Can FG sustain subsidy on electricity?

The Nigerian Government has been paying electricity subsidy to the Nigeria Electricity Supply Industry. This means that there is the Cost Reflective Tariff of supplying 1kWh (kilowatt hour), and the Allowed Tariff that consumers are “allowed” to pay. This variance, otherwise called “subsidy” has now turned into an elephant in a chinaware shop.  The subsidy […]

The Nigerian Government has been paying electricity subsidy to the Nigeria Electricity Supply Industry. This means that there is the Cost Reflective Tariff of supplying 1kWh (kilowatt hour), and the Allowed Tariff that consumers are “allowed” to pay. This variance, otherwise called “subsidy” has now turned into an elephant in a chinaware shop. 

The subsidy is a result of the government’s policy consideration on (a) welfarism – to support social welfare of consumers who might not be able to pay the high true cost of the service, (b) economic stability – ensuring a stable and affordable energy supply is essential for economic development, and (c) political – to mitigate possible social unrest. 

The federal government, in 2020, with the introduction of Service Based Tariff, decided to phase out subsidy on electricity tariff, because of the strain it’s putting on Government finances, and inefficiencies it promotes in the energy sector. 

The minister of Finance, Budget and National Planning under President Muhammadu Buhari, Mrs Zainab Ahmed, had said that the federal government had quietly removed all subsidies in the power sector with a plan to gradually end subsidies on petrol. 

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This was necessitated by the fact that payment of subsidy, both on petrol and electricity, has become an albatross on government finances. Between 2015 and 2020, the shortfall in allowed tariff reportedly stood at about N2.4 trillion, averaging N200 billion yearly, and in 2022 alone, over N600bn has been paid in subsidies, and it has been estimated to skyrocket to at least N1trillion in 2024. 

The question now is: with the present state of government finances, is payment of subsidy on electricity tariff sustainable? 

In 2022 the Nigeria Electricity Regulatory Commission (NERC) rolled out the Multi Year Tariff Order that gradually phases out subsidy so that Nigerians can start paying Cost Reflective Tariff. For instance, in the MYTO 2022, the Cost Reflective Tariff, on the average, should be N68.42 per kilowatt hour (kWh), while the Allowed Tariff the DisCos were to charge was N59.89/kWh. With this, the federal government provided N8.53/kWh as subsidy. Between January and March 2023 alone (Q1, 2023), the total subsidy of N52.7bn was paid to the 11 Discos. 

The rationale behind the MYTO 2022, as approved by the regulators was premised on the fact that DisCos that are in highly urban centres are allowed to charge tariffs that are near cost reflective due to evidence of high purchasing power and high consumption level in those areas while DisCos that are in areas with low income consumers are allowed to charge lower Allowed Tariff, therefore paying higher subsidy. 

This makes the subsidy regime to impact more on low income bracket of consumers. It means people living in places under Abuja DisCo, Ikeja DisCo and Eko DisCo were paying tariff that is nearly Cost Reflective, while people living in places under Benin, Yola and Ibadan DisCos are paying much less 

An example, as seen in the NERC Q1 Report shows that Eko DisCo’s Cost Reflective Tariff was put at N62.04/kWh and the Allowed Tariff (AT) was N59.49/kWh, making the variance, or subsidy paid to Eko DisCo just N2.55/kWh, totalling about N2.04bn.

Similarly, for Abuja DisCo, Cost Reflective Tariff was N65,67/kWh, and Allowed Tariff was N63.24/kWh, variance just being N2.43/kWh, again total of N2.15bn was paid in Subsidy to AEDC. 

The reverse was the case in places like Yola, for instance, where Cost Reflective Tariff was N147.55/kWh and Allowed Tariff was N65.99/kWh, thus leaving the government to bear the burden of N81.56/kWh which amounted to N7.82bn. 

In July 2023, the new administration placed a freeze on the tariff review, which has greatly distorted the plan, and skyrocketed the shortfall in the electricity tariff shortfall, reversing the progress made in the MYTO 2022 to phase out the subsidy. 

Majorly because of the changes in the macroeconomic indices like foreign exchange, inflation, the unified exchange rate, the cost of electricity has also increased drastically.  Eighty per cent of generation is gas-based and gas amounts to 30-40% of generation cost so the floating of the dollar spiked cost of generation, the naira-dollar exchange rate rose from an average of N464.08/$ in Q1 to N798.40/$ in Q3 and the Nigerian inflation rate rose from 22% in Q1 to 24.10% in Q3, while the US inflation rate dropped from 5.58% to 3.20%. 

 The Weighted Average of Cost Reflective Tariff in Q3 of 2023 has therefore increased from N68.42 average to N111.12. This also means that the average subsidy has increased to about N51,23/kWh, totalling about N332.68 billion in Q3 alone. 

Another issue facing the electricity market is the delay and bottlenecks associated with paying the electricity subsidy as well as the slow cycle of the electricity market. The subsidy is funded from various pools such as the budget appropriation, FGN commitments domiciled at the Federal Ministry of finance, World Bank guarantees and loans, as well as CBN facilities. 

Who are the beneficiaries of this subsidy? 

The rate design provided that the subsidy paid by the government should have more benefit to the masses who are mostly low-income earners across the DisCos.  But present data shows that areas identified as high income areas are now benefitting more from the subsidy than areas identified as low income consumers. 

For instance, government now has to pay N46.66/kWh in Subsidy to Abuja DisCo, from the Q1 figures of N2.43/kWh, raising the subsidy figures to Abuja Disco to N43.26bn in Q3. This is a jump of 1,912% from N2.15bn in Q1 to N43,26bn in Q3, 2023. Similarly, Eko DisCo that was N2.55/kWh in Q1 has seen a rise of 1, 676% in subsidy payment as at Q3, 2023. 

Similar Data for Yola DisCo shows only a 98% rise in subsidy payment in Q3, 2023 for Yola DisCo, Cost Reflective Tariff was N214.57/kWh but the Allowed Tariff remained at N65.99/kWh with government paying N148.58/kWh, amounting to N15.52bn in Q3 2023. 

 Data clearly shows that the high-income consumers, or the rich, are benefitting more from the subsidy than the low-income consumers that the subsidy was designed for. 

Data from National Bureau of Statistics established that the rich/high income households have a higher electricity consumption pattern than their poor neighbours.  

Further report from NERC also shows that the subsidy payment for the poorest 20% in the Non-Maximum Demand Consumers, mainly residentials, stands at measly N0.43bn, while the richest 20% gulps N17.24bn in subsidy payment in Q1 2023. The middle-income group also accounts for N3.36bn in subsidy 

By Q3, 2023, the richest 20% accounts for N117.8bn, while the poorest 20% benefitted only N2.97bn. These figures show clearly that the electricity subsidy has been disproportionately benefiting the rich consumers, while excluding the poor ones it was designed for. 

It is also detrimental to government finances. The federal government is urged to take a quick decision before the situation spirals out of control like the petrol subsidy. 

Electricity subsidy is not sustainable, and we need to start thinking of where else the subsidy we are paying in electricity tariff can be better applied. 

 

Adegbemle is the convener and Executive Director of PowerUpNigeria