How new tariff rules impact Nigeria's electricity pricing

The Nigerian Electricity Regulatory Commission (NERC) has recently rolled out new regulations governing the processes for electricity tariff reviews in the country. The move comes amidst widespread debates and concerns over a speculated tariff hike initiated by the Federal Government. The latest directive, signed by the NERC Chairman, emphasizes the commission's responsibility to ensure fair tariffs that enable licensees to recoup costs and achieve a reasonable return on their investments. Oti Ikomi, the CEO of Proton Energy, shed light on these developments in a recent interview with CNBC Africa. He clarified that the newly issued guidelines essentially reiterate existing policies. They stipulate a major review every five years and a minor review every six months or as needed. Key factors influencing tariff adjustments include changes in U.S. and Nigerian inflation rates, as well as fluctuations in the exchange rate. Contrary to speculations, recent improvements in Nigeria's exchange rate should not necessitate a tariff increase. Ikomi attributed the uproar surrounding the tariff hike to what he described as 'hysteria' incited by a conference in Dar es Salaam, Tanzania. Reports suggesting that only 65% of costs were being met fueled misconceptions, with subsidies of approximately 200 billion naira per month still prevalent in the sector. He clarified that while Band A tariffs are fully cost-reflective, Bands B, C, D, and E continue to benefit from subsidies. The goal is for these subsidies to gradually diminish over time. In addressing the complexity of the Multi-Year Tariff Order (MITO) methodology, Ikomi acknowledged that while it may appear intricate to the general public, industry professionals comprehend its mechanisms. MITO utilizes various formulas to ascertain the cost-reflective tariff based on input costs. It underscores the necessity for consumers to pay the appropriate value for electricity services, a paradigm shift urged by successive administrations in Nigeria. The viability of Distribution Companies (Discos) has been a subject of scrutiny, particularly in light of a 156 billion naira decline in remittances to the Nigerian Bulk Electricity Trading company during the initial nine months of 2024. Ikomi highlighted the sector's challenges, including the aggregate technical commercial and collection losses averaging 47%. To enhance sustainability, reducing losses attributed to transmission, collection, and distribution inefficiencies is imperative. While some Discos exhibit viability, others require restructuring and financial interventions to thrive. Amidst these discussions, the Mission 300 initiative emerges as a pivotal endeavor aimed at improving energy access for 300 million Africans by 2030. Nigeria, with a current energy access deficiency of 62%, targets universal access within the next decade. Implementation remains a critical factor, as evidenced by previous initiatives like the Power Sector Recovery Plan (PSRP) under President Jonathan's administration. The nation now embarks on the Nigerian Energy Compact, necessitating a concerted effort to actualize its objectives. Ikomi stressed the importance of attracting substantial investments to bolster the infrastructure and create an enabling environment for private sector participation. Proton Energy anticipates injecting $23 billion in new investments to support the Mission 300 agenda. Collaboration with international partners, reinforced by consistent policies and a focus on renewable energy sources like hydroelectric power, will be instrumental in achieving Nigeria's energy objectives by 2030. As the country navigates its energy landscape, a strategic emphasis on implementation and sustainability across the entire value chain is paramount.