BusinessDay
Nigeria's leading finance and market intelligence news report.

Electricity subsidy benefits rich Nigerians more – World Bank study

Electricity consumption in Nigeria has been subsidised for several decades, but a small portion of the country’s population has benefitted from this while a greater majority still lack access to electric power, according to a World Bank study.

Permissible electricity tariffs in 2019 covered 56 percent of the sector’s required revenue. The gap was the tariff shortfall of N540 billion to be funded by the Federal Government of Nigeria and the 2020 projection could be much higher.

Nevertheless, the subsidy disproportionately benefits the rich because they are connected to the national grid. Nearly 60 percent of the subsidy goes to the richest 20 percent of the population; 7 percent of the subsidy goes to the bottom 40 percent and less than 2 percent benefits the poorest 20 percent, according to Muhammad Wakil, energy specialist, World Bank Group highlighting the report. The decision to subsidise electricity consumption means funds with alternative uses have been allocated to it.

Economists tend to measure the real cost of a choice in terms of the opportunity missed. That is the alternative uses of the funds. Some of the opportunity costs of subsidising electricity lie in the lost investments in social infrastructure such as health, education, which determines the quality of a country’s human capital stock. These social facilities also better benefit the poor.

READ ALSO: 80m Nigerians lack access to electricity – REA

In 2019, the Federal Government approved budget was N8.9trillion, of which health was N428 billion and education was N650 billion. It means the Federal Government of Nigeria spent more subsidising electricity consumption for mostly its rich population, in 2019 than it did to provide health infrastructure for its more than 82 million people living on less than N386 a day, according to the National Bureau of Statistics.

People with deep knowledge of Nigeria’s Electricity Supply Industry (NESI) say the electricity market subsidy goes entirely to two tariff classes, the residential 1 (domestic) (R1) and R2 classes. The R1 pay N4 per kWh. This is N50 below the average range of N53 – N55 per kWh to deliver electricity. R1 customers consume less than 50 kilowatts.

Nobody is complaining because the Discos have systematically moved many of these consumers to R2, who pay more. The overwhelming bulk goes to the R2 class. This class of customers has electricity demand level of above 50kWh.

This is the class where everybody from the president to the middle-class population living in urban areas belongs. The average tariff is between N25 – N26 per kWh. The remaining N27- N28 is paid by the Federal Government.

“The richer you are the less of consumption subsidy you should enjoy. So, bundling most people into R2 is inefficient. This accounts for the disproportionality,” Ayodele Oni, energy partner, Bloomfield Law Practice told BusinessDay. “Subsidies are for the poor.”

These electricity consumption subsidies have shut private investments out of the sector. Electricity generation companies (Gencos) represent at least 80 percent of natural gas off-take. When tariffs do not cover the cost of distributing electricity to households distribution companies are unable to pay everyone along the value chain from the transmission to generation companies and gas suppliers.

About 47 percent of Nigerians do not have access to grid electricity and those who do have access, face regular power cuts.

Additionally, the economic cost of power shortages in Nigeria is estimated at around $28 billion – equivalent to 2 percent of its Gross Domestic Product (GDP). Getting access to electricity ranks as one of the major constraints for the private sector according to the 2020 Doing Business report.

However, the Federal Government has embarked on the Power Sector Recovery Programme (PSRP) dated 2017 – 2021. This has been designed to improve the reliability of electricity supply, achieve financial and fiscal sustainability. This is expected to also enhance accountability in the power sector in Nigeria. Under this programme, the World Bank’s board of directors in June 2020 approved $750 million with terms and conditions as determined by the Power Sector Recovery Operation (PSRO).

“The lack of reliable power has stifled economic activity and private investment and job creation, which is ultimately what, is needed to lift 100 million Nigerians out of poverty,” Shubham Chaudhuri, country, World Bank country director for Nigeria said. “The objective of this operation is to help turn around the power sector and set it on a fiscally sustainable path. This is particularly urgent at a time when the government needs all the fiscal resources it can marshal to help protect lives and livelihoods,” post Covid-19 pandemic.

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