The Nigerian Electricity Regulatory Commission (NERC) on Thursday, 22nd of August published a new electricity tariff on its website, increasing the cost by an additional sum between NGN8 and NGN16 for every kilowatt-hour energy provided by their respective distribution companies. Until now, the Nigeria Electricity Supply Industry (NESI) has been marred with non-cost reflective tariffs and high aggregate technical commercial and collection (ATC&C) losses. The challenges which have created a liquidity crisis in the fragile sector is gradually pushing it towards bankruptcy despite the interventions from the Federal Government of Nigeria.
The argument to fixing the problem was whether to first deal with the abysmally low collection efficiency component of the ATC&C losses which on the average for 2019 is at 20%, or to implement a cost-reflective tariff. Increasing tariff without first addressing the problems of commercial and collection losses would simply create a vicious cycle as the action can result in deviant consumer behavior and increase the level of theft.
To solve the puzzle, NERC in her wisdom first introduced the Meter Asset Provider (MAP) scheme where consumers can advance payment for metering and get it installed within 10 working days. This, the Commission hopes will Fast-Track Closure of Metering Gap, and then the expectation that it will facilitate improvement in revenue collection.
Secondly, NERC embarked on the tariff review process for presumably, cost reflectiveness which will become effective on 1st January 2020. We examine how this new tariff increase will affect businesses in Nigeria.
The business climate in Nigeria has never had it better in terms of electricity supply, with most businesses generating up to 50% of their electricity. The energy losses associated with the self-generation model is significantly high that it erodes business operating profits.
The trade-off would have been to optimize the use of cheaper grid electricity as much as possible when available. But the frequent number of outages from the grid diminish this value. Currently, the industry is trying to recuperate and consequently, the increasing electricity tariff. This could mean two things for your business profitability;
- (1) increase the price of your product and services; or
- (2) reduce energy cost by implementing energy efficiency measures
To put these scenarios into perspective, if your annual electricity consumption is 2,000,000 KWh in Abuja and you generate about 40% of your own electricity at NGN90 per unit (KWh) using a diesel generator, your current annual energy cost would be NGN128.5million. If you do nothing and continue with business as usual with the increased tariff, your energy bill will increase by 12.8%, eroding your pre tax profit by NGN16.4million per annum.
If you choose option one above by increasing the cost of your product and services, most likely, you would see a drop in demand, especially if you are in a sector with high elastic demand. And if your business is already struggling with the current economic downturn, it might as well mean the end of the road for your business.
If you choose option two by implementing energy efficiency measures, through which 20% cost savings can easily be achieved, you would completely avoid the impact of the increased tariff, plus a further 9.8% reduction in your annual energy cost leading to NGN12.5 million increase in your pretax profit.
Let’s imagine that instead of going for cost reduction, you try to increase sales instead. If your pre-tax earnings margin is 15%, then you would have to increase sales by NGN193.3 million per year to get the same impact as option 2. And how would you do it? Most of the time you can’t be certain that the actions you would take to boost sales will deliver the expected results. You might be left with expensive advertising campaigns and new product development, and insufficient payback.
Prof. John Momoh (pictured), Chairman of NERC, didn’t miss his words during the assumption of office of the new Minister of Power, Mr. Sale Mamman when he said: “You are going to be paying for those wasted energy, so we have to minimize loss at the customer end.”[ In the current globalized and competitive economy, the efficiency of materials, energy, and processes determines who wins the market and Nigeria is not an exception.