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Cost-Reflective Tariffs and Regulatory Risks

Participants discuss regulatory options during a September 2015 cost-reflective tariff training in Abuja, Nigeria.

The Need for Cost-Reflective Tariffs

Establishing a sound economic basis for energy prices is one of the most critical functions of the energy regulator. Pricing has broad implications for the health of the national utility sectors and economies. Tariffs provide a necessary signal for investors who depend on steady revenue streams to manage stable energy supply and modernize the sector. Existing inefficiencies in energy systems across the globe reinforce the need for stronger efforts to establish cost-reflective tariffs and financially viable electricity sectors.

 

Our Work

With support from the United States Agency for International Development (USAID), NARUC developed a gamified training on designing and applying cost-reflective tariffs that blends capacity-building with scenario-based simulation: energy sector stakeholders participate in an interactive format – a game – that explores regulatory decision-making and sustainable energy sector development.

Participants work in small teams, debating real-world challenges and analyzing the implications of different regulatory choices. This training provided a platform to establish further collaboration and dialogue, enabling participants to exchange perspectives with each other and learn the pricing and sustainability impacts of these choices. This training can be applied across a number of topics in a modular manner.

 

Selected Results

NARUC has already achieved the following results from the cost-reflective tariff simulation:

Tanzania

  • With a wide variety of stakeholders, the training created a platform for peer-to-peer engagement to build consensus on cost allocation and tariff methodology.
  • The Tanzania Energy and Water Utilities Regulatory Authority (EWURA) received this cost-reflective tariff training to enable them to update the most recent cost of service study in 2016.

Nigeria

  • The Nigerian Energy Regulatory Commission (NERC) and distribution companies (DISCOs) improved their understanding of the costs of generating, transmitting, and distributing electricity
  • NERC regulators gained an in-depth understanding of the components of a cost of service study and tariff design.
  • The tariff design capacity of NERC regulators was strengthened by discussions of tariff reform policy with the DISCOs, which enabled NERC to clarify its goals in a constructive setting.

At A Glance

Project Dates: 2014-Present

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