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The power sector and its economic impact for 2016

Nigeria in 2016 Special Edition

Dr. Sam Amadi, the immediate past Chairman of Nigeria Electricity Regulatory Commission, NERC, a seasoned lawyer, and a civil rights advocate bares his mind on the impacts the power sector will have in Nigeria in 2016.

With the approval of a new tariff by the Nigerian Electricity Regulatory Commission, NERC, the electricity market in

Dr. Amadi
Dr. Amadi

Nigeria is bound for significant change. Implementation of the new tariff will begin in February of 2016. Many residential and commercial consumers should expect that the new tariff will greatly impact the commercial and personal decisions.

Already, for businesses, cost of electricity supply constitutes about 40% of their operational costs and is greatly increasing their cost of doing business.

The Manufacturers Association of Nigeria, MAN, has decried huge energy bill as a major constraint to global competitiveness of Nigerian industries and a setback for a successful industrialization policy.

The most important fact about the new tariff is the removal of fixed charge. The law requires NERC to develop one or more methodologies for the pricing of electricity services. Since 2008, NERC has developed and implemented the Multi Year Tariff Order, MYTO. MYTO is a 5 years tariff pathway with bi-annual review to re-index prices to such escalators as rate of inflation, foreign exchange, changes in cost of gas and available generations. If these escalators cumulatively create a plus or minus 5 percent change then the tariff is re-indexed. The whole idea of the MYTO is to create certainty in the pricing of electricity services and bankability of projects in the electricity market.

NERC has been largely successful with the MYTO as it has encouraged private sector investment in the sector, especially during the last concluded privatization. In the electricity market, the distribution companies otherwise called the Discos are the cash collectors for other value chains. Tariffs for generation and transmission services, including cost of feedstock, are all captured in the retail tariff that distribution companies charge their customers. The retail tariff has two components: the fixed charge and energy charge. Fixed charge is paid by electricity consumers every month no matter how much electricity they consume and even if they did not consume at all. It has been the most controversial aspect of the regulatory framework of the Nigerian electricity market.

Because consumers pay a fixed charge even if they don’t receive electricity in any particular month, it has been perceived as exploitative and an incentive for inefficiency for the distribution companies.

NERC had justified monthly fixed charges in additional to variable energy charge as a valid regulatory policy that allows operators in the electricity market to recover capital investments.

The regulatory commission has now reversed the policy as a strategy to force the distribution companies to put booths on the ground and ensure reliability of electricity supply. With fixed charge the disco is guaranteed minimum returns notwithstanding the unreliability of electricity supply. By unhooking this life-support, the regulator has forced the discos to run through the knife-edge. If the discos succeed in change management and supply electricity to their customers most of the time, then they earn enough revenue to service their commitments and earn good returns on investment. If they fail to effectively manage their network, they hurt their bottom line and perhaps end in bankruptcy. This is the ultimate shock therapy. So, the first important impact of the new tariff is that it unhooks the utilities from consumer subsidies and ensures more efficiency by making financial viability of the discos totally hooked to how much hours of electricity they supply to their consumers. So, expect more efficiency in electricity supply in 2016.

More efficiency means less cost for households and businesses. With removal of fixed charge the customers could potentially reduce their energy bill. If there is no supply they will pay nothing. This will make the most impact with big commercial consumers whose monthly fixed charges run into hundreds of thousands of naira. They will witness significant reduction in monthly energy bill. And if the removal of fixed charge leads to improvement in availability and reliability of electricity then they make more savings. We should watch out for reduction in the 40 percent electricity cost of industries in 2016

Another game-changing feature of the new tariff is the mandate on complete metering of customers by the regulatory commission. The metering gap in the market is about 50%. This is unacceptable. The metering crisis is caused by many decades of poor financing and management in the sector. The new policy in the tariff regime places obligation on the distribution companies to meet all their customers. To get this to happen, the policy frowns at estimated billing and empowers unmetered customers who dispute their bills not to pay the disputed bill until they have completed the process of dispute resolution. But they will pay amount equal to the last undisputed bill. Again, in 2016 electricity consumers who have paid for meters under the customer-financing option and have not been metered since 60 years will no longer be issued bills by distribution companies. Nevertheless, they will continue to receive supply until they are metered.

The metering policy in the New Year will also spur investment in production of meters and metering platforms. Happily, NERC has developed a local content regulation that mandates localization of technology, services and employment. The new policy will trigger greater economic growth and also incentivize energy conservation as hitherto unmetered customers now have meters and able to control their consumption. Energy conservation through demand-side management (DSM) will improve household income to be channeled towards consumptions that enhance social and economic wellbeing. Already many households spend so much on energy consumption that they have little left for other welfare enhancing consumptions.

In 2016 we should expect bigger foreign investment in generation as the electricity market matures. More independent power producers would enter the electricity market. Already NERC has licensed about 144 such producers to generate about 31,000mw. The absence of critical market supporting institutions has been the reason many of these project promoters are yet to generate electricity. Now that the architecture of the electricity market is good to go, we should expect faster movement toward project delivery.

2016 will be a good year for the power sector. We will see a much more financially viable electricity market, a better governed efficient electricity utility and a less dissatisfied consumer.

Published in the Business Eye’s print version, Jan 2016 edition.

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