Amadi - NERC Has Not Increased Electricity Tariffs

AllAfrica |

The Chairman of Nigerian Electricity Regulatory Commission, Dr. Sam Amadi, recently visited THISDAY's Corporate Head Office in Lagos, where he spoke on the tariff methodology, estimated bills, apparent poor financial position of the new investors and other raging issues in the privatised electricity industry. Excerpts:

Current Poor Electricity Supply

At the beginning of the privatisation process, foreign investors were ready but they were watching to see if the process would collapse after six months. In other words, as at the time we designed the process, foreign investors were cynical. They did not believe that this was going to happen.

The World Bank told us that they doubt if we could sell more than one or two assets. The foreign investors knew that if they look at the demand and supply in Nigeria, it is potentially a good market. But they were playing safe with their money.

So, invariably, it was Nigerians and Nigerian banks that financed the process. Now, they have taken over and people are complaining about failure of service.

Three things are very clear. One, this is a market that is supply-driven. That means if you want power, then transmission can transmit it and the distribution companies can supply to customers. If you don't have supply, there is no power for the transmission company to transmit and there will be nothing for the distribution companies to distribute.

The implication of this, therefore, is very simple. That is, by the time in 2012 when we released the new tariff from July 1, we projected 9,062 megawatts as what we would have as at today. That has implication for commerciality because if power is selling for N10 per megawatt hour, if you multiply it by 9,062mw, you will see the total revenue the industry will today predicate their expenditure on maintenance and infrastructure.

But as at March 30, 2014, when we began to review our mark up date for 2014, power supply was about 3,600 or 3,700mw. What I mean is that for the distribution companies, the revenue they expect to get is less than the projection.

If there is a huge revenue shortfall because of inadequate generation, it means that down the line, the value chain has broken. They will not have money to replace transformers and they will not have enough money to implement their metering plans.

As at March 30, 2014, when we began the review of our mark up date for 2014, power supply was about 3,600mw. Now, we had about 51 per cent. What I mean is that for the distribution companies, the revenue they expect to get was less than projected. If there is huge revenue shortfall because of inadequate generation, it means that down the line, the value chain is broken. There won't be enough money to replace transformers when they are bad; there won't be enough money to implement their metering plan.

The first problem since the private investors took over is that they took over when all the projections were down. Electricity supply was very low. In fact, it has improved now because there was a point when there was several sabotage of gas infrastructure that made generation to drop to as low as 2,700mw as against 9,062mw in the projection. At that level, every strategy of regulation becomes theoretical because if you don't have power to sell, it is a problem.

So, the first problem was gas. Nigerians are right to question the story about gas. When we give gas as excuse, it sounds foolish. How can a gas country suddenly start giving excuse that it can't generate power because there is no gas?

Before NERC built the Multi-Year Tariff (MYTO) model, we sit with the people in the Ministry of Petroleum Resources and other stakeholders and we go through certification of what quantity of gas should be expected.

We don't assure that gas will come. We always want to know with certainty, the exact quantity of gas that will come. We built a good model. We built a MYTO model even in a not-very-good scenario because if we have used good scenario, we would have projected 16,000megawatts.

This would have been the best case scenario and it would have been a realistic benchmarking if gas is available. Today, we have about 7,000mw ready to come into the market but no gas to fire the turbines. So, if you look at that, you could say that you can generate 6,000mw today, if we put the gas in the power plants.

But vandalism of gas pipelines accounted for some of the very terrible slippages in gas management. In the early February and March 2014, we lost 800mw to vandalism.

Before now, the power reform was moving fast but gas was lagging behind. Today, you see a mismatch. You have a much-more developed power sector and a very under-developed gas sector, both in terms of policy and management framework. Initially, gas people were not thinking about power; all along, Liquefied Natural Gas (LNG) is the business of gas. So, they did not bother about domestic supply.

It was not until 2008/2009 that government tried to develop gas obligation framework that commits the International Oil Companies (IOCs) to contribute gas to the domestic market. Many of the International Oil Companies have gas in oil wells capped because the profit from dealing in gas is lower than the profit from dealing in oil.

Financial Capacity of New Investors

Apart from inadequate gas supply, the new owners were supposed to buy the assets largely with equity, that is, with money they raised among themselves without borrowing. They were supposed to buy the assets with equity and use debt, that is, borrowed money to finance the improvement and upgrade of the assets.

Unfortunately, when they bought the assets, many of the investors used 100 per cent debt to buy the assets, instead of equity. Many of the investors had very low equity and much of debt. It has many implications. The Nigerian financial market is short-term- they are looking for their money after two months.

By the time they paid for the assets around July 2013, it took a long time for them to take over because of labour issues. By the time they took over, it was already time to start servicing the debts. So, the fire was coming to them on two sides - shortage of energy to sell and urgency for them to start paying debt.

NERC's Plan to Address the Gas Challenge

One of our plans is to convince the government to re-direct some export gas to the domestic market for power generation. We will plan to request that the government directs the International Oil Companies to reopen dormant oil and gas fields and incentivise investors to put their money in the development of gas infrastructure.

Currently, export price favours investment while domestic price of gas is seen by investors as a disincentive to investment in gas. The Federal Ministry of Petroleum Resources three years ago issued the indicative gas prices under gas -to-power policy from 2009 to 2012 and throughout the 2012 to 2016 tariff regime.

Gas prices have been regulated since the adoption of MYTO in 2008 and the regulated prices are applied in the 2012-2016 price regime. The regulated gas price for 2014 is $1.80million British thermal Unit

Tariff/Estimated Billing

The issue of estimated billing by the distribution companies is not supposed to happen but is happening because there is no metering. The distribution companies make more money when they base their tariff on estimation.

We are arranging $500million from African Export Import Bank to help the distribution companies execute their metering plans. NERC recently abolished Meter Maintenance Fee for all classes of consumers.

We did a minor review of the MYTO and the outcome is good news for electricity consumers. Let me correct an impression. NERC did not and has not increased electricity tariff. It is good to correct this impression because people are saying that NERC has increased tariff.

Consumers have been complaining about fixed charge and we did a minor review to reduce fixed charge with effect from June 1, 2014.

Our mandate is to ensure that consumers have access to adequate and reliable supply at a reasonable price. We, therefore, must strive to balance the dynamics between consumers, who naturally tend towards wanting to pay less for more electricity and the privatised power sector, which needs to be financially viable in order to provide the consumer with more affordable electricity.

Electricity tariff is made up of the fixed charge and the energy charge. The fixed charge recovers the capital cost and fixed operations cost like maintenance of poles, cables and transformers. It should be noted that the fixed charge is universal best practice and is not peculiar to Nigeria.

The energy charge is a function of the amount of electricity consumed and it is paid by consumers only when electricity is consumed. It is intended to recover the costs of the electricity and operations.

Consumers have complained about fixed charge and we delivered a comprehensive three-prong approach. We removed fixed charge for R1 consumers. We also cut fixed charge for other consumers and ensured that any consumer who does not receive supply for half a month will not pay fixed charge for that particular month.

In Benin Electricity Distribution Company, the fixed charge was reduced by 50 per cent from N1,500 to N750 with effect from June 1, 2014. The fixed electricity charge was also reduced by 39per cent from N1,280 TO N781.13 in Kaduna Disco. Consumers under Abuja Disco will now pay N702.11 as fixed charge against N985.92, representing 29 per cent reduction.

For Enugu Disco, the fixed charge has been reduced by 26 per cent from N874.50 to N650; while in Eko Disco, consumers will now pay N750 as against N1,125, representing 34per cent reduction. In Jos Disco, fixed charge has been reduced by 34per cent from N1,162 to N775.

In Kano Disco, fixed charge was reduced by 25 per cent from N889.50 to N669.90. Consumers under Yola Disco will now pay N750, against N1, 250, representing 40 per cent reduction; while consumers in Port Harcourt Disco will pay N700 as against N1050, which represents 33 per cent reduction.

In Ikeja Disco, fixed charge has been reduced by 17per cent from N899.50 to N750; while in Ibadan Disco, it has been reduced by 20 per cent from N781.13 to N624.95.

This reduction in fixed charge is one of the many positive actions that NERC has taken in recent times in its efforts to be more responsive to the needs of consumers, while at the same time ensuring that the power sector is strengthened for better service delivery.

It is expected that with the reduction of fixed charges, the distribution companies will be moved to improve supply so as to be able to recoup their investments through energy charge. This depends on the consumer having electricity to consume.

Remember that we have earlier directed that any consumer that has not received continuous or cumulative electricity supply for a period of 15 days in a month will not pay fixed charge and this order took effect from May 1, 2014.

We also need to achieve a balance. So, this minor review also introduces a slight increase in energy charge only for R2 customers and only in certain distribution companies. This minor increase will create additional layer of incentive.

However, consumers need not worry about the slight increase in energy charge for five obvious reasons.

First, the increase is so slight that the removal and reduction of fixed charge compensates for it. For this reason, many of the affected consumers will not even be paying more for electricity at the end of the day.

The second reason is that the slight increase is not for everyone but only for the R2 class of consumers. The implication is that it does not affect the Nigerian masses in R1 class.

Third, it is not even all R2 customers that are affected but only R2 customers in certain areas. For instance, in Ikeja Electricity Distribution Company, both the fixed charge and energy charge were reduced. So, it affects only few Nigerians.

The fourth reason why consumers need not to worry is that the slight increase will help increase the supply of electricity. The minor review will also help to incentivise consumers to be more rational about consumption because they will pay only what they consume.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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