Nigeria: Electricity Tariff Conundrum and the Delicate Balance of Stakeholders Interests

By Babatunde Osadare, Energy Analyst

Recent developments in the Nigerian Electricity Supply Industry have sparked intense debate about the appropriate electricity pricing. Recall that pricing is a key element as we accelerate towards universal access that is affordable, reliable, and modern by 2030.

Debate background

The cost of electricity in Nigeria, compared to average global costs, including Africa, has been low. The average allowed tariff since 2022 in Nigeria was about $0.05 per kWh, being one of the lowest in Africa until tariff adjustments a few days ago for a minority class of about 15% of the customer population, raising the tariff to about $0.19 per kWh. This is because the government has usually shouldered the cost differential through a flat subsidy regime applicable to all customer classes. 

With recent pressures on the purchasing power of citizens as a result of harsh economic conditions in the country, the agitation is not surprising. On the part of the government, the rising costs of electricity and the direct subsidy burden estimated at over N2.5 trillion in 2024, was unsustainable. It was not surprising therefore that some stakeholders called for an urgent review of the situation to foster a more sustainable path for the power industry.

What did the Government do?

At the beginning of 2024, the government embarked on a series of consultations and engagements with industry stakeholders to ensure the availability of gas which largely serves as feedstock for most power generation plants. With increased supply, next was engagement with the Discos and Transmission Company (TCN) to ensure that electricity is wheeled to end-use customers in line with the Service Based Tariff (SBT) regime which commenced in 2020 under Regulatory instruments.

The SBT regime in summary is designed to ensure that customers who get more power supply, pay a higher tariff than those who get less power supply. This was a strategy to balance the competing interests of consumers and the operators in a catch-22, a chicken and egg situation of which comes first, investments or cost-reflective tariffs. This is also the foundation upon which the government policy-trust of a gradual transition to a cost-reflective market is now hinged.

With increased monitoring and supervision of the Discos to ensure that the minimum service level was being provided to Band A customers over the last few weeks, the policy stage was said to be ripe to commence the gradual removal of subsidy by increasing tariffs to N225 (about 300% increase) for this class of customers. 

Customer Reactions

As expected, there have been loud negative reactions across the country by various customer groups including those that are not directly affected. many have described it as very insensitive on the part of the government as customers cannot afford the tariffs and the same may lead to higher inflation due to increased cost of production and commodity prices.

Others have alleged that the Discos hoodwinked the Regulator to approve the tariff increase to get fatter emoluments and incentives. Also interesting are allegations that the tariff increase is against the law. It will be interesting to see how this alleged illegality is substantiated.

Stakeholders Engagements

As the above customers’ reaction are not unexpected, the government, Regulator, Discos, power generation companies, gas suppliers, and others have continued to work tirelessly to sensitise customers and other interest groups on the need for the tariff increase and why it is important to build a sustainable industry free from constant government bail-out to one that can attract private investments. 

In addition, various regulatory intervention assurances are being provided including the tools the Regulator has put in place (including IT service monitoring of Discos feeders, publication of performance on Discos websites, a downgrade of feeders for service failure, payment of compensation, etc.) to ensure that service is delivered by the Discos and the consequences of service failure.

From the Policy point of view, the Minister of Power has also been at the forefront of these engagements on the plans of the Government. So far, many stakeholders have commended the Regulator for the level of sensitization and engagement to ensure there is an appreciation of the issues and the tasks ahead.

My opinion

– On the journey towards a cost-reflective market, the government must lead by example and pay its energy bills. Debt by MDAs must stop. 

– There is nothing illegal about the tariff review process. The provisions of the Electricity Act 2023 and the tariff review regulations are clear. This tariff review process started in July 2023 via the DisCos extra-ordinary tariff review applications. 

– Nothing is wrong with government subsidy interventions but its implementation must not stifle the growth of the electricity market. 

– With about a 300% increase in customer tariffs, affordability concerns will remain. Very painful adjustments will have to be made including energy consumption management.

– The Discos must as a matter of urgency prioritise customer metering and close the existing metering gap, starting with unmetered customers on Band A. Government support and intervention is required because of the huge funding requirement.

– Apart from residential customers, there may likely be a direct impact on industrial and commercial customers whose costs may increase and directly impact the cost of goods. However, this may not be the case if energy sources before the tariff increase were from more expensive diesel generators. With an improved grid power supply, the present average cost of power should be lower than energy costs based on diesel generators. Realities in this regard will vary. Grid reliability will remain a concern for industries but there are other complementary solutions to mitigate this risk. 

– The TCN remains a key factor in the success of the new tariff regime. TCN and Discos must align their energy wheeling and delivery operations to record desired success.

– Gas availability for Gencos is also important. The government must continue the ongoing engagements to unlock our gas potential for the power sector.