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States work on total electricity subsidy removal, new tariff

State governments are getting set to eliminate electricity subsidies in their territories as more states gear up to join others in running their different power markets under their own laws.

In a document put together by the Nigeria Governors’ Forum, titled, ‘Development of the National Integrated Electricity Policy and Strategic Implementation Plan Policy Recommendations by State Governments to the Federal Ministry of Power,’ the states also stated that they would implement different electricity tariffs in their domains.

They made this recommendations based on the enactment of the Electricity Act 2023. The Electricity Act 2023 is a federal law which repeals the Electric Power Sector Reform Act and is the extant legal framework for the Nigeria Electricity Supply Industry.

The EA 2023 establishes a multi-tier electricity market framework comprising of a (i) single, wholesale federal electricity market, and (ii) retail sub-national electricity markets. However, both markets are interlinked and interconnected by policies and regulations.

The EA 2023 mandates a transition of regulatory powers from the Nigerian Electricity Regulatory Commission, an agency of the Federal Government, to States Electricity Regulatory Commissions upon states fulfilling the requirements for the transition as stated in the EA 2023.

In the NGF document obtained by our correspondent in Abuja on Sunday, the governors also charged the Federal Government to continue settling the N4tn legacy debts in the power sector, stressing that the market liabilities were created by the Federal Government under a single electricity market in NESI.

The Federal Government, through the Federal Ministry of Power, confirmed the receipt of the document on Sunday, as the state governments noted that state governments were now at liberty to make electricity laws.

Commenting on winding down electricity subsidies, the NGF said, “Electricity is a commodity and a product that must be paid for by consumers. The states believe that electricity subsidies and other forms of financial interventions in the power sector by the Federal Government over the last 15 years have been inefficient and ineffective so far.

“Rather than improve the quality and reliability of service, electricity subsidies in the sector have been applied to cover inefficient costs and lack of service by Discos, TCN, Gencos and gas producers across the NESI.

“Moreover, the so-called electricity subsidies benefit only customers who are connected to the national grid and enjoy some form of supply reliability. Millions of households, particularly in underserved and unserved communities, pay more than twice the average true cost of on-grid supply.”

They stated that the 2001 National Electric Policy recommended the restricted use of subsidies for the promotion of universal access to electricity.

“States agree with the retention of this policy,” the governors stated.

They added, “To this end, states recommend that wholesale and retail electricity subsidies to customers and across the NESI value chain are reduced and eventually eliminated over time, except for pre-defined customer categories or in line with national economic growth initiatives.

“Where electricity subsidies are deemed necessary, the states propose a cost of service analysis which will be conducted by the state to determine the cost of supply and arising electricity subsidies for each state.

“Where electricity subsidies continue to be implemented as a specific policy of the Federal Government, it must provide funding for the subsidies before implementation.”

In addition, they noted that the method, and criteria for the application of electricity subsidies by the Federal Government should be transparent and precise with clear regulatory framework to determine the extent of subsidies required and category(ies) of consumers that would be eligible to receive electricity subsidies.

“The FMoP and NERC should also ensure that there should be no discrimination in implementing electricity subsidies, against states and regions, especially states and regions with more efficient electricity markets.

“It should also be noted that continuing electricity subsidies may undermine the viability and sustainability of state electricity markets.

“Thus, the Federal Government and states should collaborate in determining how any subsidy by the Federal Government is applied within a state electricity market. In this regard, the states propose a joint framework with the Federal Government for administering future electricity subsidies in a state electricity market,” the NGF stated.

On February 14, 2024, The PUNCH reported that the Federal Government raised the alarm of the rise in electricity subsidy.

In the report, the Minister of Power, Adebayo Adelabu, revealed that subsidy on electricity for 2024 would gulp about N3tn, whereas only N450bn was budgeted for this purpose in this year’s budget, adding that it was now very difficult to sustain power subsidy.

“What we have made provision for in the 2024 budget for subsidy is N450bn and we will require N2.9tn for subsidy. So can we afford it? We must be realistic. Can we afford it?

“N450bn is less than 20 per cent of the about N3tn that is required for subsidy if we must continue at the current price (for electricity). So these are things that we need to decide on as a nation,” Adelabu had stated.

Electricity tariffs

They stated that “it should be recognised that states will implement different end-user tariff methodologies within their

markets according to the state electricity policies and strategic implementation plans, viability and market sustainability requirement and peculiar socio-economic characteristics in states.”

They, however, recommended that electricity tariffs should be both efficient and cost-reflective across the federation.

“States urge the Federal Government to revert to the 2001 Electric Policy recommendation (chapter 6, pg. 37) on

electricity tariffs regulation. The National Assembly and the Federal Government should allow NERC to independently carry out its regulatory functions of determining, approving, and implementing economic wholesale tariffs at the appropriate time, and not (politically) intervene in the tariff setting process.

“In determining wholesale tariffs, NERC must also adhere to its regulations/rules for tariff approvals and reviews, including the need to transparently hold consultative public hearings and mandatorily consult with SERCs on wholesale tariff methodologies and tariff proposals by Licensees of the commission,” the NGF stated.

The states said the Federal Government should continue settling the N4tn legacy debts in the power market.

“States recommend that existing market debt (arising from a combination of unfunded electricity subsidies, legacy debts, payment shortfalls, and interest penalties and Central Bank of Nigeria debt) and tariff shortfalls, which are more than N4 trillion, should continue to be borne by the Federal Government as the market liabilities were created by the Federal Government under a single electricity market in NESI.

“The debts should not be passed onto State Electricity Markets as it would make State Electricity Markets unviable. In this regard, states recommend that the Federal Government should restructure retail electricity tariffs to remove such market debts and tariff shortfalls on end-user electricity tariffs.

“States will also not bear any market liability of successor Discos that was  incurred inefficiently,” the governors stated in their document.

On April 23, 2024, The PUNCH reported that NERC transferred its regulatory oversight of the electricity market in Enugu and Ekiti states to the governments of both states.

It disclosed this in separate orders issued by the commission, stating that the regulatory oversight of NERC in Enugu State has been transferred to the Enugu State Electricity Regulatory Commission.

Also, the commission’s regulatory oversight in Ekiti State has been transferred to the Ekiti State Electricity Regulatory Bureau.

The commission exercises regulatory oversight of the Nigerian Electricity Supply Industry as the apex sectoral regulator in accordance with powers conferred by the Electricity Act 2023.

The electricity market in Nigeria was previously centralised and the move to decentralisation was achieved when presidential assent was granted to the amendment of relevant portions of the Constitution of the Federal Republic of Nigeria on March 17, 2023.

Paragraph 14{b) Part ll of the Second Schedule to the 1999 Constitution provides that “a House of Assembly may make laws for the State with respect fo generation, transmission, and distribution of electricity to areas not covered by a national grid system within that State.”

But this was amended to “a House of Assembly may make laws for the State with respect to generation, transmission, and distribution of electricity to areas within that State.”

This amendment granted legislative autonomy to federating states in the Federal Republic of Nigeria by empowering the sub-national governments to legislate on the generation, transmission and distribution of electricity within each respective state.

Section 2(2) of the EA, takes due legislative cognisance of the powers conferred on the federating states with the amendment to Paragraph 14{b) Part Il of the Second Schedule to the 1999 Constitution.

State electricity laws

The NGF document also said states electricity laws have now come into existence, giving state authorities powers to develop legal, policy and regulatory frameworks over electricity matters within their states.

“However, the provisions of state electricity laws do not cover the operation and regulation of the national grid within their territories, or interstate electricity operations. Several states have already enacted their electricity laws,” the NGF stated.

It recommended that “the Federal Government should, pursuant to the EA, do all in its powers to support any state that wishes to enact its own electricity law, adding that “once a state meets all the requirements, the NERC should issue the necessary Transition Order and provide relevant support to states in this regard.”

The states reiterated that the multi-tier legal and regulatory environment is normal under a federation such as Nigeria.

They said, “Different states are at liberty to make electricity laws that would boost electricity access within their territories. States electricity laws are not in conflict with the EA 2023, provided the provisions of the state law apply solely within the state territory and do not cover national grid operations.”

They also stated that “the National Assembly is urged and encouraged to reject all requests for amendment of the EA 2023 that would create conflicts of law between the EA 2023 and a State Electricity Law or invalidate the provisions of a State Electricity Law.”

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