Multi-year tariff order vs Electricity Trading

I wrote something a couple of weeks ago about why the setup of the electricity sector in Nigeria leads to too little production, very few incentives to actually increase capacity and an electricity pricing regime that is stagnant. And all this is without corruption and government ineptitude.

The flavour of the month now is the Multi-year tariff order. Basically it is a system borrowed from India to set a price for electricity. The idea is to set a fair price for electricity that takes the costs of production into account and is “favourable for new investment”. The price is set for a number of years (five in Nigeria’s case) so as to provide some kind of certainty for producers. We’ve had this system since 2003 (but don’t quote me on it). The idea is to deal with the potential market power of electricity generators. The pricing system has done little to encourage new investment in electricity over the last 6 or 7 years though. There are two direct reasons for this. The first is the party at the other end of the negotiating table ( yes the government). Governments always have the tendency to use their status as the government to negotiate prices that are too low and not very flexible and as a result provides no real incentives for new investments. The second and probably most important reason is that companies have to negotiate with the Nigerian government and there are few institutions that inspire less confidence than the Nigerian government.

The other option that is not being talked about is electricity trading. The idea behind electricity trading is to sidestep the transmission sector ( which as I explained before is where the systematic monopoly exists ) and allow deals between the many producers and the many distributors. A predetermined charge for transmission is paid ex ante. Electricity is ubiquitous in the sense that 100 MW of electricity at 200v is 100MW of electricity at 200v. It doesn’t matter who produces it as long as it is produced and gets into the grid and is “delivered” to the distribution company. With enough producers and distributors a “fair” market price can be agreed without the involvement of government in price setting. Of this doesn’t exclude the government but the success of the system will not depend on the government.

Electricity trading seems like a viable option to by-pass the probable government ineptitude. Seems like something worth considering at least.

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