The recent unification of Nigeria’s naira exchange rate, which has resulted in the depreciation of the currency at the investor and exporter window, is anticipated to lead to an increase in electricity prices across the country.

The Central Bank of Nigeria (CBN) recently announced the consolidation of all segments of Nigeria’s foreign exchange market into a unified system. This move allows market forces, including supply and demand, to play a significant role in determining the exchange rate.

However, the unification of the exchange rate is expected to have repercussions on electricity tariffs in Nigeria. Experts in the electricity sector predict that Nigerians should brace themselves for an imminent rise in electricity prices when a minor review is conducted in December.

Dr. Damilola Oluwole, Director of Energy Markets and Rates Consultants, explains that current electricity tariffs are designed with consideration for the inflation rate. The tariff inflation is based on historical average rates from the National Bureau of Statistics (NBS), with the current figure standing at approximately 22.4%. Consequently, the impact on tariffs due to the slight increase in the Consumer Price Index (CPI) is expected to be marginal.

The foreign exchange (FX) rate utilized in the tariffs is based on the average CBN rate from the past six months, with a 1% premium added to it. Dr. Oluwole notes that using the figures provided on the CBN’s website, the rate of USD/NGN 467.53 is derived, signifying a marginal increase compared to the current rate of USD/NGN 441.48.

This implies that the recent circular issued by the CBN, which provides rate guidance based on the Investors’ and Exporters’ (I&E) window, will not take full effect until the bi-annual tariff reviews in December 2023, at which point the I&E window rates will have been in effect for six months.

Odion Omonfoman, CEO of New Hampshire Capital, an electricity consulting company, shares a similar perspective. He explains that inflation rate and foreign exchange rates are two key factors used to determine adjustments in end-user tariffs, both of which have been increasing. Any further inflationary pressure would impact end-user tariffs.

While the unification of the exchange rate is advantageous for the economy, it will result in higher electricity and energy costs for consumers. With exchange rate unification, electricity tariffs will experience significant increases due to the disparity between the CBN rate and the new unified rates.

Furthermore, the fluctuating exchange rates render the fixed exchange rate used in the Multi-Year Tariff Order (MYTO) 2022 invalid. The Nigeria Electricity Regulatory Commission (NERC) will need to establish a new methodology to compute the applicable exchange rate during tariff adjustment periods.

Omonfoman highlights that power sector entities, such as Distribution Companies (DisCos) and Generation Companies (GenCos), incur costs for imported equipment and materials, which include dollar elements. These costs must be recovered through end-user tariffs. Examples of such equipment include cables, transformers, sub-station equipment, software licenses, and other imported electrical components.

The unification of foreign exchange rates and the subsequent increase in tariffs will also impact off-grid customers. They will face higher costs for solar photovoltaic (PV) equipment, which is priced in dollars, resulting in increased capital costs that must be recuperated through off-grid tariffs.

“Unfortunately, customers have no idea about the changes to tariffs, and if they are paying, as both the Nigeria Electricity Regulatory Commission (NERC) and DisCos, no longer inform customers about electricity tariff increases or publish the MYTO tariffs anymore,” he stated

Leave a Reply

Your email address will not be published. Required fields are marked *