Learn how the unification of the naira and its subsequent depreciation will impact electricity tariffs in Nigeria. Brace for an expected 25% hike in December.
Are we ready for a jolt in our electricity bills? Get set because experts forecast a sharp surge in power costs this December.
We’ll be looking at how the unification of the naira, coupled with the depreciation of the currency, has a cascading effect on electricity prices.
Unification of the Naira
Recently, the Central Bank of Nigeria (CBN) unified all segments of the nation’s forex market, collapsing all windows into one platform.
Now, market forces such as supply and demand will shape the exchange rate, creating an interesting dynamic.
Enhancing Liquidity and Stability
These bold changes serve a grander scheme of enhancing liquidity and stability in the Nigerian Foreign Exchange Market.
The new policy mandates all transactions to go through the Investors and Exporters (I&E) window, where the exchange rate is market-driven.
The Impact on Electricity Tariffs
However, with every action comes a reaction.
The unification of the exchange rate has stirred the waters in the electricity sector.
Experts anticipate that this move will inevitably lead to an increase in electricity tariffs for both on-grid and off-grid consumers.
An Insight from Dr. Damilola Oluwole
Dr. Damilola Oluwole, a Director of Energy Markets and Rates Consultants, shared his expertise.
According to him, the current electricity tariffs are influenced by the inflation rate.
The impact of the tariffs is marginal due to the slight increase in the Consumer Price Index (CPI).
The Role of Forex Rate
The FX rate applied in the tariffs bases itself on the average CBN rate from the past half-year, plus a 1% premium.
Given the CBN website’s data, Dr. Oluwole calculated the rate of USD/NGN 467.53, a minor increase from the current USD/NGN 441.48.
The Potential Tariff Hike
If we adopt the I&E window rate, which stands at USD/NGN 663 as of June 16th, and maintain all other factors, a rise of about 25-30% in average tariffs is likely for some distribution companies.
A Perspective from Odion Omonfoman
Odion Omonfoman, the CEO of New Hampshire Capital, concurs with Dr. Oluwole’s analysis.
He stresses that the two main factors impacting end-user tariff adjustments are the inflation rate and foreign exchange rates, both of which are on an upward trajectory.
Repercussions for Customers
Despite its benefits for the economy, the unification of the exchange rate will undoubtedly translate into higher electricity and energy costs for consumers.
Tariffs will increase significantly due to the gap between the CBN rate and the new unified rates.
Impact of Fluctuating Exchange Rates
The variable exchange rates invalidate the fixed exchange rate used in MYTO 2022.
Consequently, the Nigeria Electricity Regulatory Commission (NERC) will need to devise a fresh methodology for calculating the applicable exchange rate during tariff adjustment periods.
End-User Tariffs on the Rise
Fluctuating exchange rates could bring about significant increases or decreases in electricity tariffs.
Costs incurred by power sector entities, which include dollar elements, must be recouped through end-user tariffs.
The Meter Asset Provider Scheme
Customers might also have to shell out more for prepaid electricity meters under the Meter Asset Provider (MAP) scheme.
The Impact on Gas Prices
Lastly, gas prices, a significant part of wholesale electricity tariffs, will swell in Naira terms.
This increase will then transfer to end-user electricity tariffs.
Brace yourself for heftier electricity tariffs starting July 2023.
While the unification of FX rates brings certain economic benefits, it also heralds significant changes for electricity consumers.
An understanding of the intricate relationship between currency exchange rates and electricity tariffs can prepare us for these changes and allow for more informed decision-making.
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FAQs
What is the effect of the unification of the naira on electricity tariffs?
The unification of the naira, which has led to its depreciation, is expected to cause an increase in electricity tariffs.
What role does the inflation rate play in determining electricity tariffs?
The inflation rate plays a crucial role in determining electricity tariffs. Current tariffs are designed taking into account the inflation rate.
What is the consequence of the unification of the exchange rate on end-users?
The unification of the exchange rate is likely to result in higher electricity and energy costs for end-users.
How will the fluctuating exchange rates affect MYTO 2022?
The fluctuating exchange rates mean that the fixed exchange rate used in MYTO 2022 is no longer valid. This necessitates a new methodology for calculating the applicable exchange rate.
How will the price of gas be affected by these changes?
In Naira terms, the price of gas, a significant part of wholesale electricity rates, will rise. This increase will then be passed on to end-user electricity tariffs.
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