Introduction
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).
Energy plays a fundamental part in the
economic growth process of every economy. Several studies have shown a
positive and significant link between electricity use and economic
growth. Studies have also shown that insufficient, unreliable or costly
access to power can be binding constraint to business and ultimately
hinders growth.
The industrialization programme of the 1970s which
saw the development of textile and other manufacturing industries in
Northern Nigeria was greatly hampered by several factors which include
access to finance, ease of doing business, unreliable and costly access
to energy amongst others. While all the factors are important towards
achieving industrialization and growth in the country, this paper mainly
focuses on access to energy.
Energy cost is arguably one of the
most significant cost elements in the production line, as such lack of
reliable and affordable electricity can be attributed to the failure of
industrialization in Nigeria. The Electricity Power Sector Reform
(ESPR) Act which led to the privatization of the electricity asset in
Nigeria was meant to address some of these challenges – however, it also
opens the debate between affordability and cost reflectivity in the
face of low electricity supply and weak purchasing power of the general
populace.
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. This will go a
long way in making electricity more reliable and affordable and thereby
supporting the overall growth and development of the economy.
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.
Thank you.
Yusuf Hamisu Abubakar, OON
Chairman, Kaduna Electricity Distribution Plc
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