With new service reflective tariff, FG cuts power sector subsidy

The Federal Government has successfully cut subsidy to the power sector with the migration to the Servicebased tariff, in November, where customers are charged based on the number of hours of electricity supplied.

Data from the electricity market show that the collections and remittances to the market by electricity distribution companies (Discos) have improved remarkably.

Discos confirm that between October and November collections, there was a 10 percent uptick in collections and was seen again in December. There is also an improvement in overall industry market obligations settlement to both the Nigerian Bulk Electricity Trader and Market Operator.

“What is happening now can be described as collaboration and cooperation among all stakeholders in the power sector. Kudos to the Federal Government,” said Sunday Oduntan, executive secretary of the Association of Electricity Distribution Company (ANED).

Another factor responsible for this improvement in Discos collections is the central bank’s loans to Discos which are aimed at improving meter distribution, upgrade of electrical infrastructure, and capital expenditure of the Discos.

“The achievements of some of these interventions span the value chain of the power sector,” said Moses Pila, an energy lawyer and senior associate at Templars, a law firm.

Pila said previous loans led to the recovery of generating capacity of more than 1,200MW in both hydro and thermal plants through the overhaul of turbines and most Discos have been able to carry out projected capital expenditure through the issuance of letters of credit ( LCS) for the purchase of meters and other electricity assets.

This improved revenue is helping the government reduce the burden of providing subsidies to the sector but it has now passed over to the customers who have seen their bills increase by between 30 and 50 percent. However, many complain that the Discos are not supplying power for the full contracted hours under the service-based tariff.

Last year, during negotiations with labour groups, government officials agreed to a deal wherein the Federal Government would pay N5 billion monthly as subsidy till December 2020.

According to the terms of the agreement, electricity customers across Bands A-C, who saw a tariff increase will enjoy different levels of discount. Customers in Band A will see a 10 percent reduction in tariff increase which amounts to N2.49 per kilowatt hour, adding an N1.8 billion bill to the government’s monthly subsidy spend.

Electricity customers in band B will enjoy a 10.5 percent reduction in tariff increase which amounts to N2.24 per kwh and will cost the Federal Government N900 million monthly.

While electricity customers under Band C will enjoy a 31 percent reduction in tariff increase amounting to N5.46 per kwh. This will cost the Federal Government N2.350 billion every month in fresh subsidies.

Customers in bands D and E, whose consumption was not subjected to tariff increase, are not affected.

Analysts say the moves to review the tariff are significant for the sector not only because it reduces the burden on the government, it will also reduce its stranglehold on the power sector.