Industry Bundle: Tariffs, Subsidies, Distribution Franchising, and Electricity Theft

Originally written by: Ivie Ehanmo (Electricity Lawyer | Legal, Policy and Regulatory Transformation Expert | Energy Law Expert)

In this eight-part, a bundle of industry developments within the Bill are highlighted alongside the implications for the industry.

Key Takeaways
Ø  With the trend of lack of power generation capacity across Sub-Saharan Africa resulting in countrywide blackouts, cogeneration may be a viable option for industries. However, the right technologies must be in place and cogeneration projects usually require long offtake agreements, thus, they may place a burden on a company’s balance sheet if the pricing dynamics are not favourable, compounded with the possibility of low commodity prices globally.

Ø Bilateral contracts theoretically, may be agreed between the seller and buyer for any period, dispatch profile or price. Nevertheless, to prevent abuse of market power, restrictions may be placed upon the terms of the contract by the market rules. Consideration should be given to the possibility of higher transaction costs in terms of search costs for evaluating counter-party credit risk. In addition, because electricity production and consumption by sellers and buyers do not usually match contracted amounts, there is a need for a balancing mechanism for the system operator to maintain real time equilibrium. Furthermore, Institutional, and technical constraints need to be addressed, as direct contracting between generators and distributors may lead to suboptimal dispatch schedules.

Ø Although ideally, uniform tariffs should apply across all customer classes to ensure cost-reflectivity, lifeline customers are usually exempted from such provisions and several approaches can be adopted such as the increasing block tariff (IBT) approach, such that consumption up until the average consumption rate per month is set at a lifeline tariff and any excess above the average consumption rate in a given area is charged at a standard rate, in such a way that enables it cross-subsidise the lifeline tariff.

Ø Cross-Subsidies, if not properly phased out, may bring about rising price elasticity of electricity demand in industry, and force the industry to seek energy alternatives. Cross subsidies should be financed in a way that imposes the least degree of distortions on the tariffs of other customer categories, pending phase-out.

Ø The Bill establishes the Federal Power Task Force, responsible for the monitoring and enforcement of offences under the Bill including the apprehension and prosecution of persons suspected of electricity theft, meter tampering or bypass, etc. Nevertheless, the Bill fails to ascribe substantial weight to the theft of electricity with insufficient deterring sanctions.

Read more in the Policy Brief here.
Source: LinkedIn