High Inflation: Federal Government Spends N600bn On Electricity Subsidy
Federal government has spent over N600 billion to subsidise electricity in 2023 alone, as forex unification and the high inflationary pressures in pushed cost-reflective tariffs to N124/kWh.
The Nigerian Electricity Regulatory Commission (NERC) which made this known revealed that the federal government paid the sum of N2.8 trillion to subsidise electricity consumed in the country from 2015 to 2022.
This is as the minister of Power, Adebayo Adelabu, is advocating for the pricing of gas utilised by the electricity Generation Companies (GenCos) in Naira to allow better management of the foreign currency-related inflationary trends in the sector.
The minister faulted the country’s current pricing of gas utilised by GenCos in US dollars, noting that that is the major issue in Nigeria’s power sector.
Speaking on Tuesday, at the ongoing three-day ministerial retreat in Abuja, Adelabu said
the pricing of gas utilised by GenCos in Dollars affects the pricing of electricity to end-users due to foreign exchange volatility.
“A hugely volatile variable that significantly affects the pricing of electricity to end-users. A more preferable option is to ensure that the gas utilised by the GenCos is traded in Naira to better manage the foreign currency-related inflationary trends that challenge the faithful application of the Multi-Year Tariff Order (MYTO) methodology,” he said.
The development comes barely a week after GenCos warned that they may not be able to sustain current electricity supply levels following the payment of only 28.3 per cent of an invoice for power supplied to the national grid by the Nigerian Bulk Electricity Trading Plc in the September payment cycle.
“The good news here is that over 98 per cent of the feedstock powering electricity generation in the country are transition or clean fuels, as Nigeria ramps up its capacity to generate more electricity through renewable means such as solar, hydro, wind, bioenergy and others,” he said.
Adelabu said the ministry would like to see more utility-scale solar power plants by 2030, which brings added responsibility for investments in generation and grid stability to address the variability that transmission of renewable energy-generated power over long distances brings.
“This brings with it the need for distributed generation power systems from renewable energy-driven power plants, that are localised around clustered communities and embedded or captive areas while at the same time stabilising our national grid and or deploying super-grids or regional grids that can transmit generated power over long distances with minimal losses.
“We need our investors, financiers and NESI value chain players to dimension the opportunities and electricity sector alignment with Nigeria’s Energy Transition Plan to ensure we meet our energy transition aspirations,” he said.
Meanwhile, during his presentation at the ministerial retreat, NERC chairman, Sanusi Garba, said the the federal government will pay as much as N1.6 trillion to subsidise electricity in 2024 unless the current tariffs are reviewed to align with current economic realities.
According to him, the federal government from January to April 2023 paid a total of N57 billion to subsidies the revenue shortfalls of the distribution companies (DisCos).
Sanusi said that without the tariff reviews that commenced in 2019, subsidies payable by the government would have grown to about a trillion naira per annum by 2023.
“From 2015 almost N2 trillion has been paid by the federal government in subsidies and this is because of the huge gap between what revenue should have been and what it has been. In the current year, the estimated requirements for subsidy is in the region of N600 billion and the projection for next year if nothing is done is about N1.6 trillion,” he said.
Garba explained that the electricity sector has been challenged by issues including insufficient end-user tariffs, poor revenue collection by DisCos, infrastructure deficit, huge metering gap, as well as ineffective contracts that limited the accountability of operators.
He noted that between January 2020 to January 2023, tariffs have been reviewed and increased from 55 per cent of cost recovery to 94 per cent. He added that without the tariff reviews that commenced in 2019, subsidies payable would have grown to about a trillion naira per annum in 2023.
“Service-based tariff was instrumental in the transition to cost reflective tariff. The unification of FOREX and current inflationary pressure in 2024 has pushed cost-reflective tariffs to N124/kWh.
“It is imperative for policy support to review end-user tariffs to minimise fiscal burden.”
Speaking further, Garba noted that several initiatives of the commission and previous government mass metering resulted in the deployment of 2.4 million meters across the country, with less than 10 per cent of meters installed post-privatisation having been funded by DisCos.
“Of 12.43 million electricity customers, 5.41 million have been and 7milion unmetered. Nigeria has a 5.5 million net metering gap to be funded.
“DisCos have only achieved 56 per cent of their expected CAPEX investments from 2015 to 2021, while TCN has achieved 28 per cent of their CAPEX investments from 2013 to 2030,” he said.
Sanusi proposed the implementation of automatic monthly tariff adjustments to manage volatilities in FOREX and inflation ratesas well as the imperatives for policy support to review end-user tariffs to minimise fiscal burden.
The minister of power Adebayo Adelabu, had also stated that one of the objectives of the Nigerian electricity sector reform programme initiated over 23 years ago is to make electricity available to consumers across the country.
According to him, poor track record in contracting, contract management, and adherence to contractual obligations, among other issues plaguing the electricity supply industry.
“With impartial examination, it is evident that these identified factors erode confidence in the viability of the sector and pose fundamental challenges of inadequate capitalisation and limited access to funds for the diverse players along the energy value chain, from gas supply to electricity distribution.
“Even as electricity consumption per capita was at 140 KWh in 2021, relatively low in comparison to neighbouring countries and almost three times lower than the average for Sub-Saharan Africa., Nigeria is a case study in a deep electricity paradox.
“Nigeria has grown to become the host of probably the world’s largest fleet of diesel- and petrol-powered generation capacity that is utilized for baseload supply. Various figures have been mentioned but it is safe to say that this fleet measures no less than 40,000MW of total capacity. At an average operating cost of no less than N=250/kWh as opposed to an average economic tariff today of approximately N=120/kWh (weighted between petrol and diesel generation),” he said.
Speaking further, the minister stated that over 98 per cent of the feedstock powering electricity generation in the country are transition fuels, as Nigeria ramps up its capacity to generate more electricity through renewable means such as solar, hydro, wind, bioenergy and others.
The minister also highlighted the pricing of gas utilized by electricity generating companies in US dollars was a major issue in the sector and a hugely volatile variable that significantly affects the pricing of electricity to end-users.
For him, a preferable option is to ensure that the gas utilized by GenCos is traded in Niara to better manage the foreign currency-related inflationary trends that challenge the application of the Multi-Year Tariff Order (MYTO) methodology.
“While we appreciate the interplay of contractual obligations, economics and the application of the Petroleum Industry Act, it must also be said that, as a matter of urgent national interest and economic survival, we must find ways and means to pursue domestic gas policies and incentivize stakeholders for the supply of gas for inland use in electricity supply, other industrial activities, and conversion to CNG and LPG for transportation and domestic uses respectively.
“Therefore, I would suggest that one of the major deliverables from this policy-making process is a viable method for establishing a sustainable capital investment programme around gas processing and transportation infrastructure with its associated fiscal incentives and policies that will attract/unlock investments into the production of Naira-denominated gas from inland gas basins, and in Non-Associated Gas fields from Nigeria’s various prolific hydrocarbon basins,” he said.
