The Nigerian Electricity Regulatory Commission (NERC) has proposed an upward review of the existing multi-year tariff order (MYTO) in the country. It is proposing that from 2020, power consumers in Nigeria will be charged an additional sum of N8-N14 for every kilowatt-hour of power. The long-term objective is to achieve a cost-reflective tariff.
Nigeria is not alone (African countries and their electricity price)
The impact of the proposed hike in electricity tariff on corporates, consumers and investors are mixed.
Economic theory implies that the price of any commodity is at equilibrium when its supply
equals demand. Any price above the equilibrium price results in a gap. This gap leads to distortions in the market as well as macroeconomic inefficiencies.
Currently, electricity tariffs in Nigeria are priced below the equilibrium price. This explains why the supply of electricity is not enough to meet the demand of the same. A move to a more cost-reflective tariff and an efficient pricing mechanism will encourage investment in the power sector. This, in turn, would create more jobs and improve the sector’s growth rate.
The proposed policy could easily become another challenge for the Nigerian consumer in the coming months and not just in terms of the increased price. The trickle-down effect of the hike could be inflationary. The rise in electricity tariffs without a corresponding increase in power supply would translate to a notable rise in the operating costs of corporates. The price burden is then passed to final consumers, leading to a rise in inflation.
Other issues to address in the power sector
The entire electricity value chain (generation, transmission and distribution) in Nigeria is saddled with challenges. The issues include:
Low capacity of the Transmission Company of Nigeria (TCN): Power generated is not
power transmitted. The newly signed deal between Nigeria and Siemens to generate
25,000Megawatts of electricity by 2025 will have minimal impact if the average Nigerian
does not receive half of the power generated. Challenges such as inadequate funding, suboptimal gas supply and poor infrastructure facilities have to be addressed to improve power transmission.
Debt overhang: Total exposure of the sector to the banking system is in excess of N1.20
trillion. This represents 5.54% of aggregate industry loans and 9.78% of total deposits. An
increase in tariffs would improve the cash flow of the Disco’s as well as reduce their debt
service burden. It will make the sector more viable and improve the cash flows of the operators by increasing their operating margins. If the government goes further by offering some debt forbearance, this will go a long way in fortifying the balance sheets of the banks and reduce their non-performing loans to total loans ratio. This ratio was put at 9.36% when the CBN governor addressed the media after the last MPC meeting in July. It is expected that any support and improvement at the fundamentals of the industry will attract additional investments and restore solvency to the industry.
The following is an excerpt from Financial Derivatives Limited, titled Economic Bimonthly Update