Electricity: Challenges and Prospects

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With a population surpassing 170 million, Nigeria targets an ambitious 20,000MW of electricity generation by the year 2020 and to rank among the top 20 economies in the world. Nigeria’s current available generation capacity, estimated at approximately 6,000 MW, is inadequate to meet the unsuppressed demand estimated at approximately 15,000 MW.  According to World Bank Report, only about 55% of the population currently have access to electricity; and for that segment of the population, only 30% of its needs are currently met. Meeting the generation targets set for 2020 requires substantial private-sector investment in the supply chain, including gas to power infrastructure, generation, transmission and distribution networks. Most of these are now private-sector-operated (except the transmission system).

Purpose of Privatisation

The purpose of the privatisation was to ensure increased electricity supply in the country, through enabling and preservation of efficient industry and market structures, while also ensuring the optimal utilisation of resources for the provision of electricity services. The reform also sought the maximisation of access to electricity services, by promoting and facilitating consumer connections to distribution systems in both rural and urban areas.

The reform, however, provided that the prices charged by licensees are fair to consumers and are sufficient to allow the licensees to finance their activities and to allow for reasonable earnings for efficient operation. The reform also made adequate considerations for safety of lives and equipment as well as protection of consumer rights.

Concept of Electricity Pricing in Nigeria

The privatization programme was premise on the provision of a cost reflective tariff – as relates to every business endeavour, having the right pricing is an essential requirement for success. Balancing between a cost reflective tariff and an affordable tariff is one of the biggest challenges facing the Nigeria Electricity Supply Industry (NESI).

Multi Year Tariff Order (MYTO) is the methodology used to set wholesale and retail prices in the NESI. It is a unified way to determine total industry revenue requirement in a building block approach; total cost associated with generation – total cost associated with transmission – total cost associated with distribution as well as regulatory charges.

Nigeria Electricity Regulatory Commission (NERC), being the regulator for the industry has the mandate to approve tariffs. In an effort to make electricity tariffs more affordable, NERC adopted sculpting of the tariff such that Discos are required to under-recover now (by charging less than the cost reflective tariff) and are allowed to recover in the future. This model, while bringing temporary ease on the retail tariff, comes with attendant challenge of how to manage the huge shortfall resulting from the sculpted tariff.

The sculpted average tariff for Kaduna Electric in 2016 was N30/KWH while the actual cost reflective tariff was N48/KWH. This was approved based on economic indicators (inflation, exchange rate, gas prices) prevalent in 2015 and the resulting shortfall from the sculpted tariff in 2016 amounts to more than N25 Billion.

The MYTO model also requires bi-annual review of these economic variables which has not been done since January 2016. By the time the exchange rate variable is adjusted in the model, the average cost reflective tariff for Kaduna Electric will be around N74/KWH.

Cost-Reflectivity vs. Affordability

The crucial role energy plays in the development of the economy cannot be over emphasised. Industries in this part of the country can only thrive with reliable and affordable access to electricity. While this is much desired by all, the current structure does not fully support the realisation of this objective.

Charging a cost reflective tariff of more than N70/KWH at this period of economic recession is not only irrational but detrimental to the growth of the economy. Therefore, Kaduna Electric fully supports a fair and affordable tariff that will support growth and development within our franchise states. It is however important to note that as privately run company, decisions are guided based on its business case that does not jeopardise the interest of all major stakeholders.

The government has the overall mandate and authority to steer the course of economic direction in this country and she has a critical role to play in ensuring that this balance is achieved.

The Role of Government

Government interventions are necessary to moderate prices and make electricity more reliable and accessible. Government intervention can come through a combination of all or some of the following; by subsidizing the price of gas to thermal power plants, bearing the burden of exchange rate shock on the retail tariff, taking up responsibility of tariff shock due to low generation capacity as a result of security issues, support the Gencos and Discos to access cheap finance through international, regional or local developmental initiatives among others.

Conclusion

A clear link has been established between electricity consumption and economic growth. With an annual population growth rate of around 3% and an unemployment rate of nearly 15%, Nigeria is in pressing need of boosting its productive activities to curb crime and reduce poverty levels.

Manufacturing and other SMEs are the key drivers of economic growth, which is mainly challenged by reliable and affordable electricity supply.

For the reform in the electricity sector to be achieved, all stakeholders – Discos, Gencos, Government, all categories of consumers – must holistically work, and in some cases make difficult sacrifice towards the success of the industry.

As a Disco, we are committed to improving the quality and reliability of electricity supply within our franchise states. Significant investments have already been made in acquisition, studies, foundational ICT systems, working tools, metering, safety systems, replacement of existing systems, expansion of grid, maintenance of existing systems, working towards providing alternative payment channels through web, POS, ATMs, mobile etc. Further investments is being put in place to close the metering gap, have a robust Customer Relationship Management Systems, advanced Distribution or Operations Management Systems, as well as new infrastructure and grid expansion.

Our customers across all categories – Industrial, Commercial, MDAs and residential – have a responsibility to behave ethically and pay their electricity bills regularly and timely to enable us meet our market obligation and serve our customers well.

The government even has a bigger role to play in ensuring stability of the industry. The liquidity challenge currently faced must be addressed and issues currently affect the industry that are macroeconomic in nature such as FX risk, security challenge affecting generation capacity, impact of inflation must be owned and addressed by government to make electricity supply more affordable and reliable.

The synergy amongst these different stakeholders is necessary for electricity sector to become the catalyst of economic growth in Nigeria.

Source: The Nation

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