May 6, 2022/CSL Research
The Nigerian Electricity Regulatory Commission (NERC) on Thursday gave some Electricity Distribution Companies (Discos) approval to increase their tariffs. The discos include; Port Harcourt Electricity Distribution Company (PHEDC); Jos Electricity Distribution Company (JEDC); Kano Electricity Distribution Company (KEDC); Kaduna Electricity Distribution Company (KEDC); Ikeja Electricity Distribution Company (IKEDC), and the Ibadan Electricity Distribution Company (IBEDC). The regulator stated the tariff hike was based on the extraordinary review of the Multi-Year Tariff Order which took effect from January 1, 2022. NERC based the increase on the Performance Improvement Plans of the DisCos and indices such as gas price, inflation, exchange rate, US inflation rate and available generation capacity.
Pricing remains one of the biggest challenges facing the power sector. In 2014, the generation and distribution segments of the power sector value chain were privatised to attract new investments and introduce private sector efficiency in running the segments. However, 7 years later, it is widely accepted that the privatisation process has not yielded desired results. The sector has been plagued by several challenges including; lack of costreflective tariffs, poor metering coverage, energy theft, decrepit infrastructure, and regulatory stranglehold. However, of all these challenges, the lack of appropriate pricing for power remains the biggest challenge in our view
The most potent factor driving the liquidity squeeze in the sector stems from the non-cost reflective tariffs charged by the Discos. This has remained a major clog in the wheel for the Discos, making most of them technically insolvent. The cash flow generated from end consumers (in a case where they get paid for all they distribute) significantly falls short of the breakeven point needed to keep operations running due to poor pricing. Matters worsen when we factor in payment defaults, power theft and ATC&C losses. We note that the Federal Government has had to intervene on different occasions to keep the industry on its feet. The problem of cost-reflective tariffs stems from the MYTO framework used to guide pricing. The framework’s cost assumptions are far from current realities.
That said, the NERC has been working to implement new electricity tariffs but has been challenged by government unwillingness at sometime before the 2019 elections, resistance from Discos who were unwilling to meet some terms of the new MYTO framework and resistance from consumers. Nevertheless, the new tariffs were implemented end of 2020. Although there have been complaints that the increase is still inadequate. That said, we reiterate that though we agree that cost-reflective tariffs are needed to realise the gains of the privatisation exercise, we believe any upward review of utility costs at a time like this, will necessarily strain an already impoverished Nigerian consumer.
