HomeBlogUncategorizedPricing in the Nigerian Electricity Industry (NESI).

Pricing in the Nigerian Electricity Industry (NESI).

The Electricity Tariff:

OVERVIEW

First and foremost, what is Electricity Tariff?

Electricity Tariff is the pricing structure that determines how much consumers pay for the electricity /energy they consume. The tariffs are typically designed to cover the costs of generating, transmitting, and distributing electricity, as well as to provide a reasonable return on investment for electricity providers.

Table of Contents:

  1. Introduction
  2. Tariffs Structure in NESI
  3. The MYTO, 2024
  4. The Objectives of MYTO,2024
  5. Factors Influencing Tariff Determination
  6. Impact of Tariff Changes on Electricity Consumers
  7. Your Rights and Obligations
  8. Recommendations
  9. Conclusion

INTRODUCTION

Electricity tariffs are a decisive component of the Nigerian electricity industry because, they directly impact the cost of power for consumers nationwide. It is worth noting that electricity tariffs have a significant influence on consumer behavior, investment choices, and the overall sustainability of the Nigerian Electricity Supply Industry (NESI).

It has become imperative and highly essential for electricity consumers in Nigeria to have a comprehensive understanding of electricity pricing in NESI. When consumers are well-informed about pricing/tariffs and other relevant information, they are empowered to make informed decisions especially, regarding electricity usage.

TARIFF STRUCTURE IN NESI

The pricing and billing methodology in the electricity industry is a crucial aspect overseen by the Nigerian Electricity Regulatory Commission (NERC). Established as a regulatory body following the sector reform of 2013, NERC plays a pivotal role in ensuring the efficiency and fairness of pricing within the Nigerian Electricity Supply Industry (NESI). The reform of 2013 marked a significant milestone in NESI, leading to the privatization of the nation’s power generation and distribution assets and the unbundling of the defunct Power Holding Company of Nigeria (PHCN).

Among its key functions, the Commission is saddles with the responsibility of creating, promoting, and maintaining efficient electricity industry and market structures, as well as ensuring the optimal utilization of resources for the provision of electricity services.

Additionally, NERC works to ensure that the prices set by licensees are fair to consumers and enable distribution companies to recover their operational costs, including a reasonable return on invested capital.

To fulfill its mandate, NERC has developed a pricing structure known as the Multi-Year Tariff Order (MYTO) to regulate pricing within NESI. Through MYTO, the commission establishes guidelines and approves tariff adjustments to ensure the stability and sustainability of pricing in the electricity sector. This framework is essential in promoting transparency, efficiency, and fairness in the pricing of electricity services in Nigeria.

What is MYTO?

The Multi-Year Tariff Order (MYTO) is a tariff model designed by the Nigerian Electricity Regulatory Commission (NERC) to implement incentive-based regulation. It aims to incentivize performance that exceeds certain benchmarks, reduce technical, commercial, and collection losses, and ultimately lead to cost recovery and improved performance standards.

Simply put, MYTO is a pricing mechanism designed to regulate electricity prices in the Nigerian Electricity Industry. The MYTO methodology establishes a 15-year tariff path with significant reviews conducted semiannually.

THE MYTO 2024.

In a recent announcement from the Nigerian Electricity Regulatory Commission (NERC), significant changes have been made to the subsidy regime and service delivery within the Nigerian Electricity Supply Industry (NESI). These changes, which come as a result of a minor review and the approval of the Multi-Year Tariff Order (MYTO 2024), are in accordance with the Electricity Act 2023. The main objective of these changes is to ensure that tariff rates are aligned with the cost of efficient operation, while also prioritizing customer protection and encouraging investments for enhanced service delivery.

As a result of these changes, customers in the highest quality service category (those in the “Service Band A” tariff class) will now be required to pay tariffs that are closer to the cost-reflective tariff, also known as the True Cost of Production. However, the Government will continue to provide subsidies for the majority of Nigerians who fall outside of this category.

Under the new tariff structure, only 15% of customers (those in Band A) have been transitioned to the updated tariffs. The remaining 85% of customers (in Bands B – E) will still benefit from government subsidies. This strategic approach aims to strike a balance between ensuring fair pricing for high-quality service and providing support for the majority of electricity consumers in Nigeria.

Tariff Classes

Tariff classes consist of two layers: the first layer being the tariff service bands, which are further sub-classified based on the type of service connection. These tariff service bands represent distinct categories of end-users and their corresponding tariff classes.

Tariff Service Bands

End-user tariffs are divided into five (5) Tariff Service Bands, each representing a different level of service quality. This quality is determined by factors such as the minimum average hours of supply per day, frequency and duration of interruptions, service voltage levels, and other service parameters.

– Service Band A: Customers receiving a minimum of 20 hours of supply per day
– Service Band B: Customers receiving a minimum of 16 hours of supply per day
– Service Band C: Customers receiving a minimum of 12 hours of supply per day
– Service Band D: Customers receiving a minimum of 8 hours of supply per day
– Service Band E: Customers receiving a minimum of 4 hours of supply per day

Tariff Subclasses

These service bands are further divided into various tariff subclasses, which ultimately determine the end-user tariffs.

The tariff subclasses include:

  • Non-Maximum Demand (Non-MD)
  • Low voltage Maximum Demand (MD 1)
  • Medium/High voltage Maximum Demand (MD 2)
  • Lifeline Tariff Class (R1) for consumption of not more than 50 kWh per month.

All electricity consumers are grouped into tariff service bands, with the exact cost determined by the type of connection they have. Consumers with a two-wire connection fall under the Non-Maximum (Non-MD) tariff class.

Consumers with a three-phase connection and low-voltage requirements are classified as Low-voltage Maximum Demand (MD 1) tariff class.

End-users with three-phase connections and Medium/High voltage requirements are categorized as Medium/High Maximum Demand (MD-2) customers. These customers require a dedicated Distribution Transformer (DT) for their service.

Under the current tariff structure, pricing is based on the quality of service, measured by the minimum average hours of supply per day over a one-month period.

The type of service connection provided to the end-user is determined by the connection equipment and load demand, whether it is Non-MD, MD-1, MD-2, or R1.

If a consumer with non-maximum demand decides to purchase a distribution transformer for private use, they will automatically be placed in the Medium/High voltage Maximum Demand (MD 2) tariff class and billed accordingly.

By analyzing and categorizing end-users into specific tariff classes, distribution companies can ensure equitable and suitable pricing based on the level of service provided.

FACTORS INFLUENCING TARIFF DETERMINATION

Tariff assumptions are carefully considered under the provisions outlined in the MYTO Methodology and the Regulation on Procedure for Electricity Tariff Review in the Nigerian Electricity Supply Industry (NESI).

The parameters projected in the Order, as well as the key indices taken into account when evaluating the tariff application of any Distribution Company (DisCo), are influenced by changes in external factors that are beyond the control of operators in the NESI. These variables include the Nigerian rate of inflation, United States inflation rates, NGN/USD foreign exchange rates, gas prices, and available generation capacity.

The recent minor review of tariffs has been prompted by a shift in the subsidy regime towards a targeted intervention approach, with a primary focus on protecting the vulnerable population.

TARIFF OBJECTIVES

The primary objectives of the Multi-Year Tariff Order are as follows:

  1. Establish a clear path towards transitioning to fully service-based cost-reflective tariffs by July 2021.


2. Reclassify and disaggregate customers and customer clusters based on the commitment of Distribution Companies (DisCos) to providing quality service to customer clusters.


3. Ensure that customer tariffs are in line with the quality and availability of power supply promised to customer clusters by the DisCos.


4. Encourage sustained improvement in the reliability and quality of power supply by incentivizing DisCos to adhere to their Vesting Contracts and MYTO load allocation.


5. Create a framework for resolving imbalances between the Transmission Company of Nigeria (TCN) and DisCos regarding the delivery and off-take of available energy, under Market Rules, Vesting Contracts, and other industry documents.


6. Develop and implement a framework for enforcing market discipline about market remittances and managing potential revenue shortfalls in the industry. This includes establishing a minimum market remittance requirement to address discrepancies between cost-reflective tariffs and allowed tariffs in settling invoices issued by the Nigerian Bulk Electricity Trading Plc (NBET) and the Market Operator (MO).


7. Support interim payment arrangements within the electricity market and reinforce the requirement for payment securitization, ensuring a smooth flow of funds from DisCos to NBET and MO.

These objectives aim to enhance the efficiency and transparency of the electricity market in Nigeria, ultimately benefiting both consumers and other industry stakeholders.

IMPACT OF TARIFF CHALLENGES ON ELECTRICITY CONSUMERS

Electricity tariffs are crucial for the financial sustainability of the Nigerian Electricity Supply Industry (NESI). Unfortunately, the factors contributing to the current situation are complex. The removal of fuel subsidies, which led to a significant increase in energy prices, is one of the key drivers behind the rocketing cost of electricity. However, attributing all the blame to this factor would be overly simplistic. The challenging economic environment, marked by inflationary pressures and exchange rate volatility, further exacerb aggravates the difficulties faced by NESI consumers.

Some of the most pressing issues that consumers and stakeholders encounter include:

  1. Tariff Affordability
  2. Revenue Collection
  3. Tariff Rationalization

Affordability: High electricity tariffs can impose a heavy financial burden on consumers, particularly low-income households and small businesses. The recent tariff increase, which saw costs for “Service Band A” customers rise by over 300%, underscores the impact on electricity consumers.

Tariff Collection: Timely tariff collection is essential for the sustainability of electricity providers in a dynamic market. However, challenges such as underpayment, non-payment, electricity theft, and billing errors can hinder revenue collection efforts. Without effective measures to address revenue leakages, resistance from consumers may grow, especially in light of recent tariff adjustments.

Tariff Rationalization: Balancing cost recovery with affordability is an ongoing struggle for regulators. Careful management of tariff adjustments is necessary to prevent undue hardship for consumers while ensuring sufficient revenue for electricity providers to invest in infrastructure and service enhancements.

Addressing the currents tariffs requires a delicate balance between economic pragmatism and social responsibility. While acknowledging the imperative of ensuring the financial viability of NESI, policymakers must exercise precaution and empathy in their decision-making processes.

ELECTRICITY SUBSIDY

In the Nigerian electricity industry, an electricity subsidy is a form of financial assistance provided by the government to reduce the cost of electricity for consumers. The primary goal of this subsidy is to make electricity more affordable, particularly for vulnerable or low-income households, by offsetting a portion of the operational costs incurred by electricity providers.

Various mechanisms have been used to implement this subsidy, including direct payments to electricity companies and or adjustments to tariff rates (capping) to ensure they remain below the actual cost of production and distribution. Essentially, the government bridges the gap between the cost of providing electricity and what consumers pay for it.

Capping of Estimated Billing

In the Nigerian Electricity Industry, the word “capping” establishes a maximum limit on consumer electricity charges, set by the government to subsidize costs and keep prices affordable, particularly for low-income households. For consumers, this ensures:

  1. Affordability: Electricity prices stay reasonable, preventing them from soaring, benefiting those struggling with high bills.
  2. Government Support: Direct subsidy by the government eases financial burdens and enhances access to electricity.
  3. Balancing Act: While providing immediate relief, capping poses challenges in maintaining sector financial sustainability. Addressing the gap between capped tariffs and actual costs is crucial to prevent strain on government finances and infrastructure investment.
  4. Policy Impact: Changes in capping policies affect consumers and providers, altering tariff rates and financial viability.

Overall, capping supplements subsidies, maintaining affordable electricity prices. Understanding capping’s influence aids informed decisions and advocacy for accessible, affordable electricity.

Despite the importance of electricity subsidies in the Nigerian Electricity Supply Industry (NESI), many consumers still do not fully understand the concept possibly due to lack of knowledge. The recent announcement regarding subsidy realignment in NESI, effective as of April 1, 2024, resulted in a significant increase in tariff costs for customers in “Service Band A,” with rates rising by over 200%. This news sparked widespread negative reactions across the country, with many Nigerians expressing their dissatisfaction and citing various reasons for their disagreement with the new rate changes.

This decision also served as a wake-up call for many electricity consumers who were unaware that they were benefiting from subsidized electricity rates. However, according to a statement by the Honourable Minister of Power, Chief Adebayo Adelabu, the federal government of Nigeria has been paying a substantial amount in subsidies to cover the shortfall in remittances from Distribution Companies (DisCos) and can no longer sustain these payments in NESI. The Minister emphasized that the subsidy commitment was approaching an unsustainable amount of NGN3 trillion, a figure corroborated by the Nigerian Electricity Regulatory Commission (NERC).

In light of these developments, it is evident that the regulator believes the Nigerian electricity market has reached a level of maturity that allows it to operate without the need for government interventions.

RECOMMENDATION

Electricity tariffs in the Nigerian Electricity Supply Industry (NESI) offer opportunities for innovation and improvement. The recent tariff increase signifies progress for the industry, as it injects much-needed liquidity into the pockets of Distribution Companies (DisCos), Generating Companies (GenCos), and other stakeholders. This influx of funds should ideally lead to enhanced infrastructure, improved services, and a stronger electricity ecosystem. However, the decision by the Nigerian Electricity Regulatory Commission (NERC) to implement this hike during a period of widespread economic hardship raises questions.

From a critical standpoint, the timing of the tariff review could not be worse. Many Nigerians are already grappling with reduced purchasing power and economic uncertainties, making the prospect of higher electricity bills a significant concern. In some cases, electricity bills may exceed the minimum wage, placing an unbearable burden on already struggling households. This situation could potentially lead to an increase in electricity theft as desperation grows, further complicating the challenges faced by the industry.

Given these concerns, it is important to explore alternative approaches to addressing liquidity issues in NESI. Rather than burdening electricity consumers with exorbitant tariff hikes, initiatives such as promoting private investment among consumers could provide viable solutions for raising capital and improving the network. Additionally, enhancing transparency in billing processes and investing in customer education programs can build trust and encourage stakeholder participation in NESI.

By addressing the metering gap, implementing demand-side management programs, and promoting energy efficiency initiatives, stakeholders can collaborate to optimize energy consumption patterns, reduce wastage, and enhance overall efficiency in the industry. These proactive measures will not only benefit consumers but also contribute to the long-term sustainability and success of the Nigerian Electricity Supply Industry.

Conclusion

Electricity tariffs play a crucial role in guiding the operations of all stakeholders in the Nigerian Electricity Industry (NESI), influencing consumer behavior, investment decisions, and overall industry performance. As the industry evolves and responds to market changes, ensuring the affordability and reliability of electricity tariffs is paramount for policymakers, regulators, and industry players.

By promoting dialogue, promoting transparency, and embracing innovation, the Nigerian Electricity Industry can reach its full potential. This will enable the industry to build a robust and resilient electricity sector that meets the diverse needs of all stakeholders. Ultimately, this will contribute to sustainable economic growth for years to come.

Call to Action (CTA):

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Frequently Asked Questions

  1. What factors influence electricity tariffs in Nigeria?
  2. How can consumers reduce their electricity costs under varying tariff structures?
  3. Are there government programs or incentives available to help consumers manage their electricity expenses?
  4. What are the implications of fluctuations in electricity tariffs on household budgets?

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