In a recent analysis of the Nigerian electricity sector, the Federal Government's subsidy to the industry has experienced a significant drop of approximately 80% between 2019 and 2022. The Nigerian Electricity Regulatory Commission (NERC), in its third-quarter report, disclosed that government support for the Nigerian Electricity Supply Industry (NESI) decreased from N49.50 billion in 2019 to N10.17 billion as of the fourth quarter of 2022.
According to the report, the N10.17 billion monthly support marks a substantial reduction in government subsidy to NESI, which reached a peak of around N49.50 billion per month in 2019. The decline in government assistance is part of an ongoing effort to eliminate subsidies entirely and enable the electricity market to function on purely commercial terms without government intervention.
The primary beneficiary of the government's support in the electricity sector is the Nigerian Bulk Electricity Trader (NBET), responsible for payment across the electricity value chain.
NERC's report highlights the introduction of the Service-Based Tariff as an opportunity for Distribution Companies (DisCos) to enhance customer service by ensuring a consistent supply of high-quality energy. This, in turn, is expected to lead to increased revenue for DisCos without resorting to broad-based tariff hikes.
The Commission further emphasized that ongoing investments by DisCos in infrastructure and metering initiatives will result in a more reliable energy supply to customers, improved revenue assurance, and subsequently, enhanced collections and market remittances.
Meanwhile, as government subsidies dwindle, DisCos are pushing for a tariff increase to sustain their operations. In response to the declining support and to account for changes in macroeconomic parameters affecting the quality of service, DisCos have filed an application for a rate review with the Nigerian Electricity Regulatory Commission.
Among the factors cited by DisCos for the tariff increase request are the rise in the exchange rate, currently at approximately N785/$1, and an inflation rate of 22.41% recorded in May 2023. The previous tariff increase was based on an official exchange rate of N400/$1.
According to the NERC's fourth-quarter report, the NESI's revenue is on an upward trajectory. Despite challenges, DisCos managed to collect ₦243.65 billion out of ₦332.28 billion billed to customers, translating to a collection efficiency of 73%. This marked a 15.65% increase in total collections compared to the third quarter of 2022, where ₦210.67 billion was collected.
As the government subsidy continues to shrink, the electricity sector faces the task of balancing the need for tariff increases to maintain operations while ensuring customers receive reliable energy at sustainable rates. With ongoing reforms aimed at eliminating subsidies, the future of Nigeria's electricity industry lies in the market's ability to function efficiently without government support, fostering a competitive and sustainable environment for all stakeholders involved.
