Nigeria to scrap electricity bands, hike tariff for all in 36 months

Nigeria is set to abolish its current electricity tariff band structure and transition to a single, “cost-reflective” pricing system over the next three years, according to a recent report by the International Energy Agency (IEA).

The IEA’s latest electricity report, released last week, revealed that the Nigerian government plans to merge the existing Band A, B, and C categories into a unified tariff system. This will result in a phased increase in electricity prices across all customer groups, with the goal of eliminating subsidies and ensuring that tariffs reflect actual production costs.

Currently, Band A customers, who are expected to receive at least 20 hours of electricity daily, pay the highest tariffs. In early 2024, the government implemented a price hike for Band A users, raising rates to N225 per kilowatt-hour, up from N66 per kilowatt-hour.

Bands B and C, which receive fewer hours of electricity, pay significantly lower rates. However, with the planned tariff restructuring, these distinctions will be eliminated, meaning that customers who currently pay lower rates may see significant increases in their electricity bills.

Reasons for the Tariff Overhaul

The government argues that the existing tariffs have made it difficult for power companies to recover production costs, leading to severe financial shortfalls and mounting debts within the sector. In March 2024, the government settled part of the debts owed to gas producers to prevent a further decline in gas supply to electricity generation companies.

“The government plans to transition the entire power sector to a single, cost-reflective tariff band within the next three years,” the report said.

In February, President Bola Tinubu’s energy adviser, Olu Verheijen, said Band A tariffs now cover about 65% of electricity costs, with the government subsidizing the rest.

She denied implying an imminent hike when she told Bloomberg the government would resolve the shift to cost-reflective tariffs “in the next few months.”

Verheijen said the priority is stable electricity and protecting low-income Nigerians, while ensuring fairer pricing long term.

She said the federal government spends over N200 billion monthly on electricity subsidies, mostly benefiting the richest 25%, and is working on a targeted system to aid low-income households.

“This approach will make electricity more affordable and accessible for millions of hardworking families. Furthermore, the federal government is addressing one of the major roadblocks to improved service, the mounting debts owed to power generation companies.

Impact on Consumers and the Economy

Analysts warn that the transition will place additional financial pressure on consumers already grappling with high inflation and rising living costs.

Meanwhile, Nigeria’s electricity demand is projected to grow by more than 5% annually between 2025 and 2027, according to the IEA. Despite recent infrastructure improvements, including the commissioning of the Zungeru hydroelectric plant in April 2024, the sector continues to struggle with gas supply constraints and frequent grid collapses.

Electricity demand declined by around 6% in 2024. Following the start of the Zungeru hydroelectric plant in April 2024, Nigeria now counts 28 grid-connected power plants, which increased the country’s total installed capacity to 14 GW (14,000 megawatts), compared to 12.6 GW in 2023.

However, this growth in installed capacity did not suffice to compensate for the decrease of available capacity. In the first half of 2024, the average daily available capacity was 4.14 GW, slightly lower than the 4.54 GW recorded in 2023.