Social media is rife with complaints about how expensive electricity units have become. A friend recently said to me, “I used to buy ₦5,000 worth of electricity and use it for three months, now I can’t say the same.” First off, I applaud his energy conservation skills, but that’s a topic for another day; let’s discuss why you are paying more for electricity.
How your electricity tariff is calculated
Electricity tariffs are calculated based on a model called the Multi-year Tariff Order (MYTO). This model inputs the dollar exchange rate, price of gas, inflation and other parameters to calculate utility companies’ tariffs. Because these factors change often, the MYTO is subject to annual minor reviews and major reviews every five years.
However, before the review last year, there has been no minor review since 2015 and no major review since adopting the methodology. As a result, electricity prices remained the same despite the considerable rise in the dollar exchange rate, the increased price of gas and the rise in inflation since 2015. Essentially, tariffs did not reflect the cost of supplying electricity. While the average cost-reflective tariff for 2019 was ₦60.51/kWh, the Nigerian Electricity Regulatory Commission (NERC) allowed DisCos to charge only ₦33.83/kWh. This resulted in a tariff shortfall which contributes to the liquidity crunch in the electricity market. To prevent a collapse of the electricity sector, the government had to cover the shortfall, essentially subsidising the sector. According to NERC, the power sector recorded a tariff shortfall of ₦1.72 trillion t from 2015 to 2019, meaning the government had to pay about ₦425 billion per year to cover this.
So why is your electricity bill higher?
Subsidising the electricity sector is unsustainable, so the government in 2017 approved a Power Sector Recovery Plan (PSRP) funded by the World Bank. This programme has several financing guidelines that the sector must adhere to for access to the funds, one of which is an annual reduction in the amount provided by the government to cover tariff shortfalls.
Under the PSRP Financing Plan for 2020, the federal government approved only ₦380 billion to cover tariff shortfalls in 2020. This meant the regulator, NERC, had to adjust end-user tariffs to make up for the reduced amount. Average end-user tariffs had to increase by 59 per cent by July. NERC implemented a Service-Reflective Tariff which classifies consumers by daily hours of supply and commensurately increases their tariff. However, this increase was delayed to September 2020 due to the economic impact of the Pandemic on Nigerians.
It gets worse before it gets better!
Under the PSRP financing plan, NERC is expected to carry out an extraordinary review of the MYTO, which would provide a new increased tariff for the period 2021-2023. It is yet to be seen if the implementation of this tariff will happen this year. Earlier in January 2021, after releasing a new tariff order (that some sources claimed increased the average tariff by as much as 50 per cent), NERC made a U-Turn reassuringly stating that it had not approved any tariff increase.
While this may have provided a respite for electricity consumers, the truth is that tariffs have to go up. The government cannot afford to keep subsidising the sector, especially as the COVID-19 pandemic severely affected its finances. The government is looking to cut non-essential spending in the years ahead hence the need for the World Bank loan. Assessing these funds is dependent on the elimination of government subsidy to the sector.
Brace yourself because electricity tariffs are set to go even higher!