Overview One of the most difficult aspects of Nigeria’s economic development plan is still the power industry. The industry still faces significant structural, financial, and governance issues despite numerous reform initiatives over the years.
These issues are multifaceted and include transmission bottlenecks, inadequate investment capacity, political economy restrictions, tariff distortions, and an ongoing liquidity crisis throughout the value chain. The sector’s financing gap has grown and subsidy dependence has been solidified as a result of the difficulty to establish a fully cost-reflective tariff regime, primarily because of social and political sensitivities after recent macroeconomic reforms.
In order to maintain the supply of electricity and avert system failure, government intervention has become necessary in the short term. However, without deeper structural repairs, increased transparency, and the execution of reforms gradually but credibly, the current trajectory—characterized by mounting sector debt currently at roughly ₦4 trillion—is not financially sustainable.
Context & Background
It has long been acknowledged that power sector reform is essential to Nigeria’s industrial development, social welfare, and economic competitiveness.
However, progress has been uneven and sluggish. In contrast to other reform areas, the electricity sector has a special difficulty since its value chain—gas supply, generation, transmission, and distribution—is so intertwined that flaws in one part threaten the system as a whole.
The reform environment has been made more complex by recent macroeconomic changes, including as the removal of fuel subsidies and the unification of foreign exchange, which have increased cost-of-living pressures and increased resistance to tariff adjustments in the power sector.
Tariff Reform’s Political Economy
The challenge of creating a truly cost-reflective pricing structure is a significant obstacle to power sector reform.
Because of worries about affordability and the social effects of reforms on homes and companies, electricity rates are still capped.
However, the industry cannot provide enough liquidity to maintain operations or draw in new investment without cost-reflective pricing.
The ensuing burden of subsidies has compelled the government to make financial interventions on a regular basis, so shifting inefficiencies and revenue deficits onto the public balance sheet.
Therefore, one of the most difficult and politically delicate aspects of Nigeria’s current reform agenda is the reform of the power industry.
Structural Flaws and Privatization Difficulties
In addition to tariff problems, the industry has intrinsic structural flaws, especially after privatization.
There are still issues with:
• Some private investors’ financial and technical capabilities
• Gaps in due diligence and transparency throughout the privatization process
• Ineffective operations and poor governance, particularly in the TCN and distribution firms (Discos). These difficulties have restricted revenue collection, lowered service quality, and decreased operators’ capacity to make investments in network improvements and loss mitigation.
Limitations on Transmission and Public Ownership
The government continues to own and run the Transmission Company of Nigeria (TCN). Control of this vital infrastructure by the public sector has been linked to delayed network growth, insufficient funding, and operational inefficiencies.
Transmission is still a major bottleneck that limits the use of generation capacity and lowers system reliability. Liquidity and service delivery issues throughout the value chain are made worse by this segment’s weaknesses.
The frequency of grid collapses has decreased, nevertheless, thanks to recent initiatives under the Presidential Power Initiative.
Crisis of Liquidity Throughout the Power Value Chain
The power industry functions as a close-knit network. One segment’s financial problems spread swiftly to others. At the moment:
• Gas suppliers are difficult for generating companies (Gencos) to pay.
• Distribution firms (Discos) can’t make enough money to pay Gencos.
• Underinvestment and governance issues plague transmission infrastructure. Sector confidence and sustainability are being undermined by these circumstances, which have solidified a systemic liquidity crisis.
Justification for Financial Intervention by the Government
In the short term, government involvement to close the financing gap in the sector is now unavoidable due to the scope and immediacy of the situation.
Preventing a collapse of the electrical supply system is the goal of recent efforts, such as bond issuances to settle overdue commitments, especially to gas suppliers and Gencos.
While longer-term reforms are progressively put into place, such actions are required to keep power available for homes and businesses.
Progressive Change and New Positive Advancements
There is a compelling justification for gradual and incremental reform, even though a quick shift to complete subsidy elimination may not be politically feasible. Current events show cautious advancement, such as:
• The creation of distinct tariff bands, like Band A
• More decentralization, with states taking on more operational and regulatory responsibilities
• Growth of autonomous power initiatives
• Growing usage of renewable energy sources in homes and businesses These patterns imply that the industry is gradually becoming more resilient and diversified in spite of present difficulties.
Risks to Transparency, Debt, and Fiscal Sustainability
The finance arrangement in place is unsustainable. Liabilities in the sector have increased to around N4 trillion and are still rising. It is imperative to make sure that all unresolved claims are:
• Accurately confirmed
• Subject to a thorough audit
• Oversaw with integrity and transparency
Nigeria’s experience with fuel subsidy programs shows how susceptible subsidy schemes are to misuse and dishonesty. Therefore, to avoid comparable results in the power industry, robust oversight and accountability procedures are crucial.
Implications for Policy and Suggestions
Establish a Clearly Defined Plan for Cost-Reflective Tariffs
Establish a gradual and predictable shift to cost-reflective pricing while providing vulnerable customers with tailored social support.
Boost Accountability and Governance
Boost financial settlements, debt verification, and subsidy administration openness.
Address the Weaknesses of the Distribution Sector
Enforce performance standards for discos, such as loss minimization, technology advancements, and recapitalization.
Transmission Management Reform
To increase productivity and investment, investigate alternate management or concession structures for TCN.
Encourage renewable energy and decentralization
To ease the strain on the national grid, promote independent power projects, state-level efforts, and the use of renewable energy.
Reduce Your Financial Exposure
Financial assistance from the government should be explicitly time-bound and connected to quantifiable reform benchmarks.
In conclusion
Nigeria’s power sector reform is a gradual, long-term process rather than a quick remedy.
Progress will be slow due to the sector’s complexity, political economy limitations, and institutional flaws.
However, the current course will continue unsustainable in the absence of swift action to resolve structural inefficiencies, enhance governance, and guarantee fiscal restraint.
Building a financially viable, dependable, and inclusive electricity industry that can support Nigeria’s economic growth and development requires a balanced strategy that combines short-term government support with medium-to long-term structural transformation.
• The CEO of the Center for the Promotion of Private Enterprise (CPPE) is Dr. Muda Yusuf.
