March 27, 2024/CSL Research

According to recent reports citing the Nigerian Electricity Regulatory Commission (NERC), the electricity subsidy in Nigeria increased by 22.16% between 2019 and 2023, rising from N528 billion to N645 billion. With the release of the 2024 electricity tariffs in January, it is projected that the subsidy payments by the Federal Government could skyrocket to N1.6 trillion this year.

The report further discloses a historical trend in subsidy payments: N225 billion in 2015, N308 billion in 2016, N351 billion in 2017, N440 billion in 2018, N528 billion in 2019, N501 billion in 2020, N251 billion in 2021, N144 billion in 2022, and N645 billion in 2023. Additionally, NERC data indicates that the January and February 2024 subsidies amounted to N264 billion.

Minister of Power Adebayo Adelabu highlighted that the government has yet to settle subsidies for the previous year and the initial two months of this year. Adelabu emphasized the delicate balance the government faces, acknowledging that while continuous subsidy payments strain its financial resources, halting them is currently unfeasible due to Nigerians’ economic challenges.

These challenges stem from the recent removal of petrol subsidies and the devaluation of the Naira. In January 2024, NERC introduced the new Multi-Year Tariff Order (MYTO), which increased electricity tariffs for consumers across the 11 electricity distribution companies. However, the utilities refrained from implementing the hike as the federal government committed to subsidizing the new tariffs.

One of the most glaring problems with the power sector is its uncommercial tariff plan. There appears to be no correlation between the cost of producing and supplying electricity and the tariff charged to the customer. To compound the matter, billing and cash collection remain grossly inefficient due to poor metering.

The Multi-Year Tariff Order (MYTO) was intended to set electricity tariffs for consumers over a 15-year period from 2008 to 2023. There were to be minor reviews of the industry’s pricing structure twice yearly (announced on 1 December and 1 June) and major reviews every five years. Minor reviews can only consider 4 variables: the inflation rate, gas prices, foreign exchange rates and actual daily generation capacity.

In June 2012, a new tariff structure was introduced, primarily aimed at raising tariffs. This move was prompted by several factors: key assumptions underlying the 2008 Multi-Year Tariff Order (MYTO) were unmet, and others failed to represent the operational environment accurately. Consequently, the tariff schedule was deemed non-cost-reflective, posing a deterrent to potential investors. Since 2014, adjustments have been made to the MYTO II tariff.

However, electricity distribution companies (DISCOs) observe that the tariffs remain non-cost-reflective. The sharp devaluation of the Naira since June 2023 necessitates a significant reassessment of the tariffs. Yet, increasing tariffs at this juncture is likely to worsen the financial burden on the average Nigerian consumer, who has already been significantly impacted by both the devaluation of the Naira and the removal of the subsidy on Petroleum Motor Spirit (PMS).