Transcript Slide 1

TARIFF REGULATION IN THE NIGERIAN
ELECTRICITY SUPPLY INDUSTRY
PRESENTATION AT THE NERC/NARUC WORKSHOP
BY
MARKET COMPETITION AND RATES DIVISION
JULY, 2008
Competitive Electricity market and Tariff
Regulation
To promote competition in the Nigerian Electricity Supply
Industry (NESI), NERC was established in 2005 with the
following objectives:
– to create, promote, and preserve efficient industry and
market structures, and to ensure the optimal
utilization of resources for the provision of electricity
services;
– to maximize access to electricity services, by
promoting and facilitating consumer connections to
distribution systems in both rural and urban areas;
– to ensure that an adequate supply of electricity is
available to consumers;
– To ensure that the prices charged by licensees are fair
to consumers and are sufficient to allow the licensees
to finance their activities and to allow for reasonable
earnings for efficient operation.
Activities Subject to Tariff Regulation
1. According to Section 76(1) of the Act, the following activities are
subject to tariff regulation:
– Generation and trading, in respect of which licences are
required pursuant to this Act, and where the Commission
considers regulation of prices necessary to prevent abuse of
market power and
– Transmission, distribution and system operation, in respect of
which licences are required under this Act.
2. In the transition and medium term stages of the market, the Multi
Year Tariff Order (MYTO) will derive a tariff for:
– Transmission and Distribution/Retail using a revenue
requirement approach determined by the building blocks
methodology while
– Prices for generation will be based on the long run marginal
cost method (LRMC) to produce proxy for a market price.
3. Generation price in the long term will be determined by market
forces and also retail tariff.
Market Development and the Extent of Price
Regulation
Market Stages
Transition Stage
(1st 5 years)
Medium Stage (years
5 to 10)
Long Term
Generation
Part unregulated (based on
Regulated prices using bilateral contracts)
vesting contracts based
Unregulated (based on
on life cycle costs of an Part regulated based on
bilateral contracts)
efficient new entrant
vesting contracts (matches
the regulated load)
Transmission
Regulated prices using
building blocks
Distribution
Retailing
Regulated prices using
building blocks
Regulated prices using
building blocks
Regulated prices using
building blocks
Regulated prices using
building blocks
Regulated prices using
building blocks
Regulated prices for the
regulated load
Unregulated prices for the
contestable load
Unregulated (all load is
contestable)
Tariff Principles
The pricing of electricity in Nigeria was based on a set of pricing
principles and cost assumptions and designed to provide tariffs
for each of the generation, transmission, distribution (including
retail) sectors.
The underlying pricing principles that guided the development of
the tariff model were:
1
2
–
–
–
–
–
Cost recovery/financial viability – regulated entities should be
permitted to recover their (efficient) costs, including a reasonable
rate of return on capital.
Signals for investment – prices should encourage an efficient
level and nature of investment (e.g., location) in the industry.
Certainty and stability of the pricing framework is also important
for private sector investment.
Efficient use of the network – Generally, this requires “efficient”
prices that reflect the marginal costs that users impose on the
system and the reduction of cross-subsidies.
Allocation of risk – pricing arrangements should allocate risks
efficiently (generally to those who are best placed to manage
them).
Tariff Principles (cont.)
• Simplicity and cost-effectiveness – the tariff structure and
regulatory system should be easy to understand and not excessively
costly to implement (e.g., facilitate metering and billing).
• Incentives for improving performance – the way in which prices
are regulated should give appropriate incentives for operators to
reduce costs and/or increase quality of service.
• Transparency/fairness – prices should be non-discriminatory and
transparent. Non-discriminatory access to monopoly networks is
also a key prerequisite for effective competition in the contestable
sectors.
• Flexibility/robustness – the pricing framework needs to be able to
cater for unforeseen changes in circumstances.
• Social and political objectives – the pricing framework needs to
provide for the achievement of social policy goals such as user
affordability, universal access and specific policies such as the
National Uniform Tariff, etc.
Legal and Regulatory Basis of Tariff
Methodology
1. Section 76(2) provides for NERC to adopt appropriate tariff
methodology within the general principles established in the Act,
which:
– Allows recovery of efficient cost including a reasonable rate of return
– Gives incentives to improve efficiency and quality
– Sends efficient signals to customers on costs they impose on the
system
– Phases out or reduces cross subsidies
2. NERC had adopted three basic principles in the determination of an
appropriate methodology. These principles require that a regulatory
methodology:
– Produces outcomes that are fair;
– Encourages outcomes that are efficient in that it involves the lowest
possible costs to Nigeria and encourages investment in electricity
generation; and
– Is simple, transparent and avoids excessive regulatory costs.
MYTO Methodology
1.
2.
3.
4.
After extensive consultation with industry stakeholders,
consumers ,labour unions and relevant government
institutions a tariff methodology was developed and adopted
for the sector
NERC adopted the use of a Multi Year Tariff Order (MYTO)
pursuant to the authority given under Section 76 of the
Electric Power Sector Reform Act (2005).
The MYTO provides a 15 year tariff path for the electricity
industry, with limited minor reviews each year in the light of
changes in a limited number of parameters (such as
inflation, exchange rate and gas prices) and major reviews
every 5 years, when all of the inputs are reviewed with
stakeholders.
It uses building block approach to determine cost of
providing electricity services and equate price to reasonable
cost include reasonable return to capital invested.
MYTO Methodology.. (Cont)
5.
The methodology to determine the MYTO tariff path is
known as the building blocks approach.
6. This was selected from a number of alternative methods,
such as price cap regulation and rate of return regulation,
which is also called cost of service regulation.
7. The advantage of the building blocks approach is that it
combines the positive attributes of rate of return regulation
and price caps.
8. This type of regulation is known as incentive-based
regulation.
9. The Nigerian electricity supply industry needs to improve
performance on a number of levels and this form of
regulation provides incentives to do so.
10. The regulated entities have an incentive to do better than
the projected performance levels built into the tariff path.
What are the Building Blocks?
There are three standard building blocks used in this approach:
Return on capital, payments to both
debt and equity providers, estimated by
WACC
Return of capital, depreciation
allowance to pay for run down of capital
and replacement
Operating costs, includes fuel, variable
and fixed O & M, overheads,
administration
Building Blocks as an Incentive?
1.
2.
3.
The Electricity Supply Industry is being restructured
into a number of companies, some of which may be
privatised – each with different financing, rates of
return & cost structures
Need a uniform regulatory framework that can apply to
all fairly. It does not matter whether individual
companies have different costs, capital structures, and
use different accounting methods
Within the framework we can apply government policy,
such as the development of a market, and provide
incentives for new investment and efficiency
improvements.
The Process Used to Construct the MYTO
and Set the Average Tariff
Inputs to the tariff; forecasts of load, capacity, fuel costs, investment,
levels of losses, customer numbers, O & M costs
Generation costs,
life cycle cost
methodology
Transmission tariff
Building Blocks
Distribution & retail
tariff
Building Blocks
Final retail tariff
To consumers
MYTO Assumptions for Projected Generation,
Losses and Final consumption
Load
Sent-out from stations (GWh)
Transmission Losses
Delivered to Distribution
Distribution Losses
Delivered to customers
Non-technical losses (non-billed energy)
Billed to Customers
Revenue Collection losses
Sales where Revenue is collected
Revenue based sales as % of Sentout energy
Total technical and non technical losses
% of SO
GWh
% of DD
GWh
% of DC
GWh
% of
GWh
% of SO
2008
2009
2010
2011
2012
22,548
36,424
60,707
97,131
109,272
8.05%
8.05%
8.05%
8.05%
8.05%
20,733
33,492
55,820
89,312
100,476
11.00%
18,452
20%
14,762
16%
12,400
55%
34.5%
11.00%
29,808
18%
24,442
13%
21,265
58%
32.9%
11.00%
49,680
16%
41,731
10%
37,558
62%
31.3%
11.00%
79,488
14%
68,359
8%
62,891
65%
29.6%
11.00%
89,423
12%
78,693
6%
73,971
68%
28.0%
Methodology-Generation (Vesting Contracts)
1.
2.
3.
4.
The price for generation as contained in vesting contracts
will be based on the most economically efficient new
entrant, determined as an open cycle gas turbine (OCGT)
All generators (existing and new), regardless of their age
or conversion technology, will be paid this vesting contract
price.
Those generating under PPAs will continue to operate and
be paid according to their PPAs
Vesting contracts will be securitized under the market
securitization process and should take on the form of a
standard bilateral contract which is now being developed
Methodology-Transmission and Distribution
(Cont..)
In order to calculate a projected annual value for each of
the building blocks an estimate was required for:
1.
2.
3.
4.
5.
6.
.
The initial value of transmission and distribution capital
assets;
A particular weighted average cost of capital (WACC) to be
achieved each year;
A capital expenditure program for transmission and
distribution/retail as a whole developed from a forecast of
feasible growth;
An appropriate method of depreciation;
An efficient level of operating expenditure and overheads;
and
A rate of improvement in industry losses covering
transmission, distribution, billing and revenue collection.
MYTO forecast of System Losses
60.0%
50.0%
Transmission Losses (% of SO)
Distribution Losses (% of BSP)
Percentage losses
Non-technical losses (% of Deliv from Dist)
40.0%
Revenue Collection losses (% of Billed sales)
Total losses (% of sentout)
30.0%
20.0%
10.0%
0.0%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Incentives Provided to Operators in the
MYTO Model
•
•
•
MYTO gives the regulated entities the incentives to do better than
the projected performance levels built into the tariff path.
Each company’s incentive is based on its costs and productivity
considerations.
Some incentives given to the operators in the tariff model include:
1. The capacity factor has been set at 70%. New plants will have a high
level of availability and should be running at maximum output for a
high proportion of the time in order to meet demand.
2. Internal Use of station – this was set at 1% but most stations use less
than this.
3. Sent out efficiency – for Genco’s was taken to be 34% but usually
stations deliver more than this.
4. Higher level of technical and commercial losses (34%), operators
more especially distribution companies could do better than this.
5. Operators can keep any gain for at least five years before next major
review
6. Price of gas , exchange rate and inflation risk eliminated by annual
minor review
Current Status of Tariff Development and
Rates Approval - Approved Revenue
Requirement
Regulated costs (nominal) (NGN '000)
Total Generation
Transmission
All Discos
Total
N'000
Vesting contract costs + PPAs
Annual NERC Licence charge
Total
Opex
Var O&M Costs
Admin costs (fixed)
Fixed O&M Costs
Total
Return on Capital
Return of Capital
Annual Corpoarate HQ Admin charge on TCN
NERC charge
Ancillary service charge 1%
Total
Opex
O&M Costs
Admin costs (fixed)
Fixed O&M Costs
Total
Return on Capital
Return of Capital
Corporate HQ Admin charge
Market Operator charge
NERC charge
Total
2008
2009
2010
2011
2012
81,017,719
810,177
81,827,896
4,479,846
2,725,980
0
7,205,827
4,203,778
6,329,823
3,037,482
311,654
177,394
21,265,957
0
13,415,448
0
13,415,448
13,594,425
3,805,815
4,364,007
76,636
528,845
35,785,174
123,304,225
1,233,042
124,537,267
7,526,142
3,025,838
0
10,551,980
17,827,760
9,794,178
2,429,985
609,059
381,739
41,594,701
0
14,891,147
0
14,891,147
35,839,767
4,945,667
3,491,205
137,414
889,578
60,194,778
204,243,476
2,042,435
206,285,911
13,045,313
3,358,680
0
16,403,993
33,842,697
11,535,707
1,943,988
637,264
617,824
64,981,473
0
16,214,332
0
16,214,332
58,296,998
6,190,990
2,792,964
254,216
1,256,242
85,005,741
334,996,488
3,349,965
338,346,452
21,707,400
3,728,135
0
25,435,536
46,280,420
17,640,530
1,555,191
909,117
893,565
92,714,358
0
17,997,908
0
17,997,908
80,952,244
11,696,541
2,234,371
451,487
1,699,988
115,032,539
395,153,914
3,951,539
399,105,453
25,397,659
4,100,949
0
29,498,607
91,352,273
24,203,450
1,555,191
1,466,095
1,450,543
149,526,160
0
19,797,699
0
19,797,699
147,968,167
16,007,458
1,787,497
558,715
2,791,793
188,911,328
138,879,027
226,326,747
356,273,126
546,093,349
737,542,942
The Adopted Tariff Path and Subsidy
Calculation
Energy consumption
Billed sales (all discos) (GWh)
Revenue collected sales (all discos) (GWh)
Regulated Tariff
Average tariff (NGN/MWh) (billed sales)
Average tariff (NGN/MWh) (Revenue collected sales)
Tariff breakdown by sector (N/kWh) (billed sales)
Average tariff based on billed sales
2008
14,762
12,400
2009
24,442
21,265
2010
41,731
37,558
2011
68,359
62,891
2012
78,693
73,971
9,407.89
11,199.87
9,259.59
10,643.21
8,537.38
9,485.98
7,988.58
8,683.23
9,372.45
9,970.69
11.20
10.64
9.49
8.68
9.97
NERC Adopted Tariff
Adopted/levelised tariff by NERC
Percentage of overall regulated tariff adopted by NERC
NERC adopted Regulated costs (nominal) (NGN '000)
6.00
7.00
8.50
10.00
10.00
53.57%
74,400,339
65.77%
148,854,331
89.61%
319,241,838
100.00%
628,905,427
100.00%
739,711,059
Subsidy requirement (NGN'000)
Subsidy requirement N/Kwh
64,478,689
5.20
77,472,416
3.64
37,031,288
0.99
0
0.00
0
0.00
Future Challenges
•
•
•
•
•
Annual review
Five yearly major review
Monitoring performance of operators
Valuation of regulated assets base
Uniform Industry reporting framework
and accounting standard
• Public awareness
• Effective stakeholders consultation, etc.