Nigeria’s Electricity Tariff Hike and Fear for Economic Sustainability

Nigeria’s economy has been struggling. In February, the headline inflation rate rose to 31.70 percent, representing an increase of 1.80 points when compared to 29.90 percent recorded in January, according the National Bureau of Statistics (NBS).

On a year-on-year basis, the headline inflation rate was 9.79 percent points higher compared to the rate recorded in February 2023, which was 21.91 percent. Also, on a month-on-month basis, the headline inflation rate in February  was 3.12 percent, which was 0.48 percent higher than the 2.64 percent rate recorded in January.

In the month under review, the food inflation rate  was 37.92 percent on a year-on-year basis, representing an increase of   13.57 percent points when compared to the 24.35 percent recorded in February 2023.  NBS attributed the rise in food inflation on a year-on-year basis to increase in prices of bread and cereals, potatoes, yam and other tubers, fish, oil and fat, meat, fruit, coffee, tea, and cocoa.

Since the floating of the nation’s currency, The Naira, in the first half of last year, it has experienced more than 300 percent depreciation. The Manufacturers Association of Nigeria (MAN) recently said that its members have lost nothing less than N1.5 trillion to forex-related transactions in  the last six months.

“Within the last six months, our companies have incurred not less than N1.5tn in forex-related transaction losses. By the time our results are out for Q1, in terms of the performance of companies, this will be very clear,” the Director-General of MAN, Segun Ajayi-Kadir, told The Punch.

On Thursday, April 4, the exchange rate  in the Nigerian Autonomous Foreign Exchange Market (NAFEM) was N1,255.07/$1.  Amid rising inflation, the Central Bank of Nigeria (CBN) in March, raised the interest rate by 200 basis points from 22.75 per cent to 24.75 per cent – a development which some experts say may stifle investment.

Nigeria ended the petrol subsidy regime in May 2023 after  Bola Tinubu assumed office as president. Since then, many Nigerians have been struggling with high cost of food prices, transportation and other essentials. The country is now in the process of ending electricity subsidy too.

On Wednesday, the Nigerian Electricity Regulatory Commission (NERC)  announced a 300 percent increase in  tariff for customers on Band A classification. Band A customers enjoy 20 hours and above electricity supply daily and would now pay N225 per kilowatt hour instead of N68 as the case was.

According to  NERC’s Vice Chairman, Musliu Oseni, customers on Band A  represent 15 percent of the 12 million electricity customers in the country. He added that those on Band B, C, D and E would not be affected.

“We have over 3,000 feeders and initially we had over 875 feeders as Band A feeders based on the classification of the DisCos. But upon reviewing these feeders performance, the Commission has reduced it to fewer than 500 feeders which qualify as Band A feeders that are currently meeting the average 20 hours average service.

When you look at that less than 500 feeders vis-à-vis  the over 3,000 feeders, the computation shows that just 17 percent of the total feeders of the distribution companies now qualify as Band A feeders. When you look at where those 17 percent feeders are critically, it is estimated that just under 15 percent of total customers are benefiting from those feeders that are currently connected to those feeders.

“On the basis of that, the Commission has decided that only the 17 percent feeders and 15 percent customers will be affected by any rate increase that the Commission will ever approve for the distribution companies,” Oseni said at a press briefing in Abuja.

“Further to that, the Commission has issued an order which is titled: April 2024 supplementary order, that is, it is supplementary to the order issued in December 2023. The April 2024 order takes effect from today April 3, 2024) and in that order, the Commission has approved a rate review of N225/kWh for 15 percent of the customer population in NESI. That means that less than 15 percent of the customers will be affected”, he added.

The hike in tariff comes about a day after the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) raised the base price for natural gas from $2.18 to $2.42 per Metric Million British Thermal Unit (MMBTU) for power and gas-based industries. Over 70 percent of the country’s electricity is generated from gas-fired plants.

“Accordingly, after due consultation with key stakeholders and taking into cognisance the provisions of the PIA, as well as the gazetted Gas Pricing and Domestic Demand Regulations, the NMDPRA hereby establishes the Year 2024 Domestic Base Price as USD 2.42/MMBTU,” said Authority Chief Executive of NMDPRA, Farouk Ahmed.

More problems for Nigerians

A former Vice President, Atiku Abubakar, has criticized the new hike in electricity tariff, saying that it would create more problems for Nigerians.

He said that Nigerians are currently facing  difficulties as a result of the petrol subsidy removal and floating of Naira.

Abubakar noted that it would also impact negatively on the manufacturing sector as they battle with high interest rate and high diesel cost.

The 2023 presidential candidate of the Peoples Democratic Party (PDP) said the Tinubu’s administration is   pushing the country’s economy into a deeper crisis, adding that his reforms “are without a human face”.

He called on the government  to revisit the privatization exercise that produced the Distribution Companies (DisCos).

“As usual, the government is unleashing another dose of reforms without adequate notice and without an adequate post-reform plan to mitigate the pain.

“The increase in electricity tariff comes at a time when Nigerian citizens are going through excruciating difficulties occasioned by the withdrawal of subsidy on PMS and floating of the domestic currency.

“The government has not successfully dealt with the pains associated with the implementation of those measures, and now this. The hike in electricity tariff will create more difficulties for the citizens as inflationary pressures are elevated. Our manufacturing sector will similarly be impacted negatively. Not only are they paying higher interest rates on their bank loans but also paying more for diesel, paying higher wages as a result of the new minimum wage. The President’s men are pushing the economy into a deeper crisis. His reforms are without a human face.

“It is important that we understand the root cause of the inefficiencies in the power sector before unleashing another dose of reforms. It is time to revisit the privatization exercise that produced the DisCos,” Abubakar said in a statement.

“Tinubu must (a) ensure that these reforms are sequenced, (b) implement measures to mitigate the pain, and (c) hold the NERC responsible for ensuring improved service delivery,” he added.

Also, the Minority Caucus of the House of Representatives has criticized the timing of the tariff hike, citing prevailing economic challenges.

“The hike which is over 200 per cent above the rate of inflation, utterly disregards the plight of ordinary citizens, who are grappling with the adverse effects of the removal of oil subsidy, galloping inflation, unemployment, and inadequate access to basic amenities,” said Minority Leader of the House, Kingsley Chinda, in a statement.

“The timing of this tariff hike, amidst prevailing economic challenges, is not only insensitive but also detrimental to the well-being of Nigerians. It further highlights the disconnect between policymakers and the realities faced by the masses of our people.”

FG makes case for tariff hike

The Minister of Power, Adebayo Adelabu, has said that before the introduction of the new electricity tariff, the federal government was subsidizing about 67 percent of the power sector, which would have translated  to N2.9 trillion by the end of 2024 based on the current exchange rate.

According to the Minister, this is more than 10 percent of  Nigeria’s national budget. Adelabu stressed that it  would be unwise for the country to continue to subsize the power sector alone with about N3 trillion.

“We are in a subsidy pricing regime whereby government provides a large portion of the cost of producing, transmitting and disturbing power in the country.

“And I must tell you, as at today before the introduction of the tariff increase, government is subsidizing nothing less than 67 percent of the cost of producing, transmitting and distributing electricity supply in Nigeria.

“At the current exchange rate, this is going to translate to N2.9 trillion for 2024. This is more than 10 percent of the national budget.

“Power sector is just a single sector out of so many sectors the government has to attend to. All these sectors are all competing from this meagre revenue from the government,” he said at inter-ministerial press briefing on Friday in Abuja.

“So it will be insensitive on our part to force on government to continue to subsidize at that rate of almost N3 trillion to the power sector alone. We just have to be realistic,” Adelabu added.

Also speaking at the briefing, the Minister of Information and National Orientation, Mohammed Idris, said the federal government  is sustaining electricity subsidy to 85 percent of Nigerian consumers. He said this  re-justifies Tinubu’s administration “credential as a Pro-People democratic government”.

He assured that the tariff hike would bring about improvements in service delivery, infrastructure development, and economic prosperity.

Idris said: “Misconceptions and concerns around the tariff review are understandable. However, let me reassure every Nigerian that this review is a strategic step toward a more sustainable, efficient, and equitable electricity sector. It lays the groundwork for significant improvements in service delivery, infrastructure development, and economic prosperity. Our focus must therefore remain steadfast on ensuring that the electricity sector’s transformation benefits all Nigerians, supports our industries, and propels our nation towards its bright future.

“You would also recall that the President Bola Ahmed Tinubu signed the Electricity Act (Amendment) Bill, 2024 into law to further strengthen the governance structure in the Power Sector and mandates the GenCos  to set aside 5 percent of their actual annual operating expenditure from the preceding year for the development of the host communities. The Act also removed Electricity from the Exclusive list to empower state government to generate and distribute electricity to residents.”

With this new tariff hike, how affected businesses and households would survive  is a question on the lips of many Nigerians.