Nigeria’s electricity sector raises end-user tariffs ahead of September audit

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Long the country’s Achilles heel, the electricity sector in Nigeria took another step forward in late May, when an increase in end-user tariffs was announced. Though the rise in prices prompted concern from consumers, the change will help to attract fresh capital from private investors who require at least cost-recovery levels for production and distribution.

The announcement from the Nigerian Electricity Regulatory Commission (NERC) will mean a rise in the price consumers are to pay as of June 1 under the Multi-Year Tariff Order (MYTO), a framework used to determine pricing mechanisms on a biannual schedule. The rates have typically varied depending on location, as well as customer type, and were raised from a range of N11.94 ($0.07) to N15.57 ($0.09) per kilowatt/hour (KWh) to a range of N13.21 ($0.08) to N17 ($0.10).

For example, it rose in Abuja from N13.25 ($0.08) to N14.70 ($0.09), and from N13.98 ($0.085) to N16.01 ($0.098) in Kano, the largest city in the northern part of the country. Rates were kept steady at N13.21 ($0.08) in Ikeja, a district of Lagos where a significant portion of homes and offices of the city’s government workers are located.  

Calculating capacity

Consumers reacted to the decision with protests in some places, including in Delta and Imo States, following protests earlier this year in response to an erratic energy supply.

Nigeria has long grappled with insufficient output, which has led to both depressed demand levels and a dependency on expensive diesel-fired generators. The country produced around 4306 MW as of March 31, which is roughly half of what the MYTO, last drawn up in 2012, forecast for 2014. Demand is likely double or triple the country’s present generation capacity, but a precise measure is impossible to calculate.

As a comparison, South Africa, which has a population around one-third the size, produces ten times the amount of electricity. Indeed, Nigeria’s power plants and dams have produced on average 3000 MW daily for 170m people, with generation companies also faced with irregular supplies of inputs. According to local media, Egbin Electric Power, which manages a 1320 MW plant in Lagos State, is able to produce only half of its total capacity due to inadequate gas supplies.

A legacy of underinvestment in the transmission and distribution networks have also led to further losses from Nigeria’s grid.  

Privatisation of the electricity sector

However, it is these sorts of issues that the tariff increase – itself part of a broader push to overhaul the sector – is seeking to address. The government privatised almost all of the state’s assets in a long-awaited process that was completed in the second half of 2013. These assets were unbundled and formed into 17 successor companies, six of them holding generation assets and 11 distribution networks, all sold separately for about $2.5bn in total.

The government then sold majority stakes in four of the generation companies and all of the distribution networks to consortia of buyers – mostly local corporations and businessmen, each with a foreign company serving as a technical partner. Two of the six generation companies are hydroelectric, and instead of being privatised, operating rights to those facilities were given concessions so that the government could maintain formal ownership and control over its waterways.  

Steps to reform the electricity market

The new owners took over their assets in late 2013 and are expected to rehabilitate them in 2014 ahead of a system-wide facilities audit by the Nigerian Electricity Regulatory Commission in September. If the plants are deemed to be in shape to continue on to the next step in the power-reform process, that next step would include the activation of two new government agencies: the Nigerian Bulk Electricity Trader and the Gas Aggregation Company of Nigeria. These would act as a bulk electricity trader to buy power from producers and resell it to distributors and a gas-allocation agency that will connect gas producers to electricity producers respectively.

Those two agencies are expected to exist for a temporary period to mitigate risk, and ensure the partially privatised market is able to establish contractual agreements at cost-recovery plus levels. Traditionally, non-payment to distribution companies by consumers has resulted in low collection rates and problems with debt management.

Low tariffs – something that is common through most West Africa markets – have also historically created challenges for distribution companies, which is one reason why the increase is pricing may prove to be yet one more step in bringing Nigeria’s electricity sector closer to realising its potential.

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