April 17, 2024/CSL Research
On 3 April, the Nigerian Electricity Regulatory Commission (NERC) announced a rise in electricity tariffs for customers receiving a minimum of 20 hours of power daily. Specifically, the tariff for Band A customers surged from N68 per kilowatt-hour to N255/KWh. Earlier, in January 2024, NERC introduced the new Multi-Year Tariff Order (MYTO), which proposed increases in electricity tariffs across the 11 electricity distribution companies. However, these adjustments were not immediately implemented by the utilities, as the federal government assured its commitment to subsidizing the new tariffs. According to data from the Nigerian Electricity Regulatory Commission, electricity subsidies in Nigeria experienced a notable 22.16% increase between 2019 and 2023, climbing from N528 billion to N645 billion. It was projected to further rise to N1.6 trillion this year before the tariff hike took effect.
One of the most glaring problems with the power sector is its uncommercial tariff plan. There appears to be no correlation between the cost of producing and supplying electricity and the tariff charged to the customer. To compound the matter, billing and cash collection remains grossly inefficient due to poor metering. 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. Minor reviews can only consider 4 variables namely: the rate of inflation, gas prices, foreign exchange rates and actual daily generation capacity.
In June 2012, a new tariff structure was introduced, primarily aimed at raising tariffs. This move was prompted by several factors: key assumptions underlying the 2008 Multi-Year Tariff Order (MYTO) were not met, and others failed to accurately represent the operational environment. Consequently, the tariff schedule was deemed non-cost-reflective, posing a deterrent to potential investors. Since 2014, adjustments have been made to the MYTO II tariff. However, electricity distribution companies (DISCOs) continue to assert that the tariffs remain non-cost reflective. The sharp devaluation of the Naira since June 2023 necessitates a significant reassessment of the tariffs. Yet, increasing tariffs generally at this juncture is likely to exacerbate the financial burden on the average Nigerian consumer, who has already been significantly impacted by both the devaluation of the Naira and the removal of the subsidy on Petroleum Motor Spirit (PMS). This probably resulted in the increase in tariffs for only Band A.
Though affecting only Band A customers, we expect the steep increase in tariffs to further pressure inflation numbers. Nigeria’s headline inflation rose to 33.20% in March, 150bps higher than the 31.70% recorded in February and 1116bps higher than the 22.04% recorded in March 2023. Month-on-month, headline inflation declined to 3.02%, which is 10bps lower than the 3.12% recorded in February. The headline inflation number was driven by increases in both food and core inflation.
