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Electricity Subsidy Removal: FG’s Last Shot in the First Month

Subsidy removal on Electricity by July 2023, is the last shot of the new administration of President Bola Amed Tinubu in His first month in office.

Recall the President announced that “petrol subsidy is gone’ on May 29, in his inaugural speech. Since then, the price of Petroleum Motor Spirit (PMS) has sold at an average of N488/liter, over 160% increase.

Sixteen days after, the FG, through the Central Bank of Nigeria (CBN), announced the removal of foreign exchange subsidy, allowing a free float of the naira on the Investors and Exporters window (I&E). As a result, the naira currently exchange for an average of N740/$ on the I&E window and N745/$ in the parallel market.

The Bola Tinubu-led government is set to remove the alleged last subsidy on electricity tariff, effective July 2023. An unconfirmed report claim that the Federal government pays about N50 billion monthly to subsidize electricity for its citizen. If that is true, then it means the country uses more than one-quarter of its annual GDP for electricity subsidies.

That means, going forward, Nigerians will pay more for electricity as the tariff is set to go up to as high as 40% or by the amount of the subsidy. The move will end all forms of subsidy in the electricity and energy sector in the country.

The impact would complement the float to further complicate the pricing formula of the Nigerian Electricity Regulatory Commission (NERC) 2022 MYTO plan. Despite not meeting the threshold of supplying at least 5,000 megawatts yearly after signing contracts with NERC, the Commission’s current Service Based Tariff was pegged on the exchange rate of N441 per dollar and the inflation rate of 16.97%. now, the exchange rate hovers between N770 to N775/$, and the inflation rate prints at 22.41 percent as of May 2023.

According to NERC’s orders in 2015, the average tariff across distribution firms (DisCos) and end-user classes was about N25/kilowatt, which became effective on September 1, 2020.

Tariffs set to increase following naira devaluation The average tariff went to N60/kilowatt in the MYTO for 2022. The average tariff was N64 per kilowatt across classes of customers. The forex used in determining the 2015 tariff was N198.97 per dollar, N383.80 per dollar in 2020, and N441.78 per dollar applied in 2022. With the increased tariff plan, the lowest end-user class may pay around N100/kilowatt.

The effect

A hike in electricity translates into a hike in manufacturing costs. The cost would further be pushed back on the consumer. If it becomes unbearable, the high cost of doing business would lead to downsizing, which increases the rate of unemployment which is currently at about 40%.

The action will also increase local prices of goods and services, as producers push the increased cost on the consumers by the rate of the increase. This further reduces the consumers’ purchasing power which has already been eroded by petrol subsidy removal and naira depreciation among others.

The action may further increase Nigeria’s position in the ease of doing business, which currently stands at 131 out of 190, according to the World Bank. 

Advice to Companies

We believe it’s time to invest more in alternative sources of energy. We highly recommend renewable energy sources such as Sola energy, Wind energy, Hydropower, Bioenergy, etc.  These would not only reduce the overdependency on fossil fuel, but would also help to preserve the environment amid increased climate change, and disaster.

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