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HomeBusinessNigeria considers tariff review as electricity subsidy spending reaches N2.8 trn

Nigeria considers tariff review as electricity subsidy spending reaches N2.8 trn

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The Nigerian government may entertain the request made by power distribution companies (Discos) to review their tariffs, as the government’s spending on electricity subsidies has risen to N2.8 trillion.

A report from the Nigerian Electricity Regulatory Commission (NERC) reveals that previous increases in electricity tariffs by Discos have saved the government from paying an additional N1trillion in annual subsidies to power firms. The report, titled ‘Overview of the Nigeria Electricity Supply Industry,’ was released by the NERC in July 2023.

According to the report, between January 2020 and January 2023, tariffs increased from covering 55 percent of the cost recovery to reaching 94 percent.

The tariff reviews that began in 2019 played a crucial role in preventing subsidies payable by the government from growing to approximately N1tn per year by 2023. The introduction of the Service-Based Tariff was instrumental in achieving this transition towards cost-reflective levels.

The NERC report also highlights that the subsidy (tariff shortfall) paid by the Federal Government between 2015 and 2022 reached N2.8 trillion as of December last year. Furthermore, between January and April of this year, the subsidy on electricity amounted to N57 billion, with the Service-Based Tariff scheme helping to reduce the government’s expenditure on power subsidies.

The report states that the annual subsidy decreased from N528 billion in 2019 to N144 billion in 2022, while the subsidy incurred in 2023 year-to-date (January to April) stood at N57 billion.

The NERC emphasized the significant role played by the Service-Based Tariff in reducing the tariff subsidy burden, which totaled NGN2.8 trillion between 2015 and 2022.

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The yearly increases in power tariffs implemented by the Federal Government through the NERC have been aimed at eliminating subsidies on electricity. In line with this, the 11 power distribution companies in Nigeria recently applied for a review of electricity tariffs to incorporate changes in the country’s macroeconomic parameters.

The NERC disclosed this information in a notice, where the Discos explained that their rate review request was based on factors affecting the quality of service, operational efficiency, and sustainability of the companies.

Notably, some power distribution companies initially announced a tariff hike, set to take effect from July 1, 2023, on Sunday, June 25, 2023. However, the Discos retracted their decision the following day after facing widespread criticism, citing the absence of approval from the Nigerian Electricity Regulatory Commission.

This development sparked concerns among power consumers, leading to a rush in purchasing additional electricity units in anticipation of a potential tariff increase. Nevertheless, on July 1, 2023, it was observed that the Discos did not implement the tariff hike, indicating that they were still awaiting regulatory approval from the power sector regulator.

The NERC has published a notice on its website inviting the general public to provide comments on the rate review applications submitted by the distribution licensees. Interested stakeholders are advised to review and consider the excerpts of the rate review applications filed by the respective licensees, as stated in the notice.

A senior official at the NERC, speaking on the tariff requests made by the Discos, mentioned that the commission would request further justifications from the power companies during the proposed meeting. The official highlighted the need to assess factors such as the Discos’ Performance Improvement Plan, the acquisition of transformers, and the enhancement of services and infrastructure.

Additionally, the NERC official mentioned the importance of understanding the plans to increase the duration of electricity supply for customers. While the Discos may argue about the impact of foreign exchange rates, they should also acknowledge the reduction in gas prices, the official stated.

As discussions continue, the Nigerian government, the NERC, and power distribution companies aim to ensure transparency and accountability in addressing the challenges faced by the power sector, while considering the potential tariff review.

(omayowa@globalfinancialdigest.com; Newsroom: +234 8033 964 138)

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