By Professor Wakeel Isola
Electricity tariff has been a subject of discussion in the public domain in the last few weeks. The bone of contention is the proposed upward review of power tariff by the Nigerian Electricity Regulation Commission (NERC).
It could be recalled, however that, following the unbundling of the electricity industry in Nigeria, NERC was created as the apex regulatory body for the implementation of the Electric Power Reform Act of 2005.
One of the cardinal objectives of the reform is to ensure a system of generation, transmission, distribution and marketing that is efficient, safe, affordable and cost effective throughout the industry.
It is instructive to note also that prior to the reform, electricity pricing was inefficient as the uniform tariff was below the cost of production per unit. In order words, the defunct National Electric Power Authority (NEPA) as government monopoly was a loss making company.
This was because the cost of production of electricity per unit was more than the selling price. As an economist, in one of the studies I conducted on the power sector reforms in Nigeria, it was estimated that while the uniform tariff was fixed at N7 Kwh, the optimal tariff could had been N11.60 based on the result of a simulation carried out in that study.
Therefore, the need to ensure a cost reflective tariff becomes inevitable as a means of transforming the sector. I envisaged also that a cost reflective tariff would motivate genuine private investors both local and foreign into the sector because adequate returns on investment would be guaranteed.
Following best global practice, NERC adopted the Multi-Year Tariff Order (MYTO) framework for determining the industry’s pricing structure. Essentially, MYTO is more or less a block building approach to the determination of end- user tariff which must be reviewed periodically, irrespective of whether it is a minor or major.
Indeed MYTO is a pricing regime which ensures that the Gencos, Transco and Discos are able to recoup their investments and fair returns within the macroeconomic milieu of the country. To date, MYTO has been reviewed several times since its inception in 2008.
In 2015, there was an amendment representing a 45 per cent increase in power tariff which generated heated disagreement between the government and stakeholders. The government on its part argued that the old tariff was not viable as it would not attract the required investment in the sector.
To register their complaints, the stakeholders, including members of the organized labour engaged in mass rallies across the country and issued a two-week ultimatum to government to revisit the decision. In what seems an apparent way of bowing to pressure from organized labour, the federal government suspended the implementation of the new tariffs. The suspension appeared to be a policy reversal capable of discouraging genuine private investors into the sector.
NERC has recently proposed another upward review which has expectedly generated much debate in the last few weeks similar to the situation in 2015. This write up is an intervention geared towards a presentation of suggestions that will contribute to the dialogue. The pertinent question which must unequivocally agitate any mind following the debate should be: why do we always have upward review and not a downward one?
In answering this question, it would be helpful to note that the MYTO methodology is based on the variables that change overtime and is very volatile. For instance, interest rate, inflation rate, and exchange rate are the major macroeconomic variables used in calculating the end-user tariff under MYTO.
In addition, most of the inputs employed to generate, transmit and distribute electricity were either imported or denominated in foreign currency. For example, gas which is mostly used by the thermal plants is a tradeable product; the price of which is determined in the international market in US dollars.
Also the plants and equipment used along the value chain of electricity production (generation, transmission and distribution) are imported items which must be paid in foreign currencies. Unfortunately, the depreciation of naira against international currencies has aggravated the problem. Over the years, we have had cause to move from exchange rate of about N110.00 to the dollar in 1999 to a dollar; about N365 to a dollar in December 2019, representing over 231.8 per cent depreciation within a period of twenty years.
From the available data from the Central Bank of Nigeria (CBN), the inflation rate jumped from about 8.9 per cent in July 2019 to about 11. 98 in December 2019. All these variables are not constant in Nigeria.
The high exchange rate coupled with high interest rate in the face of mounting inflation has therefore led to an upsurge in the cost of production, and consequently high tariff.
To further amplify the situation, the quantum of electricity generated, transmitted and distributed is too meager relative to expectation. Expectations had been high following the introduction of the power reforms to the extent that, similar to what happened in the telecommunication industry; electricity output would increase as many players come on board with sufficient capital and technical know-how.
In fact the projection from the Nigerian Energy Commission showed an output of about 33,000 MW. By the same token, it was simulated in one of my studies that Nigeria had the potential to generate about 54,000 Megawatts of electricity given the availability of gas and hydro resources.
Regrettably, after the reform, total generation has been oscillating between 3,400 MW and 4,700 MW, which cannot permit the realization of economy of scale and scope. Besides, the per capita of electricity available to consumers is too small, hence the standard of living in the country has been in a record low.
There is no doubt that, the hash macroeconomic environment coupled with the meager production capacity will always lead to high cost of production, and of course, the effect of this is automatically passed to the consumers; hence an upward tariff might be inevitable.
The unfortunate scenario triggered by the problem explained so far illustrates why the recent upward tariff can be justified. It is in order to posit that, the government represented by the NERC is on the right track by engaging in the process of consulting with relevant stakeholders in order to secure acceptance.
My position as an economist is however that, beyond consultations, certain basic issues must be addressed. First, the quality of service delivery in the power sector, which is characterized by black-out, brown-out and erratic supply, must be addressed.
The industrial sector, including the artisans and households are adversely affected by the erratic power supply. In an attempt to outwit the problem of unreliable power supply, producers have invested in in-house captive power generation to complement power supply from the national grid.
Also, households have devised methods of self-help to cope and adapt with the power situation using diverse strategies which are often dictated by their financial capabilities. In a recent study, it was apparent that both high income and low income families tend towards the use of generators. However, they also make use of lamps and solar energy in few cases.
Both classes of families also use gas stoves as an alternative to electric stoves for cooking and occasionally they use kerosene stoves. However, the attendant challenges of using in-house power generation have been the misallocation of scarce resources, high cost of production and low standard of living. Consequent upon this, the need to improve the service delivery in the sector is important in order to justify the proposed tariff hike.
Ideally, tariff like any other price of any commodity is supposed to be a signal to both the consumers and producers in allocating and distributing the scarce resources in the economy. Producers will come on board to produce if only the returns on invest is assured.
A rational consumer will buy a commodity if only utility is derived. Under this scenario, it is evident enough that the tariff structure under the MYTO framework favors only the producers while consumers are at a disadvantage owing to a number of factors.
For instance, it has been estimated that about 50 per cent of electricity consumers are not metered but only make payment by estimated bills. Under this condition, the proposed tariff can hardly be used as a means of allocating scarce recourses by the consumers.
In a manner of conclusion, may I say that the extent to which the proposed consultations by the government would go to spur stakeholders’ acceptance of the power tariff hike will depend on how much the questions of poor quality of service delivery, low quality of output and the scarcity of meters to the consumers are factored into the consultations.
To this end I dare say that, the fundamental principle under which power sector reforms hinges or operates, which is very weak in this case, must be addressed. Finally, all stakeholders including government, electricity consumers, workers in the sector, contractors, the civil society etc. must work together and operate on the same page. Workable tariff is just one of the problems besetting the power sector that requires urgent attention.
Isola is of the Department of Economics, University of Lagos