Electricity tariff schemes reflect the degree of a country’s power sector development, cost of service delivery, government subsidies and policy. In addition to the quality of service, it shapes business, commercial and industrial operations. This article provides an overview of the cost-reflective and service-based electricity tariff scheme.
What is a Cost-Reflective Tariff?
A Cost-Reflective Tariff (CRT) is a tariff that envisages the true cost of electricity service delivery to the consumers while allowing a reasonable Return on Investment (RoI) for the investor. A CRT does not include government interventions or subsidies.
Take, for example, a loaf of bread for breakfast; to produce a loaf of bread, a baker needs to have the required ingredients for making bread. In addition to this, the baker needs other essentials such as an oven, baking tools, reliable electricity supply e.t.c. The baker inputs raw material costs and other production costs, in addition to the profit, before arriving at the cost of a loaf of bread. Therefore, a tariff is Non-Cost Reflective when the true costs of tariff components are excluded in the final tariff.
On the other hand, a Service-Based Tariff (SBT) is a tariff based on the number of hours of electricity service a consumer receives from the Distribution Company (DisCo). For example, Customer A receives 20 hours while Customer B receives 16 hours of electricity supply in a day. Therefore, in applying the SRT, Customer A will pay more for electricity than Customer B because he receives must hours of supply than Customer B.
All around Africa, the challenge of implementing a cost-reflective tariff is paramount. As a result, several governments seek ways to improve tariff affordability for consumers in the electricity sector. Service reflective tariffs, consumer subsidies, and cross-subsidies are measures being put in place to improve affordability, especially for low-income consumers. In Nigeria, for example, the federal government, in a bid to improve the sector’s financial viability, made a switch from a cost-reflective to a service-based tariff, in which consumers will pay based on the duration of electricity supply. Meanwhile, some days back, the Zimbabwean government announced its expected transition to the cost-reflective tariff in 2022 to enable the Electricity Supply Authority (ZESA) to recover from the sector’s financial losses.