Generation Costs Dominated 2022 Nigerian Electricity Tariffs At 49.02% – NERC Report

An analysis of the electricity market by the Nigerian Electricity Regulatory Commission (NERC) revealed that the major contributor to end-user tariffs in 2022 was power generation costs, which claimed a commanding share of 49.02%.

The Commission, through its 2022 Market Competition Report, delved into the specifics, shedding light on the critical factors impacting the average end-user electricity tariff.

NERC emphasized that the costs associated with power generation played a pivotal role in shaping the electricity landscape in Nigeria. In the second half of 2022, under the Multi-year tariff order (MYTO) arrangement, the expenses linked to power generation were identified as the lion’s share, constituting nearly half of the average end-user electricity tariff.

The report emphasized that following closely behind generation costs was the noteworthy influence of distribution costs, which made up 24.24% of the average end-user electricity tariff. These expenses encapsulate the processes responsible for transporting electricity from power stations to consumers’ homes and businesses, with efficiency losses also playing a role at 17.68%.

Efficiency losses encompass a variety of technical, commercial, and collection issues, representing challenges in the infrastructure, commercial efficiency, and payment collection. Addressing these losses is deemed pivotal in streamlining the electricity distribution system and reducing overall costs for consumers.

Further down the line, transmission costs were identified as another factor, constituting 9.30% of the average end-user electricity tariff. These costs revolve around building, maintaining, and operating the transmission networks responsible for transporting electricity.

Additionally, Value Added Tax (VAT) contributed 6.98% to the tariff, and it’s critical to understand the impact of taxes on consumers’ expenses. The Nigerian Electricity Market Stabilization Facility (NEMSF) Repayment accounted for 2.35%, representing the unit cost per kilowatt-hour associated with repaying loans that financed past tariff subsidies. Lastly, the Administration and Regulatory Charges made up 1.50% of the tariff.

The NERC report presented recommendations for reducing generation costs, emphasizing strategies like “least-cost dispatch” and efficient contract activation to bring stability to power generation.

Combining these approaches with a proactive reduction of losses in the transmission and distribution process could lead to a more cost-effective electricity generation system, possibly allowing for the gradual phasing out of tariff subsidies without a tariff increase.

Notably, the report highlighted that Nigeria’s end-use electricity tariff was relatively lower compared to eleven out of 11 ECOWAS countries, primarily due to a Federal Government tariff subsidy and the relatively cheaper gas prices, a crucial input in electricity generation.