Explainer: What is cost reflective electricity pricing and how does everyone benefit? (1)

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In the last six years, Nigerians have embarked on a quest to make electricity consumption and supply more efficient through privatisation, based on the belief that private sector actors working with market forces of demand and supply would help rectify the ailments in the sector.

However, the privatisation process has been slow to produce the desired outcomes in terms of attracting fresh investments across the sector’s value chain of generation, transmission and distribution of electricity.

Lack of fresh investments into the sector have brought some electricity distribution companies (Discos) to the edge of bankruptcy and caused investment shortfalls of close to N1.4 trillion. These investment gaps account for the fact that Nigerians do not enjoy the benefits of steady electricity supply.

A major function of the Nigerian Electricity Regulatory Commission (NERC) as contained in section 32(d) of the Electricity Power Sector Reform (EPSR) Act, 2005 is to ensure that the prices charged by licensees are fair to customers and sufficient to allow the licensees to finance their activities and to allow for reasonable earnings for efficient operation.

To make the sector self-sustaining without bailouts from the government, cost-reflective electricity pricing has been called for. But what is cost reflective electricity pricing and how will it benefit everyone?

Cost reflective electricity pricing requires Discos to introduce tariffs that more strongly reflect their underlying costs. Good tariffs should be efficient, equitable, provide stable bills for consumers and revenue for businesses, and be acceptable to customers. There are several types of cost-reflective tariffs, and each fulfills these criteria to a greater or lesser extent.

An average retail electricity price today is N32 per kilowatt hour, for a product that has an average retail price of N80 per kilowatt hour on a cost reflective basis. This includes the debates … Read More...