Contrary to expectations, Nigeria’s electricity distribution companies (DisCos) have chosen not to proceed with the proposed tariff increase scheduled for July 1, as previously announced.
The DisCos had issued notices urging consumers to purchase prepaid electricity vouchers before the said date to avoid higher charges.
However, the Abuja Electricity Distribution Company (AEDC) promptly debunked the notice, stating that they had no intention of raising tariffs. With the original deadline date gone, Nairametrics reached out to three major DisCos to verify the status.
Our findings revealed that all the distribution companies across the country did not implement the speculated tariff hike on July 1.
Also, feedback from consumers who renewed their electricity vouchers between July 1 and July 5 confirmed that no additional charges were imposed within their respective tariff bands.
Nairametrics reached out to some representatives from the major DisCos, where they learnt that the current tariffs remained unchanged, as they were awaiting directives from the Nigerian Electricity Regulatory Commission (NERC) to approve any proposed new tariff rates.
A source from NERC who chose to remain anonymous also informed Nairametrics that the Commission had not approved any rate increase and as such, DisCos were not permitted to activate higher tariffs from July 1, 2023.
It is crucial to note that DisCos cannot unilaterally modify tariffs; they require approvals from the NERC, the regulators of the power sector value chain. Furthermore, any tariff revision must be approved by the President before NERC can instruct compliance by the DisCos’.
The Impact on DisCos Revenues
The failure to review and implement the process for tariff increase would have a severe impact on the Nigeria Electricity Supply Industry (NESI) value chain. According to Odion Omonfoman, the Chief Executive Officer of New Hampshire Capital, emphasized that the purpose of the review is to adjust electricity tariffs to reflect changes in foreign exchange rates and the 22.41% inflation rate, thereby ensuring that tariffs remain cost-reflective for industry operators.
Omonfoman highlighted the issue of gas prices as an example of the expected increase in generation costs, explaining that while gas prices are denominated in dollars, they are paid for in Naira. With the new exchange rate hovering around N768 to a dollar, gas-to-power prices should be N2,534 per million standard cubic feet (MMScf) of gas.
He went on further to explain that a failure to review tariffs means that generating companies (GenCos) will not be able to meet their obligations to gas suppliers, which could lead to a lower amount of gas availability for electricity generation to meet the demands of the consumers.
Currently, gas suppliers are faced with millions of dollars in unpaid gas bills amounting to over $1 billion. However, based on agreed gas supply contracts, the inability to increase tariffs by DisCos could lead to further accumulation of debts beyond the current level of indebtedness experienced. With further payment shortfalls, the overall debt burden in the power sector would render it unsustainable.
Long-standing Debt Burdens in the Electricity Sector
Following a conversation with Nairametrics, a key finance lead staff member (who chose to remain anonymous) of one of the bigger generating companies (GenCo), stated that the power industry has been grappling with long-standing debt burdens.
Investors who purchased GenCos and DisCos almost 10 years ago did so through project finance transaction agreements, with approximately 70% of the funding derived from debt and the remaining 30% from equity.
To date, investors are still struggling with debt repayment challenges, as they have to rely on the cash flows from DisCos and GenCos. With Nigeria’s electricity tariff implementation still incomplete, there have been significant delays in settling some of these debts, thereby putting a strain on the DisCos and Gencos’ ability to raise new financing for infrastructure development.
Insights on Nigeria’s Electricity Tariff Order
Nigeria’s Multi-year Tariff Order (MYTO) aims to establish a cost-reflective tariff structure that ensures that there are adequate cash flows to finance the funding and functionality of the power sector.
The slow-paced tariff review process when compared to the fast-paced changes being implemented within Nigeria’s changing economic climate creates additional shortfalls that could affect the optimal performance of the electricity value chain.
Our source further explained that DisCos would be unable to upgrade their infrastructure, including cables and power lines, to accommodate additional power generation. This is especially problematic considering the widespread electricity theft in certain areas, despite the use of meters, resulting in estimated Aggregate Technical, Commercial, and Collection (ATC&C) losses amounting to approximately N2 billion monthly for the DisCos.
The source also noted that without cost-reflective tariffs, GenCos cannot carry out the necessary system overhauls mandated by the MYTO every four years. These overhauls are essential to maintain the efficiency and continuous operation of gas-fired power plants. Moreover, rising debts and partial implementation of the MYTO have deterred banks and investors from further financing the electricity sector.
The Inevitable Future of Electricity Tariffs
Omonfoman further stated that Nigerians will ultimately have to bear the burden of higher electricity tariffs to sustain the electricity sector. He acknowledged that the accumulated debt would need to be repaid sooner or later, even if the government were to provide subsidies to consumers to cover the shortfall in payments to gas suppliers. However, he expressed doubts about the government’s ability to allocate funds for such subsidies.
Addressing concerns about the rising cost of living due to the removal of fuel subsidies and the 22.41% inflation rate, Omonfoman highlighted two potential options.
- Either the Federal Government directly absorbs the costs if it has the necessary funds or,
- The burden is shifted to customers in the future.
However, he argued that the latter option would be unfair to customers, as it would accumulate interest over time.
A New Approach to Tariff Reviews
A third expert, who chose to remain anonymous and shared insights with Nairametrics, stated that tariff reviews would still occur in the coming months, which will result in higher electricity prices for Nigerians.
However, NERC is currently exploring a new system for tariff reviews and approval. Under this approach,
- DisCos will be responsible for reviewing and proposing their new rates to NERC.
- DisCos will then facilitate stakeholder consultations where they can present justifications for the proposed rates.
- Once approved, a new electricity tariff will be established.
It’s important to note that NERC plans to hold a stakeholder meeting this month to outline the implementation of the Electricity Act, which aims to transform Nigeria’s electricity sector in a positive manner.
The inability of DisCos to increase tariff on July 1 and the non-implementation of cost-reflective tariffs poses significant challenges to the revenue of DisCos and the overall sustainability of the electricity industry value chain of the power sector.
The accumulation of debt, inadequate infrastructure upgrades, and the reluctance of investors to support the sector are pressing issues that need to be addressed for the long-term viability of Nigeria’s electricity industry.
In January and February I bought electric unit for my metre for #20,000 and was given 364 units. Now for same #20,000, I am given 270 units. That’s an increase of 225% by KADECO.. The increase has already being made or do they want to increase again!.
I mean an increase of 25%.
There’s no justification for increase in electricity tariff inspite hike in the inflation and exchange until Discos supply all unmetred customers across the country. There are estimated 7 million unmetered customers across the country and they clamouring for increase in tariff. The president should decline approval for any increase proposal from NERC.