Trillions in Debt: FG pulls plug on subsidy-heavy power market
CHIGOZIE AMADI
For decades, Nigeria maintained electricity tariffs below the actual cost of supply because the federal government regarded electricity as an essential service with significant social and political consequences.
This made it difficult for the sector to recover its costs and attract the necessary investment, leaving it largely dependent on government subsidies.
The federal government has now hinted at plans to stop treating electricity subsidies as an open-ended federal liability to reposition the industry, deepen liquidity, and position the power sector on a more sustainable financial path.
This was disclosed in a major policy shift announced by the Budget Office of the Federation in early February 2026 and, more recently, by the Special Adviser to the President on Power Infrastructure, Sadiq Wanka.
In a statement, the Director-General of the Budget Office of the Federation, Tanimu Yakubu, said,
“When tariffs are held below cost, a gap is created. That gap is a subsidy, and a subsidy is a bill.”
Currently, FG subsidy accounts for 51.95% of the total electricity bill, according to the Q1 2026 report of the Nigerian Electricity Regulatory Commission (NERC).
The accumulated shortfalls and unpaid FG subsidy from 2015 – 2024 resulted in the N4 trillion verified power sector debt being offset through a multi-stage settlement process under the Presidential Power Sector Debt Reduction Program.
Historically, electricity customers in Nigeria have never paid a cost-reflective tariff.
Therefore, the subsidy gap widened, and payment obligations accumulated.
Now, the FG is unwilling to continue on that perilous path and has announced a planned phase-out of electricity subsidies.
Back in December 1992, the FG established the Utilities Charges Commission (UCC) to regulate charges for public utilities, including electricity tariffs for the National Electric Power Authority (NEPA).
Then, electricity tariffs were not set to reflect the full cost of service because the FG funded NEPA as a social welfare service.
Even though it was a government-owned public utility expected to finance its operations through electricity revenue, the FG remained responsible for significant financial interventions, capital investment, and settlement obligations.
Following the enactment of the Electric Power Sector Reform Act (EPSRA) 2005, NEPA was restructured into the Power Holding Company of Nigeria (PHCN), whose successor companies were subsequently privatised and expected to operate commercially without relying on government budgetary allocations.
The EPSRA 2005 also established NERC and empowered it to regulate the electricity industry.
NERC introduced the Multi-Year Tariff Order (MYTO), using a building-block approach to determine electricity tariffs.
Under this approach, the costs of individual components of the electricity value chain, including gas supply, generation, transmission, and distribution, were considered to determine the tariff needed to enable cost recovery for electricity supply.
However, when the Multi-Year Tariff Order (MYTO) was introduced in July 2008 to establish cost-reflective tariffs, it was significantly higher than what consumers were used to paying.
Therefore, the federal government absorbed part of the difference through a subsidy that was intended to last for three years, from July 2008 to June 2011.
Subsidy was subsequently provided for another two years, from June 2012 to June 2014.
From 2015, subsidy obligations began to accumulate as unpaid liabilities, eventually contributing to the multi-trillion-naira debt crisis now confronting the power sector.
When MYTO was introduced in 2008, the FG subsidy was about 32% of the actual cost of electricity supply.
By Q1 2026, the subsidy component was 52% as tariffs allowed to electricity distribution companies remained insufficient to cover the full cost of electricity.
The FG’s latest response to the accumulated power sector debt through the N729 billion Series II bond issuance highlights how this open-ended subsidy regime leaves the FGN exposed to indeterminate subsidy obligations.
So, the FG is now moving to discontinue the subsidy-dependent model that created the sector’s accumulated debt crisis in the first place.
It has announced that as part of the gradual transition towards cost-reflective electricity tariffs, subsidy will be distributed across the three tiers of government, rather than being an exclusive federal government liability.
President Bola Tinubu has directed the Budget Office of the Federation to operationalise existing electricity laws and create a “practical, transparent and enforceable” sharing formula for electricity subsidy with proposed protections for vulnerable consumers under the Power Consumer Assistance Fund (PCAF).
What began as a temporary socio-political intervention became a permanent feature of the electricity market, accumulating into trillions of naira in debt.
Confronted with the consequences, the federal government is now moving away from its subsidy-dependent model and pursuing a gradual transition towards cost-reflective electricity tariffs.
