Regulatory Environment and Electricity Tariff Design in Nigeria. Nigerian Electricity Regulatory Commission June, 2013

Transcription

1 Regulatory Environment and Electricity Tariff Design in Nigeria By Nigerian Electricity Regulatory Commission June, 2013

2 Outline Functions of the Commission Tariff Regulation in Nigeria Methodology of Pricing Generation in MYTO IPPs expectation from the Regulator 2

3 Establishment and Functions of NERC 1. NERC was established under Electric Power Sector Reform Act, Officially inaugurated on October 31, Established as Independent Regulator to drive the power sector reform programme of FGN through: Ensuring fairness, transparency & level playing ground for all investors Evolving policies to attract private investment from Nigeria and internationally Development and enhancement of indigenous capacity in the electricity sector Electricity on Demand

4 Establishment and Functions of NERC (cont..) 4. Create, promote and preserve efficient industry and market structures and ensure optimal utilisation of electricity resources 5. Maximise access to electricity services, by promoting and facilitating consumer connections to distribution systems in both rural and urban areas 6. Ensure that an adequate supply of electricity is available to consumers 7. Price regulation 8. Ensure that regulation is fair and balanced for licensees, consumers, investors, and other stakeholders Electricity on Demand

5 NERC Regulatory Instruments (cont..) As sector regulator, NERC undertakes technical and economic regulation of the sector The major instruments of regulatory control adopted by NERC in carrying out its regulatory functions include Primary and subsidiary Legislations Primary Instrument The EPSR Act No Secondary Instruments includes: I. Subsidiary Legislations (Rules & Regulations) S.96 of the EPSR Act provides for drafting of the following Regulations: II. Administration of affairs of the Commission III. Rights, obligations and duties of Licensees IV. License application, modification and cancellation procedures V. Standards VI. Information required from Licensees VII. Tariffs determination procedures VIII. Fees, levies and other charges payable by Licensees IX. Licensee mergers, acquisition, affiliate relationships Electricity on Demand

6 NERC Regulatory Instruments (cont..) Process of Rule making 1. Prepare draft Regulations/Consultation Paper 2. Send to major stakeholders and publish in national dailies and receive comments and observations from stakeholders 3. Incorporate relevant comments and prepare final draft of Regulation 4. Obtain Commission approval to Regulation 5. Gazette Regulations Electricity on Demand

7 General Terms and Conditions of a License According to Section 62 of the EPSR Act 2005, the Commission may issue licenses to persons wishing to engage in the business of electricity generation exceeding 1MW in aggregate at a site and excluding captive generation. Licensees must comply with the followings: Compliance with all Applicable Laws in Nigeria; Payment of License and Operating Fees; Provision of Information to the Commission; Licensee may engage in Commission approved supplementary activities to the licensed business; Have separate accounts for the licensed business separate from any other business the licensee is engaged in; Not engage in Prohibited Activities as per his license; Employ best corporate practices in the procurement of goods and services; Submit to Compliance Monitoring; Grant authorized agents Access to Premises;

8 Regulatory Instruments (Market Rules) The Market Rules define the Market organisation and trading arrangements for the Nigerian power sector and sets out: 1. Conditions, general procedures and methodologies for the administration of the Electricity Market 2. Market Rule to be developed by System Operator in consultation with Market participants and approved by the president upon recommendation by the Minister 3. Amendments to the Market Rules to be approved by NERC Electricity on Demand

9 Regulatory Instrument ( MYTO ) 1. The following activities are subject to tariff regulation according to the Electric Power Sector Reform Act (2005): Generation and trading, Transmission, distribution and system operation 2. The Multi Year Tariff Order (MYTO) is the tariff vehicle : Transmission and Distribution/Retail using a revenue requirement approach determined by building blocks methodology while, Prices for generation will be based on long run marginal cost method (LRMC) to produce a proxy for market price OR Contract prices would be set for each generator and the contract price would be a NERC determined price for each form of generation and each generation site that does not have a PPA.

10 What is MYTO? i. Incentive regulation was adopted to attract investment due to inadequate generation capacity, poor transmission network, dilapidated distribution network and higher level of commercial ii. losses The law requires the Commission to ensure that 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 iii. MYTO is a unified way to determine efficient total industry revenue requirement iv. Provides a 15 year look ahead for tariff in the sector due to long gestation period required for investors to recoup investment v. MYTO is used to set wholesale and retail prices in the NESI vi. Enables recovery of costs and allows reasonable profits, i.e., the revenue requirement 10

11 Tariff Principles MYTO sets tariffs for the three electricity sectors based on certain principles and assumptions, namely: Cost recovery/financial viability licensees recover efficient costs, including a reasonable return on capital Signals for investment tariffs should encourage an efficient level and nature of investment (e.g., location) Certainty and stability of the tariff framework enables private sector investment Efficient use of the network tariffs should reflect the marginal costs that users impose on the system, influence efficient use and reduce cross subsidies Allocation of risk the tariff framework should allocate risks efficiently to those best placed to manage them 11

12 Tariff Principles (2) Simplicity and cost effectiveness the framework should be simple and not costly to implement Incentives for improving performance it should incentivise cost reduction and quality of service Transparency/fairness it should be transparent and ensure open access to monopoly networks Flexibility/robustness it should cater to unforeseen changes in the market Social and political objectives it should provide for the achievement of social goals such as universal access and demand side management 12

13 MYTO Methodology General Assumptions to Disco Retail Tariff Inputs to the tariff forecasts of load, capacity, fuel costs, investment, levels of losses, customer numbers, O & M costs and other economic and technical data Generation costs, life cycle cost methodology Transmission tariff Building Blocks Distribution & retail tariff Building Blocks Final retail tariff To consumers 13

14 Generation Tariff Methodology 1 1. NERC has determined that the price of electricity to be paid to generators will be at the level required by an efficient new entrant to cover its life cycle costs (including its short run fuel and operating costs and its long run return on capital invested) 2. The method to be used here is the Long Run Marginal Cost (LRMC) method. 3. LRMC involves calculating the full life cycle cost of the lowest efficientcost new entrant generator, taking into account current costs of plant and equipment, return on capital, operation and maintenance, fuel costs, etc. 4. LRMC is applied in two ways: Benchmark costing: Creates a proxy for the market price which an efficient generator is expected to operate below. Individual long run marginal cost for each generator: This sets prices for each generator according to its plant and site specific costs. 14

15 Generation Tariff Methodology 2 1. The classic LRMC applies to the successor Gencos, as set out in the 2008 Tariff Order, in which the long run marginal cost of an OCGT plant will be calculated for the successor Gencos by the NERC. 2. The individual (site specific) LRMC model requires each new entrant IPP that requires a tariff beyond the MYTO benchmark to apply to the NERC for approval. 3. The IPP will open its procurement process, accounts and financial model to scrutiny by the NERC, which will then apply prudence and relevance tests to determine whether such plantand site specific costs should be allowed in the tariff. 15

16 Technical and Cost Assumptions S/N Description Units OCGT (New Entrant) 1 Installed capacity MW Capital cost US$/KWh 1,200 3 O&M Cost (Fixed) NGN/MW/Yr 2,496,000 4 O&M Cost( Variable) NGN/MWh Capacity Factor % 80 6 Auxiliary Requirement % 2 7 Economic life Year 20 8 Construction period Year 3 9 Sent out efficiency % Availability % F l t $ 18

17 Revenue requirement table Total Generation Wholesale generation costs + PPAs Annual NERC Licence charge Total Generation Transmission Opex Var O&M Costs Opex Subtotals Return on Working Capital Depreciation Bulk Trader Charges NERC Charge Admin costs (fixed) Fixed O&M Costs Ancillary service charge Total Transmission All Discos Opex O&M Costs Total Three building blocks Opex Subtotals Return on Capital Depreciation NERC charge Total Distribution Admin costs (fixed) Fixed O&M Costs

18 Retail Tariff 1. Retail tariffs reflects the costs of the entire value chain for the NESI, beginning with natural gas (fuel for generation plant), on to wholesale generation, through to transmission, distribution, metering and billing and finally to the consumer. The components of cost that are taken into account in constructing the domestic retail tariff through these steps in the value chain are: 2. Electricity supplied through Wholesale Contracts and PPAs for the supply of wholesale electricity injected into the transmission network. 3. A Transmission Use of System (TUOS) charge to TCN for each MWh delivered to the distributor/retailer s bulk supply point(s). 4. Electricity distribution through the local distribution network owned and operated by the distributor/retailer. 5. Marketing, metering, billing and revenue collection (retailing). 6. Institutional charges 7. FGN tariff subsidy targeted at vulnerable tariff classes (R1 and R2). 18

19 IPPs Expectations Mitigation of all systematic and unsystematic risks All Costs recovery Best Return on Investment Take or Pay Contract 100% Exchange Rate and Inflation Risk cover Bankable PPA Regulatory Certainty

20 Regulatory Certainty Independent regulatory Commission established in Commissioners appointed by the president and confirmed by Senate Removal only through due process Well motivated and compensated work force Identified source of independent funding Regulation based on consultation and must be fair and seen to be fair and transparent

21 Cost Recovery One of the functions of the NERC is to ensure that prices charged by licensees are: Fair to consumers Sufficient to allow the licensees recover all reasonable cost Finance their activities and Allow for reasonable earnings for efficient operations. The Commission came up with MYTO in MYTO 2 became effective 1 st June, MYTO 2 incorporates benchmark tariff (LRMC) for new IPPs wishing to generate electricity using gas, coal, large and small hydro, biomass, wind and solar. IPPs can also submit their costs to the Commission (open their books) and a site and plant specific tariff will be approved for them by the Commission. Cost of fuel pass through

22 Exchange Rate Risk MYTO 2 provides for minor review semi annually and major review every five years. Minor review takes into consideration some key variables such as inflation, exchange rate, gas price and generation capacity. The exchange rate risk is mitigated by reviewing the tariff semi annually and adjusting it if there is change of + or 5% of the total aggregate revenue. The Commission receives the data on exchange rate from the Central Bank of Nigeria. The first minor review of MYTO 2 produce no adjustment in tariff.

23 Inflation Risk In the MYTO, the rate of inflation is used to ensure that investors are well compensated against rising cost of doing business and workers in the industry are paid living wages. To achieve this, the NERC has escalated the following variables: WACC; Fixed labour cost; Fixed admin cost; Variable O&M cost; Other Fixed O&M cost; and Capital Investment. Bi annual Minor review escalate all the above variables with actual rate of inflation. 23

24 Bankable PPA NERC licensed NBET to purchase power from the IPPs The Nigerian Bulk Electricity Trading Company (NBETC) was established with the main aim of purchasing power from the Gencos and selling it to the Discos. The problem of lack of credit worthiness of DISCOS is addressed by NBET. Those IPPs that sign PPAs with the NBET will have to be paid for their power. World Bank is providing PRG to some selected IPPs. Once PPAs are signed with the NBET, IPPs have guarantee of payment The IPPs will be paid according to their contracted available capacity

25 Take or Pay Contract Tariff methodology and 2012 generation tariff order provided for capacity payment and energy payment. Capacity payment = Capital cost+ Fixed O&M cost + 1/3 of tax cost Energy payment= Fuel cost+ Variable O&M cost + 2/3 of tax cost. All PPA must minimally provides for capacity payment IPPs are paid Capacity and Energy Charge. Once an IPP declares its capacity it is expected to be paid for that capacity plus energy cost.

26 Return on Investment Nominal before tax WACC 25% Nominal after tax WACC 17% Real pre tax WACC 11% Real after tax WACC 7% Allowance for adjustment of nominal WACC due to inflation and other identifiable risk

27 THANK YOU Contact us at: Adamawa Plaza, Plot 1099 First Avenue, Off Shehu Shagari Way, Central Business District, Abuja Website: E mail: info@nercng.org 27