Power Sector Tariff Review: Laudable but Success Rests on Effective Implementation

Following the updated Multi-Year Tariff Order (MYTO) as at year-end 2019, the Nigerian Electricity Regulatory Commission (NERC) approved an upward review (starting January 1, 2020) of electricity tariffs paid by consumers across the country. The adjustment was in line with the bi-annual review provided in the MYTO 2015 (as amended). The new update covers an estimated tariff shortfall of ₦534.4bn for 2020, which the government would cover. Hence, implementing the recommended tariff change would ease the burden of electricity subsidies on government’s finances.

However, based on the FG’s Power Sector Recovery Plan (PSRP), implementation would be delayed until April 1, 2020 while a gradual transition to cost-reflective tariffs is expected by year-end 2021. The tariff hike would affect all eleven Discos, with the increase ranging between 59.7% - 77.6% for commercial, industrial, special, and lighting consumers. Residential electricity consumers (single and three-phase meter users with electricity consumption of about 50 kWh in premises wholly for residential purposes) would be given a reprieve as the ₦4.0/kWh tariff was left unchanged. In our opinion, this decision underlies the weak political will to make decisive changes which has affected the sector. 

Given the severe liquidity crunch affecting the power sector, with an estimated tariff shortfall of ₦1.7tn between 2015 and 2019, we perceive this much-awaited review as positive for the various players in the value chain. The Discos are burdened with overdue obligations due to poor collections, which has hampered investments and the development of the sector. This largely reflects high Aggregate Technical and Commercial Collection (ATC&C) losses which stood at 44.5% on average as at Q2:2019. On the technical side, losses have been caused partly by poor infrastructure and maintenance. On commercial losses, weak tariffs, poor metering, meter bypass, among others, are responsible. We believe a blend of cost-reflective tariffs and much improved metering from the current average level of 42.9% would improve collections and in turn investment across the value-chain. However, the exclusion of certain customers means that progress would be slower than expected.

We expect the new tariff regime, if implemented, to put pressure on consumer prices as higher energy costs would translate to rising cost of production for businesses and weak purchasing power for consumers. But on a positive note, the gradual implementation of the increase in tariff would help consumers better adjust to the new pricing regime.


Afrinvest

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