Resolving Illiquidity Issues in the Nigerian Electricity Supply Industry (NESI) – NERC’s Recent Orders
The Nigerian Electricity Regulatory Commission (NERC) has sought to resolve the liquidity crisis in the Nigerian Electricity Supply Industry (NESI) over the last few months with its issue of the 2019 Minor Review of Minor Review of MYTO of 2015 and Minimum Remittance Order for Year 2020 (2019 Minor Review Order) and the Order on the Transnational Accounting Treatment of Tariff Related Liabilities in the Financial Records of Participants in NESI (2020 Transitional Order).
NESI has been bogged down by illiquidity constraints under the contracting structure that forms the basis of electricity supply in Nigeria, which requires efficient collection and remittance of tariff payments by DisCos to settle all the invoices and liabilities throughout the electricity supply value chain. Tariff setting is regulated by NERC’s Multi-Year Tariff Order (MYTO) methodology, which aims to set cost-reflective tariffs for energy consumers by considering a number of macroeconomic indices including available generation capacity, the inflation rate, the exchange rate, the generation price, gas price and gas transportation price. However, the tariff set under MYTO did not reflect the cost of supplying electricity due to changing macroeconomic indices and a slow movement on the part of the regulator to update the Tariff Order to reflect the changes. In 2019, NERC issued 2 Minor Review of MYTO to address the historic and future deficits in the sector.
2019 Minor Review Order
The 2019 Minor Review Order considered the actual changes in the macroeconomic indices used to determine end user tariff and it made projections for those indices for the year 2020. Nigerian Inflation was projected at 11.3% for the years 2019-2020. US inflation was projected at 1.8% for 2019 and 2.1% for 2020. The exchange rate was pegged at NGN310 for the years 2019-2020. The Order also provided the minimum remittance requirements for DisCos to settle their market invoices and further provided that the federal government intervention under the Power Sector Recovery Plan (PSRP) financing plan be applied to cover any tariff shortfalls.
While the Order anticipates an increase in tariff, NERC announced that it does not envisage any increase until April 2020, and a transition to full cost reflective tariff will only occur by the end of 2021.
2020 Transitional Accounting Order
NERC issued the 2020 Transitional Order, under which DisCos are mandated to settle their the Nigerian Bulk Electricity Distribution Company Plc (NBET) invoices in full as adjusted by the applicable tariff shortfall in the 2019 Minor Review Order. However, the unpaid tariff-related portion of the NBET invoices shall temporarily remain on the DisCos’ books as a liability until it is paid to the power generation companies (GenCos) from CBN’s Payment Assurance Facility (PAF) or other funding sources under the PSRP financing plan.
Implications of the Orders
The implications of the 2019 Minor Review Order is an eventual increase in tariffs and an easing of the liquidity crisis in NESI. The Transitional Order also shows a desire by the federal government to implement the initiatives in the PSRP financing plan and all historic and future debts in the sector. These Orders are commendable in their efforts to achieve the market reset and make the industry attractive to private investors and financiers.
For further information on the Nigerian Electricity Supply Industry or how the 2019 Minor Review Order and the Transitional Order affects your business, contact Brooks and Knights Legal Consultants. Are you a stakeholder in the Nigerian power sector? Brooks and Knights Legal Consultants provides bespoke legal advisory and policy advocacy services relevant to your business. Contact Us.
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