The Nigerian electricity sector has long been plagued by a myriad of challenges, ranging from insufficient power generation to unreliable transmission and distribution networks. In a recent development aimed at addressing these systemic issues, the Nigerian Electricity Regulatory Commission (NERC) approved a significant increase in electricity tariff for a subset of consumers.
On April 3, 2024, the NERC Vice Chairman, Musiliu Oseni, announced that the regulator had approved an increase in electricity tariff from ₦68 per kilowatt-hour (kWh) to ₦225 ($0.15) per kWh for customers in the Band A category (this has been further reviewed downwards to ₦206.8/0kWh). According to reports, the Band A category represents circa. 15% of electricity consumers in the country but accounts for 40% of the nation's total electricity consumption.
Given that liquidity has been one of the critical challenges of the power sector, one would wonder if the hike in electricity rate is the long-awaited solution to the multi-faceted challenges that have plagued the Nigerian power sector for decades? Or will it simply add to the existing burdens faced by Nigerian households and businesses?
This article delves into the complexities of the Nigerian power sector, analyzes the implications of the tariff increase, and explores potential pathways to address the sector's persistent challenges.
The Nigerian Power Sector Challenges
The Nigerian power sector has been marred by a range of interconnected challenges that have hindered its ability to provide reliable and affordable electricity to the populace. Ranking high amongst these challenges are inadequate power generation capacity, transmission and distribution bottlenecks, sub-optimal pricing and subsidies, operational inefficiencies of the Distribution Companies (DisCos) as well as regulatory uncertainties and policy inconsistencies.
Against this backdrop, a school of thought, though unpopular, would posit that the recent electricity tariff hike was a necessary measure to address the financial sustainability of the power sector. The government had in the past faced mounting pressure to reduce the burden of subsidies, which have become increasingly unsustainable. The tariff increase is intended to align consumer prices with the actual cost of electricity supply, thereby reducing the strain on the government's finances and creating a more conducive environment for private investment in the sector.
The Electricity Tariff Hike
NERC's decision to increase electricity tariff for the Band A category consumers, is a significant but controversial move. While the regulator has emphasized that the tariff hike will only affect 15% of electricity consumers, the implications of this decision are far-reaching.
The tariff hike specifically targets consumers in the Band A category, who are supposed to receive a minimum of 20 hours of electricity supply per day. This category represents the most reliable and consistent power supply among all consumer bands. The tariff for Band A consumers was raised from ₦68 per kWh to ₦225 per kWh (now ₦206.8/0kWh), representing a staggering 330.8% increase (now 304.1%). This significant jump in prices has undoubtedly started to impact households and businesses.
Although NERC cited several factors that necessitated the tariff hike, including the rising cost of gas for power generation, as well as the devaluation of the Nigerian Naira, the tariff increase serves as a means to reduce the government's subsidy burden, which has become increasingly unsustainable. By shifting a larger portion of the cost to consumers, the government aims to free up resources for other critical developmental priorities.
Assessing the Effectiveness of the Tariff Hike
As previously noted, the tariff increase aims to align consumer prices with the actual cost of electricity supply, which could enhance the financial sustainability of the power sector and attract the much-needed private investment.
The tariff hike may also provide a stronger incentive for DisCos to improve their operational efficiency, reduce technical and commercial losses, and invest in infrastructure upgrades. However, a significant increase in electricity prices such as the recent move places additional financial burden on households and businesses, particularly those already struggling with the rising cost of living.
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