Recent Classification of Power into Bands: Impact on Nigeria's Electricity Tariff System
Recent Classification of Power into Bands: Impact on Nigeria's Electricity Tariff System
Introduction
On April 3, 2024, the Federal Government of Nigeria, through the Nigerian Electricity Regulatory Commission (NERC), implemented a new electricity tariff for customers classified under Band A. This move has stirred widespread discussions and concerns across the country, as electricity is a fundamental necessity, and the new tariffs are expected to significantly affect many Nigerian households and businesses.
Musliu Oseni, the vice-chairman of NERC, announced that customers under Band A, who are entitled to 20 hours of electricity daily, will see their tariff rise to N225 per kilowatt (kW) from the previous N66 per kW. This 240.9 percent increase has raised eyebrows, particularly given the economic realities facing many Nigerians. The adjustment is part of a broader initiative to reduce electricity subsidies by N1.14 trillion in 2024, while also pushing distribution companies (DisCos) to improve their supply capacities and service delivery.
Understanding the Power Classification Bands
NERC classifies customers into five different bands, ranging from A to E. Each classification is based on the number of hours of electricity supply a customer receives daily:
Band A: 20 hours of electricity per day Band B: 16 hours of electricity per day Band C: 12 hours of electricity per day Band D: 8 hours of electricity per day Band E: 4 hours of electricity per day
The Band A customers are the primary targets of the new tariff review, with a notable increase to N225/kW, while customers in Bands B through E will continue to pay N63/kW, N50/kW, N43/kW, and N40/kW respectively. NERC explained that the review would apply from April to December 2024, with all DisCos expected to implement the new rates.
Key Factors Behind the Tariff Hike
The increase in electricity tariffs for Band A customers is largely influenced by inflation and the foreign exchange (FX) rate. NERC's Multi-Year Tariff Order (MYTO) accounts for inflationary pressures and FX fluctuations as key determinants in tariff calculations. The DisCos adopted an exchange rate of N1,463.31/$, despite the dollar trading slightly below N1,300 in the official market. This rate was based on a 1% transaction cost added to the average exchange rate of N1,448.82 as obtained from the Central Bank of Nigeria (CBN) between March 19 and March 25, 2024.
Inflation has also played a pivotal role in the tariff review. In February 2024, Nigeria’s inflation rate hit 31.7%, as reported by the National Bureau of Statistics (NBS). NERC factored this inflation rate into its projection for 2024, further justifying the need for a tariff adjustment. In comparison, the United States' inflation rate for February 2024 stood at 3.2%, a figure also considered in revising Nigeria's inflation projection.
Electricity Generation Capacity
Another critical factor influencing the tariff review is the available electricity generation capacity. NERC based its projections on reports from the system operator, with Ikeja Electric, Abuja Electricity Distribution Company (AEDC), and other regional DisCos providing data on their offtake capacity. For instance, Ikeja Electric used an average of 603 megawatts per hour (MWh/h) in January 2024, while AEDC averaged 611MWh/h, and Kano Electricity Distribution Company (KEDCO) used 268MWh/h. These figures help determine the distribution capacity and supply reliability that DisCos can provide to customers in each band.
Gas-to-Power Prices and Their Impact
The electricity tariff review is also affected by gas-to-power prices. On April 2, 2024, the Nigerian Midstream and Downstream Petroleum Regulatory Authority, in line with the Petroleum Industry Act (PIA) 2021, increased the wholesale price of gas-to-power from $2.18 per million British thermal units (MMBTU) to $2.42/MMBTU. This 11% increase further drove up the cost of electricity generation for power companies (GenCos), which in turn passed the additional costs to DisCos and ultimately to consumers in Band A.
GenCos have long advocated for an increase in the wholesale price of gas, citing the rise in gas prices on the international market. With this increase now in effect, the cost burden on electricity consumers has grown considerably.
The Consequences for DisCos and Consumers
With the new tariffs in place, DisCos are now required to meet stricter service commitments for Band A customers. According to NERC, if a DisCo fails to provide the committed 20 hours of electricity for two consecutive days, it must publicly explain the cause of the service failure on its website and provide a timeline for restoration. If the failure persists for seven consecutive days, the feeder will be automatically downgraded to Band B service levels.
This stricter monitoring of service delivery is expected to drive improvements in the reliability of electricity supply. However, the sudden increase in tariffs, especially during challenging economic times, has been met with significant public outcry. For instance, AEDC was fined N200 million by NERC for tariff violations after a system glitch caused overcharges for customers who had been downgraded from Band A to Band B due to reduced electricity supply.
Moving Forward: A Time for Reflection
The electricity tariff increase has brought to light broader concerns about the affordability of power in Nigeria, especially given the rising cost of living. While the federal government and NERC argue that these changes are necessary to reduce subsidies and improve the liquidity of DisCos, many Nigerians feel that the timing is inopportune.
Inflation, a volatile exchange rate, and the increasing cost of basic goods and services have already strained the average household budget. Coupled with this, Nigeria’s economic challenges have made it difficult for many citizens to cope with such significant increases in electricity tariffs.
Ultimately, the classification of power into bands, while aiming to streamline service delivery, is being viewed as a reflection of the broader socioeconomic divide in the country. The higher rates for Band A customers—often those in more affluent areas—while maintaining lower tariffs for Bands B to E, is seen as a form of classism. At a time when unity and inclusivity are crucial for national development, the last thing Nigeria needs is further economic division within the essential services sector like electricity.
In these difficult times, a more thoughtful and balanced approach is needed to ensure that essential services like electricity remain affordable and accessible for all Nigerians.
References
1. Aro, B. (2024). "Bands classification, approved FX rate — inside NERC’s electricity tariff review." TheCable. Retrieved from TheCable
2. Nigerian Electricity Regulatory Commission (NERC). (2024). Multi-Year Tariff Order (MYTO) Review.
3. National Bureau of Statistics. (2024). Nigeria's Inflation Rate Reports for February 2024.
4. Nigerian Midstream and Downstream Petroleum Regulatory Authority. (2024). Gas-to-Power Benchmark Prices for April 2024.
