This is coming against the backdrop of pressure by Nigerian labour unions threatening to embark on strike from Monday if the government refuses to reverse the new increases in the electricity tariff and fuel price.
Industry analysts say there is no point reversing the decision on the service-reflective tariff and subsidising the electricity market since it would deter investors and drag Nigeria’s push to enforce a credible electricity market.
Chuks Nwani, an energy lawyer, warns that the Federal Government may not recover from the cost of reverting to the former tariff rate as it would suffer a huge credibility deficit.
“For me, I would call it an economic suicide mission if the government reverts and succumbs to labour pressure. This will lead to near-death of the power sector in Nigeria,” Nwani said.
“The issue of taking one step forward and one step backward in the power sector will keep pushing away the credible electricity market we are seeking to build,” he said.
Nigeria’s central bank and other industry stakeholders comprising the Nigerian Electricity Regulatory Commission (NERC), the 11 distribution companies (DisCos), and others have been leading a progressive charge to drive reform in the power sector.
The World Bank has also tied most of its facility support to Nigeria’s power sector, which is in the neighbourhood of $750 million, to credible market reform in the power sector.
“What the government needs to do is to explain to labour how it arrived at the new numbers. If labour is saying drop down the tariff, can labour also say drop down the cost of fuel used in generating power? Remember, these are determined by market forces and people have to pay,” Nwani said.
“It is like telling the woman in the market to drop the cost of one mudu of garri in the market. Can labour do that? I understand the fact that the purchasing power of workers dropped but the government can still be engaged properly on that to sort it out,” he said.
On the positive impact of the power sector reforms, Nwani expressed optimism that the tariff reset, NERC’s franchising regulation would widen investors’ interest in Nigeria’s power sector.
“For me, I believe that investors should see an opportunity with the tariff increase. Recall before the tariff increase, NERC has passed the franchising regulation, which is a window for investors who possibly have intended to invest in the distribution network to come in and invest,” he said.
He noted further that from his observation, the tariff increase is a bit above generation cost, which is a very big incentive for new players to come in and invest.
“I still believe that investors would now start seeing the sector from a different perspective. We still need to appeal to them to see a different sector from what used to be. Possibly, there is a need for the BPE to sensitise investors that where we are today has been able to create a wide profit margin for any investor who wants to come into franchising business,” he said.
The tariff review, analysts say, will ensure that prices charged by DisCos are fair to consumers but sufficient to allow recovery of the efficient cost of operation, including a reasonable return on the capital invested in the business.
It is expected to provide the path to transitioning the Nigerian electricity supply industry to a service-based cost-reflective tariff by July 2021.
The tariff will be commensurate with the quality of service measured by the number of hours and quality of service to clusters of electricity customers, as the industry expectedly will achieve improvement in reliability and quality of supply on a progressive basis as well as incentivise the operators to expedite metering their customers.
The NERC recently issued a new order instructing the DisCos on the modalities for billing customers who fall under different classifications with the commencement of the new tariff, saying Nigerians who receive less than a 12-hour supply of electricity will not be affected until service improves.
The order reflects the impact of changes in the macroeconomic parameters and revenue requirements and a revised tariff design that aligns rates paid by customers with the quality of service as measured by the average availability of power over a month period.
According to NERC, the objective of the order is to ensure that prices are fair to customers and sufficient to fully recover the efficient cost of operation, including a reasonable return on capital invested by the DisCos.
The power sector regulator said the new guidelines would provide a path to a transition to full service-based cost-reflective tariffs by July 2021, and re-classify as well as disaggregate customer clusters on the basis of commitment to quality of service.
NERC told the power distributors that it arrived at the new rates after considering the country’s rate of inflation for July 2020 as obtained from the National Bureau of Statistics (NBS), which was 12.82 percent.
Sam Amadi, a former chairman of the NERC, in his response, made a case for regulatory efficiency in driving confidence in the sector.
“What we need to do now is to use regulation to stimulate and achieve the latent efficiency in the system while government (executive branch) uses energy policy to expand beyond the limitations of the DisCos,” Amadi said.
“National Assembly have their job cut out for them. They ought to set up a real parliamentary commission to study thoroughly the entire reform and present a comprehensive policy recommendation. These expert recommendations will now trigger legislative intervention to redirect the strategic development of the sector,” he said.