The Nigerian electricity sector continues to grapple with the challenge of balancing affordability for consumers and the financial viability of the industry. The Nigerian Electricity Regulatory Commission (NERC) recently announced a 2.76% increase in the federal government’s electricity subsidy for December 2024, rising to N199.64 billion from N194.26 billion in November. This persistent need for substantial government intervention underscores the structural issues within the sector, including inadequate cost-reflective tariffs, operational inefficiencies, and challenges in achieving consistent power generation and distribution. While the government maintains subsidies to cushion the impact on consumers, the rising cost raises concerns about the long-term sustainability of this approach and the need for more comprehensive reforms.
The decision to retain existing electricity tariffs across all customer categories, despite the rising subsidy, reflects the delicate balancing act between economic realities and social considerations. Band-A customers continue to pay N209/kWh, while tariffs for Bands B to E remain frozen at December 2022 rates. This freeze provides some relief to consumers facing broader economic pressures, including a reported 33.9% inflation rate. However, it also places a greater financial burden on the government and potentially hinders the much-needed investments in infrastructure upgrades and improved service delivery within the electricity sector.
The NERC attributes the increase in the electricity subsidy to a confluence of factors. A depreciating Naira, pegged at N1,687.45 to the dollar, contributes to higher import costs for equipment and materials essential for power generation and distribution. The escalating inflation rate further erodes the purchasing power of the Naira, increasing operational expenses for electricity companies. Finally, fluctuations in available generation capacity also play a role. Periods of reduced generation, often due to gas supply constraints or technical issues at power plants, necessitate increased reliance on more expensive alternative sources, adding to the overall cost.
The benchmark gas-to-power price remains at $2.42/MMBTU, as established by the Nigerian Midstream and Downstream Petroleum Regulatory Authority. This price, while stable in the short term, is subject to future adjustments based on market dynamics and regulatory decisions. The gas-to-power price is a critical component of electricity generation costs in Nigeria, given the significant reliance on gas-fired power plants. Ensuring a stable and predictable gas supply at a competitive price is crucial for the viability of the power sector and for minimizing the need for government subsidies.
The NERC emphasizes that the approved tariffs are subject to monthly adjustments based on key economic indicators, including inflation, exchange rates, and gas-to-power prices. This dynamic tariff structure aims to reflect the changing economic landscape and ensure that tariffs, while remaining affordable for consumers, also allow for a reasonable return on investment for operators in the electricity sector. However, the frequent adjustments also create uncertainty for both consumers and investors, potentially hindering long-term planning and investment decisions.
The ongoing challenges in the Nigerian electricity sector highlight the need for a comprehensive and sustainable approach to reform. While subsidies provide temporary relief, addressing the underlying issues of cost-reflective tariffs, infrastructure limitations, and operational inefficiencies is crucial for long-term stability and growth. This requires a collaborative effort between the government, regulatory bodies, and private sector players to create a more efficient, reliable, and affordable electricity sector that can support Nigeria’s economic development aspirations. The ongoing debate on tariff adjustments and subsidy levels reflects the complex interplay of economic and social considerations in the pursuit of a sustainable energy future for Nigeria.
