Cost-reflective Electricity Tariffs Set To Take Effect in July 2020

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Thursday, August 22, 2019   /08:22AM / By CardinalStone Research / Header Image Credit: Nigeria Electricity Hub

 

The Nigerian Electricity Regulatory Commission (NERC) has revised its Multi Year Tariff Order (MYTO) to reflect expected changes in key variables for 2019 and beyond. According to NERC, the Power Sector Recovery Plan (PSRP) provides for a gradual transition to cost-reflective tariffs in Nigeria that takes into consideration the less privileged in the society. On the strength of this, an intermediate review of end-user tariffs has been proposed for January 2020 with a view to achieving full cost-reflective tariffs by July 2020. In the interim, the Federal Government (FG), through the PSRP, has committed to fund the revenue gap arising from the difference between cost-reflective tariffs and actual end user charges subject to clearly stated conditions. On the average, the review of end user allowed tariffs suggests a c.30.0% increase in electricity charges by 2020, per our estimates.

 

Figure 1: Reviewed end user allowed tariffs (N/kWh)

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In our view, the proposed switch to cost-reflective tariffs is likely to have mixed impact in the market. First, we see scope for increased pressures from higher energy cost for manufacturers across the country. Notably, producers in the brewery and consumer spaces are more likely to be adversely impacted, given their inability to fully transfer cost burden on account of aggressive market competition and weak consumer discretionary income. That said, players within the power value chain are likely to be positively impacted by the move. To this point, companies such as Seplat and Transcorp are likely to experience improvement in general operating environment. On the macro front, we see scope for renewed inflationary pressures from 2020, with the Housing Water Energy Gas and Other Fuels (HWEGOF) sub-component of CPI likely to drive core inflation higher. Consumer discretionary income is also likely to weaken as higher energy spending erodes real income levels. 

Despite the short-term shocks outlined above, we believe the proposed policy is likely to drive greater investments across the power value chain, reduce unemployment, support GDP, and taper inflationary pressures in the medium-to-long term. In addition, the review is likely to make the power value chain more self-sustaining with the possibility of improving power supply across the country. The move is also likely to highlight governments willingness to finally pursue long-awaited reforms that can attract foreign providers of patient capital and drive improvements in gross capital formation.


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