Tariff

Electricity tariffs are the rate at which electricity is sold to a consumer. These tariffs are determined by considering total production costs from generation plants to wholesale generation, transmission, distribution, metering and billing and finally to the consumer. Nigerian electricity tariffs are typically regulated by the government or The Nigerian Electricity Regulatory Commission (NERC) to ensure fairness, sustainability, and the financial viability of the power sector.

Electricity is the bedrock of civilization, providing energy for our homes, businesses, and industries. However, the accessibility and affordability of electricity have always posed significant concerns for both consumers and policymakers. One of the critical factors influencing the electricity tariff set by utility companies is the electricity subsidy which the government pays to upset a part of this tariff costs making it affordable to its citizens.

However, recently the government has expressed its inability to continue subsidizing electricity due to severe financial and revenue constraints. As a result, Distribution Companies (DisCos) have proposed a 40% electricity tariff increase from July 1, 2023. Other contributing factors to this proposed increase are the fuel subsidy removal and the unified exchange rate.

The electricity tariff increase has become a subject of intense debate and discussion. Therefore, there is a need to outline the possible implications of this proposed tariff increase in varying sectors. Some of the impacts are as follows:

Impact on Consumers: An increase in electricity rates directly affects the consumer’s pockets, as higher rates translate into increased monthly bills, especially with already skyrocketed bills from the fuel subsidy removal. According to the National Bureau of Statistics (NBS), 40.1% of Nigerians are classified as poor. As such, many households in Nigeria, especially those in rural areas, are low-income households with limited disposable income, and the burden of higher electricity costs can be particularly challenging. In addition, the increased financial strain on consumers’ income can lead to reduced discretionary expenses, affecting local businesses and the overall economy.

Impact on Businesses: All businesses heavily rely on electricity to function optimally. This means that a spike in electricity tariffs directly impacts operational and production costs, reducing profitability and competitiveness. Energy-intensive industries, such as manufacturing, mining, and hospitality services, may experience significant challenges when tariffs spiral. Higher electricity costs may compel businesses to cut back on operations, reduce staff, or pass on the increased expenses to consumers through higher prices, ultimately impacting the purchasing power of the general population.

Renewable Energy Adoption: Globally, countries are making efforts towards transitioning to cleaner energy sources to curtail the adverse effects of climate change on the planet and reduce dependence on fossil fuels. The tariff spike may cause people to seek alternative energy sources, thus promoting renewable adoption and providing the much-needed boost needed to help Nigeria realize its 2030 goals and the Energy Transition Plan.

Attracting Investments: For the NESI, the increase in electricity tariff seems like a giant leap towards achieving cost-reflective tariffs. For several years the electricity value chain has suffered losses, with DisCos being unable to meet their financial obligations. Achieving cost-reflective tariffs instils confidence in the minds of investors and intending investors, and it demonstrates that investors can recoup profits from their investments.

The electricity tariff increase will impact varying sectors and stakeholders negatively and positively. Therefore, these predicted impacts present a difficult task for policymakers to strike a balance between the requirement for a power sector that is financially sustainable with affordable energy. Given that the pains of fuel subsidy removal still linger, will the DisCos hold off on this impending increase or proceed? The coming days will tell.