Electricity tariffs in Nigeria will increase up to 88 per cent under reforms designed to revive the power sector and attract outside investors. Thank you for reading this post, don't forget to subscribe!
The proposed new rates, seen by the Financial Times, will be announced in the coming weeks, before the privatisation of 18 state-run power generation, distribution and transmission companies this year.
But the move is likely to cause controversy, coming just a month after the removal of fuel subsidies, which caused petrol prices to more than double. The price increase prompted street protests and a weeklong nationwide strike, forcing Goodluck Jonathan’s administration partly to backtrack.
Nigeria’s government said the higher “cost-reflective tariffs” for residential and commercial electricity customers were necessary to ensure that investors could make a profit.
Under the new pricing regime, due to become effective in April, tariffs will rise 25-88 per cent, though most customer classes will see a 50 per cent increase in their bills. The government hopes that cushioning the blow for the poorest consumers – a policy absent during the fuel subsidy removal – will ensure that there is no repeat of the public outcry.
“We are making sure that the urban poor and rural dwellers be provided a subsidy so that they don’t see a significant increase in tariff,” Bart Nnaji, the minister of power, said in an interview in Abuja. “The rest should be able to pay for it.”
Nigeria sells power below cost at an average of about 10 naira, or six US cents, per kilowatt hour, one of the cheapest rates in Africa. But despite having large reserves of natural gas that can fire thermal plants, the country’s electricity supply and service is among the world’s worst, with half of the 160m population lacking access to the grid. Peak output is little over 4,000MW, with per capita consumption just 3 per cent that of South Africa, Nigeria’s rival for the continent’s biggest economy.
Frequent blackouts mean that most of Nigeria’s power comes from privately owned petrol and diesel generators, greatly increasing business costs and deterring potential investors. It is hoped that privatisation will greatly improve service and output, with the government targeting 18,000MW output by 2016.
The new tariff was calculated to reflect the real cost of supplying electricity, with a return of investment factored in, according to the Nigerian Electricity Regulatory Commission. This comes to about 23 naira/kWh, which Mr Nnaji said was near the average price in Africa and less than half the cost of self-generated power in Nigeria.
The biggest consumers of electricity, wealthy individuals and businesses, will pay the highest rates, cross-subsidising the less well-off. The government will also provide a 60bn naira subsidy this year, allowing the tariff for the poorest customers to be fixed at 3.3 naira.
Previous attempts to reform the power sector have foundered, despite the injection of billions of dollars. But these efforts appear to have momentum. Bolanle Onagoruwa, director-general of the Bureau of Public Enterprises, charged with selling the six state-owned power generation and 11 distribution companies carved out of the Power Holding Company of Nigeria, told the Financial Times that privatisation should be finished by the end of the year.
Hundreds of companies have expressed interest in investing, according to the bureau of public enterprises. Nigeria’s transmission company will also be privately managed, with Canada’s Manitoba Hydro and Power Grid Corporation of India shortlisted to submit bids.
The World Bank, which is providing partial risk guarantees to investors, said Nigeria’s power sector reform was one of the most complex undertaken in Africa.