Electricity Tariff in Nigerian Electricity Supply Industry

Intro

One of the primary functions of the Commission as contained in Section 32 (d) of the Electric Power Sector Reform (EPSR) Act, 2005 is to ensure that the prices charged by licensees are fair to customers and sufficient to allow the licensees to finance their activities and obtain reasonable profit for efficient operations.

In pursuant to the authority given under Section 76 of the EPSR Act 2005, the Commission established a methodology for determining electricity tariff in the Nigerian Electricity Supply Industry (NESI) and subsequently issued a Tariff Order called the Multi-Year Tariff Order (MYTO) that sets out tariffs for the generation, transmission and distribution of electricity in Nigeria.

MYTO

The Multi-Year Tariff Order (MYTO) is a tariff model for incentive-based regulation that seeks to reward performance above certain benchmarks, reduces technical and non-technical/commercial losses and leads to cost recovery and improved performance standards from all industry operators in the Nigerian Electricity Supply Industry.

It is used to set wholesale and retail prices for electricity in the industry by employing a unified way to determine total industry revenue requirement that is tied to measurable performance improvements and standards.

The purpose of    the MYTO is to set cost-reflective tariffs which will allow     the power sector to be properly funded and functional. It provides a 15-year tariff path for the NESI with limited minor reviews each year in the light of changes in a limited number of parameters (such as inflation, interest rates, exchange rates and generation capacity) and major reviews every 5 years, when all of the inputs are reviewed with stakeholders.

Objectives of MYTO

• 1.    Cost recovery/financial viability - regulated entities should recover their (efficient) costs, including a reasonable rate of return on capital.
  2.    Certainty and stability of the pricing framework which encourages an efficient level of investment.
  3.    Incentives for improving performance – It provides incentives to reduce costs, improve quality of service and encourage efficient use of the network.
  4.    Allocation of risk –  It promotes the efficient allocation of risks.
  5.    Simplicity and cost-effectiveness – It is easy to understand and implement.

Tariff Methodology

The MYTO methodology uses a building blocks approach in setting Transmission and Distribution tariffs which provides the benefits of both price cap and incentive based regulation. It is simply a way of bringing together all of the industry’s costs in a consistent accounting framework.

The three building blocks are:

• The allowed return on capital –fair (market based) rate of return on capital invested;
• The allowed return of capital – recoup capital over the useful lives of the assets (depreciation);
• Efficient operating costs and overheads.

While Generation tariff is determined using a benchmark Long Run Marginal Cost (LRMC) of the most economically efficient new entrant.

This offers a transparent framework for determining electricity tariff that engender legitimacy and acceptance by providing for clear dis-aggregation and determination of necessary operating costs and overheads and reasonable Return on Investment.