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Nigerians are anticipating that the Nigerian Electricity Regulatory Commission (NERC), which oversees the electricity sector, will take action against the planned increase in power tariffs starting from Tuesday, August 1. Distribution companies are seeking to adjust their charges for power in line with inflation and other factors, including the recent adjustment in the foreign exchange rate. Some analysts have suggested that the tariff could potentially rise by as much as 40% next month.

Each distribution company (Disco) calculates its tariff based on specific assumptions about various factors, including the maximum aggregate losses it will incur, macroeconomic factors such as Nigerian and US inflation (considering that energy, a key input, is fully dollarized), and the USD-Naira exchange rate. Additionally, Nigerian interest rates, distribution costs, transmission costs, and generation costs are considered, spread over a certain amount of expected electrical energy to be received during the tariff period, measured in megawatt-hours per hour or megawatt-hours for the entire period.

These cost components are further broken down into various fixed and variable costs, aiming for transparency to NERC. This includes a return on investment based on a weighted average cost of capital, resulting in a cost-reflective tariff that the Disco expects to collect.

Once collected, on each settlement day of the month, the Disco remits a specific sum to its sellers, covering all costs included in the tariff, except its own share, which is retained to cover costs and make distributions to capital providers.

Two key points emerge from this explanation. First, the viability of the electricity supply ecosystem heavily depends on Discos and their full revenue collection. Second, it is solely NERC’s responsibility to ensure efficiency in managing each cost component and revenue collection.

It is important for Nigerians to understand that the challenges faced by the grid-connected electricity market and the resulting damage to Nigeria are rooted in NERC’s failure to enforce efficient behavior by licensees throughout the electricity value chain, Discos’ inefficiency in revenue collection, and the continued payment of consumption subsidies by the government to Discos, Gencos, and TCN.

As long as subsidies flow into the sector, licensees have no incentive to improve efficiency or expand their regulatory asset base. This creates a vicious circle.

Discos’ owners and managers have learned to exploit the 16-year-old MYTO (multi-year tariff order) methodology established by NERC since privatization. They take advantage of the irrational fear of tariff increases harbored by politicians and regulators. Various interest groups, including organized labor, employer’s groups, industrial users, civil society organizations, and the media, have also learned this game and frequently stoke public anger over electricity tariffs they perceive as “too high.” Unfortunately, they often overlook the fact that electricity, like any other consumer good, is a manufactured product. It is worth noting that Nigerians pay much higher costs for electricity supply from backup generators than from the national grid.

Therefore, policymakers and regulators need to focus on making the cost of electricity supply not only more efficient but also more abundant and economical. It is evident that self-generation is unlikely to be more economical than grid-connected energy.

Over the past 35 years, particularly the last 23, an estimated $15 billion has been spent on various programs. In return, service quality is questionable, stories of corruption in administering these subsidy schemes have circulated, customer dissatisfaction is high, and the capacity delivered to the national grid has stagnated. During the past 10 years since privatization, the Federal Government has provided over $6 billion in subsidies to the 11 Discos, mostly labeled as loans that remain unpaid and may be deemed unrepayable. During this period, none of the 11 Discos has achieved a single key performance indicator, whether in metering, loss reduction, increased energy volumes, customer numbers, fault repair, reduced faults, or financial performance ratios.

Now, with subsidies ending and bills due for payment, Nigerians find themselves in a Catch-22 situation, angrily demanding that the federal government not end the subsidies or increase electricity tariffs.

The politicization of tariffs by politicians, combined with the constant manipulation of the tariff-setting mechanism by both Discos and NERC, has further compounded the issue. They have failed to be transparent about the actual costs incurred by each component of the tariff and the efficiencies of these costs. It is mandated by law that NERC establishes a tariff methodology for the electricity value chain that allows efficient licensees to recover the full costs of their business activities, including a reasonable return on capital invested.

What is unjustifiable is NERC’s allowance for Discos to include a 40% ATCC (Aggregate Technical Commercial & Collection losses) in the tariff. This means Discos assume that 40% of the energy they receive from Gencos via the grid will be lost due to engineering, commercial, and collection losses.

After almost a decade of investment to reduce these losses, especially at the distribution level, through funds from the CBN and the World Bank, it is shocking to discover that these losses have not been reduced at all. NERC is proposing to allow Discos to add these losses to the tariff without first demanding an account of the billions of dollars supposedly invested in their networks since the so-called core investors took over in 2013.

To address these issues, it is crucial for NERC to enforce the law and thoroughly scrutinize every cost item in the tariff build-up to ensure maximum efficiency. Similarly, NERC should encourage thermal Gencos to improve the efficiency of their natural gas fuel usage and phase out less efficient open cycle gas turbines (OCGT). Furthermore, the current system of tariff review initiated by NERC should change, as it wrongly implies that tariffs are determined by NERC when, in reality, tariffs are proposed and justified by the Discos for NERC’s approval.