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Electricity price rises without matching increase in generation

By on June 2, 2014

Despite the gap in projected and actual available generation capacity in the power industry, a recent review of the Multi Year Order (MYTO) by the Nigerian Electricity Regulatory Commission (NERC) which raised the prospect of increase in monthly tariff paid by certain classes of electricity consumers has triggered fresh controversies in the power sector, reports Chineme Okafor
The 2014 bi-annual review of the Multi Year Tariff Order (MYTO) that was recently conducted by the Nigerian Electricity Regulatory Commission (NERC) has revealed that there will be a marginal increase in the monthly tariff paid by certain classes of electricity consumers in Nigeria.

What this means is that starting from June 1, 2014, each of the customers that fall within the affected tariff classifications will have to pay more for energy services supplied to them by their various distribution companies.

The increase which will mostly affect customers within the tariff classes of Residential-2 (R2) and Commercial-1 (R1), will however not affect the total amount that these classes of consumers will pay for the fixed charge component of their bills; the fixed charge are usually embedded in the monthly electricity bills and has been justified by NERC and industry operators as a universal practice for maintenance of operational hardware like transformers, office building, wire and cables amongst others.
But even with the recent tariff increase, electricity customers are not guaranteed adequate supply of electricity by operators in the industry because of the lingering shortage in overall generation capacity of generating plants in the country.

The MYTO framework had during the review process projected a 2014 overall power generation capacity of 9,061 megawatts (MW), but figures from the National Control Center (NCC) Oshogbo shows that the market only has about 4,306MW gross capacity to share, meaning a huge 4,755MW will be missed as a result of several reasons ranging from low gas supply, vandalism of power assets and possible energy loss from poor infrastructure.
For instance, the Chief Executive Officer of Egbin Electric Power Plc, which is Nigeria’s largest power generating station with an installed capacity of 1,320MW consisting of six units of 220MW each told THISDAY in a recent interview that the plant had undergone intensive repairs of its units such that it could do almost 1,100 megawatts but the fact that adequate gas supply was not guaranteed to it, it’s output had been pegged at a maximum of 600MW, meaning that it cannot take advantage of the existing economy of scale to operate the way it would want to.

Justifying the tariff review
According to the design of the MYTO framework, NERC stated at its announcement of the new tariff order that certain electricity distribution networks within the Nigeria Electricity Supply Industry (NESI) will rather witness some level of reduction in the various components of their monthly electricity tariff to consumers.

It explained that various variables had come in to play in the determination of the Disco-specific tariff. What this means as stated by the Chairman of NERC, Dr. Sam Amadi, in his announcement in Abuja is that for instance, the total monthly fixed charge in the bill of customers that are within the Ikeja Electricity Distribution Company in Lagos which was hitherto N894.56k will now drop to N750 within the new tariff structure while that of customers in the Abuja Electricity Distribution Company will remain at N702 for R2 customers.

On retail price of energy, the new tariff noted that there will be a slight increase in the retail price of electricity supplied to R2 customers in the Abuja distribution network by N1.45k from the previous N13.25k to N14.70k while the same customer class in Ikeja distribution network will have no increase in their retail price for electricity. Accordingly, the differentials in each of the Disco’s approved tariff are occasioned by the total costs incurred in distributing power allocated to each of them. Ikeja for instance will spend less in distributing power to its customer base due to its almost close-knit landscape as compared to Abuja which covers Kogi, Niger and Nasarawa states.
While indicating in his presentation that the tariff is specific to each distribution network, Amadi however said that the aggregate review indicates a reduction in the wholesale tariff that would be paid to Generation Companies (GenCos) as from June 1; this is also due to the reduction in generation costs to Gencos.

He explained that certain significant changes in the country’s macro-economic indices like the inflation and exchange rates as well as price of gas that the commission usually collects from the Central Bank of Nigeria (CBN) and National Bureau of Statistics (NBS) for the review had impacted well on the tariff output, hence, his claims of a moderate increase.
The chairman explained that save for the favourable macroeconomic variables, R2 customers in Abuja distribution network would have for instance paid N985.92k as monthly fixed charge based on its projections for these macro-economic variables.
“The NERC on Friday May 21, 2014 approved the review of the MYTO. This review will take effect on June 1, 2014 and it has reduced fixed charge component of the tariff that would have taken effect on June 1.

The MYTO provides for bi-annual reviews that take effect on June 1 and December 1 to ensure that some critical and financial variables underlying electricity tariff in Nigeria are still realistic and current. These variables are the rate of inflation, exchange rate, gas price and available generation capacity,” Amadi said.

He further stated: “To ensure that the Nigerian electricity market remains financially viable and able to attract investment to improve capacity and reliability, electricity prices are indexed to changes in these variable. The review shows that the aggregate of these variables have changed by plus or minus 5 per cent of the MYTO figure; the changes are significant changes.
For instance, whilst the MYTO had projected an inflation rate of 13 per cent, the inflation as at March 30, 2014, the cut-off date for the reviews is 7.8 per cent which is 5.2 per cent less than projected. Similarly, MYTO projected an exchange rate of $1 to N178 but the March 30 data from the CBN shows a rate of N157.30k to $1, which is 11.6 per cent less than projected.”

Tariff hike, low generation capacity
With regards to the gap in projected and actual available generation capacity in the industry, Amadi explained that the resultant effects of protracted loses in generation capacity was that the benefits from the macro-economic variables are now outweighed by the generation loss, hence, the increase in end user tariff.
“Recalling that one of the indices for the minor review is available generation capacity, unfortunately the well known fact today is that gross available capacity from the grid as of 31st March review date is 4,306MW; this is well below the 9,061MW that NERC had on the basis of all information available to it when MYTO-2 was set in June 2012.

This is a 52 per cent reduction on projected capacity, the reasons for this huge loss have been extensively reported and explained but suffice to say that the consequence of this completely outweighs the benefits that were gained from the positive macro-economic indices,” Amadi said.
He further added that: “The direct consequence for the NESI is that the significant fixed costs incurred by all three sectors of the NESI have to be spread over a much lower quantity of energy projected to be sold to consumers. For this reason, the commission regrets that the distribution element, i.e. the end user or customer tariff will have to increase.

This is in fulfillment of the statutory obligation in section 5.76(2)(a) of the EPSR Act 2005 which mandates that the commission sets a tariff methodology that allows a licensee that generates efficiently to recover the full costs of its business activities, including a reasonable return on the capital invested in the business.”
As it stands, a meagre 3,424MW which the NCC reportedly receives will be shared by 50 per cent of Nigeria’s 160 million population that are connected to the national grid; the regulator however stated that its commitment to regulatory due processes has helped grow investors’ confidence in the sector and that the MYTO framework remains a critical assurance mechanism of the financial viability and regulatory certainty of Nigeria’s emerging power sector, adding that the ultimate goal of expanding generation capacity and strengthening reliability in the electricity market will be achieved through it.

Customers React
As expected, electricity consumers in Abuja that are aware of the expected price hike have questioned the rationale for the increase while members of the defunct Power Holding Company of Nigeria (PHCN) labour unions who had earlier opposed government’s privatisation of the power sector considers the hike to be exploitative.

Customers who spoke to the paper at the Wuse 2 cash outlet of Abuja Electricity Distribution Company (AEDC) expressed their dismay at the seeming inability of the NERC to get the distribution companies to provide meters that have been paid for by them.

One of them who was not comfortable with disclosing his name to the press, ironically stated that he had no difficulties with the fixed charge component of his bill but the energy cost which he said was too much compared to his monthly usage which he claimed was very low. His bill is estimated by AEDC due to its refusal to provide him with a meter that he had paid for and with which he said will be useful in regulating his energy consumption.

While noticeable changes in the MYTO-2 framework include more flexibility in wholesale generation pricing, consideration of many other essential variables during its minor reviews and other fuel types, the framework thus created 14 different classes of customers that would pay different rates according to their class as well as consideration for poor customers.
In this case, consumers that use less than 50Kwh/month would enjoy a special benefit of not paying a fixed charge for their electricity and they are regarded as lifetime consumers placed under the R-1 class R1 but such customers may be moved up to R-2 based on the average monthly electricity consumption of the previous three months.

For example, if the calculated average consumption for three months is above 50Kwh, the R1 consumer will be advanced to the next tariff class.
However, an R1 consumer could use more than 50 Kwh of power in one or two months of the three, but still remain classed as R1 so long as the average usage for the three months was less than 50 Kwh. Similarly, a fund to be administered by NERC will be dedicated to the subsidisation of electricity consumed by these poor customers; Amadi however said that the administration of the fund is being worked out by the commission.

 

 

[This Day]