A Review of the Nigerian Energy Industry

Poor generation distorts power sector projections

Sam-Amadi, NERC*Wholesale tariff paid to GENCOs reduce
*R2, C1 customers grapple with tariff hike

Oscarline Onwuemenyi

07 June 2014, Sweetcrude, Abuja – The current inadequacy of power generation has thrown more kinks in the second Multi-Year Tariff Order, MYTO-2. introduced by the Nigerian Electricity Regulatory Commission, NERC, besides bringing increased stress to the private investors now running the power generation and distribution companies.

The MYTO was created to establish adjustments to the rate of electricity bills paid by consumers across the country, but when last week NERC announced a review of the electricity tariff system as contained in the MYTO 2 released in 2012, gone was the confidence that the generation capacity would grow to match the incremental system of tariff review to ensure sustainability for the power sector.

NERC chairman, Dr. Sam Amadi, who revealed details of the review in Abuja, explained that it was done to ensure that the industry remained financially viable and continued to attract investments.

He explained that though the review revealed favourable macro-economic indices, it also uncovered huge reduction in available energy capacity which the MYTO had projected at 9,061 megawatts, mw, in June 2012, but was at 4,306mw as at March 31, this year.

According to Amadi, this loss of available capacity far outweighs the benefits from the positive macro-economic indices.

“This is a 52% reduction on projected capacity. The reasons for this huge loss have been extensively reported and explained. Suffice to say that the consequence of this loss of available capacity completely outweighs the benefits that were gained from the positive marco-economic indices earlier discussed,” he added.

The NERC boss revealed that the MYTO provides that where the review shows that the aggregate of these variables (inflation, exchange rate, gas price and available generation capacity) have changed by plus or minus 5% of the MYTO figures, the changes are significant and would result in a review of the tariff.

He added: “The present review shows certain significant changes. For instance, whilst MYTO had projected an inflation rate of 13%, the inflation as at March 30, 2014 the cut-off date for the reviews is 7.8%, which is 5.2% less than projected.

“Similarly, MYTO projected an exchange rate of $1 to N178 but by March 30, data from the Central Bank of Nigeria shows a rate of N157 to $1, which is 11.6% less than projected.

Based on MYTO-2 assumptions, strong economic showings like lower inflation rate and lower exchange rate would have seen across-the-board decrease in tariff but low available generation capacity has ensured that such gains were wiped out.

As at June 1, 2014, there ought to have seen a general tariff hike as the electricity industry continues to grapple with the problem of low generation occasioned by inadequate gas supply to power plants.

Amadi also disclosed that as a result of the review, the wholesale tariff paid to generation companies has also been reduced.

The Ministry of Power and NERC have campaigned aggressively for the tariff hike, which they argue would enthrone efficiency and good governance in the Nigerian Electricity Supply Industry, NESI, even as they claim it would eliminate waste and guarantee cost-reflective pricing.

Amadi argued at the introduction of the MYTO-2 two years ago that it would ensure steady power supply and guarantee efficient customer delivery in Nigeria. These assumptions have, however, become a mirage and are part of the distortions caused by the current inadequacy of power generation.

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