Their excitement was understandable. For one, the stakeholders saw the
Act as an all-inclusive framework which will serve as a guide to the decentralisation of the power sector in order to encourage private investment and build a competitive electricity market.
Under the Electricity Act 2023, which replaced the Electricity and
Power Sector Reforms Act 2005, states, private companies and individuals are now legally permitted to generate, transmit and distribute electricity.
The Act also said without a license, but an undertaking, any private individual or company is empowered to generate not more than 1MW (Megawatt) of electricity in aggregate at a location.
The Act, which gladdened the hearts of electricity consumers, also said subject to the determination of the Nigerian Electricity Regulatory Commission (NERC), private individuals or companies can sign an undertaking to distribute electricity of not more than 100 Kilowatts in aggregate at a location.
It further said power generation licensees are obligated to meet renewable energy generation as prescribed by the NERC. NERC will only surrender regulatory responsibilities to states with established electricity market laws.
An obviously excited and expectant Director-General of Manufacturers’ Association of Nigeria (MAN), Segun Ajayi-Kadir said the Electricity
Act 2023, if well implemented, promises to be a major game-changer for the manufacturing sector.
While noting that the Act will address the numerous constraints within the power sector, he added that it has favourable implications for the manufacturing sector, including reduced cost of alternative energy, competitive and lower electricity tariffs and improvement in the inflow of Foreign Direct Investment (FDI).
Other expected mouth-watering deliverables, according to Ajayi-Kadir include an increase in Internally Generated Revenue (IGR), improved infrastructure and less tax burden on manufacturers, more investment in renewables, backward integration and energy security.
The possibility of a stable power supply and proper planning that will translate to improved performance of the manufacturing sector and, by extension, the economy, based on the Act also buoyed the hopes of private sector operators.
But those were as far as excitement and expectations encouraged by the Act goes. They appear to have been shorty-circuited by widespread panic and outcry, forced by the latest development in the electricity supply industry namely, a proposed 40 per cent upward review of electricity tariffs from July 1, 2023.
The crux of the matter is that while the envisaged turnaround in the fortunes of stakeholders in the industry, propelled by the Electricity
Act 2023 was in line with the current administration’s optimistic beginning, the planned 40 per cent tariff hike from July 1, 2023, may have put such optimism in the cautious mode.
President Tinubu had, during his inauguration on May 29, announced a number of fiscal and monetary policy changes and decisions, including the immediate stoppage of the fuel subsidy regime and the unification of the hitherto multiple Naira exchange rates, among other fiscal and monetary policy measures.
However, while these policy changes, including the June 9 signing of the Electricity Act 2023, resonated with manufacturers in particular and the business community in general, the proposed 40 per cent upward review of electricity tariffs from July 1 has not gone down well with private sector operators, including organised labour.
The stage for what may become a major confrontation among the Federal Government and manufacturers, including private operators, the labour movement and civil society was set when the NERC reportedly confirmed that a review of the Multi-Year Tariff Order (MYTO) was ongoing and will be implemented from July 1.
According to a NERC senior official, the Commission is mandated to review the tariff twice a year. It is statutory. Until the outcome, which one cannot presume, I cannot say it will be an upward or downward review as it could go either way.
The major determinants of the review, The Newsmen learnt, are mostly inflation rate, the Naira/Dollar exchange rate, and the price of gas.
However, much as stakeholders across the electricity value chain are on the same page on the need to urgently salvage the country’s beleaguered power sector, especially the electricity supply industry, they argued that doing so through an increase in electricity tariff at this time is tantamount to overkill; that is it’s a bitter pill to swallow by struggling private sector operators and Nigerians generally.
Why manufacturers, businesses are kicking
Ajayi-Kadir put the grouse of manufacturers and other private operators’ planned tariff hike in perspective when he lamented that in the last eight years, electricity tariff has been increased by 186 per cent, noting that the fact that the government itself is owing N75 billion in unpaid electricity bill is indicative of how burdensome the cost of electricity has become.
He, therefore, said it was highly concerning for manufacturers to witness the electricity tariff skyrocketing beyond the present embattling high prices, starting July 1.
“A 40 per cent hike at this time is simply outrageous. As a matter of fact, a further rise in electricity tariff could lead to several unsavoury consequences,” he said.
For instance, the MAN D-G, in a statement, which was made available to The Newsmen at the weekend, said a higher electricity tariff will directly increase the cost of production for manufacturers.
“Already, we have energy constituting between 28-40 per cent in the cost structure of manufacturing industries. You can imagine the impact on manufacturing industries that are energy-intensive such as metal processing, heavy machinery and chemicals manufacturing,” he said.
Manufacturers’ profit margins, Ajayi-Kadir also warned, will reduce.
According to him, a spike in the electricity tariff will erode the profit margin of manufacturers and reduce their ability to expand operations and create new jobs.
That is not all. The MAN D-G also raised the alarm over the high probability of activities paralysis.
“This is a definite possibility among Small and Medium-sized Enterprises (SMEs) which are unable to accommodate the higher price,” he said.
The government’s collectable revenue, he further said, will also take the hit. This is so because the hike in electricity tariff will reduce manufacturers’ profitability and, by extension, the quantum of taxes and fees payable to the three tiers of government.
“Manufacturers remain the largest income taxpayer in the country.
Therefore, in the event of poor income generation due to high costs of production, the government purse will suffer,” Ajayi-Kadir stated.
He also said with the increased cost of production that will come with the tariff hike, manufacturers will ultimately pass on the additional cost to consumers of their products, and this will increase the cost of locally made products in the market and complicate the rising inflation rate.
Also, an increase in electricity tariff will reduce the purchasing capability of consumers, and one of the resulting effects will be a fall in demand and a recession of manufacturing activities over time.
The MAN boss also warned that the sector’s competitiveness will definitely worsen.
He said: “The high cost of products will make locally-produced items less competitive when compared with imported alternatives.
“This is also true of exports, as Nigerian products may find it more difficult to penetrate foreign markets. Such a move will restrict our export earnings because it will be impossible to compete with counterparts in the global trading environment.”
The high probability of outward investment is also a source of worry for manufacturers.
According to Ajayi-Kadir, some manufacturing industries may consider shifting production to other economies with lower electricity tariffs and guaranteed availability.
Economy hobbled by N10.1trillion yearly loss to electricity shortage
Much of the fears currently being expressed by manufacturers and other businesses over the proposed 40 per cent increase in electricity tariff stemmed from the huge financial toll the crisis in the electricity supply industry has been taking on them and the economy generally.
According to Ajayi-Kadir, the absence of a stable, effective and fairly priced electricity supply in Nigeria has been a long-standing challenge for manufacturers. The worrisome development, he said, compelled many manufacturing industries to supplement the unreliable electricity supply with alternative energy sources.
He, however, expressed regrets that the available alternative energy sources such as diesel have become expensive, with manufacturers spending, on average, N144.5 billion on sourcing alternative energy in 2022 alone.
This was up from N77.22 billion spent in 2021, translating to about an 87 per cent increase in the cost of access to alternative energy sources by manufacturers within a year.
Manufacturers also lamented that the shortage of electricity supply has been taking a huge toll on the economy, with an annual loss valued at about N10.1 trillion or two per cent share of Nigeria’s Gross Domestic Product (GDP).
The Association lamented that the unfavourable situation in the power sector has positioned Nigeria among the worst countries to do business in, with a rank of 171 out of 190. This is also one of the prominent reasons for the relocation of some MAN members to some countries where the electricity supply is relatively stable.
Before news of the upward adjustment in electricity tariff filtered in, manufacturers were optimistic that if fully implemented to the letter, the new Electricity Act 2023 will see a drastic fall in the cost of alternative energy they incur, and this will, in turn, boost their profit margin.
MAN, as an advocacy Association, has always pushed for the need to charge cost-reflective electricity tariffs to avoid extortion of its members hence, they envisaged that the new Act will usher in a regime of competition and lower electricity tariffs.
“It is of great delight that this new Act fits like a glove as it will help actualise a cost–reflective tariff, considering the healthy price competition it will bring between the states and private investors,” Ajayi-Kadir had said.
Sadly, however, his excitement and expectations, including those of other private operators, organised labour and Nigerians generally, may be short-lived if the government goes ahead to implement the proposed plan to jerk up electricity tariff by as much as 40 percent effective July 1.
Rather than increasing the tariff on a mere 4,000MW to meet all revenue needs of stakeholders in the electricity supply industry, manufacturers said they expect that the Federal Government and the
NERC will ensure improvement in electricity generation, transmission and distribution, leading to adequate and reliable electricity supply.
“The government should ensure that, at least, 90 per cent of electricity consumers are metered to ensure consumption reflective electricity bill payment and formulate electricity policies that will aid investment in the energy industry to increase generation capacities that will usher in large-scale production of electricity and ensure effective implementation of the recent Electricity Act (2023),” manufacturers demanded.
Organised labour also kicks
The planned hike in electricity tariffs has also not gone down well with Organised labour. The Nigeria Labour Congress (NLC) has cautioned the Federal Government to pull the breaks on the proposed hike, warning that if implemented, it will increase the burden on Nigerians.
The NLC President, Comrade Joe Ajaero, in a statement last week, hinged the labour movement’s opposition against the move on the recent removal of petrol subsidy and the unification of the Naira exchange rates, which, according to him, put many Nigerians under intense financial pressure.
Comrade Ajaero said: “The plan to increase electricity tariff by 40 per cent by July 1 is both insensitive and callous and reflects an organised indifference to the well-being of consumers, especially, the poor ones. “The massive increase is explained away as a response to the over 100 per cent increase in the pump price of premium motor spirit (PMS).
Even with details revealing a movement in inflation from 16.9 per cent to 22.41 per cent (threatening to needle 30), and a shift in the exchange rate from N441 to N750, Ajaero said the NLC believes that these figures are not just for this “reckless proposed tariff increase.
“The issue of capacity to pay and quality of service delivery is not only germane but superior to any rationalisation by market logic. The service providers, in spite of sundry support, have not been able to meet the threshold of 5,000 megawatts,” Ajaero said, adding that “coupled with this, there have been surreptitious increases without notice in violation of statutes.”
The NLC President also drew attention to what he considered the inherent risk in the new regime of tariffs. According to him, there is no control, implying that by August, consumers will pay new rates. Besides, when other products or service-rendering entities come up with new prices or rates, the ordinary Nigerian would have been badly hit.
Ajaero said the rate at which proponents of the tariff increase are going is “highly combative and combustible” “….the market economies which the market fundamentalists seek to emulate have in place socio-economic safeguards which we do not have.
“In light of this, our advice is that this proposed tariff hike should be shelved for our collective safety,” the labour unionist said.
Will the government heed the advice of organised labour, manufacturers, and other concerned electricity consumers and shelve the implementation of the proposed tariff hike? Will manufacturers’ call for the diversification of energy sources and intensifying infrastructure investment in the power sector hit the right chord in the eras of the authorities?
Rather than go ahead with the planned tariff hike, will the government, working with the NERC, eradicate outrageous bills by closing the metering gap through the liberalisation of ultimate users’ access to effective mass metering?
Also, will the administration ensure the connection of all consumers to the electricity grid to avoid free-riding and unfair charges on the few connected consumers, while working on efforts to increase the electricity supply base in order to distribute the total cost among a high number of consumers at a much-lower unit cost?
Also, will the administration ensure the connection of all consumers to the electricity grid to avoid free-riding and unfair charges on the few connected consumers, while working on efforts to increase the electricity supply base in order to distribute the total cost among a high number of consumers at a much-lower unit cost?
More importantly, perhaps, will the government engage in extensive and intensive consultations with all stakeholders, particularly the manufacturers and focus on measures that will salvage the sector and halt the trend of the shutdown of factories, knowing the implications and the multiplier effects on employment and the economy?
While answers to some of these questions are in the realm of conjecture, they are pertinent, particularly for the manufacturing sector, which, at present, is the engine of growth, but is still struggling due to an inclement production environment.
Therefore, the consensus of manufacturers and other private operators and Nigerians is that care should be taken to avoid introducing burdensome measures that will further strangulate the manufacturing sector and the whole economy.
