Power Africa Success Story: Nigeria's Tariff Reform Delivers Major Financial and Environmental Benefits

Energy and Infrastructure

Power Africa Success Story: Nigeria's Tariff Reform Delivers Major Financial and Environmental Benefits

Commentary
Posted on: 14th October 2021
By Multiple Authors
Yusuf O. Ali
Energy Advisor, Nigeria, Power Africa Senior Advisors Group Programme
Gareth Walsh
Energy Practice Lead, Tony Blair Institute for Global Change

Nigeria’s power grid supplies less than a fifth of the amount of energy of the United Kingdom’s – despite Nigeria’s population being three times larger. The scarcity of power on the main grid leads many Nigerian households and businesses to rely on domestic diesel generators (Nigeria has one generator for every 12 households). Generators are both expensive, producing power at around five times the cost of the grid, and extremely bad for the environment, producing more than three times the carbon emissions of grid power per unit of energy. The economic costs of both the deficits in power from the grid and the reliance on diesel generation are vast: the World Bank estimates that inadequate power supply costs the Nigerian economy around $28 billion each year.

The Tony Blair Institute for Global Change (TBI), working in partnership with Power Africa to deliver the Senior Advisors Group programme, is supporting the Nigerian vice president’s office in addressing these challenges. This past year, TBI worked with the federal government of Nigeria to introduce innovative tariff reforms that incentivise distribution companies to sell more power to consumers. These reforms have led to a 20 per cent increase in the energy sold to consumers and made the sector more environmentally – as well as financially – sustainable. From an environmental perspective, the resulting carbon benefits of replacing power produced by diesel generators with power from the grid (a mix of gas and hydropower) are expected to reduce carbon emissions by more than 3.5 million tonnes this year. This is equivalent to delivering more than 3,000 MW of solar-generation capacity1 Assuming the additional energy available from the grid displaced the need to produce power in standalone diesel generators. – more than has been constructed in sub-Saharan Africa in the past five years. From a financial perspective, the reforms will reduce the need for government subsidies by more than $600 million this year, freeing up much-needed fiscal space to address the health and educational impact of the Covid-19 crisis. In addition to these benefits, the reform has made the sector a more attractive investment proposition, and previously pessimistic investors are beginning to look at the sector with cautious optimism.  

How Does the Introduction of a New Tariff Scheme Deliver These Benefits?

Service-based tariffs are a unique innovation designed to address the fundamental challenge in the Nigerian power sector: tariffs are too low to cover the costs in the sector, which leads to under-investment and poor service; yet this poor service makes increasing tariffs politically unpalatable. The new tariffs break this cycle by linking the amount a consumer pays directly to the quality of service the same consumer receives. By linking tariffs to quality of service, customers are more willing to pay for grid-based energy. Electricity distributers, on the other hand, are incentivised to invest to improve the quality of their service in the knowledge that they can charge a higher price for the power they sell. The result of this is an increase in the amount of power supplied through the grid and a lessened reliance on diesel generators.

The reform of tariff methodology has been many years in the making, but it was ultimately a combination of strong political leadership and the fiscal imperative resulting from recent oil price shocks that saw it over the line. President Muhammadu Buhari prioritised reforming the ailing power sector upon taking office in 2015, with a focus on developing a strong policy framework. After many twists and turns, and informed by analytical support from TBI, this led to the Nigerian Electricity Regulatory Commission (NERC) proposing the revised tariff approach in March 2020, creating five customer tariff bands depending on service quality, measured by number of hours of daily power supply.

Implementation has been challenging. Tariff adjustments were initially put back due to the pandemic, before being opposed by the National Assembly. TBI backed efforts by the vice president’s Power Sector Coordination Working Group to resolve the impasse, providing rapid analysis of the impact of the tariffs that proved critical in discussions between the working group and the National Assembly, allowing a political breakthrough that provided greater protections for the country’s poorest customers. Only customers guaranteed at least 12 hours of electricity each day would see tariff increases, while all other customers, roughly 55 per cent of the customer base, would have their tariffs frozen.

There was, however, to be one final hurdle. Barely three weeks after the new tariffs took effect on 1 September 2020, some of Nigeria’s trade unions began to demand that the new tariff regime be revoked. Difficult negotiations with the government followed in late September and October 2020, with unions insisting on lower tariffs and government unwilling to yield on the level of subsidy reduction. Ultimately, after weeks of late nights, and thanks to the analysis of the TBI advisor, a compromise was reached that both retained the incentive on the distribution companies to increase the power provided through the grid and satisfied the trade unions.

Successfully navigating Nigeria’s complex power sector and political landscape to deliver these reforms was only made possible through strong political leadership. TBI, operating in partnership with Power Africa, was privileged to work with government leaders and support them in leading this major step forward for the Nigerian power sector.

Lead Image: Getty Images

Find out more
institute.global