Ask Nigeria Header Logo

Struggles in power sector despite subsidy

Photo of author

By Abraham Adekunle

Signs of dying sector despite privatization by government.

In the span of nine years, from 2015 to 2023, Nigeria committed a staggering ₦3.2 trillion to Electricity subsidies, with an additional projected expenditure of ₦1.6 trillion in 2024. Despite this substantial financial injection, the state of electricity supply in the country continues to deteriorate, creating significant challenges for businesses and manufacturers. The growing disparity between expenditure and the worsening electricity situation highlights the urgent need for effective strategies to address and enhance the nation’s power sector. Recently, at the Idu Industrial Zone in Abuja, the familiar hum of heavy generators drowned the street. These generators, running on environmentally damaging fossil fuel, cost businesses significant sums.

Husein Akor, running a wood processing company in the industrial area, spends approximately ₦48,000 daily on powering generators, constituting 40% of his production expenses. Despite being connected to the grid, Akor has lost trust in its reliability, forcing him to rely on Alternative Energy sources. Similarly, businesses like Mudiame University in Irrua, Edo State, face daily expenses of over ₦45,000 for diesel to power generators, as grid-connected electricity proves insufficient for their needs. The unreliable Power Supply pushes institutions and businesses toward alternative sources, creating additional financial burdens.

Power outages plague small businesses in Nigeria; they face closure.

Individuals like Mrs. Mercy Onyemaechi, who ventured into pap production to support her family, also face challenges due to erratic power supply. The collapse of the electricity grid in November 2020 led to significant losses for her business, highlighting the impact of unreliable power on small enterprises. In Nigeria, over 80% of electricity consumers are households, while only 20% rely on grid-connected electricity. Despite being cheaper, the quality and reliability of grid-connected and alternative clean energy sources are major concerns. The grid has collapsed approximately 141 times in the last decade, and the available electricity is far from meeting the demands of homes and industries.

The Nigerian Electricity Regulatory Commission (NERC) reported that, as of the first quarter of 2023, aggregate technical and commercial losses in the electricity sector averaged 46.39%. Some distribution companies, like Kaduna Electricity Distribution Company, recorded losses as high as 75. This inefficiency contributes to the challenges faced by manufacturers, who experienced a 17.3% surge in production and distribution costs in the second quarter of the current year. Manufacturers, grappling with high energy costs, have invested nearly ₦1 trillion in alternative energy sources over the past seven years. This financial strain has resulted in the closure of approximately 95 Manufacturing companies each year, with GlaxoSmithKline Plc being the latest casualty, leading to over 4,451 job losses annually in the manufacturing sector.

Challenges persist in Nigeria’s power sector despite billions in subsidies.

Despite the Privatization of the power sector in 2015 with the aim of achieving self-sufficiency, the Federal Government has continued to subsidize electricity Tariffs. From ₦225 billion in 2015, the subsidy increased to ₦1.6 trillion in 2024, with fluctuations in between. This significant subsidy, aimed at mitigating the impact of tariff increases, has not translated into improved electricity supply. Investments from international financial institutions, such as the World Bank, African Development Bank, Japan, and France Development Agency, totaling over $7.5 billion, were intended to enhance Nigeria’s transmission network and grid capacity. However, challenges, including Corruption allegations, political factors, and mismanagement, have hindered the intended impact of these investments.

Even with the substantial Subsidies and investments, the power sector remains mired in inefficiencies, and the tariff structure reflects a lack of alignment with market dynamics. The recent release of a new Multi-Year Tariff Order (MYTO) has doubled tariffs for consumers, raising concerns about the impact on the already burdened public. While the government is set to bear a substantial burden of ₦1.6 trillion in 2024, the Sustainability of such subsidies remains in question. The challenges in the power sector are exacerbated by inflation, foreign exchange fluctuations, and the Devaluation of the Naira. The inability to pay invoices in full, coupled with the comatose state of over 20 power plants due to lack of funding for maintenance, poses a serious threat to the sector’s sustainability. The power sector’s indebtedness to banks and other financial institutions further compounds the liquidity crisis.

Related Article: Nigeria power sector policies are outdated 

Experts and stakeholders emphasize the need for a comprehensive approach to address inefficiencies, reduce losses, and enhance the sector’s overall performance. Liberalizing the power sector, implementing realistic tariffs, achieving widespread metering, and phasing out subsidies are proposed solutions to create a sustainable and efficient power sector in Nigeria. The challenges persist, and the government’s ability to navigate the delicate balance between subsidizing electricity tariffs and ensuring fiscal sustainability remains a critical concern for the nation’s economic future.


Disclaimer

The content on AskNigeria.com is given for general information only and does not constitute a professional opinion, and users should seek their own legal/professional advice. There is data available online that lists details, facts and further information not listed in this post, please complete your own investigation into these matters and reach your own conclusion. Images included with this information are not real, they are AI generated and are used for decorative purposes only. Our images are not depicting actual events unless otherwise specified. AskNigeria.com accepts no responsibility for losses from any person acting or refraining from acting as a result of content contained in this website and/or other websites which may be linked to this website.