What the eligible customer scheme means for electricity prices in Nigeria

Access to electricity is still a major challenge in Nigeria despite series of reforms and initiatives since the enactment of the Electric Power Sector Reform (EPSR) Act in 2005. About half of the population does not have regular and reliable access to electricity. Consumers also pay high tariffs despite the absence of significant improvements in the power supply.

The Nigerian electricity sector is unbundled, vertically separating the generation, transmission, and distribution sub-sectors. The generation companies (GENCOs) transmit electricity through the Transmission Company of Nigeria to the (regional) distribution companies (DISCOs) who then dispatch electricity to the end-users – industries, businesses, households. However, the DISCOs have faced problems of financial liquidity and have been unable to provide the basic infrastructure (such as meters and transformers) required for effective service delivery. Yet, the Eligible Customer Scheme (hereafter, EC Scheme) which was introduced in May 2017 would further put pressure on the financial liquidity of the DISCOs and affect electricity consumers through higher tariffs.

The EC Scheme, which is defined in Section 100 of the Act, allows big electricity consumers such as large industries to be supplied electricity directly by the GENCOs, bypassing the DISCOs. The purpose of defining eligible customers is to facilitate competition in the electricity market by allowing customers to purchase electricity from the supplier of their choice, rather than from the DISCOs in their region (regional monopoly). There are four categories of ECs presented by the Nigerian Electricity Regulatory Commission (NERC). The first comprises of those with minimum consumption of 2MWhr/h and connected to a metered 11Kv or 33kV delivery point on the distribution network. The second category covers those connected to a metered 132kV or 330kV delivery point on the transmission network. The third category includes those with consumption higher than 2MWhr/h on monthly basis and directly connected to a metered 33kV delivery point on the network, while the last category is those with monthly consumption in excess of 2MWhr/h and directly connected to the metering facility of a generation company.  

While the EC Scheme would enable industrial customers to have access to much-needed electricity and evacuate stranded generated electricity, it has implications for the financial performance of the DISCOs and the electricity tariff faced by non-eligible customers. Large industrial customers account for a substantial proportion of DISCO’s revenue. Thus, the implementation of the scheme would reduce the revenue available to DISCOs, thereby worsening their financial situation and undermining their ability to provide necessary distribution infrastructure. The DISCOs are already challenged by a low tariff environment, high aggregate technical, commercial, and collection (ATC&C) losses and the EC Scheme would further worsen it.

The EC Scheme would lead to an increase in electricity tariffs for non-industrial consumers. The scale of electricity tariff across the various DISCOs shows that the tariff paid by industrial customers (average of N45.72/kWh for Class D2) is over ten times that of residential customers (N4/kWh for R1 – lowest-ranked customers). DISCOs would therefore need to charge non-industrial customers more in order to recover the loss of revenue from industrial customers. In fact, Section 28 of the ESPR Act allows the Commission to impose a competition transition charge on consumers and eligible customers to ensure the affected licensees “earn permitted rates of return on their assets”. The collection of these competition transition charges would constitute an increase in tariffs paid by electricity consumers. Thus, regular customers would bear parts of the cost of the EC Scheme. To mitigate the impacts on non-eligible consumers, the competition transition charges should be limited to only ECs.

Four years since the implementation of the EC scheme, it has been beset by several challenges and controversies, leading to its temporary suspension by the regulator in August 2021. In the notification of the suspension of the scheme, the NERC notified the Transmission Company of Nigeria that several ECs are yet to meet energy consumption requirements and GENCOs do not show proof of excess capacity. In fact, according to the Association of Nigerian Electricity Distributors, the NERC is yet to approve any application for eligible customer status[1].

Although the EC Scheme would enhance competition in the electricity sector in the long term, it works best in a competitive electricity market characterized by efficiency and market-driven tariffs. GENCOs are currently tied to a power purchase agreement with the Nigerian Bulk Electricity Trading Plc, and can only sell additional capacity to eligible customers. With the current tariff structure, GENCOs may be unwilling to invest in additional capacity. More so, the creditworthiness of the eligible customers to sign long-term power purchase contracts with GENCOs is also an issue to be addressed.

[1] https://www.thisdaylive.com/index.php/2021/08/26/discos-we-have-no-hand-in-suspension-of-eligible-customers-scheme/