Why Increase Electricity Tariff?

Posted: May 27, 2012 in Uncategorized

By Felix Ayanruoh

The Nigerian Electricity Power Regulatory Commission(NERC) proposal to increase electricity tariffs from June 1, 2012 has generated hostile reception from stakeholders and consumer advocacy groups. For some, it is a move to further impoverish the indigent in our society. With the combined effect of the fuel subsidy probe, oil subsidy removal and continued power shortages, Nigerians are right to once again be anxious about electricity tariff increase.

NERC has argued that about fifty Private Independent Power Projects have been licensed to produce about 20,000 megawatts of power in the near future and that – if these plants are not cost-effective – the ultimate investors will not invest as expected.

Inasmuch as Nigerians have the right to ask the hard questions, we must not remain oblivious to the underlying reasons behind the increases. The debate and discussions on this issue should be devoid of emotions and legalese.Presently, electricity is sold to consumers below the short-run and long-run marginal cost of production; and even the most rudimentary understanding of basic economics and common sense dictates that this is not a sustainable business model.Quite simply, the reform process will be a failure if potential investors cannot get fair return of their investment, as no investor will be willing to invest in the sector.
In addition to its economic impact, under-pricing electricity precipitates the wasteful usage of electricity and critically impairs the operating revenues of utilities companies, forcing them to reduce efficiencies and capital investment, forego essential maintenance and to seek government subsidies. The unwillingness of governments to raise tariffs in line with costs due to the political pressure has lead to power reform failures in many economies of the world. It should be noted however, that recent tariff increases in most developing countries have been granted on a haphazard basis to overcome immediate difficulties, rather than to ensure their long-term financial equilibrium. It is my belief that the present increase is intended to ensure long-term financial balance.
Government is faced with the dichotomous dilemma of formulating a tariff structure to incentivize power generation and distribution, on the one hand; and social engineering of the market through subsidies for the benefit of the economically disadvantaged, on the other.

The crucial question that stakeholders and consumer advocates should be asking therefore is who exactly is a “low-income” consumer? This is a difficult question, but experiential answers may be found in the Brazilian model which offers important lessons on the impact of energy reform on the electricity consumption levels of the poor urban and rural households.
Retaining a degree of subsidy to improve access to electricity service for the poor is justified, in part because of the lack of social welfare infrastructure for distributing income support to the poor. The issue therefore is electricity subsidies or cross subsidies and not tariff increase per se. A cost-effective tariff system is critical to the success of power sector reform; as such, NERC’s proposed tariff increase deserves a chance to succeed.
Felix Ayanruoh is a US energy attorney licensed in the state of New York State and District of Columbia.


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