Transitioning to a Cost Reflective regime – Positive for the economy?

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In response to the liquidity challenges and limited profitability in the Nigerian Power Sector, the Nigerian Electricity Regulatory Commission (NERC) released the ‘2016 – 2018 Minor Review of Multi-Year Tariff Order 2015 & Minimum Remittance Order’. The policy indicates that from July 2020, consumers of power supply will face an increment of N8-N14 for every kilowatt/hour of power distributed, to fully reflect the costs and operating climate faced by the Discos.

Transitioning to a Cost Reflective regime – Positive for the economy? - Brand Spur

For a prolonged period, the power sector has been plagued by a cash crunch within its value chain, with a ripple effect on core operators and segments. With the current tariff charged on electricity supply to end-users and the government’s inability to fund the revenue gap, the Discos are unable to fully fund the Nigerian Bulk Electricity Trading (NBET), which in turn defaults on Power Purchase Agreements (PPA) with the Gencos,
causing overall discord in the power sector value chain.

However, with the recent signing of the N600bn intervention fund, the Government, through the Power Sector Recovery Plan (PSRP) intends to fund all shortfalls owed to Discos within the periods of 2015-2018, and going forward, till a cost-reflective tariff is achieved.

While this development puts a solution to the continued financial underperformance of the Discos, a number of core issues remain at play. Funding the tariff shortfall poses a challenge to the government, already encumbered with low revenue generation and cost consuming activities. Additionally, as much as the plan is to transition to a higher cost environment slowly, providing a cushion for power consumers, it still poses inflationary pressures with a trickle-down effect on the cost of production. However, investors in the sector will be looking at government posture to assess the government’s resolve to achieve a cost-reflective tariff.

 

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United Capital Plc Research (UCR)