MYTO Contacts

Name: Sharfuddeen Mahmoud
Phone: 09- 462.1415

Name: Aisha Mahmud

Generation Tariff

The Nigerian Electricity Regulatory Commission (NERC) has determined that the price of electricity to be paid to generators in the Nigerian Electricity Supply Industry (NESI) 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). The Commission believes that in a market such as the NESI, where demand is more than supply, the price of electricity should be at a level that allows efficient operators who have already invested in the market, make reasonable profit, and attract new entrant investors.

Section 3 of the MYTO Methodology states that “The main objective in setting bulk electricity prices in vesting contracts are to cover the costs of existing plant and allow for their efficient maintenance and on-going investment programs while ensuring that an appropriate price for bulk electricity supplied by generators under vesting contracts is the unit price an efficient new plant would require in the Nigerian Electricity Supply Industry (NESI).”

Wholesale contract prices offer the prospect of some certainty about cash flows during the transition towards a competitive market.

In setting wholesale price, the method to be used is the Long Run Marginal Cost (LRMC) method. This involves calculating the full life cycle cost of the lowest-efficient-cost new entrant generator, considering current costs of plant and equipment, return on capital, operation and maintenance, fuel costs, etc.

The, 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

The two methods above will be utilised by the NERC as follows:

For the successor Generating Companies (GenCos) i.e. Generating Companies that were privatised, the classic LRMC applies as set out in the 2008 MYTO, in which the long-run marginal cost of an Open Cycle Gas Turbine (OCGT) plant will be calculated by the Commission.

Each new entrant IPP that requires a tariff beyond the MYTO benchmark must apply to the Commission for approval and an individual (site-specific) LRMC model will be utilised. In such case, the IPP will open its plans, accounts, and financial model to scrutiny by NERC, which will then apply prudence and relevance tests to determine whether such plant- and site-specific costs should be allowed in the tariff.

It is pertinent to note that feed-in tariffs have been developed for investors wishing to invest in generation capacity that utilises other sources of energy including solar, wind, biomass, and small hydro.

Click HERE to learn more about the NERC regulation on Feed-In-Tariff

It is to be noted that when the Nigerian electricity market evolves to a point where bilateral contracts are signed between generators and distributors, this LRMC will determine the price set in wholesale contracts.

Click HERE to download the NERC MYTO 2012 for Generation