One feeling unites Nigerians across various religious, ethnic, and geographical landscapes: that sense of distaste and uproar when there is an announced electricity tariff increase! Nigeria has the largest population of people (87 million) in Africa without access to electricity. However, about 40 per cent of its 206 million people live below the country’s poverty line of NGN 137,430 (about $334) per year[1], highlighting the need for energy access solutions that consider the potential energy burden of customers. Perhaps, the strong correlation between electricity access and income levels cannot be over-emphasized.
There is no doubt that multilateral donors and government subsidy programs have enabled millions of Nigerians to afford electricity despite the energy sector challenges. Still, it is likely that the economic situation may not improve from the status quo in the near term, especially as the subsidy regimes for the energy sector wind down gradually due to fiscal constraints and push for a market-driven cost-reflective tariff. This will potentially trigger widespread incidence of higher energy burden for low-income consumers in peri-urban and rural areas. Thus, while 24/7 electricity is desirable, it is vital to ponder the high energy burden for millions in a post-subsidy electricity market, given the country’s current economic state.
Energy burden is defined as the portion of the total household income used for residential energy costs, expressed as a percentage [2]. According to the World Bank’s threshold indicated in its Multi-tier Matrix for measuring household electricity supply, a household is said to have a high energy burden when the annual cost of energy exceeds 5 per cent of household income [3][4]. Anker Living Income Reference Value for Rural Nigeria estimates family income at NGN 63,962 per month or NGN 767,555 per year in 2020[5]. Rural household electricity consumption in Nigeria is between 0.38kWh/day to 20.56kWh/day[6] (or 139kWh/year to 7524kWh/year). Assuming an electricity tariff of NGN28.03/kWh[7], the estimated annual electricity cost for a rural household using average consumption of 2737.68 kWh/year[8] is NGN 76,737 per annum, which exceeds 5 per cent of the estimated income of a rural household in Nigeria. This indicates the current energy burden millions of Nigerians shoulder despite the current subsidy and Nigeria’s grid electricity tariff being the cheapest in Africa[9]. The post-subsidy era will, unfortunately, exacerbate this energy burden.
The Reality We Face
The UN Sustainable Development Goals 7 highlights the need for modern energy access to be affordable; however, often, techno-economic analysis of energy access solutions focus on affordability estimates based on a 24/7 supply basis rather than on the demand basis, which takes into account the limited & priority hours of use that better captures customers reality. While the lack of actual demand data, the opacity of customers income levels and limited availability of technological tools may have necessitated this approach, it has resulted in many failed projects because the customers will always adjust their demand and time of use to what they can afford – negating the optimistic projection of project developers. Although customer demand pattern and time of use vary based on socioeconomic status, lifestyle, culture, and climatic factors, the socioeconomic status of customers is a key factor in the financial sustainability of any energy project. Understandably, customers in Nigeria may be unwilling to disclose their economic status and income levels. However, some policy efforts are crucial and innovative approaches can be explored to make such data acquisition possible and easily accessible.
Nigerians may clamour for more energy supply, and rightly so, the country requires adequate energy to meet enormous demand gaps in urban centres. But with the rising cost of grid electricity and self-generation following the gradual removal of subsidies, most Nigerians in rural and peri-urban areas with low incomes may not afford increased hours of power supply. Rather, they require quality power supplied at productive and high priority periods pending when their socioeconomic status improves. Rural areas typically have characteristics that threaten the viability of energy projects, e.g., low productive use, high energy loss, low metering penetration, low-income dwellers, and huge distribution network assets (DNA) and metering investment requirements. Therefore, deploying energy solutions in these areas that focus on priority hours will ramp up aggregated demand within those priority hours. Furthermore, an affordable tariff due to reduced capital expenditure (CAPEX) and operational cost for limited supply hours makes this approach optimal.
Alternatively, stakeholders can promote energy efficiency programs amongst these low-income groups to reduce their energy costs and enhance affordability. Although these approaches may impact the length of time needed to recoup project investments, the certainty of revenue flow given that the solutions meet customers economic reality should provide comfort to investors. Again, negotiating these priority periods may not be easy across communities due to varying customer needs, distribution network constraints, and variability of supply from solar for off-grid energy providers.
The way forward
In March 2020, the Nigeria Electricity Regulatory Commission (NERC) took a bold step from a demand-based tariff regime to a Service-Based Tariff (SBT) regime implemented in September 2020. While this is commendable and ensures some level of fairness, its implementation by electricity distribution companies (DisCos) across the country is not without challenges. With less emphasis on the ability of customers to pay (affordability) irrespective of supply hours received, the focus of the SBT regime is to ensure that the rates paid by customers align with the quality of service as measured by the average daily availability of supply. Therefore, all stakeholders and participants in energy access projects must take steps to align energy project economics with the potential energy burden of customers considering tariff affordability and priority period of power supply especially, in the post-subsidy era.
Some DisCos are making good efforts via deepened customer engagements to understand customer needs and communities’ supply priority period as a loss reduction strategy. However, their dispatch plans and scheduling decisions should be more data-driven, and demand-side focused. Digitalization strategies via the procurement of Supervisory Control and Data Acquisition (SCADA) system, Energy Management System (EMS), Commercial Management Systems (CMS), smart meters, and other advanced technologies based on its Performance Improvement Plan (PIP) CAPEX outlay will likely improve DISCO’s visibility, capabilities, and performance in this regard.
On the other hand, energy modellers for off-grid project developers should consider that not all communities served within rural and peri-urban areas will require 24/7 electricity but supply that meets critical demand periods between certain hours of the day and fits their economic capability per time. These approaches to energy service and power supply will enhance customer service experience, build trust between customers and utilities (on-grid and off-grid), promote supply certainty, improve productive use, enhance project sustainability, and reduce operational costs in these rural and peri-urban areas as we transition to a full cost-reflective tariff era.
References
[1] World Bank, “Nigeria Releases New Report on Poverty and Inequality in Country” (May 28, 2020)
[2] Hernández, Diana, and Stephen Bird. 2011. “Energy Burden and the Need for Integrated Low-Income Housing and Energy Policy.” Poverty & Public Policy 2 (4): 668–88. https://doi.org/10.2202/1944-2858.1095.
[3] Kojima, M. and Trimble, C. (2016) Making power affordable for Africa and viable for its utilities. Africa renewable energy and access program (AFREA). Available at: https://openknowledge.worldbank.org/bitstream/handle/10986/25091/108555.pdf?sequence=7 (Accessed: 2021)
[4] ESMAP (2015) Beyond connections: Energy access redefined, Energy Sector Management Assistance Program, World Bank Group, Washington DC.
[5] Anker Research Network (2020) Rural Nigeria 2020. Global living wage coalition. Available at: https://globallivingwage.org/wp-content/uploads/2021/01/Rural-Nigeria-LI-Reference-Value.pdf
[6] Isihak, S., Akpan, U. and Ohiare, S., 2020. The Evolution of Rural Household Electricity Demand in Grid-Connected Communities in Developing Countries: Result of a Survey. Future Cities and Environment, 6(1), p.10. DOI: http://doi.org/10.5334/fce.96
[7] Assumed electricity tariff based on NERC’s 2021 Multi-Year Tariff Order (MYTO) for AEDC’s residential customer within Band D and E (lowest bands)
[8] Isihak, S., Akpan, U. and Ohiare, S., 2020. The Evolution of Rural Household Electricity Demand in Grid-Connected Communities in Developing Countries: Result of a Survey. Future Cities and Environment, 6(1), p.10. DOI: http://doi.org/10.5334/fce.96
[9] Trimble, Christopher Philip, Masami Kojima, Ines Perez Arroyo, and Farah Mohammadzadeh. ‘Financial Viability of Electricity Sectors in Sub-Saharan Africa: Quasi-Fiscal Deficits and Hidden Costs’, 2016. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2836535.