Electricity Tariff Set to Increase Over 40%, Signaling the End of Energy Subsidies

In the coming days, electricity tariffs in Nigeria are expected to surge by more than 40%, a move that could mark the eventual elimination of all forms of energy subsidies in the country.

With a monthly subsidy of approximately N50 billion still present in the electricity sector due to revenue shortfalls, the impending tariff hike from July 1 poses another significant challenge for President Bola Ahmed Tinubu’s administration in its ongoing market reform efforts.

The administration has already removed subsidies on Premium Motor Spirit (PMS) and floated the national currency, decisions that have complicated the price-setting process of the Nigerian Electricity Regulatory Commission (NERC) under the 2022 Multi-Year Tariff Order (MYTO).

Although the power sector players have been unable to meet the target of supplying at least 5,000 megawatts per year since signing contracts with NERC, the current Service Based Tariff (SBT) set by NERC was based on an exchange rate of N441/$ and an inflation rate of 16.97%.

According to NERC’s orders, in 2015, the average tariff across distribution companies (DisCos) and customer classes was N25 per kilowatt-hour. However, in the MYTO for 2022, the average tariff rose to N64 per kilowatt-hour across customer classes. The foreign exchange rates used in determining the tariffs have increased from N198.97/$ in 2015 to N441.78/$ in 2022, reflecting the significant impact of currency depreciation. Inflation rates have also risen from 8.3% in 2015 to the current rate of 22.41%.

The impending tariff hike for July 2023 was expected to remove subsidies and increase the previously frozen tariff bands D and E. Under this adjustment, the average tariff for bands D and E was projected to increase from N54.59/kilowatt-hour to N62.16, while the average increase across all bands would move to N67/kilowatt-hour. However, due to the ongoing depreciation of the naira and escalating inflation, experts predict that the new average tariff could reach approximately N88/kilowatt-hour, allowing the sector to recover its costs.

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Stakeholders express concerns that the increase, driven by changing parameters, will have severe consequences for households and small businesses. Energy costs alone are expected to rise by over 70%, putting significant pressure on purchasing power amid high unemployment rates and poverty levels.

At present, the available electricity on the grid stands at 3,057.7MW from 17 power plants, with an average load intake of 3,000MW by all the DisCos in the past four months. However, the persistent inability of the DisCos to meet 100% of their remittance orders has led to an unreliable grid and financial losses.

As the affordability of electricity becomes a major consideration while the grid remains unstable, stakeholders fear that the Nigerian Electricity Supply Market may face even more significant challenges ahead. Consumer apathy and a shift towards alternative energy sources could undermine the outlook for the sector, as consumers lose confidence in the system.

Energy experts emphasize the need to support the government’s efforts to stabilize the economy and reduce dependency on foreign exchange, even if it means accepting higher electricity tariffs and petroleum product prices. However, some question the current pricing structure in the energy sector, particularly the pricing of Premium Motor Spirit (PMS), which they argue is anti-competitive.

Amidst the ongoing upward reviews of power tariffs, concerns arise over potential exploitation of electricity consumers. Some experts suggest addressing these issues through the Consumer Protection Council or an organized body representing electricity consumers,

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