November 12, 2020 – Nigeria has emerged as the eight-country in this year’s Electricity Regulatory Index Report published by the African Development Bank.
Uganda has for the third time in a row emerged as the top performer in the latest index. Uganda, along with Namibia, Tanzania, Zambia and Kenya, the other top performers, have regulators with the authority to exert the necessary oversight on the sector.
These countries have well-developed electricity regulatory frameworks, and their regulators can exert the necessary regulatory oversight and authority on the regulated entities and the sector for measurable outcomes.
However, the overall electricity regulatory frameworks of African countries is poorly developed, and most countries experience major regulatory weaknesses.
The ERI, a flagship report of the African Development Bank is a composite index which measures the level of development of electricity sector regulatory frameworks in African countries against international standards and best practice.
The ERI 2020 reveals gaps in the quality of service delivery frameworks of most countries. Most (53%) do not have the quality of service regulations or codes. Of those who do, only 17% of those regulations set ceilings on key service reliability indices such as System Average Interruption Duration Index and System Average Interruption Frequency Index (SAIDI-SAIFI) with appropriate penalties for noncompliance by utilities.
Service Reflective Tariffs in Nigeria – Transitional Path to Cost-reflective Tariffs and Improved Quality of Service Delivery
In 89% of the countries surveyed, regulators do not factor these SAIFI and SAIDI indices into tariffs to incentivize the utilities to reinforce the network to improve service reliability. Consumers are therefore left at the mercy of the discretional powers of the utility when it comes to service reliability.
Exclusion of reliability indices in tariffs denies the utilities the needed funds and incentives to improve the network for improved service reliability. This introduces a vicious tariff cycle that is incommensurate with service delivery. Many consumers are sensitive to electricity supply reliability, especially industrial and commercial consumers, who have zero tolerance for supply outages because of their profitability and viability.
These consumers are often willing to pay commensurate tariffs to incentivize the utilities to deliver a high quality of service. To address this, in August 2020, the Nigeria Electricity Regulatory Commission (NERC) introduced service reflective tariffs. These are tariffs where consumers are categorized into tariff bands. Each band plays a tariff that is commensurate with guaranteed minimum hours of electricity supply per day.
NERC arrived at this measure when during its public hearing in different franchise areas for tariff review, it observed that, some end-users were willing to pay higher tariffs if the distribution companies could guarantee them some fixed hours of supply.
Under this tariff scheme, minimum hours of supply are specified for five different tariff bands –tariff band A to tariff B and E. Each tariff band has different tariff classes within it. Consumers in tariff band “A” pay the highest tariffs and are guaranteed the highest number of hours of supply per day (a minimum of 20hrs/day).
This reduces gradually to tariff band “E” where consumers pay the least tariffs and are guaranteed the least number of hours of supply (a minimum of four hours of electricity supply per day). Utilities are penalized for failure to meet the guaranteed hours of supply.
This is an innovative two-pronged transitional path towards cost-reflective tariffs. It is an incentive to ensure the ability of supply (reducing SAIDI). While it incentivizes more customers to gradually migrate into higher supply reliability bands and pay commensurate tariffs, it provides the needed revenue and obligates reinforcement of the network over time. This ensures guaranteed and reliable service delivery to the respective bands and eventually to all.
69% of the countries surveyed have regulatory mechanisms in place to facilitate electricity access especially to rural customers. However, in 21 of the 36 countries surveyed, it was found that the utility is not involved in funding rural electrification but rather the government, NGO’s and consumers.
In terms of reliability specifically, the service-reflective tariffs address the duration of outages (SAIDI) but not the frequency of outages (SAIFI). Consumers may enjoy the guaranteed hours but with a high number of interruptions or flickers lasting a few minutes. It therefore does not eliminate the need for developing and implementing appropriate quality of service regulations.
The third edition of the ERI report was launched during the Digital Energy Festival of the Africa Energy Forum, on 5 November 2020. The event brought together more than 70 stakeholders in the energy sector, regulators, international organizations, and development finance institutions like Africa50 and the World Bank.