FG finalizes electricity subsidy removal and plans to raise rates by 200%

FG finalizes electricity subsidy removal and plans to raise rates by 200%



• Energy economists say cost-push inflation is looming
• Further burden on the economy and industry due to high costs

President Bola Tinubu is likely to direct the Nigeria Electricity Regulatory Commission (NERC) in the coming days to implement the 2024 Multi-Year Tariff Order (MYTO), which could increase current tariffs by nearly 200 percent. There are signs that there is a sex.

Following the rise in natural gas prices, this could increase the burden on household budgets and reduce the purchasing power of Nigerians who are already grappling with multiple challenges.

In the 2024 MYTO, electricity tariffs are scheduled to increase from the current midpoint (N70kWh) to an average of N205 Naira per kilowatt hour (KWh). This would result in an approximately 193 percent increase in fees across user categories.

Electricity subsidies in the last decade amounted to 5.4 trillion naira. Since Tinubu took office, electricity subsidies have increased to nearly 1 trillion naira in nine years and are projected to reach 2 trillion naira by 2024.

A presidential official told Bloomberg that the tariffs would be implemented within weeks, while the Nigeria Midstream and Downstream Regulatory Authority (NMDPRA) adjusted the price of natural gas for the power sector from $2.18 to $2.42. Added $0.5. Stakeholders are pushing back.

Recall that gas supplies, which were sold to power plants at a duty of $2.18 per million British Thermal Units (MMBTU), are facing challenges posed by the Naira. His cost per MMBTU in Naira was only 390 Naira in 2021, in 2022 he cost 411 Naira per MMBTU, in 2023 he cost 653 Naira per MMBTU and in January this year he has risen to 800 Naira per MMBTU. It then soared to 1 Naira 496 in February before the NMDPRA. Added on Sunday.

This comes after the inflation rate rose significantly from 16% in 2021 to over 31% in February.

As of 2015, Nigeria's electricity subsidy was N225 billion, increasing to N308 billion in 2016. 351 billion naira in 2017. 440 billion in 2018. In 2019 it was 528 billion naira and in 2020 it was 501 billion naira. In 2021, it was 251 billion naira. 144 billion Naira in 2022; 645 billion Naira last year and is expected to exceed 2 trillion Naira in 2024.

Tinubu had suspended the Service Based Tariff (SBT) imposed by the previous government at the same time as abolishing the Premium Motor Spirit (PMS) subsidy, but later returned the subsidy through the back door.

According to the 2024 NERC Customs Order, most customers in the North East under Yola DisCo will pay between N234 and N179. Companies under Jos DisCo pay between 166 Naira and 101 Naira kWh depending on bands from A to E.

Also, companies under the Ikeja Electric umbrella charge between N143 and 69kWh, while Abuja DisCo charges between N153 and 74kWh. Eko DisCo charges between 125 Naira and 79 Naira kWh. Consumers under Benin DisCo’s jurisdiction will be purchasing between 137 Naira and 100 Naira kWh.

Enugu charges between 154 Naira and 95 Naira 95 kWh while Kano charges between 159 Naira and 90 Naira 90 kWh depending on the band to which the customer belongs. Ibadan DisCo charges between N140 and N97 kWh while Port-Harcourt DisCo charges between N142 and N100 kWh. At Kaduna DisCo, it ranges from N163 to N88 kWh.

Bloomberg had reported that prices for urban consumers are about to rise from an average of 68 naira to 200 naira.

Since Tinubu ended power subsidies last year, the country has been unable to meet the shortfall, which has affected power generation and reduced the grid's performance to around 3,000 megawatts.

In January-February this year alone, electricity subsidies soared to N267 billion, but payments to power generation companies declined from 92% in 2022 to 12% in January and February, with power producers This indicates that the company is gradually approaching its closure.

Industry statistics obtained by the Guardian show that subsidies rose from N12 billion in 2022 to N37 billion between January and April 2023. It increased to 55 billion naira from May to September and settled at 74 billion naira from October to December before surging. 267 billion naira in his first two months of this year.

NERC had pegged the 2024 MYTO gasoline price at $2.18, but the new price of $2.42 per MMBTU poses a risk, especially for consumers who are often on the receiving end.

NMDPRA first announced the price on its official handle of X before it was widely published in newspapers today, revealing that commercial customers will buy petrol at $2.92/MMBTU. The decision was taken under the provisions of the Petroleum Industry Act (PIA), which empowered the regulatory framework to determine market-based pricing regimes in Nigeria's domestic gas market.

Discos

The document, signed by the agency's CEO Farooq Ahmed, says the regulator has a duty to determine the Domestic Base Price (DBP) and marketable wholesale price for natural gas supplied to strategic sectors. It pointed out.

Mr. Ahmed said the decision was taken after thorough consultation with key stakeholders and taking into account the provisions of the PIA, with pricing based on the national reference price of $2.42 per MMBTU and the wholesale price of natural gas. Said to be based on.

Nigeria is currently promoting a 10-year gas policy to increase gas production and revitalize the gas-based economy, but the new gas tariff is said to be a dilemma for the Nigerian economy.

The Chairman of the Economic Society of Nigeria (NES), Professor Adeola Adenikinju, believes that the increase in gas prices will not only cause gas companies to increase investment but also increase the cost of power supply.

He noted that the increase could increase investment returns in the gas sector and have a positive impact on investments in gas supply and gas distribution infrastructure.

“However, electricity supply prices and production costs for other gas-using sectors will also rise. This will lead to inflation as consumers who cannot afford higher electricity prices may seek illegal connection options. “The losses recorded in the power sector could further increase and even surge further,” Adenikinju said.

He noted that an important indicator to watch is the improvement in electricity supply, adding that if the domestic electricity supply becomes more reliable, the ultimate effect on the economy will be positive.

Dan Kunle, an energy business consultant, points out that both the electricity and gas sectors need price structures that reflect appropriate costs, noting that investments in gas, like the electricity sector, are capital-intensive. he emphasized. According to him, if Nigeria is to promote its power sector and petrochemical industry, all of these require huge investments.

Kunle said Nigeria is heavily dependent on gas for electricity and if gas prices are not right, the supply will dry up. Electricity costs will also have to adapt to the new reality.

Kunle maintained that the electricity price hike was justified, adding that the federal government cannot continue to subsidize electricity and gasoline.

prepaid meter.file photo

“I am not surprised that the electricity sector has completely collapsed. Gas and electricity are still not cheap in Nigeria. The investment deficit in both sectors is very large. It is better to import oil and gas across the Atlantic to Nigeria. It could be cheap and competitive,” Kunle said.

Professor Wunmi Ildea, a prominent energy economist, said the rise in the price of natural gas for electricity has an inflationary effect that drives up costs.

The immediate impact, he said, is that electricity generation will be more expensive and those costs will be more likely to be passed on to consumers.
Elaborating on a number of impacts, Iredea said high inflation due to cost-push inflation would significantly reduce disposable income available to purchase goods and services after paying large amounts of electricity and money purchasing power. Stated.
“Even though higher natural gas prices may lead to an increase in gas supplies to the power sector, this scenario does not improve the situation for the oil and gas sector.

Currently, demand for gas in the electricity sector is price elastic, so if there are no buyers, more gas will be available for purchase. There may be limits for power distribution companies to evacuate generated electricity at high prices.

Finally, the power to raise the price of gas for electricity by invoking the provisions of PIA 2021 represents the trilemma of intent, spirit and letter of the Act,” Ildea said.

Power market analyst Lanre Elatui said gas producers are expected to increase production costs due to exchange rate fluctuations.

“About 80% of the country's electricity is generated with gas, so the impact on the power sector is clear. Current end-user rates, determined by using $2.18 for gas, will increase to $2.42. “However, gas prices are a pass-through cost and end-user rates will inevitably rise.”

Source: guardian.ng

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