Electricity fixed charge is not rocket science

 (By Onoakpoma Ohimor)

Few will argue that the Nigerian electricity supply industry is far from the above scenario, as current demand far outstrips supply. The average residential electricity consumer gets served less than 100 units (kWh) in a month. Furthermore, the new operators in the industry are yet to make significant investments that will improve the lot of the consumers. Current demand is yet to be met much less carrying of spare capacity.

THE Nigerian Electricity Regulatory Commission (NERC) recently held a public consultation and hearing in respect of its recent order on fixed charge, which has become a subject of discontent and agitations among electricity consumers.

  The order states that consumers are not required to pay the fixed charge element of their electricity bills if they suffer up to 15 days of blackouts either at a stretch or cumulatively in any given month. The order which took effect in May was pursuant to the statutory powers of NERC to regulate the industry and set prices for the supply of electric power. Subsequently, during the minor review of the existing Multi-Year Tariff Order (MYTO2), the fixed charge was frozen at the current rate thus preventing the automatic increase that would have taken effect mid 2014. Consequently, most residential consumers will continue paying a monthly fixed charge of N750.

   Clearly, the intention behind NERC’s order is protection of consumers from exploitation, as there is no commercial justification for consumers to pay the fixed charge when service is not delivered. Based on media reports, the consensus of opinion at the hearing was that implementation of the order would be cumbersome and would not deliver the desired results. (I had expressed the same position in an article titled Privatised electricity industry – the first six months published in June 2014). The distribution companies were most vocal in calling for reversal of the order understandably in view of the loss of revenue. If reports in the media are anything to go by, NERC is expected to reverse the order or make significant adjustment to it.

   While NERC deserves commendation for at least listening to consumers’ complaints and being open to alternative views, there are better options for resolving the fixed charge issue. In the previous article referred to above, I had advocated a number of options on the issue of fixed charge and hope to elucidate on one in particular – drastic reduction of the current fixed charge.

   An unforgettable comment of one of my professors in school was; if you ask the right questions you are likely to get the right answers. The pertinent question at this junction is what is the essence of the fixed charge? The fixed charge element is associated with costs that do not vary with consumption. It is meant to help electric utilities (providers) pay for the huge cost incurred whether or not consumers use the service. The fixed charge is very apt in scenarios where electricity providers carry spare capacities in a bid to meet anticipated and unanticipated demand from consumers. In other words, fixed charge will be plausible and defensible in scenarios where operators have made significant investments in generation and distribution capacities.

   Few will argue that the Nigerian electricity supply industry is far from the above scenario, as current demand far outstrips supply. The average residential electricity consumer gets served less than 100 units (kWh) in a month. Furthermore, the new operators in the industry are yet to make significant investments that will improve the lot of the consumers. Current demand is yet to be met much less carrying of spare capacity.

  In view of the abysmally poor supply situation of the Nigerian electricity supply industry, it becomes difficult to justify a high fixed charge which can only encourage inefficiency among operators and breed discontent among consumers. While the order by NERC that consumers should not pay the fixed charge in the case of long blackouts and freezing at the 2013 level are welcomed, I posit that a downward review would achieve even more.

   By skewing the current tariff in favour of the variable energy charge, consumers will only have to pay more when electricity is supplied and much less in cases of prolonged blackouts. The table below shows the outcomes if the fixed charge is reduced by a certain percentage and the variable energy charge increased by a corresponding percentage for average consumption of 60kWh and 100kWh per month.

  Clearly, the distribution companies will earn more for supply of electricity and less in cases of blackouts, better still there is a significant increase in revenue for delivering more electricity.

 

CurrentScenario AScenario B

 

Current25% decrease in fixed charge and a corresponding 25% increase in energy charge (cost per kWh)50% decrease in fixed charge and a corresponding 50% increase in energy charge (cost per kWh)

A

Average Monthly Consumption (kWh)

60

60

60

B

Cost per kWh

14

17.5

21

C

Energy Charge (A*B)

840

1050

1260

D

Fixed Charge

750

562.5

375

E

Total Monthly Cost (C + D)

1590

1612.5

1635

 

 

Sure Revenue for DISCOS (D/E)%

47.17

34.88

22.94

 

 

% Increase in Revenue (Escenario – Ecurrent)/Ecurrent

1.42

2.83

 

Current25% decrease in fixed charge and a corresponding 25% increase in energy charge (cost per kWh)50% decrease in fixed charge and a corresponding 50% increase in energy charge (cost per kWh)

A

Average Monthly Consumption (kWh)

100

100

100

B

Cost per kWh

14

17.5

21

C

Energy Charge (A*B)

1400

1750

2100

D

Fixed Charge

750

562.5

375

E

Total Monthly Cost (C + D)

2150

2312.5

2475

 

 

Sure Revenue for DISCOS (D/E)%

34.88

24.32

15.15

 

 

% Increase in Revenue (Escenario – Ecurrent)/Ecurrent

7.56

15.12

  It is obvious that by skewing the tariff towards a higher energy charge and lower fixed charge, Discos will be incentivised to provide more power as they will increase their revenue with every additional unit of electricity supplied. The current tariff structure as provided in MYTO does not incentivise the Discos to improve on supply.

   Current electricity prices in Nigeria are already comparable to what consumers pay in developed countries, rather than an overall increase, what needs be done is a restructuring of the tariff that will get the value chain to deliver more electricity. As the demand and supply gap is bridged with increased capacity, the fixed charge can then be increased to help operators recoup the additional investments made in generating and distribution capacities.

   While investors in the electricity supply industry are eager to recoup their investment and turn a profit, the hapless and traumatised consumers are deserving of a better deal – significant improvement in electricity supply.

Ohimor is a financial consultant based in Lagos.

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