Federal government announces $600m electricity subsidy to reform power sector

DDM News

The Federal Government has unveiled plans to introduce an annual electricity subsidy of $600 million for all consumers starting in 2025 as part of a broader initiative to reform Nigeria’s power sector.

Diaspora digital media (DDM) gathered that this subsidy is expected to remain in place until 2027, helping to offset the gap between cost-reflective electricity tariffs and the regulated rates that consumers pay.

The initiative aims to improve the financial sustainability of power distribution companies while simultaneously addressing Nigeria’s metering deficit.

According to Nigeria’s Energy Compact document, which was obtained by Sunday PUNCH, this plan is a core component of the National Energy Compact.

It aligns with Nigeria’s broader strategy for electrification and the transition to cleaner energy sources.

Nigeria presented its energy compact alongside Côte d’Ivoire, Zambia, and nine other African nations during a two-day summit in Tanzania that focused on innovative energy solutions.

However, the government views this subsidy as a temporary measure designed to ensure electricity remains affordable while gradually transitioning to full cost-reflective tariffs.

The Energy Compact document highlighted that the subsidy could be implemented in different ways.

One approach could involve a uniform monthly subsidy for all electricity consumers.

Alternatively, the government may choose to provide a subsidy covering the first 50 kilowatt-hours of electricity consumed each month.

This method aims to address the inefficiencies of previous subsidy programs, which disproportionately benefited wealthier households rather than low-income consumers.

By 2027, the government plans to introduce a “social tariff” to specifically protect vulnerable and low-income consumers once a fully cost-reflective pricing system is established.

The Energy Compact document outlined the roadmap for achieving full cost-reflective tariffs, explaining that a subsidy of $600 million per year would be maintained from 2025 to 2027 while efforts to close the metering gap continue.

It further noted that to make electricity pricing more equitable, the government will introduce a uniform subsidy in 2025 that will remain in place as metering deficits are addressed.

One of the major components of this reform is tackling Nigeria’s significant metering gap.

Currently, about seven million electricity consumers in the country lack meters, which results in inefficient billing and revenue losses for the power sector.

To address this, the government has developed a phased plan to install smart meters across the country.

In 2025, 1.5 million smart meters will be installed.

This will be followed by four million additional meters in 2026.

Another 1.5 million meters will be deployed in 2027.

Bridging the metering gap is expected to significantly improve revenue collection, ensure more accurate billing based on actual consumption, and reduce the need for future subsidies.

The electricity sector has long struggled with financial instability due to various challenges, including technical losses, inefficient tariff collection, and liquidity shortages.

Despite government efforts through the Power Sector Recovery Programme, tariff shortfalls reached approximately N650 billion in 2023.

These shortfalls are projected to rise sharply in 2024 and could exceed N2.2 trillion if reforms are not implemented effectively.

The new subsidy initiative is expected to provide temporary financial relief while ensuring that power distribution companies can meet their payment obligations to generation companies and the Transmission Company of Nigeria.

Experts believe that without these reforms, Nigeria’s electricity sector will continue to suffer from chronic underfunding and operational inefficiencies.

Analysts have pointed out that while the subsidy will help stabilize the market in the short term, long-term sustainability will require full implementation of cost-reflective tariffs.

The government is also under pressure to improve infrastructure, enhance grid reliability, and encourage private-sector investments in power generation and distribution.

The transition to a fully cost-reflective pricing model will be a crucial test for Nigeria’s ability to modernize its electricity sector without causing undue financial hardship for consumers.

If implemented correctly, the subsidy program will serve as a bridge, allowing time for critical reforms to take effect while preventing an immediate surge in electricity costs for consumers.

As 2027 approaches, policymakers will need to evaluate whether the sector is ready to fully transition away from subsidies or if additional measures will be required to maintain affordability and reliability.

With mounting financial pressures and growing electricity demand, the success of this initiative will play a key role in determining Nigeria’s energy future.

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