Decoding the Order - MAY 2024 SUPPLEMENTARY ORDER TO THE MULTI-YEAR TARIFF ORDER 2024

What goes up, can surely come down!??

Following the reduction of electricity tariffs for Band A customers by the Nigerian Electricity Regulatory Commission (NERC), I have seen and read several brilliant write-ups by my colleagues and other industry experts here on LinkedIn about the tariff reduction. Additionally, I watched the NERC Chairman, @GarbaSanusi's interview on AriseTV News Night, which provided a simplified breakdown and invaluable insights into the subject matter, and as such, I initially did not intend to write on the subject. However, after encountering news stories erroneously attributing the tariff reduction to pressures from the House of Representatives, the Nigeria Labour Congress, and other entities, I felt compelled to write a brief piece to dispel these misconceptions and offer further clarity on the issue.

On May 3, 2024, NERC issued another Supplementary Order to its initial MYTO Order issued in January 2024. This Supplementary Order, which is to take effect from May 6, 2024, was issued to recognize the changes in the macroeconomic indices that occurred in the month of April.?

As my headline may have suggested, one of the key highlights of this Supplementary Order is a reduction in the tariff payable by customers in Band A. In the following sections, I'll delve into the reasons behind this adjustment and the implications for consumers.

WHY HAS THIS OCCURRED??

1. Monthly Reviews of Tariffs

In its initial MYTO Order released in January, NERC had noted that, as part of its efforts to gradually move the Nigerian Electricity Supply Industry (NESI) to a cost-reflective market, it will undertake and implement monthly tariff reviews to reflect the changes in certain indices that are not within the control of market participants. These indices are:?

1. Naira to Dollar exchange rate
2. Nigeria’s inflation rate
3. United States inflation rate
4. Gas to power price?
5. Available generation capacity (Projected off-take)
6. Ancillary Service Charge??

Ancillary Services are a series of back-up services (like Reactive Power, Frequency Control, Operating Reserves and Black Starts), provided by generation companies (GenCos) and used by the System Operator (SO) to balance/maintain stability on the grid. As such, Ancillary Service Charge is the fee paid to those GenCos whose generators are used to undertake these backup services.

1. Changes in indices and their impact on Tariffs

To grasp the adjustments and their implications on tariffs, let's revisit the provisions outlined in the April Supplementary Order, which increased the tariff for Band A customers to N225 per kWh. It is essential to note that the benchmarks used in the April Supplementary Order were based on changes observed in March. Likewise, the benchmarks used for the May Supplementary Order were based on changes observed in April.?

For a clearer understanding, let us compare the indices specified in the April Supplementary Order with those in the current (May) Supplementary Order, using Eko Disco's data as an example.

From the table above, while there were increases in the inflation rates and the Ancillary Service Charge, there was a major reduction in the Naira-Dollar exchange rate all of which translated to a reduction of the overall tariff from N225/kWh to N206.80/kWh.?

WHAT DOES THIS MEAN FOR THE INDUSTRY AND CUSTOMERS?

This development clearly signals that the electricity tariff for Band A customers may no longer remain static, as it has been in previous years. Moving forward, we should anticipate frequent reviews and adjustments in the tariff, in line with changes in the highlighted indices, especially the Naira-Dollar exchange rate. Essentially, as the Naira strengthens against the Dollar, we can expect a reduction in electricity tariffs, and conversely, a weakening Naira may lead to tariff increases.

This underscores the urgency for the Federal Government to implement strategies aimed at stabilizing and enhancing the Naira's strength against the dollar. Enhancing our export capabilities and reducing import dependency are crucial steps in this direction. Interestingly, this also involves decreasing our reliance on fuel imports for off-grid power generation, including petrol and diesel generators.

For customers, the tariff reduction translates to a cost of N206.80 per kWh for Band A customers effective from May 6th, 2024, until the next review at the end of May. Many customers may be curious whether this reduction will affect previously purchased units at the old tariff. Unfortunately, this review does not apply retrospectively. The new tariff will only apply to units purchased from May 6th, 2024, onwards.

CONCLUSION

From the table above, it is evident that despite increases in other indices such as inflation rates and ancillary service charges, there was an overall reduction in the tariff. This highlights the significant influence of the Naira-Dollar exchange rate on the final tariff, implying that a substantial rise in the exchange rate would result in higher tariffs.

Given the recent rebound of the exchange rate to approximately N1,424.90/$1 as of May 12, 2024, it wouldn't be unexpected to see a tariff increase in the upcoming monthly review slated for June. This could change, of course, if the Federal Government and the Central Bank of Nigeria implement economic and monetary policies to counter the current depreciation of the Naira in the short term.

Nevertheless, unlike previous years, it's encouraging to observe that prices in the NESI are influenced by economic factors rather than political or other external forces like the House of Representatives or the Nigeria Labour Congress. On a lighter note, I am glad I can say that prices that go up in Nigeria can also come down (even if it is just for a month).