BREAKING: Here are key assumptions for electricity tariff reviews in Nigeria

In Nigeria, the Nigerian Electricity Regulatory Commission (NERC) makes use of key tariff assumptions for each review that is carried out….CONTINUE READING…CONTINUE READING

The Commission adjusts customer tariffs based on some costs and assumptions like the cost of electricity, operations and maintenance costs, and regulatory charges.

In a recent document, the Energy Markets and Rates Consultants (EMRC) shared some insights into how these tariff reviews work.

Here are the key tariff assumptions that may be subject to adjustment during various tariff reviews (Minor, Major, and Extraordinary) within the Nigerian Electricity Supply Industry (NESI):

Inflation Rates in Nigeria and the United States: The cost of power, being produced, supplied, and consumed in Nigeria, is influenced by inflation rates within the country.

Additionally, the importation of equipment for constructing power infrastructure exposes the sector to changes in the US inflation rate.

These inflation rates are applied in the tariff structure to safeguard investors in case of inflation-driven increases in the cost of doing business.

Gas Price: Given that a significant portion of power plants in Nigeria rely on gas for operation, the price of gas is a critical factor in power generation.

Therefore, the gas price is incorporated into the Multi-Year Tariff Order (MYTO) and reviewed bi-annually to ensure alignment with market prices and to prevent gas suppliers from incurring losses.

This gas price comprises the actual cost of gas and the expenses associated with transporting it from the supplier to the power plant.

Foreign Exchange Rate (Forex) of the Naira to the Dollar: NESI licensees often import essential equipment for generation, transmission, and distribution, such as meters, cables, transformers, and toolkits, which are valued in US dollars. This exposes the sector to foreign exchange risk.

To protect investor interests, any fluctuations in the exchange rate between the Naira and the US Dollar are accounted for.

The electricity tariff is based on the official Central Bank of Nigeria (CBN) exchange rate.

Generation Capacity: This involves estimating the projected generation capacity available based on the tested capacities of power plants.

This estimation allows for accurate energy accounting and provides clarity on the capacity available for consumption within a specific period.

For instance, if a power plant experiences unexpected downtime, leading to reduced generation capacity, a tariff review recalculates the estimated available generation capacity.

This ensures that customers are billed accurately based on the actual energy they receive, maintaining fairness and transparency.

Energy Generated & Delivered: This projection anticipates the amount of energy that will be generated and supplied to the Distribution Companies (Discos).

In the MYTO, Discos have an obligation to receive a certain percentage of the total available energy at any given time. This percentage, referred to as load allocation, varies among the 11 Discos.

These tariff assumptions play a crucial role in maintaining stability and fairness within the NESI, ensuring that both investors and consumers are protected and that the energy market operates efficiently.

Tariff reviews help to adapt these assumptions to the evolving dynamics of the industry, fostering sustainability and reliability in the Nigerian electricity sector….CONTINUE READING