Nigerians may need to brace up for tougher times as electricity tariff is set to increase by over 40 percent from July 1, 2023.
This rise follows the unification of the naira which has led to the depreciation of the naira at the investor and exporter window.
The Central Bank of Nigeria (CBN) recently made an announcement regarding the unification of all segments of Nigeria’s forex market, consolidating all windows into one.
This new system will allow market forces, such as supply and demand, to play a significant role in determining the exchange rate.
These changes were implemented as part of a broader effort to enhance liquidity and stability in the Nigerian Foreign Exchange (FX) Market. Under the new policy, all transactions will be conducted through the Investors and Exporters (I&E) window, where the exchange rate will be determined by market forces.
Aside from the unification of the naira, the already removed subsidies on Premium Motor Spirit (PMS) have also complicated the price-setting of the Nigerian Electricity Regulatory Commission (NERC) 2022 Multi-Year Tariff Order (MYTO).
Although the power sector players have been unable to meet the threshold of supplying at least 5,000 megawatts a year after signing contracts with NERC, NERC’s current Service Based Tariff (SBT) was benchmarked on an exchange rate of N441/$ and inflation of 16.97 per cent.
Going by the NERC’s orders, in 2015, the average tariff across distribution companies (DisCos) and classes of end-users was N25 kilowatt, in order of 198/2020, which came into effect on September 1, 2020. The average tariff went to N60 per kilowatt; in the MYTO for 2022, the average tariff was N64 across classes of customers.
The foreign exchange rate used in determining the 2015 tariff was N198.97/$, N383.80/$ was used in 2020, while N441.78/$ was used in 2022. The inflation used in the 2015 MYTO was 8.3 per cent, 12 per cent was used in 2020 and 16.97 per cent in 2022.
Currently, the inflation rate is 22.41 per cent and some experts have projected that it would hit 30 per cent by the end of June given the floating of the naira and subsidy removal on PMS.
Coming as the metering gap remained at over seven million, gas prices, losses and actual generation capacity are other elements in determining the tariff.
While NERC’s projected tariff for July 2023 was expected to remove subsidy and increase the previously frozen tariff band D and E, increasing the bands from N54.59/kilowatt to N62.16 for band D and N48.37/kilowatt to N61.16 on average with an average increase across the bands moving to N67/kilowatt, the prevailing floating of the naira and spike in inflation is projected to move the new average tariff to about N88/kilowatt for the sector to recover the cost.
Most stakeholders who spoke with the Guardian said that while the increase is unavoidable due to the changes in the parameters, households and small businesses, which should power the economy, may head for serious problems with energy costs alone rising to over 70 per cent as purchasing power remains a challenge in the face of unemployment and poverty.
At the time of filing this report, available electricity on the grid stood at 3,057.7MW from 17 power plants. The average load intake of all the DisCos in the last four months averaged 3,000MW, a development that follows the persistent push to make the DisCos meet up with 100 per cent of their remittance orders.
With the question of affordability emerging as a major consideration as the grid remains unreliable, forcing it to make losses, stakeholders have expressed fear that Nigerian Electricity Supply Market may face tougher times managing outlook due to apathy that may come from consumers who are losing hope in the system and resorting to alternative energy.
Energy expert, Prof Wunmi Iledare, said the restructuring of the forex market creates worries as it appears as a devaluation of the naira, adding that he’s not comfortable blaming subsidy removal and paying the right tariff for decoupling Nigeria’s economy from forex instability.
According to him, people must support the government in its effort to stop the dollarisation of its economy even if electricity tariff and petroleum products prices rise to a not-too-comfortable market-clearing price.
Iledare, however, questioned the current energy pricing in the country, adding that the PMS pricing which stayed after the NNPC announcement is anticompetitive based on the dominant firm market structure.
“Price hike cannot just depend on forex in the electricity market. Market fundamentals are key to rate determination in a decreasing cost industry producing essential commodities, like power,” Iledare noted.
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