June 18, 2020 /11:42 AM / By CSL Research / Header Image
The Minister of Power, Sale Mamman has revealed that the new increment on electricity tariff would take off in July. The Minister disclosed this at the Investigative Public Hearing on Power Sector Recovery Plan and the impact of COVID-19 pandemic organised by the Senate Committee on Power. Mamman also highlighted that the COVID-19 pandemic had affected the laid out plan for the repositioning of the electricity market towards financial sustainability under the Power Sector Recovery Programme.
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. In reaching the decision, the commission expressed that an upward review of tariffs during a period of crisis would worsen the situation of the average Nigerian, majority of whom are daily wage earners and could not conduct businesses due to the lockdown in FCT, Lagos and Ogun states in April. NERC however noted that the delay will give them a chance to negotiate and get commitments from the DisCos for service level improvements which must be commensurate with the extent of the planned tariff increase.
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 has been 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. Several attempts by the government in hiking electricity tariffs has been largely unsuccesful, as it has often led to public outcry resulting in a protest by the labour union. The overarching argument has always been that, given persistent inflationary pressures on households, weakening in the value of the local currency and shrinking real incomes, it would be unreasonable to introduce tariff hikes. With consumers still reeling from the harsh impacts brought by the global pandemic amidst the recent increase in VAT rate from 5% to 7.5%, we think the same scenario is likely to play out in 2020.
While we find the argument of consumers valid, we find blind opposition to tariff increases difficult to justify, given that consumers with epileptic power supply pay much more to get power from on-site diesel- or petrol-powered generators. That said, we remain staunch proponents of cost-reflective tariffs as we believe the continued adoption of low tariffs will exacerbate the anemic position of Discos and in turn the development of the power sector. Although, the revised tariffs scheduled to take effect from July are still not cost-reflective and requires the government to pay the shortfall to the discos, nonetheless, we think it is a step in the right direction. Based on historical precedence, gradual adjustments in electricity tariffs may be the pathway in mitigating the impact on households and averting stiff resistance from labour unions.
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