The Federal Government’s electricity tariff subsidy jumped from ₦610 billion in 2023 to ₦1.94 trillion in 2024. This represents a 219.67 per cent increase in yearly subsidy funding, despite the Band A tariff hike of April 2024.
The Nigerian Electricity Regulatory Commission and analysts observed that the subsidy figures rose following the floating of the naira by President Bola Tinubu in June 2024 as well as the removal of fuel subsidies, leading to high inflation rates.
According to NERC, the Federal Government incurred a total electricity tariff subsidy of ₦1.94 trillion in 2024 to cover the shortfall between the cost-reflective tariffs and the actual tariffs approved for customers. It was reported that the Federal Government paid only ₦371.34 million out of the ₦1.94 trillion subsidy obligation for 2024; this translates to 0.019 per cent settlement.
“It is important to note that due to the absence of cost-reflective tariffs across all DisCos (distribution companies) in 2024, the government incurred a subsidy obligation of N1.94bn (62.59 per cent of total NBET invoice) during the year, which translates to an average of N161.85bn per month.
“This subsidy obligation of the FG is largely attributable to the FG’s policy to freeze allowed tariffs paid by customers despite the increase in cost-reflective tariffs,” the 2024 report read.
The cost was higher than the amount incurred as subsidies in 2023. The NERC annual report for 2023 stated, “The cumulative Minimum Remittance Obligation for DisCos was 52.92 per cent (N685.69bn out of N1.29tn NBET invoices), meaning that the government incurred a subsidy obligation of N610.06bn (47.08 per cent of total NBET invoices).”
In the 2024 annual report, NERC explained that the government undertook to fund the gap through tariff shortfall provisions, particularly after freezing customer tariffs at December 2022 levels. According to the report, the freeze persisted despite a sharp rise in cost-reflective tariffs driven by macroeconomic pressures, especially foreign exchange rate volatility.
It explained that the subsidy obligation surged to ₦633.30 billion in the first quarter of 2024, marking a 303 per cent increase compared to the quarterly average of ₦157.15 billion in 2023 and a 1,699 per cent rise from the 2022 average of ₦35.21 billion.
Following the review of tariffs for Band A customers who accounted for about 40 per cent of the total energy consumed across all DisCos, the report showed that there was a 39.99 per cent drop in the subsidy burden between the first and second quarters. This review reduced the quarterly subsidy to ₦380.06 billion in Q2.
However, it was learnt that the Federal Government’s directive to freeze all customer rates at July levels for the remainder of the year led to a renewed increase in subsidy obligations. NERC recorded a further ₦84.06 billion increase in the third quarter, bringing the total for Q3 to ₦464.12 billion. By Q4, the subsidy had risen to ₦471.69 billion, indicating an additional ₦91.63 billion.
The commission stated that although allowed tariffs were frozen, cost-reflective tariffs continued to rise due to prevailing macroeconomic conditions. It was stated that subsidies were applied only to the generation cost payable by distribution companies to the Nigerian Bulk Electricity Trading Plc under a remittance framework known as the DisCo Remittance Obligation, which replaced the previous Minimum Remittance Obligation framework from January 2024 and required DisCos to pay 100 per cent of their DROs.
The transition, it was said, aimed to avoid subsidy debts from distorting DisCos’ balance sheets and preventing them from raising critical infrastructure funding.
“When the tariffs allowed for DisCos to charge customers (allowed tariff) is lower than the cost-reflective tariff as computed by the Commission, the government undertakes to cover the resultant gap (between the cost-reflective and allowed tariff) in the form of tariff shortfall funding.
“The FG directive to freeze all customer tariffs at the December 2022 approved rates despite the increase in the cost-reflective tariffs arising from the major increase in FX rates caused the FGN subsidy to reach N633.30bn in 2024/Q1; this represents a 303 per cent and 1,699 per cent increase respectively compared to the average quarterly subsidy liability incurred in 2023 (N157.15bn) and 2022 (N35.21bn).
“Effective 01 April 2024, the tariffs for Band A customers who account for ~40 per cent of total energy consumed across all the DisCos were reviewed to cost-reflective rates (in most DisCos). This adjustment led to a significant decrease (-39.99 per cent) in FG subsidy obligations between 2024/Q1 (N633.30bn) and 2024/Q2 (N380.06bn).
“However, the FG directive that froze all customer rates at the July rates for the rest of 2024 led to increases in the quarterly subsidy obligation of the FGN; +N84.06bn (+22.12 per cent) in 2024/Q3 and +N91.63bn (+24.11 per cent) in 2024/Q4. This is because although allowed tariffs were frozen, the cost-reflective tariffs increased due to macroeconomic factors,” the commission explained in its 2024 report.
The total subsidy obligation for 2024, according to NERC, stood at ₦1.94 trillion, with Abuja DisCo accounting for approximately ₦285 billion; Ikeja, ₦272 billion; and Ibadan, ₦236 billion. Eko DisCo attracted ₦231 billion, followed by Benin at ₦169 billion, and Enugu at ₦161 billion. Other allocations included ₦149 billion for Port Harcourt, ₦128 billion for Kaduna, ₦124 billion for Kano, ₦118 billion for Jos, and ₦67 billion for Yola DisCo.
The report added that Yola DisCo recorded the highest cost-reflective tariff at ₦266.64 per kilowatt hour due to factors including high operational costs, insecurity, and vandalism in its coverage area. Since its allowed tariffs remained the same as other DisCos, Yola ended up receiving nearly twice the average subsidy per unit of electricity delivered.
Conversely, Ikeja and Eko DisCos had lower cost-reflective tariffs and correspondingly lower subsidy allocations per unit delivered. At the national level, the average cost-reflective tariff was ₦175.31/kWh while the average allowed tariff stood at ₦100.27/kWh, resulting in a subsidy gap of ₦75.04 per kilowatt-hour.
The PUNCH