A Review of the Nigerian Energy Industry

Nigeria: Towards electricity for all

Power transmission02 September 2013, Abuja – Nigerians are very smart people; in fact, they are among the smartest people in the world. We also respond to new things, so long as they benefit us. That’s why I find it difficult to believe that some people are not seeing the future of the Nigerian electricity supply industry.

Recently, specifically in June, the yearly slight adjustment in tariff occurred. Now we have a system that is annually self-adjusting and people have seen the mechanics of the tariff. The methodology applied here will transcend this year and many more years to come.

The annual increment in tariff is enshrined in the Electric Power Sector Reform Act 2005, which also established the Nigerian Electricity Regulatory Commission, NERC. Section 76(2) expressly says: “This sector shall be regulated according to one or more methodologies adopted by the commission for regulating electricity prices and such tariff methodologies shall allow a licencee that operates efficiently to recover the full costs of its business activities including a reasonable return on the capital invested in the business; /Provide incentive for the continued improvement of the technical and economic efficiency with which the services are provided;/ Provide incentive for the continued improvement of quality of service;/ Give to consumers economically-efficient signals regarding the costs that their consumption imposes on the licencee’s business; /Avoid undue discrimination between consumers and consumer categories; /Phase out or substantially reduce cross-subsidies.”

There is no gainsaying that the electricity sector is hugely capital-intensive and requires time to fully mature. For example, the Multi-Year Tariff Order (MYTO) was developed to establish the electricity tariff to be paid by Nigerians, as long as the costs of providing electricity are borne by consumers. Basically, the model calculates the revenue requirements of the power sector and then extracts the prices that must be charged accordingly, in line with the system capacity. Huge amounts have been expended on this campaign in the last few years. And all efforts are geared towards educating the public, because it is a framework that has come to stay with us, if we must make progress in national per capita in electricity.

People should be told in plain language that this system was designed with Nigerians in mind; it will take the support of Nigerians for it to succeed in building on the foundation laid. It also provides for a 15-year projection for tariff in the sector because of the long gestation period needed for investors to recoup their investment. Ultimately, it will ensure, in the long run, that as the quantity of electricity increases the price of the product will fall. This is a well-known economic principle. The NERC cannot change an established economic theory. And that is for sure.

So NERC is only applying a theory that it hopes will improve the country. I hope Nigerians will understand. Interestingly, much of the inefficiencies in the system has been removed over the years. It is time to save the sector and to deepen institutions for the future. We can do it as a people. On the surface, it appears as one sacrifice too many . But, knowing that energy sufficiency for the country will mean a solid foundation for growth in the multiplicity of businesses and many others in the country, it is important to look at the infrastructure developed to stabilise and meet the nation’s energy needs. Just a little more sacrifice and we would be there.

In educating the Nigerian public, emphasis has to be placed on analysing in context key variables such as metering, MYTO and the credit advance payment for meter implementation. They all inter-play to shape the power sector. First, let us look at what metering does to the electricity sector. Take, for instance, a survey conducted before the recent mass deployment of meters. Statistics all over the country showed that the industry operators captured 5,172,979 in their books, representing 18.65% of households in Nigeria. This obviously has to be broadened to 80-90% nationwide.

The present headship of the NERC has shown willingness to transform the industry. Though there are obvious gaps in metering every household, I am sure the current team has taken the challenges head on. In a matter of years, not decades, electricity for all will be achieved. It is a slow but steady journey; certainly, we will get there someday.

In designing the MYTO, key variables were factored in: general inflation, interest rate and exchange rate. Other variables considered in designing the tariff methodology were plant load factor, losses, gas price, and depreciation. Projected generation capacity as well as capital and operating expenditure converged to shape the tariff that distribution firms charge.

There is also the credit advance payment for meter implementation, which is a system designed to enable consumers have access to meters even though they have not fully paid up for the product. Payment can now be spread over a period in the monthly billing. These are all measures put in place to assuage the pains of low -income earners. The high-income group can take advantage of the process, though one can purchase the meter outright.

The story of the power sector in Nigeria is one that elicits great concern, but with discipline and determination the reform process, which is on the right track now, will yield heavy dividends. Surely, we are also nearing the era of estimated billing. The long and tortuous journey is particularly not palatable. States should also evolve a mechanism to support what the government at the centre is doing towards realising the dream of electricity for all. The existing meter gap has to be closed to allow the reform process greater chance of survival. Then, the MYTO has to be implemented faithfully to give the process a chance of making it to the next stage. Finally, the credit advance payment for meter implementation has also smoothly taken off. Nigerians must take the full advantage offered by this scheme towards total meter coverage for the country. We can do it as a people. Let’s unite to support the sector which will become the critical success factor in the next decade and beyond. Nigerians are very understanding people. They won’t change this time.
— Iheanacho, a former ministerial aide, writes from Abuja.

– Leadership

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