• Saturday, July 13, 2024
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BusinessDay

Electricity subsidy: A strain on Nigeria’s finances

Lagos shoots for improved power with new electricity Law

Historically, the Nigerian Government has been grappling with the challenge of subsidising electricity within the Nigeria Electricity Supply Industry. This subsidy, bridging the gap between the Cost Reflective Tariff and the Allowed Tariff, has become a significant burden on government finances, raising concerns about its sustainability.

The rationale behind the electricity subsidy is rooted in three key considerations: welfare, economic stability, and political stability. The subsidy aims to support social welfare, ensure a stable and affordable energy supply for economic development, and mitigate potential social unrest. However, the strains on government finances have prompted a reevaluation of this long-standing policy.

Recent data reveals a concerning trend where high-income areas benefit more from subsidies than low-income ones. This contradicts the initial intention to provide more benefits to low-income earners. The rich, accounting for only 20% of electricity consumers, are reaping more significant rewards from subsidies than the intended beneficiaries.

In 2020, the Federal Government, under President Muhammadu Buhari, initiated the phasing out of electricity subsidies with the introduction of the Service Based Tariff. The decision was driven by the financial strain caused by subsidies on both electricity and petrol. Between 2015 and 2020, the electricity tariff shortfall averaged N200 billion annually, reaching a staggering N600 billion in 2022. Projections indicate the subsidy may soar to at least N 1 trillion in 2024.

The Nigeria Electricity Regulatory Commission (NERC) introduced the Multi-Year Tariff Order (MYTO) in 2022 to gradually eliminate the subsidy. However, challenges arose with the freeze on tariff reviews in July 2023, disrupting the progress made in phasing out the subsidy.

One key issue is the disproportionate impact on low-income consumers. The MYTO 2022 allowed DisCos in high-income urban centres to charge tariffs close to cost-reflective, resulting in lower subsidies. Conversely, DisCos in areas with low-income consumers charged lower tariffs, leading to higher subsidies. This skewed distribution disproportionately affects the low-income bracket.

The delay and bottlenecks in subsidy payments, coupled with the slow cycle of the electricity market, further complicate the issue. Funding sources for subsidies include budget appropriations, FGN commitments, World Bank guarantees, loans, and CBN facilities.

Recent data reveals a concerning trend where high-income areas benefit more from subsidies than low-income ones. This contradicts the initial intention to provide more benefits to low-income earners. The rich, accounting for only 20% of electricity consumers, are reaping more significant rewards from subsidies than the intended beneficiaries.

As of Q3 2023, the weighted average of the Cost Reflective Tariff has surged to N111.12, and the average subsidy has increased to about N51.23/kWh, totalling about N332.68 billion in Q3 alone. This unsustainable trajectory raises questions about the efficacy and fairness of the subsidy system.

In conclusion, the electricity subsidy in Nigeria has become a financial burden and is no longer sustainable. Urgent action is needed to address the disparities in subsidy distribution, prevent further strain on government finances, and redirect resources to areas where they can have a more significant impact.

Adetayo Adegbemle is the convener and Executive Director of PowerUpNigeria, a Power Consumer Advocacy Group.