The coming of the Tinubu Era at this critical juncture in Nigeria’s chequered history seems to have signalled, once and for all, the death knell of all energy-related subsidies. Hardly has the fallout from the federal government’s abolition of the Premium Motor Spirit (or petrol) subsidy regime died down than another subsidy regime looks set to bite the dust – as the administration of President Bola Ahmed Tinubu looks set to increase electricity tariffs in Nigeria by as much as 40% by July 1, 2023.
In assenting to the Electricity Bill passed in July 2022, the President effectively repealed the Electricity and Power Sector Reform Act, 2005, thus creating the Electricity Act 2023, which now consolidates all legislations dealing with the electricity supply industry to provide an omnibus and institutional framework to guide the post-privatization phase of the Nigerian electricity supply industry and encourage private sector investment in the sector. It also de-monopolises the generation, transmission, and distribution of electricity at the national level in a bid to empower states, companies and individuals to generate, transmit and distribute electricity.
As in the administration’s earlier policy moves since its inauguration (ie fuel subsidy and the naira forex floatation policy) the proposed electricity tariff increase is expected to have a far-reaching effect on various other sectors of the national economy and – most importantly – on household finances and the quality of life of the average Nigerian family. Already, the public domain is awash with intense discourses among various stakeholders – ranging from industry players and business analysts to organised labour and other civil society groups – as to the likely scenarios that would characterise the imposition of the new tariff in early July.
But what, really, is the new tariff about? What does it entail? What are its likely effects on the general population, and on the nation’s business community? What current inadequacies is the new tariff meant to ameliorate? What are its upsides and downsides – and what do they say about the policy direction of the Tinubu Administration, going forward? And what are Nigerians expected to do in the face of all these changes?
One thing is sure, though: With a monthly subsidy of about N50 billion still in the electricity sector owing to revenue shortfalls, the tariff hike will be another acid test for the administration’s market reforms.
The body responsible for regulating electricity tariffs in the country is the Nigerian Electricity Regulatory Commission (NERC), which periodically reviews and adjusts tariffs based on various factors such as inflation, exchange rates, gas prices, the US rate of inflation, available generation capacity, gas prices, CAPEX (i.e. Capital Expenditure) adjustment, as well as other changes, as well as the cost of operating the power sector itself. Some years back, it introduced the Multi-Year Tariff Order (or MYTO, for short), aimed at ensuring cost-reflective tariffs in the Nigerian electricity market. Under MYTO, electricity tariffs are scheduled to increase gradually over time to cover the actual cost of generating and distributing electricity. In its MYTO 2022 document, for example – as communicated periodically to Distribution Companies (or Discos), NERC explained that in line with the subsisting methodology, some indices with potential impact on electricity rates were considered, adding that these indices would be reviewed every 6 months.
NERC’s current service-based tariff (SBT) was benchmarked on an exchange rate of N441 to the dollar, and an inflation rate of 16.97%. Going by NERC’s orders, the average tariff across the DisCos and various classes of end-users was N25 per kilowatt. In the Order of 1998/2020, the average tariff went up to N60 per kilowatt; in the MYTO for 2022, the average tariff was N64 across classes of customers. The foreign exchange rate used in determining the 2015 tariff was N198.97/$, N383.80/$ was used in 2020, and N441.78/$ was used in 2022. The inflation used in the 2015 MYTO was 8.3 per cent, 12 per cent was used in 2020 and 16.97 per cent in 2022. Currently, the inflation rate is 22.41 per cent and some experts have projected that it would hit 30 per cent by the end of June given the floating of the naira and subsidy removal on PMS.
It must be noted, however, that besides NERC, the aforementioned DisCos also play a role in the implementation of tariffs, because they are responsible for billing customers and collecting payments for electricity consumed. They also bear the brunt of customers’ reactions when tariff adjustments are made – as shall soon be seen when the new tariffs are implemented in a few days.
Of course, as in the removal of fuel subsidy and the forex floatation policy, the expected socio-economic impact on ordinary Nigerians, on household incomes and expenditure, and on the cost of doing business – especially on the part of manufacturing companies and others – has been well-articulated by various stakeholders, who not only lament the worsening conditions that will inevitably result from this policy, but also point out that even the electricity that is being paid for is largely unavailable, and at best epileptic. Other stakeholders have also raised the issue of the continuing (and huge) metering gap that separates those under the prepaid scheme and those under the relatively more arbitrary estimated billing scheme. These, and other factors such as gas prices, losses and actual generation capacity (mostly at below 5,000 MW from 17 power plants), they say, make the new tariffs a bitter pill to swallow.
But aren’t there any advantages to the proposed new electricity tariffs? Indeed, there are – lots of them, in fact. And these advantages are what the administration is counting on to form part of the fulcrum on which its progressive market policies will stand. Industry experts have highlighted at least 7 potential benefits the new electricity tariffs hold for the manufacturing sector, in particular, if well implemented; indeed, they call it a ‘potential game-changer for the sector – in that it will do the following:
- Reduce the cost of alternative energy sources;
- Improve inflows of Foreign Direct Investments and manufacturing performance;
- Increase in Internally Generated Revenue;
- Improve infrastructure;
- Lessen the tax burden on manufacturers;
- Create a competitive and lower electricity tariff structure in the long run;
- Create more investments in renewable energies, backward integration and energy security, stable power supply and proper planning.
In addition to the merits above, sub-national constituents (states) would also be able to issue licenses to private investors who can operate mini-grids and power plants within their respective jurisdictions – even if such licenses would not extend to inter-state or the transnational distribution of electricity.
A caveat, though: Some consumer-protection activists in the electricity industry have weighed on the need for the federal government to ensure that the upward review of power tariffs does NOT henceforth establish a pattern of blackmail by DisCos on electricity consumers, but rather that it wouldn’t be such a bad idea if all new policy decisions and adjustments, even ones as well-intentioned as this one, should be addressed through bodies such as the Consumer Protection Council, or in consultation with an organized body of electricity consumers, etc.
Other recommendations, as to how the Tinubu-led federal government should approach this policy, have been proffered, as follows:
– Look into gas pricing and align it with domestic gas obligations. Gas to power generation plants/thermal plants should be allowed to access gas which should be traded in local currency.”
– Appoint the best people to run the industry and implement the Tinubu reforms. There is no rocket science in the electricity sector. The right people can easily diagnose what is required to reduce transmission and distribution losses, for example. These solutions will, however, require massive local and foreign investment.
– As far as electricity supply is concerned, Nigerians do not suffer because electricity tariffs are high, no. Make no mistake about that. They suffer, rather, because most of them don’t have good, well-paying jobs – and therefore have low and unsteady incomes. No tariff is low enough if you don’t have any job. That is why some Nigerians would risk their lives to cross the Sahara Desert and the Mediterranean Sea to get to countries where – ironically – tariffs are much higher than in Nigeria. So, there is, across the board, a general willingness to pay cost-reflective tariffs, but only if they would enable more stable power supply, which will translate to a more robust economy – and create more, and better, jobs.
– Expedite the supply of prepaid meters. It is bad enough to pay for electricity not consumed, even when the tariff is low. But it is more terrible when the tariff is increased substantially. The most reasonable estimate of the electricity consumed is from the meter. Even a faulty meter, as someone has said, is more reliable than the judgment of a DisCo official sitting in his office. If the customer travels out of town throughout the month and switches off all his appliances, only the post-paid meter will correctly read zero. If the customer doesn’t receive power for the whole month, only the postpaid meter will read zero.
– The government should reverse the new import duty which the meter asset providers say has been increased from 10% to 45%. This was NOT part of the agreed meter pricing estimate. If the government can save much more money on subsidies, it should be able to do without this import duty increase.
– DisCos should pay their invoices to the NBET and the market operator in full before other obligations are met. This will ensure that Transmission Company of Nigeria (TCN), the GenCos, and gas suppliers are not starved of cash. In a normal company, you cannot buy feedstock, sell goods and then pay your lenders before paying for the feedstock; the flow of feedstock will cease.
– Tariffs should be adjusted downwards by NERC WHENEVER a threshold return on equity is exceeded. Benchmarked caps should be placed on employee remuneration and other costs to ensure that cost escalations do not prevent the companies from reaching that threshold. This way, tariffs can come down as the industry gets more efficient.
– The Tinubu Administration should commit that government ministries, departments and agencies (or MDAs) will NOT be among the defaulting customers (ie via unpaid bills), because even the size of collection losses can be a disincentive to investors. It is better to promptly pay the bills of its agencies and reduce collection losses on the front end than to subsidize the industry on the back end.
- This may be unpopular, but, as some industry analysts have recommended, the average tariff should be achieved by having residential and commercial customers pay ABOVE that average while industrial customers pay below it. If the average tariff is, say, N50, residential and commercial customers can be made to pay N55, while industrial customers pay between N40 and N45 (depending on their relative volume). Because if our industries do not thrive for any reason (especially as it affects the cost of production) we as an economy will not thrive.
- NERC should endeavour to carry out the tariff reviews bi-annually (as provided for by the MYTO 2015 Order) so that the price adjustments are smaller. Even when there is NO price change following such a review, NERC should still announce that a review has been done and that there would be NO price adjustments. Consumers will come to expect and accept these adjustments whenever they occur. If these adjustments result in national panic, investors will not build new facilities. As a country we should be making investors comfortable enough to invest NOW, knowing that they are hedged against future potential changes in market conditions.
– President Tinubu should redirect the funds previously earmarked for electricity subsidies to build roads. These roads will benefit Nigerians without frustrating private investment. The funds can also be saved to reduce overall recurrent expenditure and borrowing.
It goes without saying that NOBODY likes to pay higher tariffs or taxes, by whatever name they are called. But sometimes you get to the point at which something that appears to be beneficial today will actually cost you dearly tomorrow. That’s where we are now; we’re currently paying dearly for yesterday’s subsidies. The World Bank, in a recent report, warned that without the reforms that President Tinubu has now taken on, Nigeria will harbour 25% of the world’s extremely poor people by 2030. Even if you as an individual (or your immediate family) are fortunate enough not to fall into that category by the Year 2030, a lot of people that are not – extended family, friends and even strangers – will not let you have peace. It has already begun, if you haven’t noticed: the constant requests for ‘urgent 2k and urgent tirifaif’ are becoming a social pandemic.
This is one of the painful reforms we simply HAVE to take to avoid normalization of that sad and scary outcome. So it is in our collective self-interest to support the government’s move toward cost-reflective tariffs by July 2023.
All in all, then, the signing of the Electricity Act 2023 by President Tinubu is another reflection of the boldness and commitment of his administration towards the diversification and decentralisation of the power sector. The empowerment of subnational bodies such as state governments as well as private investors, for which the Act provides, as well as the adoption of renewable energy and the reformation of the governance structure of the power sector, are – if faithfully and competently implemented – capable of driving investment, improving electricity access, and fostering long-term economic growth.