Time to end electricity subsidy

Energyday Editorial

A plan to end electricity subsidy hinted at recently by the federal government is a step in the right direction; and should be seen as a big plus for enthronement of market -driven deregulation of the sector which is a sinequanon for efficiency in the much troubled and beleaguered power sector.

With this plans, Nigerians would have to pay more for the commodity under a new tariff arrangement to be unveiled by the Federal Government.

The federal government reiterated the decision during a recent stakeholders’ engagement meeting organised by the Nigerian Electricity Commission, NERC in Lagos.

The government had pegged most of its subsidy payments in the electricity sector at N30 billion monthly.

Vice President Yemi Osinbajo, had at the opening of the 14th Nigerian Association for Energy Economics (IAEE) conference in Abuja, recently, said the government expected the electricity sector to generate its revenue from the power sector market.

Speaking through the Special Adviser to the President on Infrastructure, Ahmed Zakari, the presidency stated that, “the federal government intends to reduce its interventions in the Power Sector and thus allow the electricity market to run on its own, thereby allowing the market participants to determine the course of action.”

Stakeholders have argued that allowing market operators to determine the course of action simply means that Nigerians are to pay the full commercial price for power as determined by the generating and distribution companies.

Reacting to this revelation, one of the participants at that public hearing and Executive Director, Centre for Transparency & Accountability in the Energy Sector, Abel Godson, stated that, “with the deteriorating nature of electricity supply in the country, coupled with a deteriorating and ageing infrastructure within the electricity network, government’s pre-occupation should be about stabilizing the market, and not tariff hike.”

He also maintained that “promoting cost-reflective tariff at a time where the country is battling one its worst forex regimes and high inflation rates, which affect the cost of goods and services, will be counterproductive.”

“If this current precarious situation is met with any form of hike in electricity tariff, then we can bid goodbye to any meaningful development in the economy,” he said.

Recall that the federal government and Labour had gone into extensive discussions prior to the implementation of the Service-Based Tariff in November 2020, where the electricity regulator (NERC) had promised improvement in service delivery to Nigerians.

The Organised Labour has expressed dismay at the government’s plan and seems to align with the position of critics of the move as seen in the position of Abel Godson.

At EnergyDay, we feel the frustration and anger of the people over the problem of stable electricity, and the inability of National Electricity Regulatory Agency, NERC to fulfill its promise of improvement in service delivery, but the truth is that we can not enjoy the expected stable power under the current arrangement of subsidy regime.

Essentially, the country is providing roughly 11 per cent of the citizens’ demand for electricity despite huge government interventions in the power sector.
What we need is a free market and cost-reflective tariffs.

At the NERC stakeholder’s forum, concerns were raised about the power sector moving backwards rather than forging ahead, going by the too many policy summersault.

Zakari also mentioned that Nigeria has one of the poorest supplies of electricity despite the power sector contributing 78 per cent to GDP growth for Q2 2021.

It is a matter of great concern that the government has failed in the area of providing the needed logistics and infrastructure for sector’s growth.

On financing, there are financial institutions who are willing to provide funds but first want the government to take off subsidy and allow the private secure drive the market itself.

The price control by government is affecting the sector negatively. Nigerian GenCos are presently optimizing production and can do better, or have the capacity to produce even more.

We recall that the International Monetary Fund (IMF) recently advised the Nigerian government to completely remove fuel and electricity subsidies in early 2022.

The Washington-based organisation noted that the removal of “retrogressive” fuel and electricity subsidies should be considered a priority as part of the government’s fiscal policies.

“The complete removal of regressive fuel and electricity subsidies is a near-term priority, combined with adequate compensatory measures for the poor. The mission stressed the need to fully remove fuel subsidies and move to a market-based pricing mechanism in early 2022 as stipulated in the 2021 Petroleum Industry Act. In addition, the implementation of cost-reflective electricity tariffs as of January 2022 should not be delayed. Well-targeted social assistance will be needed to cushion any negative impacts on the poor particularly in light of still elevated inflation.”

EnergyDay recalls that last week, the Federal Government alerted that the gap between the Cost Reflective Tariff (CRT), and Allowable Tariff (AT) peaking at N28 per unit of electricity supplied to consumers, this year stands at about N1t.

This development is coming at a time that the government is also considering subsidy removal on Premium Motor Spirit (PMS), the Special Adviser to President Muhammadu Buhari on Infrastructure, Ahmad Zakari, had disclosed at the 12th edition of PwC Nigeria’s Annual Power and Utilities Roundtable, that the nation needs to optimise the potential in the power sector through a cost-reflective tariff regime.

At EnergyDay, we note that since the sector was privatised in 2013, perpetual interventions through the CBN have served as lifelines to the sector. They include Power and Aviation Intervention Fund (PAIF), hovering at about N300b, Nigerian Electricity Market Stabilisation Facility (NEMSF), which is about N213b, an N140b Solar Connection Intervention Facility, an over N600b tariff shortfall intervention, as well as a recent N120b intervention designed for mass metering among others.

In March 2017, the Federal Executive Council (FEC) approved an N701b CBN facility as Power Assurance Guarantee, just as the Federal Government, in 2019, also signed the release of another N600b to bridge the shortfall in the payment of monthly invoices by key stakeholders in the sector.

Fueled by tariff shortfall, receivable collection, technical, commercial and collection losses, financial liquidity in the power sector hovers around N4t as the apex bank, alongside the federal government has continued to initiate a series of interventions to douse tension and avert a collapse of the 2013 electricity privatisation exercise.

In about eight years, the CBN would have spent over N1.5t to keep the nation’s power sector afloat although the sector was privatised to survive by itself.

Although most stakeholders insisted that the interventions remained critical, especially in easing the liquidity crisis and attracting further interventions, they maintained that tweaking the interventions in manners that would ease further the masses’ burden and halt arbitrary billing of consumers was very important.

EnergyDay notes with much dismay the failure of federal and state governments, as well as their ministries and agencies to pay over N100b outstanding electricity bills is currently worsening the liquidity crisis in the sector.

The situation has also reportedly led to distribution companies hounding private electricity consumers who pay more through estimated bills and higher tariffs, rather than recover outstanding debts from government agencies.

We call on federal government to go the whole hog in its drive to halt subsidy regime but must institute a viable social safety net to cushion the effects of the removal on the masses.

It must explain this position to Labour and persuade it to buy in to it through a robust engagements with the workers and explaining the cushioning plans to them.