Circuit Changes: A Closer Look At Nigeria's Electricity Tariff Strategy For 2024

Revision of Electricity Tariffs in Nigeria

On April 3, 2024, the Nigerian Electricity Regulatory Commission (NERC) implemented significant tariff changes, primarily affecting Band A customers of distribution companies (DisCos), with an increase of over 240% in rates—from ₦66 to ₦225 per kWh as outlined in the "April 2024 Supplementary Orders" to the existing Multi-Year Tariff Order (MYTO) of 2024 issued to the 11 DisCos.¹

Under the Electricity Act 2023, the NERC is mandated to ensure that licensees within the Nigerian Electricity Supply Industry (NESI) can set rates that cover operational costs and yield a reasonable return on investment. After reviewing the tariff submissions from the 11 successor DisCos, which included analysis of the respective Performance Improvement Plans and a public hearing where stakeholders scrutinised and discussed the proposed rates, NERC approved tariffs aimed at maintaining a financially sustainable market conducive to Nigeria's economic growth.

Impact on Consumers

The recent tariff revisions particularly affect Band A customers, who make up about 15% of the consumer base. These customers are now assured a minimum of 20 hours of electricity daily, on average per week, meeting the promised service levels. This policy adjustment is backed by data confirming that Band A customers consistently receive the service levels guaranteed.

For the remaining 85% of consumers in Bands B to E, tariffs will continue at the December 2022 levels, upheld by the Federal Government's subsidy policy. Even with a ₦1.14 trillion reduction in subsidies due to the adjustment for Band A, significant support remains for the lower bands. EKEDC and BEDC, for example, receive substantial monthly subsidies of ₦13.74 billion and ₦11.01 billion, respectively. This strategy is designed to alleviate the economic impact on vulnerable consumers and maintain affordability amid economic shifts.

Why Tariffs are Changing.

The recent adjustments to electricity tariffs respond to external economic factors that significantly affect the cost of electricity production but are beyond the control of DisCos.

These changes integrate critical economic indices to develop a Cost Reflective Tariff (CRT), aiming to align electricity rates more closely with the actual costs in the supply chain. The economic indicators and parameters evaluated by NERC include:

1. Exchange Rate: The exchange rate, set at ₦1,463.31 to $1 from April to December 2024, includes a 1% transaction fee above the average rate of ₦1,448.82, as per Central Bank of Nigeria guidelines. This rate affects the cost of importing essential equipment for Nigeria's electricity sector. Higher exchange rates increase these import costs, which can lead to raised electricity tariffs to cover these expenses.
2. Nigerian Inflation Rate: In February 2024, Nigeria's inflation rate was recorded at 31.70% by the National Bureau of Statistics. This high inflation rate directly influences electricity tariffs because it increases the overall costs of operations and maintenance for energy companies.
3. US Inflation Rate: The US inflation rate stood at 3.20% in February 2024, according to the US Bureau of Labor Statistics. This rate is considered when setting tariffs because it affects the cost of equipment and technologies imported from the US, which are essential for Nigeria's electricity supply.
4. Available Generation Capacity: The January 2024 forecast by the System Operator confirmed that power generation capacity was sufficient to meet demand.
5. Wholesale Gas to Power Prices: From April 2024, the benchmark price for gas-to-power is set at $2.42 per MMBTU, with an additional transportation cost of $0.80/MMBTU. These prices are adjusted by the Nigerian Midstream and Downstream Petroleum Regulatory Authority under Section 167 of the Petroleum Industry Act. The cost of gas significantly impacts the overall cost of electricity production, as gas is a primary fuel source for many power plants.

Monthly Adjustments

The tariff revision for Band A customers features a mechanism for monthly adjustments responsive to the key economic indicators such as inflation, exchange rates and gas prices. This ensures that tariff setting remains financially sustainable and adaptable to economic changes.

Customer Categorization by Service Band

Electricity customers are categorized based on the reliability of service they receive, with each service band representing a different minimum number of hours of daily electricity supply. Distinctions within each band include:

• Non-Maximum Demand (Non-MD): Customers are typically residential or small commercial users who consume electricity at lower, more consistent rates. They are connected to the grid via single-phase or three-phase connections and do not reach the higher electricity demand levels that would classify them as Maximum Demand consumers.
• Maximum Demand (MD): customers are large-scale consumers of electricity, such as industrial plants, large commercial complexes, or high-usage facilities. They are characterized by their occasional or regular spikes in electricity usage, reaching the highest demand levels recorded over a specified period. These customers are typically connected to the grid through Low Voltage (LV) or Medium/High Voltage (MV/HV) systems.

Detailed Band Descriptions:

The service bands for electricity provision in Nigeria are structured to cater to varying levels of electricity supply reliability. Each band represents a minimum average of daily electricity availability that customers can expect:

• Service Band A (Minimum of 20 hours/day)
• • A - Non-MD: Customers within Band-A Service Level Feeders.
  • A - MD 1: Customers with LV connections in Band-A.
  • A - MD 2: Customers with MV/HV connections (11/33kV) in Band-A, typically large industrial operations.
• Service Band B (Minimum of 16 hours/day)
• • B - Non-MD: Customers within Band-B Service Level Feeders.
  • B - MD 1: Customers with LV connections in Band-B.
  • B - MD 2: Customers with MV/HV connections (11/33kV) in Band-B.
• Service Band C (Minimum of 12 hours/day)
• • C - Non-MD: Customers within Band-C Service Level Feeders.
  • C - MD 1: Customers with LV connections in Band-C.
  • C - MD 2: Customers with MV/HV connections (11/33kV) in Band-C.
• Service Band D (Minimum of 8 hours/day)
• • D - Non-MD: Customers within Band-D Service Level Feeders.
  • D - MD 1: Customers with LV connections in Band-D.
  • D - MD 2: Customers with MV/HV connections (11/33kV) in Band-D.
• Service Band E (Minimum of 4 hours/day)
• • E - Non-MD: Customers within Band-E Service Level Feeders.
  • E - MD 1: Customers with LV connections in Band-E.
  • E - MD 2: Customers with MV/HV connections (11/33kV) in Band-E.
  • Lifeline (R1): Customers consuming no more than 50 kWh/month.

Service Delivery Commitments and Consumer Complaints

DisCos are mandated to meet specific service delivery commitments as detailed in their Service Based Tariff (SBT) proposals. These commitments are essential as they directly link the quality of electricity provided to the tariffs paid by customers, primarily based on the average daily electricity supply over a month. Detailed service levels committed by DisCos for April to June 2024 are available in Appendix 2 of the respective Orders.

Monitoring and Compliance Measures

To ensure DisCos meet their service commitments, NERC has implemented robust monitoring and compliance strategies:

1. Technology-Based Monitoring: NERC uses advanced technology to track real-time electricity supply data directly from DisCos' systems for Band A feeders, ensuring accurate monitoring of service delivery.
2. Rapid Response Team: By April 3, 2024, each DisCo is required to set up a rapid response team to guarantee a minimum service delivery, starting with Band A. These teams handle customer complaints and work with the Transmission Company of Nigeria (TCN) to manage loads and optimize dispatches. Information about these teams ought to have been communicated to Band A customers via bulk SMS by noon on April 5, 2024, and available on DisCos' websites.
3. Public Reporting: DisCos must publish a daily rolling seven-day average of electricity supply hours for each Band A feeder by 9:00 AM the following day. If service levels fall below commitments for two consecutive days, DisCos must publicly disclose the reasons and outline a recovery plan by 10:00 AM the next day. 4. Service Band Downgrading for Non-Compliance: If a DisCo fails to meet the committed service level for a Band A feeder for seven consecutive days, the feeder will be automatically downgraded to reflect the actual service level provided, in line with Supplementary Orders to ensure transparency and accountability.

Operational Adjustments and Customer Reclassification

Under the SBT Framework, NERC permits the reclassification of customers between service bands to accurately reflect service quality, as specified in the "Order on Migration of Customers and Compensation for Service Failure." If a DisCo fails to meet set service levels, corrective measures, such as migrating customers between bands or implementing compensatory actions, are taken as detailed in Section 6 of the NERC Order.

A recent example in Abuja highlighted this mechanism in action: customers were downgraded from Band A to Band B for not receiving the promised service levels. During this audit, NERC also discovered that the Abuja Electricity Distribution Company (AEDC) had incorrectly charged these customers at the higher Band A rates. Consequently, on April 5, 2024, NERC fined AEDC N200 million and required refunds to the overcharged customers in Bands B through E.² This action highlights NERC's commitment to enforcing fairness and accountability within DisCos, safeguarding consumer rights and the integrity of Nigeria's electricity supply industry.

Addressing Customer Complaints

Customers facing billing issues must first approach their respective DisCo. If the DisCo does not resolve the issue, the complaint can be escalated to the NERC. Should further resolution be necessary, the matter may then be taken to the Federal Competition and Consumer Protection Commission (FCCPC) for additional steps. This structured approach ensures that customer grievances are addressed systematically, protecting consumer rights and promoting accountability within the energy sector.

Remittance Obligations for DisCos

NERC has outlined clear remittance obligations for DisCos to ensure the stability of the electricity market during the transition to cost-reflective tariffs:³

• Billing by NBET: DisCos receive monthly invoices from the Nigerian Bulk Electricity Trading Plc (NBET), reduced by government subsidies to lessen the financial burden. In contrast, the Market Operator (MO) bills DisCos at full rates for transmission and administrative services without subsidy adjustments.
• Settlement by DisCos: DisCos are required to pay the full amounts of invoices from both NBET and MO. Government subsidies help bridge the gap between higher cost-reflective tariffs and the currently lower billed rates.
• Government Subsidies: The Federal Government provides financial support to help DisCos meet their invoice payments by covering any shortfalls.
• Obligations and Penalties: DisCos must settle their invoices promptly as per their payment agreements. Failure to comply can result in penalties, emphasizing the need for financial diligence.
• Financial Security: DisCos must maintain adequate financial security to ensure reliable payments for procured energy.
• Payment Consistency: DisCos are expected to consistently fulfill their payment obligations. The regulatory authority may adjust these obligations as necessary.

These measures support DisCos financially while promoting a pricing system that more accurately reflects the true cost of service, thus ensuring a more stable and fair electricity market in Nigeria.

Insights: Navigating Shifts in Nigeria's Electricity Tariff Strategy

NERC has strategically used tariff adjustments to enhance market stability and protect consumers. These changes aim to transform energy from a basic commodity into a catalyst for economic growth and sustainable development.

The success of these regulatory adjustments hinges on the DisCos ability to fulfill service delivery commitments efficiently. This includes managing migrations between service bands to minimize bureaucratic delays and improve customer satisfaction. Aligning electricity supply more closely with actual usage and costs may reduce reliance on costly alternatives like diesel generators, which are often used during power outages.

While the focus on improving service for Band A customers supports regulatory standards, there is a risk that it might lead to the neglect of other bands, potentially exacerbating service disparities. To address these issues, NERC and the DisCos must ensure that enhancing service for Band A does not sideline other customers. The objective should be a balanced approach that elevates service quality across all bands, fostering an inclusive and fair energy market.

At SimmonsCooper Partners, our energy law and regulatory compliance experts provide strategic guidance and practical solutions to navigate these changes. Whether it's tariff adjustments, regulatory compliance, dispute resolution, or service enhancement, we are committed to helping businesses and consumers thrive in Nigeria's dynamic energy landscape. For more information on how we can assist you, contact us at Ikem Iisiekwena or Ema Ogbe.

Footnotes

1. National Electricity Regulatory Commission, In The Matter of April 2024 Supplemental Order to the MYTO 2024 for [Various DisCos] https://nerc.gov.ng/resources/?doc_term=myto&ins=1#nerc-documents.

2. National Electricity Regulatory Commission (NERC), Press Release "NERC Fines AEDC ₦200 Million for Violation of the New Tariff Order, Directs Customer Refunds" (5 April 2024), https://twitter.com/NERCNG/status/1776212211062431756/photo/1

3. National Electricity Regulatory Commission, In The Matter of April 2024 Supplemental Order to the MYTO 2024 for [Various DisCos] https://nerc.gov.ng/resources/?doc_term=myto&ins=1#nerc-documents.

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