Explaining the new electricity tariff

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Naija Branding
Why FG opted for electricity tariff review

Introduction

1. The estimated cost of electricity in Nigeria is ~N53/kWh. Lack of timely tariff reviews has meant we only charge N31/kWh to consumers leading to a shortfall of N22/kWh which is a subsidy. In total this subsidy cost the Federal Government of Nigeria N560 billion ($1.5 billion) in 2019 (7% of the 2019 budget).

2. If the status quo is maintained, the tariff shortfall subsidy in 2020 will be another N610 billion ($1.7 billion), although energy produced will be virtually the same as output from 10 years ago.

3. During the inauguration of the senate committee on power’s investigative hearing on 15th June 2020, the Senate President lamented that the N1.7 trillion that has been used to cover tariff shortfall over the last five years has prevented the average Nigerian from having access
to improved services in other critical sectors, e.g. healthcare, education.

4. Analysis corroborated by the World Bank have shown that 60% of the subsidy was used to cover electricity consumption for the richest 10% of the population. While billions of dollars are going to subsidise the rich, latest estimates indicate that 90 million of the poorest Nigerians have no access to power.

It should be noted that some off-grid systems in the country charge well over the N31/kWh on-grid (examples include Toronkawa minigrid in Sokoto and Rokoto minigrid in Niger amongst others.

5. There was a planned increase in tariff of 50% for all consumers scheduled for April 1st,2020. As mandated by Electric Power Sector Reform Act (EPSRA), NERC conducted public consultations. During these consultations, customers expressed willingness to pay cost reflective tariff if they received acceptable quality of service.

Based on this feedback, NERC and FGN agreed to delay the tariff review by 3 months in order to give all stakeholders the time required to design and implement a servicebased tariff system (this coincided with the onset of COVID-19).

This deferral cost the FGN an additional N90 billion in subsidy.

6. A service-based tariff system provides more equity and drives improvement
in service for all citizens. This tariff structure ensures that customers receiving high quality of
service should pay agreed rates with the DISCOs, while those receiving poor service would not experience any tariff increase.

The DISCOs themselves designed the implementation for their customers and have requested a “no objection” from NERC.

This tariff is contingent on DISCOs holding consultations and reaching agreements with their customers on penalties for poor service.

7. In the current submissions by the DISCOs, 80% of the increase in tariff will be borne by the richest 20% of the population. There is no change in tariff for the poor. Customers that receive less than 50kW of energy a month will not experience any increase and will continue to pay N4/kWh.

Customers receiving less than 4 hours of energy per day will not experience any tariff increase.

8. The Federal Government set aside N380 billion to provide subsidies in 2020 as part of the Financing Plan for the Power Sector Reform Plan (PSRP) approved by the President.

These funds are meant to continue the subsidy for the poor, while ensuring a transition to cost
reflective tariffs for others (in a phased process).

9. The Federal Government of Nigeria has a significant gap in funding the subsidy given its fiscal position. Even before the arrival of COVID-19 and the spectacular fall in crude oil prices, the 2020 appropriation approved by the National Assembly only provided N80 billion (20% of
the total) for tariff subsidy.

10. Based on the approved Financing Plan, 40% of the funds required for the 2020 tariff subsidy will come from the recently approved World Bank $750 million facility.
The World Bank facility is contingent upon removing the existing retrogressive subsidy regime that benefits the rich at the expense of the poor.

Section B – Role of the DISCOs:
11. In the past the Federal Government of Nigeria did not have any measures in place to enforce remittance of collections from the DISCOs.

In some estimates, this caused an inappropriate over retention of over N900 billion over the
past 5 years by the DISCOs. This is money the DISCOs owe the Federal Government. This debt to the FGN calls into question their solvency. Continued subsidies reinforce support
for a privatized power sector at the expense of the poor.

12. The remittance control measures introduced by NERC ensures that the DISCOs remit a regulated amount. The reluctance of some of the DISCOs to transition to service
reflective tariffs is borne out of a fear of an increase in remittance
requirements.

Section C – The Serious Impacts of Inaction for the Country:
14. Stopping the proposed tariffreview will have grave consequences for the Nigeria. The key impacts are listed below:
i. Increased financing pres pressure on the FGN: Postponing the tariff review till January will increase power sector subsidy for 2020 by N261 billion – there is no viable budgetary or lending path for securing these additional funds.

ii. Loss of World Bank $750 million facility: One of the Conditions Precedent (CP) for the World Bank approval of the $750 million facility to the Nigerian Government is a tariff review on July 1st as contained in the financing plan which was approved by His Excellency,
the President.

Failure to enact the tariff review will mean that Nigeria will miss a critical milestone thereby
resulting in non-disbursement of the funds. Without the World Bank funds, the FGN will need to find an additional N137 billion to meet the subsidy for 2020 – total new funding required will be N398 billion.

iii. Loss of additional $3 billion in World Bank and African Development Bank (AFDB) funding
for the country: It has been made clear from the World Bank and AFDB that there is an expectation as documented in our policy intent document to the IMF to remove retrogressive subsidies and focus on implementing policies for the poor and vulnerable.

The World Bank Federal Budget Support Facility of $1.5 billion to support the 2020
budget is dependent upon a sensible macro economic framework. Keeping retrogressive subsidies will disqualify us from obtaining these funds that are desperately needed.

In addition, low interest infrastructure funding for DISCOs of $1.5 billion from the World Bank
and AFDB that will be activated by

“Based on the approved Financing Plan, 40% of the funds required for the 2020 tariff subsidy will come from the recently approved World Bank $750 million facility”

December will be lost. These funds are critically needed to improve infrastructure alongside
the planned Siemens interventions.

iv. Collapse of the generation sub-sector: As a result of non-cost reflective tariffs, the generation subsector currently relies heavily on the subsidy for the payment of its invoices. Between October 2019 and April 2020, the FGN through the Payment Assurance Facility (PAF); a loan from the Central Bank of Nigeria is responsible for paying over 70% of the GENCO invoices.

The CBN Governor has stated thatthe disbursement of the World Bank funds is a CP for the disbursement of future PAF payments. Loss of the World Bank facility will result in non-release of PAF which will ultimately lead to the collapse of the generation subsector – resulting in the risk of a nationwide black out.

v. Reverse progresses made on non-FGN interference with tariff setting: One of the key features of the reform has been the transfer of tariff setting and consumer engagement responsibility to the DISCOs as envisaged under EPSRA. Any action by the FGN to cancel/delay the July tariff review puts the government firmly at the centre of tariff
setting thereby reducing investor confidence in the sector as well as further reinforcing public opinion that electricity is a public service as against a commercial commodity.

Section D – Options and Actions Needed:

15. In a country where over 50% of the population (majorly the very poorest) is not connected to electricity, government fiscal support in the power sector needs to focus on the off-grid space. With this in mind, His Excellency, the President, approved the 5 million Solar Home Systems (SHS) initiative under the Economic Sustainability Plan in response to COVID-19. This
initiative will provide low interest loan to manufacturers for the mass deployment of SHS to help over 25 million of the poorest Nigerians.  This is where the focus of the Executive and Legislature should be.

16. A combined narrative about the holistic approach to the Power Sector (on-grid and off-grid) and protections for the poor should be espoused by the joint arms of government.

17. DISCOs have continuously clamoured for cost reflective tariffs. Now that the Government is poised to allow them charge cost reflective tariffs to customers receiving high quality of service the DISCOs are backtracking solely because some of them are unwilling to increase their payment obligations for power produced by the Generating Companies.

18. Continued subsidy is rewarding poor performance by the DISCOs and preventing the electricity market from evolving, as envisaged in the Act, therefore DISCOs should be allowed to proceed with their customers engagements with NERC focusing on consumer protections.

 

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