….Naira Weakens
Our Correspondent
ABUJA — Nigeria’s electricity subsidy bill surged by a staggering 219.67% in 2024, reaching nearly ₦2tn despite a partial tariff increase introduced in April. The unprecedented rise, confirmed by the Nigerian Electricity Regulatory Commission (NERC), underscores the mounting pressure on the Federal Government’s finances amid a rapidly depreciating naira and persistent structural challenges in the power sector.
The leap from ₦610bn in 2023 to ₦1.94tn in 2024 reflects the consequences of macroeconomic volatility following the removal of fuel subsidies and the floating of the naira in June 2024. These policy shifts, intended to liberalise Nigeria’s economy, instead accelerated inflation and raised the cost of power generation — even as tariffs for most electricity consumers remained frozen.
Policy Freeze and a Growing Gap
NERC’s 2024 annual report lays bare the cost of the government’s decision to maintain retail electricity tariffs at December 2022 levels. With the cost-reflective tariff — the rate at which power should be sold to cover operational expenses — rising sharply due to the naira’s devaluation and inflation, the government found itself forced to absorb the growing difference through subsidy payments.
“Due to the absence of cost-reflective tariffs across all DisCos in 2024, the government incurred a subsidy obligation of ₦1.94tn, translating to an average of ₦161.85bn monthly,” the report noted.
Despite this commitment, the Federal Government paid just ₦371.34 million — a paltry 0.019% of the total obligation — exacerbating liquidity challenges across the sector.
Cost Pressures and Market Imbalance
According to NERC, the average cost-reflective tariff in 2024 stood at ₦175.31/kWh, while the average allowed tariff remained fixed at ₦100.27/kWh. This created a subsidy shortfall of ₦75.04/kWh — the widest gap since the sector’s privatisation.
Power Distribution Companies (DisCos) such as Abuja, Ikeja, and Ibadan attracted the largest subsidy allocations, collectively accounting for over ₦790bn. Meanwhile, Yola DisCo — plagued by insecurity and high operating costs — recorded the highest cost-reflective tariff at ₦266.64/kWh, attracting disproportionately higher subsidy per unit of energy delivered.
To insulate the DisCos’ balance sheets from this gap, the government adopted a new DisCo Remittance Obligation (DRO) framework in January 2024. This replaced the Minimum Remittance Obligation, requiring DisCos to remit 100% of what their approved tariffs could support, while the government was to pay the shortfall directly to the Nigerian Bulk Electricity Trading (NBET) Plc.
However, NBET reported minimal receipts from the government, leaving generation companies (GenCos) facing payment delays and threatening power supply continuity.
Tariff Adjustments Offer Temporary Relief
The April 2024 review of tariffs for Band A customers — who consume around 40% of total energy — offered some respite. By aligning their tariffs closer to cost-reflective levels, the government reduced its subsidy burden by 39.99%, from ₦633.3bn in Q1 to ₦380.06bn in Q2.
Yet, this relief was short-lived. A subsequent policy directive to freeze tariffs at July levels for all customer categories for the remainder of the year led to renewed growth in subsidy obligations, which reached ₦471.69bn in Q4.
Mounting Debts and Sector Fragility
Experts warn that Nigeria’s power sector is edging toward collapse unless decisive reforms are made. Bode Fadipe, a power sector analyst, noted that nearly all generation and distribution inputs are dollar-denominated, including gas feedstock, transformers, and transmission equipment.
“The fall of the naira has magnified subsidy needs because the cost of production is rising faster than the allowed tariffs. The result is a growing hole in the system,” Fadipe said.
He further described the government’s inability to fulfil its subsidy commitments as a sign that the sector, as currently structured, may not see significant improvement for decades.
“It’s a systemic failure. The power sector may not see salvation for the next 20–30 years unless we overhaul it,” he warned. “The debt to GenCos is now approaching ₦5tn, and if this ₦1.94tn is not part of that, then we are dealing with a ₦6tn burden — the equivalent of a national budget.”
Removing Subsidies: A Double-Edged Sword?
The question of whether to eliminate power subsidies entirely remains controversial. While economists argue it is fiscally necessary, Fadipe cautioned that Nigeria has yet to determine the true cost of electricity. He warned that full subsidy removal could result in widespread electricity theft.
“People are already struggling to pay. If tariffs go to full cost-reflective levels across all bands, theft will rise, collections will fall, and the system could unravel,” he said.
Indeed, the tariff for Band A consumers, adjusted to over ₦200/kWh, has already prompted public discontent, despite representing less than half of the total customer base.
Dangote’s Challenge: Private Sector Must Step Up
Offering a different perspective, Africa’s richest man and President of the Dangote Group, Alhaji Aliko Dangote, called on private investors to commit more deeply to Nigeria’s power sector. He revealed that the Dangote Group currently generates over 1,500 megawatts for internal consumption and believes the country has the potential to generate 60,000MW.
“If we alone can do 1,500MW, there’s no reason Nigeria should be stuck at 5,000MW. The private sector must stop exporting capital and invest in building our national infrastructure,” Dangote urged.
He emphasised that the privatisation of the sector offers an opportunity, not a dead end — provided capable investors are willing to make long-term commitments.
A Sector in Need of Urgent Redesign
As Nigeria battles a worsening fiscal deficit and rising public debt, the ₦1.94tn electricity subsidy — of which virtually nothing has been paid — reflects an unsustainable strategy. The current model leaves DisCos under pressure, GenCos underfunded, and consumers underserved.
What’s required is more than tariff increases. A comprehensive overhaul — including targeted investments, improved metering, cost-reflective pricing, and a shift toward renewable energy — may be the only path to a truly resilient power sector.
Until then, Nigeria’s electricity challenge remains an expensive balancing act between political expediency and economic reality.