Trystan Casey
Nigeria's electricity tariff has been a subject of recent concern, with the Nigerian Electricity Regulatory Commission (NERC) approving a significant increase in tariffs for Band A customers, who constitute about 15% of the consumer base. This decision has been met with criticism from citizens, labour unions, and experts due to the country's high inflation rate and the potential negative impact on businesses and socioeconomic conditions. The tariff hike is part of President Bola Tinubu's reform agenda to remove subsidies and improve public finances, but it has also contributed to rising inflation and cost of living challenges. Nigeria's electricity sector faces various issues, including a failing grid, gas shortages, and high debt, with a large portion of the population lacking access to power.
| Characteristics | Values |
|---|---|
| Date of tariff change | 3 April 2024 |
| Increase in rates | 240% (from ₦66 to ₦225 per kWh) |
| Consumers affected | Band A customers (15% of the consumer base) |
| Reason for change | To maintain a financially sustainable market and reduce the country's debt |
| Impact | Concerns about possible risks to the long-term sustainability of businesses, worsening inflation, and stifling small and medium enterprises |
| Natural gas | Generates more than 70% of electricity in Nigeria |
| Inflation rate | Nigeria's inflation rate was 31.70% in February 2024 |
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What You'll Learn
The 2024 electricity tariff increase
Nigeria's electricity regulator, the Nigerian Electricity Regulatory Commission (NERC), approved a significant increase in electricity tariffs in April 2024. The tariff hike, which primarily affects Band A customers or urban consumers, has raised concerns among citizens, labour unions, and businesses.
The Tariff Increase
On April 3, 2024, NERC implemented a rate increase of over 240% for Band A customers, who make up about 15% of the consumer base. The new rate is ₦225 per kilowatt-hour, up from ₦66 to ₦68 per kilowatt-hour. This increase is expected to affect only a small portion of electricity customers in the country, as claimed by the vice chairman of NERC, Musiliu Oseni.
Reasons for the Increase
The Nigerian government aims to reduce the cost of subsidies in the electricity sector, which amounted to $2.6 billion. Removing these subsidies is part of President Bola Tinubu's reform agenda to revive economic growth. The electricity sector has been facing challenges such as a failing grid, gas shortages, high debt, and vandalism. Additionally, the increase in the wholesale price of gas to power plants has added to the cost of electricity production.
Concerns and Criticism
The tariff hike has sparked concerns among citizens and labour unions, who argue that it will further worsen inflation, drive up manufacturing costs, and negatively impact small and medium enterprises. Nigeria already struggles with high inflation, with a rate of 31.70% recorded in February 2024. Additionally, there are concerns about insufficient power supply, as no place in Nigeria currently enjoys 20 hours of electricity daily. The National Union of Electricity Employees has called for a reversal of the tariff hike to avoid socioeconomic issues, even threatening to shut off the country's electricity supply if their demands are not met.
Mitigating Measures
To alleviate the impact on vulnerable consumers, the Federal Government has maintained subsidies for the remaining 85% of consumers in Bands B to E at the December 2022 levels. Additionally, NERC has assured that the tariff increase for Band A customers is backed by data confirming that these customers consistently receive the promised service levels of a minimum of 20 hours of electricity daily, on average per week.
Future Prospects
There are calls for the exploration of alternative energy sources and the implementation of renewable energy solutions to reduce reliance on gas and mitigate the impact of future tariff hikes. The Petroleum Industry Act 2021 provides for exploring alternative energy sources, but physical implementation has been minimal. Diversifying the energy mix could provide a more sustainable and cost-effective approach to powering manufacturing processes and supporting small and medium enterprises in Nigeria.
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The impact of inflation on electricity tariffs
While I could not find specific information on the impact of inflation on electricity tariffs in Nigeria, I did find some general information on the relationship between inflation and electricity prices.
Energy prices have played a significant role in the recent surge in inflation globally. For instance, in many European countries, large increases in energy prices, particularly after the Russia-Ukraine conflict, caused a significant rise in inflation. Similarly, in the United States, while the average monthly electricity bill for residential customers increased by 2% from 2022 to 2023, this growth rate was slower than the inflation rate of 4.1% in 2023. Over the past decade, US residential electricity prices have increased at a slower pace than overall inflation.
In the context of households, research shows that those experiencing an increase in energy prices tend to increase their inflation expectations significantly compared to households that have not experienced a price hike. This effect is more pronounced among low-income households and those less informed about past inflation. The more a household spends on electricity as a share of its income, the more it extrapolates from its experience of price increases.
Utility ratemaking is a complex process, but it generally involves a regulated electric utility establishing a revenue requirement to maintain operations and cover capital improvement costs. When filing for rate increases, these utilities often cite cost increases, including those driven by inflation, to justify higher revenue requirements. Public utilities commissions evaluate these requests and, once approved, the rate increases are reflected in the revenue data.
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The Nigerian Electricity Regulatory Commission's (NERC) role
The Nigerian Electricity Regulatory Commission (NERC) is the policy-making body and regulator of the Nigerian Electricity Supply Industry (NESI). It was formed through the EPSR Act of 2005 and inaugurated in 2007. NERC is governed by a Board of Commissioners, which includes the Chairman/Chief Executive Officer. The current chairman is James Adeche Momoh, a Professor of Electrical Engineering at Howard University, USA.
NERC's primary duty is to protect the interests of consumers, issue licences to operators and investors, set and review electricity tariffs, and promote competition. The Commission establishes consumers' rights and obligations, monitors the operations of the electricity market, and protects grid stability. It also works with the Nigerian Ministry of Environment to review the safety, security, and environmental impacts of proposed power plants and transmission networks.
NERC is responsible for approving tariffs and issuing operating licences to operators and investors in the NESI. It also establishes and approves operating codes to ensure service standards, quality, and safety. NERC has the power to permit the construction of transmission lines by the Transmission Company of Nigeria, the country's transmission monopoly.
The Commission reports to the President and the National Assembly on a quarterly basis and upon request. It is funded by the electricity market through fees charged for regulatory services. NERC also has an educational role, with initiatives such as the 2025 NERC Essay Competition for senior secondary school students.
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Electricity subsidies and socio-economic woes
Nigeria's power sector has been grappling with a deep liquidity crisis that jeopardizes its capacity to provide consistent electricity to its 200 million citizens. The sector's financial woes are exacerbated by legacy debts and structural losses, with the Federal Government owing around N4 trillion to GenCos. This debt accumulation results from years of underfunded tariff subsidies and non-cost-reflective pricing. The current subsidy schemes are broad and distortionary, necessitating well-designed and targeted reforms to safeguard the poorest Nigerians from unaffordable price hikes.
The energy crisis in Nigeria has persisted for almost two decades, significantly contributing to the prevalence of poverty by impeding industrial and commercial activities. Access to energy is essential for socioeconomic development, poverty eradication, and improved social benefits. However, 60% to 70% of Nigeria's population lacks access to electricity. The causal factors of the energy crisis include a regime of price control, weak cost recovery concerns, and insufficient economic incentives for state-owned companies to pursue efficient production and investment practices.
The Federal Government has historically subsidized the pricing of locally consumed petroleum products, including electricity. However, to enhance the efficiency of the petroleum downstream sector and curb petroleum product consumption, the government has reduced and removed subsidies on various energy resources, leading to price increases. The power sector's challenges are not primarily technological but rather related to incentives, governance, and financial constraints. Liquidity constraints, stemming from inefficiencies at every stage, from generation and distribution to billing and collection, are stifling investment and limiting the sector's growth potential.
To address the power sector's woes, analysts emphasize the critical importance of tackling the liquidity crisis. While the latest NERC report highlights the stability of the national grid, it is insufficient to ensure affordable and reliable electricity for all Nigerians without addressing the sector's financial challenges. The sector requires a functional commercial framework, efficient revenue collection mechanisms, cost-reflective tariffs, and improved metering to overcome its revenue and socioeconomic woes.
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The Cost Reflective Tariff (CRT) strategy
Nigeria's electricity tariff strategy for 2024 involves implementing a Cost Reflective Tariff (CRT) system. This strategy aims to align electricity rates more closely with the actual costs in the supply chain. The CRT approach takes into account various economic indicators and parameters that impact the cost of electricity.
One key factor considered in the CRT strategy is the exchange rate. As per the Central Bank of Nigeria's guidelines, the exchange rate for 2024 was set at ₦1,463.31 to $1 from April to December, with a 1% transaction fee above the average rate of ₦1,448.82. This rate affects the cost of importing essential equipment for the country's electricity sector. Consequently, higher exchange rates lead to increased import costs, which can result in higher electricity tariffs to cover these additional expenses.
Another critical factor influencing the CRT strategy is Nigeria's inflation rate. In February 2024, the country's inflation rate was recorded at 31.70%. This high inflation rate directly impacts electricity tariffs by increasing the overall costs of operations and maintenance for energy companies.
To ensure fairness and accountability, the Nigerian Electricity Regulatory Commission (NERC) has outlined clear remittance obligations for Distribution Companies (DisCos). NERC has committed to enforcing fair practices within DisCos and safeguarding consumer rights during the transition to cost-reflective tariffs. Customers facing billing issues are advised to first contact their respective DisCo. If the issue remains unresolved, they can escalate the complaint to NERC and, if necessary, to the Federal Competition and Consumer Protection Commission (FCCPC).
The CRT strategy also involves financial support from the Federal Government to assist DisCos in meeting their invoice payments. DisCos receive monthly invoices from the Nigerian Bulk Electricity Trading Plc (NBET) and the Market Operator (MO). Government subsidies help bridge the gap between the higher cost-reflective tariffs and the currently lower billed rates. These measures aim to promote financial stability among DisCos while transitioning to a pricing system that more accurately reflects the true cost of service, ultimately fostering a more stable and fair electricity market in Nigeria.
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Frequently asked questions
As of April 2024, the electricity tariff in Nigeria is N225 ($0.15) per kilowatt-hour, up from a maximum of N68 per kilowatt-hour.
The new tariff primarily affects Band A customers, who make up about 15% of the consumer base. These customers are urban consumers, also known as distribution companies (DisCos).
The Nigerian government approved the increase to reduce the $2.6 billion cost of electricity subsidies for 15% of consumers. The World Bank has previously recommended subsidy cuts to improve the country's public finances.
The new electricity tariff has raised concerns among citizens and labour unions in Nigeria, with some calling for a reversal to avoid further socioeconomic issues. The labour union and experts have argued that the hike will worsen inflation and negatively impact businesses.
