Cost Reflective Electricity Pricing on the Horizon


Monday, June 28, 2021 / 09:44 AM /  By FBNQuest Research / Header Image Credit: Energy Watch/Ecographics 


Nigeria's energy challenge has a high economic cost and is an obstacle to economic growth and development. According to World Bank estimates, the economic cost of lack of reliable power is estimated at 5-7% of GDP (c.USD25bn). The sector (ex-transmission) was privatised in 2013, with the objectives of attracting private sector investment, improving generation capacity, and enhancing electricity access and availability. While some progress has been made in addressing some of the goals (i.e. increasing generation capacity), the sector's privatisation has failed to produce the desired outcomes. Some of the sector's primary challenges include low electricity pricing, inadequate infrastructure, particularly in transmission, high aggregate technical commercial and collection losses (ATC&C).


According to the Tracking SDG7 access to electricity report, around 45% of Nigeria's population (or 89.6 million people) lack access to electricity, making Nigeria the world's largest energy access deficit nation. The bulk of the energy deficit is borne by rural dwellers, whose electricity access rate is estimated at a just 26% (74% deficit), compared with c.84% for urban dwellers.


Under the Multi Year Tariff Order (MYTO), electricity tariffs are meant to be reviewed periodically to reflect changes in key macroeconomic variables such as inflation, exchange rate (NGN/USD), and gas which is a key input for the sector. However, the government has kept electricity prices low to protect the most economically disadvantaged segments of society.


Although electricity tariffs were reviewed upwards under a new service based tariff regime which has a graduated pricing structure based on the hours of service, the prevailing rate of around NGN50 (USD0.12) per kilowatt hour (KWh) for 12 hours of service is still not cost reflective and falls below the global average of USD0.14 for households.


According to the Nigerian Electricity Regulatory Commission (NERC) latest report for Q2 '20, the overall average ATC&C losses for the 11 distribution companies (DISCOs) decreased by 277bps q/q to 49.16%, which is still high and exceeds MYTO's 20.3% levels and international best practice of 15.0%.


Illustrating the sector's liquidity challenges, the DISCOs' total Q2 '20 revenue of NGN164.1bn fell significantly short of the NGN222.5bn invoice issued by NBET. Only NGN62.4bn of NBET's billed value was settled by the DISCOs, resulting in a 28.1% remittance performance. As such, the DISCOs continue to retain most of the sector revenue meant for the electricity value chain.


The World Bank estimates that the entire revenue gap from 2015 to 2019 was c.NGN N1.7trn (USD6.0bn). The federal government has had to cover the revenue gap (which is now estimated at over NGN500bn per year) as a result of the failure to establish cost-reflective tariffs and the substantial ATC&C losses. Since 2017, the FGN has borrowed a total of NGN1.3trn (USD4.2bn) to make up the shortfall.


It is clear from the data on electricity access that subsidies mostly benefit the rich urban consumers who can afford it. Reliable power is key to achieving the government's growth objectives as enunciated in its economic recovery and growth plan.


Given government's limited financial resources, it is imperative that the tariffs be migrated towards full cost-recovery levels. Steps should also be taken to modernise the power infrastructure (with particular emphasis on transmission), reduce the ATC&C losses, and increase transparency and contract enforceability through enhanced regulatory oversight.

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