000MW, while 4000MW installed turbines are not active utilised. This gives a total of 22GW of industrial level generation capacity.

“As the economic of cost-reflective tarriff is making sense, we will realise that the DisCos would have sufficiently incentivised to increase power distribution. We are confident that the mass metering scheme will also help them improve their service deliveries,” the special Adviser to the President concluded.

Zakari, however noted that with a collective effort made through aligment of the monetary , fiscal, policy and regulation frameworks, the power sector will record massive improvement.

According to him, what this government has done has been quite significant, saying that they were confident that as infrastructure continued to improve and incentives and penalties offered to DisCos, Nigeria will get to the promise land.

Ebipere Clark, Special Assistant (Energy) to Godwin Emefiele, Governor of Central Bank, he disclosed that until Nigeria addresses the tarriff issues in the power sector , no serious investor will finance any infrastructure in the power sector.

He said, “There is a major disconnect between collections and distribution, leading to serious shortfalls. If you want investors to invest in the power sector, they would need some level of confidence that they would get their money back.

“Right now, we don’t have a system that gives that guarantee to investors. Government no doubt has limited financial capacity to address infrastructure issues in the power sector. It is fiscally stranded to address major electricity infrastructure.

“So , there is a need to create environment for private players to participate actively in driving the sector to a sustainable level. Investors need confidence on capital and return on investment.

“Unfortunately, the market situation is terrible. We essentially have about 10 to 12 Gigga Watt of electricity at the generation level, I mean turbine level on a monthly basis, while 6GW of electricity is being transmitted monthly by TCN, and 4GW is distributed by the DisCos, while only 1.6GW is being paid for by the end users.
Clark however noted that the Nigerian power sector was in a dire situation, adding that no serious investor would allow their investment to continue to go down the drain without ability to recoup capital.

According to him, there is a need to demonstrate that the actual amount of what is being distributed is paid for by end users, before investors can be attracted to increase generation capacity from 12GW to about 20GW.

Mr. Joseph Esenwa,Chief Finance Officer, Eko Electricity Distribution Company, disclosed that electricity consumers in Nigeria have to change their orientation about the value attached to use and payment of electricity in Nigeria.

In his words, “Customers need to understand that they have migrated from a public service utility company to a privatised system, where every quatum of electricity used is paid for. We need them to change their mentality of free usage of electricity to a cost reflective system. Orientation is key to the sustainability of the power sector.

“Government has also tried in the area of intervening in the metering scheme through National Mass Metering Programme. This is fundamental to the survival of the power sector but this laudable programme will fail if some Nigerians continue to bypass the installed meters in the homes.

“Meter bypass will truncate the initiative. We need regulation in this area to be able to tackle this scourge.
“Government needs to help institute the legal framework that will help us sue anyone caught bypassing the meters. Defaulters are not receiving commensurate punishment even when caught. We need a mobile or dedicated court where cases of energy theft are presented, judgement issued and penalties given without delay. This is how we can address the major issues around metering,” the EKO DisCo CFO said.