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World Bank Cautions Nigeria Against Hiking Electricity Tariffs

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December 28, (THEWILL) – The World Bank has cautioned Nigeria and other emerging economies against raising electricity tariffs.

The Bank, in its latest Commodity Markets Outlook forecast, argued that such steps will push inflation in 2022, adding that prices of electricity, which peaked at 80 per cent this year compared to 2020, will remain high next year. It, however said, prices will start to decline in the second half of the year as supply constraints ease.

It said global inflationary pressures and potentially shifting economic growth to energy-exporting countries from energy-importing ones will define the new year.

Ayhan Kose, chief economist and director of the World Bank’s Prospects Group, said the surge in energy prices poses significant near-term risks to global inflation and, if sustained, could also weigh on growth in energy-importing countries.

The Bank added that the sharp rebound in commodity prices is turning out to be more pronounced than previously projected. Recent volatility in prices may complicate policy choices as countries recover from last year’s global recession, it added.

According to the Bank, non-energy prices, including agriculture and metals, would decrease in 2022, following strong gains this year.

In the outgoing year, some commodity prices rose to (or exceeded) levels not seen since the spike of 2011.

The Bank said natural gas and coal prices reached record highs amid supply constraints and rebounding demand for electricity, although they are expected to decline in 2022 as demand eases and supply improves.

However, additional price spikes may occur in the near-term amid very low inventories and persistent supply bottlenecks.

The Bank has projected the price of a barrel of crude oil at $74 in 2022 as oil demand strengthens and reaches pre-pandemic levels.

The use of crude oil as a substitute for natural gas presents a major upside risk to the demand outlook, although higher energy prices may start to weigh on global growth.

As global growth softens and supply disruptions are resolved, metal prices are forecast to fall five per cent in 2022, after rising by an estimated 48 per cent in 2021.

Following a projected 22 per cent increase in 2021, agricultural prices are expected to decline modestly next year as supply conditions improve and energy prices stabilise.

John Baffes, senior economist in the World Bank’s Prospects Group, said high natural gas and coal prices are impacting the production of other commodities and pose an upside risk to price forecasts.

Baffes said: “Fertilizer production has been curtailed by higher natural gas and coal prices, and higher fertilizer prices have been pushing up input costs for key food crops. The production of some metals such as aluminum and zinc has been reduced due to high energy costs as well.”

The Bank explained that the events of this year have highlighted how changing weather patterns due to climate change are a growing risk to energy markets, affecting both demand and supply.

From an energy transition perspective, the Bank raised concerns about the intermittent nature of renewable energy highlight the need for reliable base-load and backup electricity generation.

The bank said: “These will increasingly need to be from low-carbon sources, such as hydropower or nuclear power, or from new methods of storing renewable power.

“At the same time, the surge in natural gas and coal prices has made solar and wind power even more competitive as an alternative energy source. Countries can benefit from accelerating the installation of renewable energy and reducing their dependency on fossil fuels.”

The report noted that forecasts are subject to substantial risks, including adverse weather, the uneven COVID-19 recovery, the threat of more outbreaks, supply-chain disruptions, and environmental policies.

Furthermore, higher food prices, along with the recent spike in energy costs, are pushing food price inflation up and raising food-security concerns in several developing economies.

As the global shift from rural to urban living continues, the report’s special focus section explores the impact of urbanization on commodity demand. Although cities are often associated with increased demand for energy commodities (and hence greenhouse gas emissions), the report also found that high-density cities, particularly in advanced economies, can have lower per capita energy demand than low-density cities.

It said the share of people living in urban areas continue to rise, these results highlight the need for urban planning to maximize the beneficial elements of cities and mitigate their negative impacts.

The Bank noted that cities are at the forefront of climate change, and strategic planning particularly for transport links, can help reduce their resource consumption and, crucially, their greenhouse gas emissions.