Assessing recent events in the Nigerian Electricity Supply Industry (NESI)

Assessing Recent Events in the Nigerian Electricity Supply Industry (NESI)

1. Introduction
The year 2019 represented an active year for regulatory oversight in the Nigerian Electricity Supply Industry (NESI). NESI saw some recent and very newsworthy events as it continued to suffer from illiquidity and the primary regulator, Nigerian Electricity Regulatory Commission (NERC) worked to manage stakeholder issues within the sector. Regulatory developments followed the path charted under the Power Sector Recovery Program (PSRP) as NERC sought to stabilize the liquidity concerns and encourage private sector investment and financing within the sector. Notwithstanding, investment opportunities continue to exist within the sector.

This article shall consider some of the recent orders issued by NERC as well as the situational context for the orders and how the orders will affect the policy and business of electricity supply in Nigeria in the year 2020 and onward. This article shall consider the following recent NERC Orders:
a) the 2019 Minor Review of the Multi-Year Tariff Order (MYTO) 2015 and Minimum Remittance Order for the Year 2020 (2019 Minor Review Order);
b) Order on the Transitional Accounting Treatment of Tariff Related Liabilities in the Financial Records of Participants in the Nigerian Electricity Supply Industry (2020 Transitional Accounting Order); and
c) Order on the Mandatory Migration of R3 Class of Residential Customers, Industrial and Commercial Customers to Cashless Settlement Platforms and other Matters Relating to the Revenue Protection in the Nigerian Electricity Supply Industry (2019 Order on Mandatory Migration to Cashless Settlement Platforms).

2. Background to the Recent Orders
The liquidity crisis within the NESI is as a result of a tariff structure does not reflect the cost and market forces involved in supplying electricity to end-users. NESI’s underpinning legislation, the Electric Power Sector Reform Act of 2005 (EPSRA), requires that tariff be regulated according to one or more methodologies adopted by NERC for regulating electricity prices. Such methodologies shall consider among others that a licensee is allowed to operate efficiently to cover the full costs of its business activities and earn a reasonable return on its invested capital; shall give to electricity consumers economically efficient signals regarding the costs that their consumption imposes on the licensee’s business and shall ensure the phasing out or substantial reduction of cross subsidies.

To this end, NERC developed the MYTO methodology to provide for tariffs that are cost reflective yet fair to energy consumers. MYTO-2015, the most recently issued MYTO, was to undergo bi-annual minor reviews and a major review within 5 years of its issue. MYTO’s methodology determined end-user tariff by considering certain macroeconomic indices including the exchange rate, the inflation rate, the available generation capacity and the gas price. These variables were to be analysed during the bi-annual minor reviews to determine any changes in tariff for each of the power distribution companies (DisCos).

However, the assumptions upon which MYTO 2015 was derived did not reflect the cost reality for the supply of electricity. While the macroeconomic indices have since risen from the MYTO 2015 forecasted levels, no minor review was undertaken in the period which has led to both a tariff shortfall and a market shortfall in the NESI. Tariff shortfall is the deficit arising from the cost-reflective tariffs that the DisCos should ordinarily have charged the end users and what they were mandated to charge under MYTO2015. As noted above, this deficit is as a result of a tariff methodology which used assumptions for its macroeconomic indices that do not represent the actual cost of supplying electricity. Market shortfall is as a result of the increase in the wholesale cost of power sold by the power generation companies (GenCos) to the DisCos and the inability of the DisCos to settle their GenCo invoices. While the wholesale cost of power has increased, the tariffs charged by DisCos to end users have remained unchanged which in turn has made it difficult for DisCos to settle their bills from the GenCos and the Transmission Company of Nigeria (TCN). This has occasioned a market shortfall. Furthermore, the Federal Government of Nigeria noted that while the MYTO tariff region is based on cost-reflective principles, delays in implementation has contributed to growing deficits within the NESI.

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