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Background

On the 17th of January 2024, the Nigerian Electricity Regulatory Commission (NERC) issued the Multi-Year Tariff Order (MYTO) 2024 for the electricity distribution companies (DisCos) in Nigeria. The MYTO 2024 was issued pursuant to sections 34 and 116 of the Electricity Act 2023,  which empowers NERC to promote cost- and service-reflective tariffs, and the adoption of tariff methodologies for regulating electricity prices of electricity distribution licensees.

The objectives of the MYTO 2024 includes ensuring fair and quality reflective tariffs for customers while also enabling the DisCos to fully recover their cost of operations, providing a reasonable rate of return on capital invested, and in turn, incentivising investment in the improvement of the electricity distribution networks. The tariff order is effective from the 1st of January 2024 and shall cease to be effective on the issuance of a new tariff review order by the NERC. However, the allowed tariffs are frozen for all customers at the rates payable since December 2022, subject to further policy direction of the Federal Government of Nigeria (FGN).

This article highlights the key provisions of the MYTO 2024.

Tariff Freeze for the Year 2024

The MYTO 2024 provides that, in line with the policy direction of the FGN on electricity subsidy, the allowed tariffs that will be chargeable by the DisCos and payable by the end customers in the year 2024 will be the same as what the end customers paid in 2023. Accordingly, the difference between the allowed tariff and the cost-reflective tariff would be borne by the FGN in the form of subsidy. However, the MYTO 2024 does not make room for electricity subsidy for the year 2025 and upward. As such, end customers are expected to pay cost-reflective tariffs from the year 2025, subject to further policy direction of the FGN.

With this policy, the estimated subsidy benefit for end customers within the Eko Electricity Distribution Plc (EKEDP) franchise area, for example, in 2024, is approximately N198.78 billion (i.e. N16.56 billion monthly).

Contribution to the Meter Acquisition Fund

MYTO 2024 makes provision for the accruing of funds to the Meter Acquisition Fund (MAF) established to support the deployment of end-user customer meters. In this regard, the sum of N1.185/kWh of the tariff charged to customers will be contributed to the MAF. MAF will be centrally managed and used as securitisation for long-term financing to facilitate the rapid closure of the metering gap in the Nigerian Electricity Supply Industry (NESI). MYTO 2024 also provides that NERC may review the amount contributed to the MAF during periodic minor reviews of the MYTO, to reflect changes in the administration of the MAF and other macroeconomic variables. Therefore, this contribution can be expected to change overtime depending on how efficient the current rate is in improving the metering gap.

Minimum Energy Offtake

MYTO 2024 revises the Partially Contracted Capacities (PCC) for each DisCo. For example, the revised PCC, which is the take or pay quantities for DisCos, for EKEDP is 513MWh/h; 603MWh/h for Ikeja Electricity Distribution Plc (IKEDC); and 611MWh/h for Abuja Electricity Distribution Plc (AEDC). The PCC took effect on the 1st of July 2022, and it is the target volume of energy to be off-taken by each DisCo from the electricity generation companies (GenCos), according to NERC Third Quarter 2022 Report. The DisCos are required to pay for the value of their PCCs once the GenCos declare that they are available for off-take, regardless of whether they offtake the energy. This structure seeks to achieve efficiency in the fulfilment of contracts and improve revenue flow in the NESI, as both contracting parties have clear supply and demand commitments to each other.

Transition to Bilateral Contracts

DisCos are mandated by the MYTO 2024 to secure adequate bilateral contracts to facilitate a seamless exit from the Nigerian Bulk Electricity Trading Plc’s (NBET) vesting contract/PPA regime. Through bilateral contracts, the DisCos are required to mitigate their exposure to volumetric energy risks. The MYTO 2024 states that effective from January 2024, the DisCos will have no recourse to claim revenue shortfall arising from generation shortfalls. The DisCos are required to continually procure additional energy volumes to serve their customers and ensure steady migration of customers to higher service bands on account of improved level of supply.

This provision encourages more engagement and synergy between the DisCos and GenCos, which will ultimately improve the access to electricity for the end-user customers who are most keen on getting more regular and good quality supply of electricity.

Market Payment Discipline

The MYTO 2024 mandates the DisCos to pay 100% of their market obligations to NBET, the Market Operator, and other bilateral counterparties for energy and market administration services rendered to them in accordance with the Market Rules and their respective contracts starting from the January 2024 market cycle. The DisCos must also provide the relevant payment securities including the posting of bank guarantees and the NESI escrow framework as required by the Market Rules and their relevant contractual provisions.

Consequently, and effective from the 1st of January 2024, any DisCo that fails to meet 100% settlement of market invoices is deemed to have committed a breach of Condition 2(5) of its license and the breach attracts full enforcement measures in line with Section 75 of the EA.

Takeaways and Conclusion

Based on our review of the MYTO 2024, we can infer that the NESI is at a turning point with the transition from NBET’s vesting contract regime to bilateral contracts between the GenCos and DisCos. The government is also pushing to bridge the metering gap with the introduction of MAF in addition to the other existing metering programmes such as the Meter Asset Provider (MAP) and the National Mass Metering Programme (NMMP). However, given the current performance of the MAP and the NMMP framework, it is yet to be seen whether MAF will be the poster child that will bridge the metering gap which, as of the 30th of September 2023, stands at 7,117,167 registered customers.

Furthermore, we see that NERC has indicated clear intentions to enforce DisCos remittance obligations, ensure the provision of payment securities to the NESI stakeholders, and sanction erring DisCos that fail to meet their 100% payment obligations. However, DisCos are considered technically insolvent at this time. Until new investors come in to inject fresh capital to the DisCos, it is unclear at this time how they will be able to meet the provision of payment security requirements.

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