Band of Bother
The trouble with Nigeria's electricity sector that higher tariffs can't seem to fix
Back in 2020, Zainab Ahmed, Nigeria’s finance minister at the time, warned that a failure to remove electricity subsidies would cause the entire power sector to crash. The mechanism by which the subsidies were to be removed were the introduction of service based tariffs where people would pay more in exchange for a guaranteed number of hours of electricity daily.
A newspaper report from September 2020:
Earlier, a new tariff regime in the power sector, under which the price of a kilowatt per hour of electricity had more than doubled, had taken effect from September 1.
The Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, had last Thursday shed light on why the federal government was forced to stop fuel subsidy, saying it constituted a drain on the country’s meagre resources.
The move at the time was to double electricity tariffs which had the effect of removing pretty much all of the implied subsidies or moved tariffs to ‘cost reflective’ ones as the term goes. The report went on further:
Osinbajo said like many Nigerians, he had not been happy with the quality of services being provided by the distribution companies (Discos), prompting the federal government to allow the Discos to make tariff adjustment as determined by guaranteed improvement in supply.
He said under this arrangement, only consumers with guaranteed power supply for 12 hours could have their tariffs adjusted, while those who experience supply below 12 hours would pay the old tariffs.He added that following arbitrary estimated billing by Discos, a move aimed at metering five million Nigerians, with the meters produced by local manufacturers has begun.
According to him, the new metering arrangement would create jobs while the National Electricity Regulatory Commission (NERC) has been directed to strictly enforce capping regulation to ensure that unmetered consumers are not billed above their metered neighbours.“The recent service-based tariff adjustment by the Discos has been a source of concern for many of us. Let me say frankly that like many Nigerians, I have been very unhappy about the quality of service given by the Discos.
“That is why we have directed that tariff adjustments be made only on the basis of guaranteed improvement in service. Under this new arrangement, only customers who are guaranteed a minimum of 12 hours of power and above can have their tariffs adjusted,” he said.
So what happened next? With the help of some charts put together by a friend, let’s do a walk-through:
The tariff increase did what they were meant to do i.e. eliminate the subsidies or move to a ‘cost reflective’ basis. By 2022, the tariffs were collecting 94% of costs which by Nigerian standards is very good. The subsidies were almost all gone.
But there was another problem:
The increase in cost recovery naturally reduced the shortfalls and increased the amounts remitted by the Distribution Companies (DisCos) to the Generation Companies (GenCos). But even at that, you could see there was still a big gap to cover. So what caused this disconnect? Tariffs were high enough to cover almost the costs but GenCos still couldn’t get paid for the power they were generating?
The simple answer is that tariff shortfalls are one thing while market shortfalls are quite another thing.
And here we see the problem: Aggregate Technical, Commercial, and Collections Loss or ATC&C Losses in the industry jargon. This is basically the amount of electricity that is pumped out over wires and cables which is not paid for due to one reason or the other. In Nigeria’s case, a big part of this is caused by the almost complete lack of progress on metering and electricity theft one way or the other. There are also inefficiencies with the grid which of course cause a lot of generated electricity to be lost.
From the chart above, we see that even after the ‘tariff shortfalls’ were eliminated with the increases in 2020, the ‘market shortfalls’ barely moved at all. There is of course a link between both types of shortfalls: in theory, better tariffs should lead to more investments in metering and other things that help to reduce ATC&C Losses which would then allow the DisCos to collect more tariffs and pass them on to the GenCos.
But this investment clearly never happened as you can see from the chart below:
Metering has stood still and thus gone backwards due to population increase and other factors. Losses remain well above target:
The result of all this is that in 2024, Nigeria has pushed through an even bigger tariff increase claiming once again that they are needed to remove the subsidies which were almost removed 4 years ago:
The Nigerian Electricity Regulatory Commission (NERC) has increased electricity tariffs for urban customers by 240%, confirming earlier reports of a possible hike in energy prices amid the country’s rising inflation.
The new rate, effective immediately, will be ₦225 per kilowatt-hour (kWh), a significant jump from the previous ₦66 per kWh, NERC’s vice chairman, Musliu Oseni told journalists on Wednesday.
These customers—under the Band A classification—use 20 hours of power supply daily and represent 15% of the country’s 12 million electricity customers. The upward price review will not affect customers on the other bands, he said.
This now feels like a doom loop which requires pausing to think about some hard questions. Tariffs go up. Investments in metering and other things to close AT&C Losses don’t materialise. Market shortfalls remain as they are. A few years later, tariffs need to go up again.
There is one ‘solution’ to this: you can simply charge a high enough tariff that covers all those losses. This will mean that customers are directly paying for all the inefficiencies of the DisCos and investments they (DisCos) should be making. If you do this, then you of course remove the incentive for them to bother eliminating those inefficiencies anyway. From the previous chart above, you can see that Kaduna DisCo is essentially losing 75% of the electricity it distributes even though the 25% it manages to collect is on a cost reflective basis. Maybe the 25% should be hit with much bigger bills that cover the 75% who won’t pay? And if you are a paying customer, why won’t you immediately find ways to move out of the 25% into the 75%.
Nigeria’s power sector privatisation is now looking like one of the biggest mistakes of all time made by a country very skilled at making big mistakes. The original sin remains that the DisCos (and GenCos) were sold to people who simply could not muster the investment required to improve the sector. This was the entire point of the privatisation exercise: that the private sector would be able to mobilise capital better and deploy it more efficiently than the government ever could.
In reality:
Nigeria’s power sector was privatised in 2013 and even though this is a comparison between a one-eyed man and his blind counterpart, you can (just about) see that generation actually increased more before privatisation than after. Either way, a peer country like Vietnam has left Nigeria in the dust over the last couple of decades.
Hindsight is of course 20:20 but should Nigeria have carried out its privatisation slower and learnt lessons along the way? Maybe. The country certainly moved very quickly compared to some other countries:
There are of course reasons why the country had to move quickly given all the years of catch up that needed to be done following so much neglect under military rule. And Romania which also moved quickly is clearly doing much better than Nigeria.
The new tariff increases have led to the unprecedented situation where, for the first time in modern Nigerian history, Nigerians are actively rejecting VIP status. No one wants to be in Band A (where the new eye watering tariffs apply) if they can help it and many have fought (successfully) to be downgraded to Band B. It has also badly exposed the DisCos where they have been outright telling lies about how many hours of power they’ve been delivering to their Band A customers to justify the trebling of their tariffs.
Nigeria’s power sector is a complex mess. But what this current tariff increase has shown is that the simple argument of getting rid of subsidies and moving to ‘cost reflective’ tariffs does not hold anymore. There are a lot more difficult questions that need answering.
Otherwise in a couple of years time, another big tariff increase will be needed to save the power sector from ‘imminent collapse’.
Hello - super insightful piece as always. Small typo, I believe AT&C should be ATC&C.
They privatised to oligarchs. This has always been the case in Nigeria. Anytime they privatise a government operation, they sell it to political friends who don't understand the business and view it as a get rich quick scheme.
Many Nigerian sectors require investment, but rentier politicians and oligarchs keep telling us that higher fees lead to better performance. But logic states that if they can charge higher fees without improving performance, where does the incentive to improve come from?