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Introduction
Investment in the Nigerian Electricity Supply Industry ("NESI")1 has proven challenging for many reasons. One of such reasons is the highly capital-intensive nature of investments in the NESI. Investors often find it difficult to cover the costs of assets procurement, facilities operation and maintenance, and other regulatory associated costs out of their own pockets. Consequently, investment in the NESI is mostly financed through borrowings from development finance institutions, banks and dedicated funds.
Another key factor contributing to the low investment in the NESI is the challenge of finding willing investors. This is directly related to the uncertainty of recouping invested capital and the profit on such investment, if any. As a result, investment in the NESI is often financed on a recourse basis. From the outset, lenders often prefer a structure that assures repayment, making investment in the NESI more challenging. In the alternative, lenders may stipulate that repayment be drawn from other entities with proven and strong balance sheets or some other credit-enhancement tools. This is, however, an uphill task for investors who are not well-established and connected to other bankable repayment sources.
While financing vehicles such as the (a) Power and Airline Intervention Fund,2(b) Shared Agent Network Expansion Facility,3(c) National Mass Metering Programme,4(d) Solar Connection Facility,5 and (e) Africa Energy Bank,6 are good initiatives, investment in the NESI will continue to suffer if the root of the challenge is not addressed – the cash-flow issue.
One of the means through which countries have attempted to tackle the investment challenge in the electricity sector is by mandating the use of cost-reflective tariffsto improve cash flow generated from electricity projects.
This article aims to examine the critical issue of whether a cost-reflective tariff is in fact a viable path forsustainable investment in Nigeria's electricity sector. We will (a) explain what cost-reflective tariffs mean, (b) identify challenges to implementing cost-reflective tariffs in Nigeria, and (c) suggest ways to navigate these identified challenges.
Summary of Conclusions
Below, we make two points. One is that having a cost-reflective tariff regime is necessary, but it is not sufficient to resolve the challenges in the NESI. Other challenges include the infrastructure deficit, the debt burden on actors in the NESI, the high level of aggregate technical, commercial, and collection ("ATC&C") losses7, and consumers unwillingness to pay and low purchasing power.
The other is that even among the varieties of cost-reflective tariff regimes that are potentially available, care needs to be taken to adopt one that optimizes critical issues such as the frequency of review, the breadth of factors to be taken into account and Nigeria peculiarities as to the interplay between Federal and State-level law-making and regulation.
Understanding Cost-Reflective Tariff
Tariff refers to the formula for determining the consideration paid by an end-user in exchange for the supply of a service or product. Cost-reflective tariff is a tariff that reflectsthe actual cost of generating, transmitting, or distributing the electricity. The Nigerian Electricity Regulatory Commission ("Commission") is the body with the authority to regulate electricity tariffs in Nigeria,8 subject to the devolution of regulatory authority to States' regulatory bodies, in which case, such States' bodies will determine electricity tariffs within their respective states boundaries.9
The activities within the scope of the Commission's tariff regulatory authority are (a) generation and trading activities subject to licensing requirements, (b) transmission, distribution, supply and system operations activities subject to licensing requirements, and (c) electricity distribution franchising or other activities that the Commission considers necessary.10 By the Electricity Act 2023 ("EA"), tariffs must (a) ensure that licensees can recover the full costs of their business activities with reasonable profit margin, (b) catalyze continued improvement of technical and economic efficiency in service delivery through incentives, (c) catalyze continued improvement ofservice quality through incentives, and (d) reflect the cost implications of consumers' electricity consumption on licensees' businesses, among others.11
In setting tariffs, the Commission is enjoined to promote cost-reflective and service-reflective tariffs and ensure the gradual elimination of cross-subsidies within a specified timeframe.12 The Commission sets tariffs mainly through the issuance of Multi-Year Tariff Orders13 ("MYTO").14
Evolution of the Multi-Year Tariff Orders
The 2007 framework (the "MYTO Framework") for the establishment of the MYTO set out a fifteen (15) year tariff path for the NESI with the objective to conduct minor and major reviews of the MYTO bi-annually and quinquennially, respectively.15 In 2024, the Commission supplemented the MYTO Framework and set out detailed procedures for tariff reviews pursuant to the "Regulations on the Procedure for Electricity Reviews" (the "Supplemental Framework).16 Unlike the position under the MYTO Framework, the Supplemental Framework mandates monthly reviews of the MYTO to reflect changes in critical macroeconomic and other minor review parameters.17 This is to reduce, to the barest minimum, the impact Nigeria's volatile macro-economic indices have on applicable tariffs.
Each review of the MYTO attempts to reflect the actual cost of generating, transmitting, and distributing electricity in the applicable tariff to ensure that the NESI is self-sustaining without relying on government bailouts and/or subsidies, and is attractive to investors. The building block methodology adopted by the Commission during reviews seeks to cater for recoupment of invested capital on necessary assets with reasonable profit margins and implementation of efficient operating costs and overheads in the tariffs.18
Issued in 2008, the pioneer MYTO ("MYTO 1") was originally meant to be operative from July 1, 2008 - June 30, 2013, subject to yearly review.19 However, its tenor was cut short in 2011. The tariffs fixed by MYTO 1 were subsidized by the Federal Government of Nigeria to reduce the shocking impact the supposed "cost-reflective tariffs" would have on the Nigerian populace. This created more harm than good in the NESI and by extension disincentivised investors due to the low actual revenue collection. 20
The tariffs assumed that the generation capacity – a fundamental index in calculating applicable tariff – would increase significantly; however, it never materialized.21 It turned out to be an over-ambitious assumption, to say the least, especially considering the natural gas and transmission constraints that plagued the NESI at the time.22 Despite the government'sintervention through subsidy,23 a gap existed between the projected revenue and the electricity generated. The foregoing, together with other factors, sorely impacted profitable market operations and led to an appeal in 2009 by market participants for an early major review of MYTO 1 in 2010-2011.24
Following persistent appeals for a major review of MYTO 1 by market participants, the Commission commenced consultations which culminated in the birth of MYTO 2.25 With a projected lifespan from June 1, 2012 – May 31, 2017, the MYTO2 departed from the national uniform tariffs approach adopted in MYTO 1.26 Rather, it provided a pricing framework for each of the eleven (11) successor distribution companies ("DISCOs") and for companies in other phases of the NESI's value-chain.
It also classified customers into five (5) blocs as follows: residential, commercial, industrial, special, and streetlight.27 The categorization was to ensure that only consumers in dire need of subsidy benefited from the government's intervention. The MYTO 2 also made provision for the recovery of return on capital invested, depreciation of capital, adoption of other macroeconomic indices such as gas price and inflation, and provided incentives for reductions in the ATC&C losses.28
Verification of ATC&C loss rates for each DISCO revealed that the benchmark ATC&C loss rates submitted by the DISCOs were significantly lower than the prevailing rate for all Discos apart from the Eko DISCO.29 This necessitated a review of MYTO 2 and the birthing of MYTO 2.1. MYTO 2.1 reviewed input data in macroeconomic indices such as exchange rate, inflation, generation capacity, and gas price. It also took into account already agreed prices in generation companies' power purchase agreements and was to be effective from January 1, 2015 – December 18, 2018.30
The upward review of the ATC&C loss rate benchmark in MYTO 2.1 had a ripple effect on the tariffs, which inevitably led to petitions from various consumer sections.31 On that note, the Commission reduced the allowable ATC&C losses to zero (0) a few months later (the "Amended MYTO 2.1").32 In effect,the Amended MYTO 2.1, which wasto be operative from April 1, 2015 – December 2018, placed the burden on DISCOs to make-up any ATC&C losses. DISCOs could, however, make a case – with evidence – that certain ATC&C losses be passed on to consumers during subsequent reviews to the MYTO.33
While the Commission's intention to force DISCOs to develop their infrastructure and improve their service offering was clear, a zero (0) ATC&C loss assumption was not only a far cry from the prevailing ATC&C loss rate but was also unrealistic. In every electric-power network, technical and commercial collection losses are unavoidable34 and cannot be as a matter of law eliminated. As expected, the DISCOs kicked against it, forcing the Commission to reconsider its position in the MYTO 2015.35 The rebuttal was particularly premised on the basis that ATC&C losses were an essential component of any proposed cost-reflective tariff; additionally, they formed part of the consideration in setting tariffs in the DISCOs privatisation documents.36
The MYTO 2015 reinstated the benchmark ATC&C loss rate (less the bill due from ministries, departments, and agencies to DISCOs) verified by the Commission in the MYTO 2.1 and recognized the shortfall in the past monthsin the computation of tariffs effective January 2016.37 It also expunged the practice of imposing fixed charges38 on consumers, however, the fixed charge was indirectly infused into consumers' electricity bill.39 The Commission published bespoke MYTOs 2015 for each DISCO based on a 10-year tariff plan submitted by each DISCO which was to allow each DISCO recover all earned and allowable revenue within the January 1, 2015 - December 2024 ten (10) year period.40
In a move to improve generation capacity, it also created a free market for DISCOs to trade prudently with embedded power generators and other independent power producers, regardless of whether or not the agreed prices were higher than the MYTO 2015 benchmark.41 Although monies due from ministries, departments, and agencies to DISCOs were deducted from the ATC&C loss rate adopted, no mention was made as to how DISCOs were to recover this revenue deficit.
Between 2015 and 2019, the macroeconomic indices based on which the DISCOs projected revenue was computed had significantly changed negatively, creating an abysmal tariff shortfall, which led to under remittance of market invoices to the now-defunct Nigerian Bulk Electricity Trading Company (NBET), amongst other domino effects.42 On August 19, 2019, the Commission published the Minor Review of the MYTO 2015 and Minimum Remittance Order for the Year 2019 ("MYTO 2016-2018") to address the revenue deficit and develop a framework to manage and prevent future shortfalls.43
Essentially, the government, in co-operation with the World Bank, devised a framework to fund the DISCOs remittance deficit to NBET and the market operator through the Central Bank of Nigeria's Payment Assurance Facility (Programme).44 The foregoing interim arrangement was projected to last until June 30, 2021 when the transition period would be wound up and a fresh cost-reflective tariff regime would be ushered in on the condition that DISCOs significantly improve the quality of their service offering.45 To this end, the Commission implored DISCOs to raise financing for the associated investment required to improve service by leveraging on, amongst several options, an escrow of the revenues for the ring-fenced service areas and opportunities for sub-franchising and embedded generation.46
In a bid to incentivize DISCOs to improve their service offerings and ensure that consumer tariffs are commensurate with the quality and availability of electric powersupply, the Commission, pursuant to the MYTO 2020, reclassified consumers into service bands.47 The service bands were classified based on the minimum hours of electricity supply consumersreceived in a day.48 Consumers with an average electricity supply availability of less than 12-hours per day over a month were exempted from tariff reviews.49
Consideration of the quality ofservice in the computation of tariffs caused a spike in the tariffs payable by customers in service Bands A, B, and C, which then led to uproar from consumers in those sections of the Nigerian populace.50 The groups called for a review of the hiked tariffs payable through joint consultative meetings with the government. Parties reached an interim consensus to suspend MYTO 2020 for 14 (Fourteen) days while the meetings were going on.51
At the end of consultations, the government issued a policy directive to reduce the tariffs payable by a 10.1%, 10.5%, and 31% reduction in Bands A, B and C respectively, in the marginal increase occasioned by the transition to service-based tariffs, which the Commission duly obliged pursuant to the Revised MYTO 2020.52 Make no mistake, the government continued to fund the DISCOsremittance deficit to NBET and the market operator through the Programme. The marginal reduction occasioned by the consumers' outcry compounded the DISCOs' remittance deficit to NBET and the market operator further.
Footnotes
1 The NESI encompasses the entire value chain of electricity supply in Nigeria, ranging from generation, transmission, distribution and trading of electricity. At the interstate level, NESI is regulated by the Nigerian Regulatory Commission (NERC) and comprises various stakeholders including Generation Companies (GenCos), Transmission Company of Nigeria (TCN), Distribution Companies (DisCos); and Independent Power Plants (IPP). Where an actor acts within only one state, and that state has a state-specific statutory regulator, that regulator will regulate the actor.
2 The Power and Airline Intervention Fund ("PAIF") was established in 2010 by the Central Bank of Nigeria with a fund size of N300,000,000,000 (Three Hundred Billion Naira). The main objectives of the PAIF are to: "fast-track" the development of electric power projects and the aviation sector by providing long-term loans to finance airlines and power projects in Nigeria; provide advantage for more private sector investments in Nigeria's power and aviation sectors; and improve power supply, generate employment, and enhance the standard of living of Nigerians through constant power supply. https://www.cbn.gov.ng/DFD/energy/paif.html accessed on June 19, 2025.
3 The Shared Agent Network Expansion Facility was established by the Central Bank of Nigeria in 2018 to promote the expansion of financial services to underserved and unserved areas in Nigeria by supporting the deployment of agents and other financial services infrastructure. https://www.cbn.gov.ng/DFD/energy/sanef.html accessed on June 19, 2025.
4 The National Mass Metering Programme was established in 2020 as part of the Federal Government of Nigeria's effort in significantly bridging Nigeria's metering gaps to reduce collection losses and increase financial flows to electricity distribution companies. https://www.cbn.gov.ng/DFD/energy/nmmp.html accessed on June 19, 2025.
5 The Solar Connection Facility was established to provide long-term low-interest credit facilities to manufacturers and assemblers of solar components and off-grid energy retailers in Nigeria, in enhancing the deployment of solar energy solutions in Nigeria. https://www.cbn.gov.ng/dfd/energy.html accessed on April 27, 2025.
6 The Africa Energy Bank was established to address the funding crisis in the African oil and gas industry which was triggered by the global energy transition. https://www.afreximbank.com/appo-and-afreximbank-sign-the-establishment-agreementof-the-aeb-declaring-it-open-for-signature-by-prospective-member-states/ accessed on June 6, 2025. The Africa Energy Bank aims to bridge the energy financing gap in Africa by offering financing solutions for energy projects, boosting energy trade, and supporting the development of energy infrastructure across the continent.
7 The ATC&C losses account for electricity losses at the distribution level of the electric power value-chain which are delivered from transmission companies to distribution companies but not paid for by consumers.
8 Electricity Act, s. 34(1)(d)(j).
9 As of the date of this article, the NERC has issued transition orders to 13 states for the transfer of regulatory oversight over their respective electricity markets. The states are: Kogi, Niger, Ekiti, Plateau, Oyo, Ogun, Enugu, Lagos, Imo, Ondo, Edo, Bayelsa, and Nassarawa.
10 Electricity Act, s. 116(1).
11 Electricity Act, s. 116(2).
12 Electricity Act, s. 34(1)(j).
13 The Nigerian Electricity Regulatory Commission uses the Multi-Year Tariff Order (MYTO) as a framework for setting prices for the NESI. The MYTO pricing model aims to establish a cost-effective and stable pricing structure that enables industry operators to earn a moderate return on investment. https://www.scirp.org/journal/paperinformation?paperid=78990 accessed on June 16, 2025.
14 https://nerc.gov.ng/wp-content/uploads/2012/03/MYTO%20Methodology.pdf accessed on April 27, 2025
15 Notice of Proposed Establishment of a Methodology for a Multi-Year Tariff Order. https://nerc.gov.ng/wpcontent/uploads/2012/03/MYTO%20Methodology.pdf accessed on July 13, 2025.
16 https://nerc.gov.ng/wp-content/uploads/2025/02/NERC-REGULATIONS-ON-THE-PROCEDURE-FOR-TARIFF-REVIEWS-INNESI-2024.pdf ; https://www.thecable.ng/provide-investment-plans-financials-nerc-releases-electricity-tariff-hikeguidelines-for-discos/ last accessed July 13, 2025.
17 NERC Regulations on the Procedure for Tariff Reviews in the NESI, clause 6(a). The Commission has the absolute discretion to conduct minor reviews at other short periods but no longer than every six (6) months. The macroeconomic indices are: (a) generation capacity, (b) gas price, (c) inflation, and (d) exchange rate.
18 Notice of Proposed Establishment of a Methodology for a Multi-Year Tariff Order. https://nerc.gov.ng/wpcontent/uploads/2012/03/MYTO%20Methodology.pdf accessed on July 13, 2025.
19 Pioneer MYTO. https://nerc.gov.ng/wp-content/uploads/2012/03/MYTO%20Order.pdf accessed on July 13, 2025.
20 https://allafrica.com/stories/200807080482.html accessed on September 6, 2025.
21 Understanding Electricity Prices – MYTO for the Layman (July 2011) https://nerc.gov.ng/wpcontent/uploads/2012/05/MYTO%20for%20the%20Layman.pdf accessed on July 13, 2025.
22 Electricity Tariffs: low or high, right or wrong? https://nerc.gov.ng/wp-content/uploads/2012/05/Electricity%20tariffs%20-%20Article%20by%20Eyo%20Ekpo.pdf accessed July 13, 2025.
23 The Government intervenes through subsidy by paying the difference between the actual cost of supplying electricity and the cost DISCOs are permitted to charge consumers.
24 Consultation Paper for the 2011 Major Review of the MYTO. https://nerc.gov.ng/wpcontent/uploads/2012/03/Consultation%20Paper%20on%202011%20MYTO%20major%20review.pdf accessed on July 13, 2025.
25 Ibid.
26 MYTO 2. https://nerc.gov.ng/wp-content/uploads/2012/06/2012%20MYTO%20for%20Distribution.pdf accessed on July 13, 2025.
27 Summary of the MYTO 2 Retail Tariffs. https://nerc.gov.ng/wp-content/uploads/2012/06/MYTO2_Retail_Tariffs.pdf July 13, 2025.
28 MYTO 2. https://nerc.gov.ng/wp-content/uploads/2012/06/2012%20MYTO%20for%20Distribution.pdf accessed on July 13, 2025.
29 MYTO 2.1 https://nerc.gov.ng/wp-content/uploads/2014/12/MYTO_2.1_2015-2018.pdf accessed on July 14, 2025.
30 Ibid.
31 https://cisp.cachefly.net/assets/articles/attachments/60205_industry_.pdf accessed on July 14, 2025.
32 Amended MYTO 2.1. https://nerc.gov.ng/wp-content/uploads/2015/04/Amended-MYTO-2.1-TarifOrder.pdf accessed on July 14, 2025.
33 Ibid.
34 Losses in the Nigerian Distribution System: A review of classification and strategies for mitigation. http://www.irphouse.com/ijert20/ijertv13n11_19.pdf accessed on July 15, 2025.
35 MYTO 2015 - EKEDC. https://nerc.gov.ng/wpcontent/uploads/2015/12/MYTO%202015%20Eko%20DisCo%20Tariff%20Order.pdf accessed on July 14, 2025. The MYTO 2015 was passed on December 21, 2015.
36 Ibid.
37 Ibid.
38 These are fees that consumers must pay regardless of how much electricity is consumed; they don't fluctuate based on usage. They represent the cost of being connected to the grid and having access to electricity.
39 The fixed charge regime saw consumers pay a flat fee in addition to an electricity charge derived from certain parameters in a MYTO. It represented monies meant for network maintenance and administrative overhead and was payable regardless of whether any electricity was consumed. https://www.premiumtimesng.com/business/195537-nigerian-government-hikeselectricity-tariffs-abolishes-fixed-charges.html?tztc=1 accessed on July 15, 2025.
40 MYTO 2015 - EKEDC. https://nerc.gov.ng/wpcontent/uploads/2015/12/MYTO%202015%20Eko%20DisCo%20Tariff%20Order.pdf accessed on July 14, 2025.
41 Ibid.
42 https://businessday.ng/energy/power/article/cost-reflective-tariff-in-the-nigerian-electricity-supply-industry-nesi/ accessed on July 15, 2025.
43 https://nerc.gov.ng/wp-content/uploads/2019/08/NERC%20Order%2on%202016%20%202018%20Minor%20Review%20of%20MYTO%202015%20&%20Min%20Remmittance%20for%20Eko%20DisCo.pdf accessed on July 15, 2025; ibid.
44 The was underthe Power Sector Recovery Program. https://www.all-on.com/media/media-releases/smes-and-alternativepower-fornigeria/_jcr_content/root/main/section/text_1206432512.multi.stream/1721637611545/eb2b3dd2e496251a63cfcf17881bdfd99f2300f2/psrp-master-document-january-twenty-nineteen.pdf accessed July 15, 2025.
45 https://nerc.gov.ng/wpcontent/uploads/2020/03/NERC%20Order%20on%20the%20Transition%20To%20Cost%20Reflective%20Tariffs%20in%20the%20NESI_March%2031,%202020_Final.pdf accessed July 26, 2025.
46 Ibid.
47 https://nerc.gov.ng/wp-content/uploads/2020/09/EKEDC_MYTO2020.pdf accessed on July 26, 2025.
48 Ibid.
49 Ibid.
50 https://nerc.gov.ng/wpcontent/uploads/2021/01/EKEDC%20MYTO%20Nov%202020_Effective%20Nov%201,%202020.pdf accessed on July 26, 2025.
51 Ibid.
52 By section 33 of the repealed Electric Power Sector Reform Act, the Commission is bound to oblige general policy directions issued by the Minister of Power.
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