Opinion: Electricity tariff – What the NERC must do to inspire investors’ confidence

by Abdul Mahmud

 an electricity Transfomer 2

There is some connection between the health of the economy and the smooth functioning of the lives of citizens that the economics of electricity sadly highlights. A stable electricity supply environment connects to the economics of the market; and the volume that it helps to grow is critical to investment and to infrastructure renewals.

The noise of generators blasting away under Abuja’s sun are as dizzying as the hues and cries of traders who fall over themselves to draw attention to their wares and customs. It’s an alluvial task to cut through the maze of generators pitched higher than bargain hunters who struggle daily to make sense of the shopping experience of the Nigerian kind. Welcome to Banex, that sprawling shopping mall in Wuse 2 area of Abuja that easily passes off as the noise pollution site of ‘electricity generating and distributing companies’.

Banex isn’t alone. Visit homes and the many business places of our country, you would find generators serving out their roles as permanent fixes of our failing electricity system, thus adding huge costs to doing business. For struggling small businesses, costs of petrol and diesel are the margins of profits that are constantly lost or are dubiously recovered by profiteers who constantly inflate the prices of goods and services to keep businesses afloat.

Power cut is a regular feature of the Nigerian electricity industry. The responses of the industry to its own inadequacies of narrowing generation capacity, absence of spare electricity, collapsed electricity infrastructure and lack of new investments, poor electricity policy environment and the security of electricity supplies have been intrepid. Take the electricity policy environment, for instance. The quadruple expansion of Abuja has never been matched by any meaningful expansion of her power generating infrastructure, thus exposing the city to the constant darkness that envelopes the many outliers of her poor and the districts of her nouveaux riche. Power cut in an ironic way is a leveller.

There is some connection between the health of the economy and the smooth functioning of the lives of citizens that the economics of electricity sadly highlights. A stable electricity supply environment connects to the economics of the market; and the volume that it helps to grow is critical to investment and to infrastructure renewals. So, the security of electricity supply is imperative as is the high level of consumption of electricity by consumers needed to sustain steady returns on investments, as well. But, how can all of this happen without new investments coming into the electricity market? How does the market incentivise itself?

The Nigerian Electricity Regulatory Commission (NERC) provides an answer, but only in part, with its long-term Multi-Year Tariff Order (MYTO), first announced in 2008 and reviewed in 2012. The long-term price contract for electricity, informed by the desire to make the electricity market attractive to foreign investors, more than anything else, takes into account the expected returns on generation, transmission and distribution of electricity within nine years, beginning 2008 and ending 2017, that the MYTO regime articulates; but what it doesn’t do is guarantee improvement in electricity supply or the quality of electricity supply as many critics, including this writer, have argued. There is a real economic sense in setting out the stores for risk investors to plough resources into an electricity market with huge consumption and return prospects. And with collapsed electricity infrastructure, deficit state investment, competition from emerging electricity markets in Eastern Europe, Asia, China and the Indian sub-continent, it is only imperative to institute market mechanisms and pricing structures that allow for steady capital inflow, with lesser risks for investors. Yes, the downside is that consumers under the MYTO regime might as well pay for poor and epileptic services in advance. But, this situation can only exist in the short term, anyway. In the long term, as it is with the electricity markets everywhere, the cap in fixed assets, development and expansion of efficient capacity margins, electricity storage, removal from exposures to the volatile fossil fuel market, electricity services will invariably improve and prices will come down.

New pricing structure is essentially an aspect of electricity market reform. It is a bitter pill; but it isn’t death where there exist an effective regulatory environment, defined and driven by policy and the law. Let’s admit, too, that no matter the volume of investments that comes into the electricity market at any given time, electricity prices are likely to increase over time. But a competitive electricity market will deliver services to consumers at affordable prices.

The Nigerian electricity regulatory environment is as young as the investments that have so far come into the electricity market. And with the regulatory and legal framework evolving apace with privatisation, the suspicion is that the economic environment is shaped more by politics than by the desideratum of investment. At least, concerns so far raised by critics of privatisation suggest that the task of regulating the new GENCOS and DISCOS to ensure effective and undistorted competition, as well as reliable and efficient electricity services, is huge for the Nigerian Electricity Regulatory Commission (NERC). NERC can only discharge itself creditably if it is able to effectively regulate the supply and demand sides of the capacity market to secure much needed investments and guarantee efficient electricity services in the short and long terms. Here, and as always, the key is how NERC manages both the rate-of-return and price-cap regulations in our high-risk, weak-governance environment and still imbues investors’ confidence in the electricity market, going forward.

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Read this article in the Leadership Newspapers
Op-ed pieces and contributions are the opinions of the writers only and do not represent the opinions of Y!/YNaija.

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