Bankable energy tariffs in Nigeria – A nagging concern for Investors
Despite Nigeria having one of the world’s largest natural gas reserves (estimated at 182 trillion cubic feet (Tcf) of proven reserves) and abundant levels of daily solar radiation, a cost-reflective and bankable tariff structure is required to ultimately generate real gains for the power sector.
As the largest country in Africa, with a population of 160 million (with an estimated growth of 6% per annum), Nigeria faces several challenges as it strives to address the acute deficit in energy supply. Nigeria ranks 116th in the world on the energy access and security sub-index with just about half of its population having access to electricity, and power outages impacting the utility of electricity for those who do receive it. Consistent under-investment, a culture of poor maintenance, corruption and bad management of resources have reduced the country’s power consumption per capita to one of the lowest in the world
Currently, the country requires an additional 40,000 megawatts of additional capacity to meet local demand and support wider economic development. It has only reached peak generation levels of about 4,600 megawatts.
Despite several past attempts that have failed to yield the desired results, the ongoing reform of the power sector under the Power Sector Reform Roadmap appears to have finally cast a brighter light on the prospects for dealing with the deficiencies in the power sector. The unbundling of the single generation and distribution body in Nigeria (the National Electric Power Authority) into 18 different generating and distribution assets for sale to private investors has been viewed as a significant positive step.
However, a major hurdle that still lingers is the implementation of a cost-reflective and bankable tariff structure to ensure continued bankability of the recently privatized generating and distribution companies. The existing Multi-Year Tariff Order 2 (MYTO), which sets out a 15 year tariff path for the electricity supply in Nigeria, does not reflect the imbedded cost to generate and distribute the power which serves as a disincentive to private investors. The Nigeria Electricity Regulatory Commission (NERC) and the House of Representatives have been unable to find a compromise on the controversial issue regarding the proposed increase in the electricity tariff scheduled to commence from February 1, 2016. NERC, along with Mr. Babatunde Fashola (the Minister for Power) have expressed the need for the implementation of the new tariff regime in order to ensure sustained investment and development in all stages of the electricity supply chain open to private investors. The new tariff regime should be geared towards ensuring (along with the on-going subsidies) an electricity tariff that accounts for production and operational cost, return on investment and the creating of incentives for costs reductions, efficiencies and quality improvements.
While maintaining the current tariff regime might make for good politics, it negatively impacts the bankability case for increased private investments in the power sector. The increase in electricity prices will cause short-term discomfort to the consumers but it is in the best interests of the sector and a step in the right direction.