CPPE: Absence of Cost Reflective Electricity Tariff Will Entrench Subsidy, Transfer Liabilities to FG’s Balance Sheet
Dike Onwuamaeze
As the liabilities of the power sector amounts to N4 trillion, the Centre for the Promotion of Private Enterprise CPPE, has declared the inability of the federal government to implement a fully cost-reflective tariff regime for the sector would entrench subsidy and transferring of inefficiencies and revenue shortfalls to government’s sheet.
The CPPE made this declaration yesterday in its policy brief captioned “Nigeria Power Sector Reform: Managing Complexity, Liquidity, and Political Economy Constraints.”
The Chief Executive Officer of CPPE, Dr. Muda Yusuf, pointed out in the policy brief that Nigeria’s power sector has remained one of the most challenging areas of the country’s economic reform agenda and has continued to face deep structural, financial, and governance challenges despite multiple reform efforts over the years.
Yusuf said that the power sector’s challenges are multi-dimensional and include political economy constraints, tariff distortions, weak investor capacity, transmission bottlenecks as well as a persistent liquidity crisis across the value chain.
He said: “The inability to implement a fully cost-reflective tariff regime, largely due to social and political sensitivities following recent macroeconomic reforms, has entrenched subsidy dependence and widened the sector’s financing gap.
“As a result, government intervention has become unavoidable in the short term to prevent system collapse and sustain electricity supply.
“However, the current trajectory, characterised by rising sector debt currently at about ₦4 trillion, is fiscally unsustainable without deeper structural corrections, improved transparency, and gradual but credible reform implementation.”
He said that a major constraint to power sector reform is the difficulty of establishing a fully cost-reflective tariff regime.
“Electricity tariffs remain capped, largely due to concerns over affordability and the social impact of reforms on households and businesses.
“However, without cost-reflective pricing, the sector will be unable to generate sufficient liquidity to sustain operations or attract new investment.
“The resulting subsidy burden has forced government to repeatedly intervene financially, effectively transferring inefficiencies and revenue shortfalls onto the public balance sheet,” he said.
Yusuf said that the government’s intervention to bridge the sector’s financing gap has become inevitable in the short term given the scale and urgency of the crisis at hand.
He also said that government’s recent actions, including bond issuances to settle outstanding obligations, particularly to gas suppliers and power generating companies (GENCOs), are aimed at preventing a breakdown of the electricity supply system.
The CPPE also observed that the retention of the Transmission Company of Nigeria (TCN) under full government ownership has been associated with operational inefficiencies, inadequate investment, and slow network expansion.
“Transmission remains a key bottleneck, constraining generation capacity utilisation and reducing system reliability.
“Weaknesses in this segment further exacerbate liquidity and service delivery challenges across the value chain,” Yusuf said.
He said that although the power sector reform has long been recognised as central to Nigeria’s economic competitiveness, industrial growth, and social welfare, its progress has been slow and uneven.
He added that the power sector presented a unique challenge due to the tightly interconnected nature of its value chain where weaknesses in one segment could undermine the entire system.
“The power sector operates as a tightly linked chain. Financial distress in one segment quickly transmits to others.
“Currently, the GENCOs struggle to pay gas suppliers; the distribution companies (DISCOs) are unable to generate sufficient revenues to meet obligations to GENCOs and the transmission infrastructure suffers from underinvestment and governance challenges
“These conditions have entrenched a systemic liquidity crisis, undermining sector confidence and sustainability,” he said.
The CPPE said that there is a strong case for phased and incremental reform because a rapid transition to full subsidy removal might be politically unrealistic.
It therefore advised the government to implement a phased and predictable transition toward cost-reflective pricing, with targeted social protection for vulnerable consumers and explore alternative management or concession models for TCN to improve efficiency and investment.
“Power sector reform in Nigeria is a long-term and incremental process rather than a quick fix.
“The sector’s complexity, political economy constraints, and institutional weaknesses mean that progress will be gradual.
“However, without decisive action to address structural inefficiencies, improve governance, and ensure fiscal discipline, the current trajectory will remain unsustainable.
“Therefore, a balanced approach that combine short-term government support with medium to long-term structural reform is essential to building a financially viable, reliable, and inclusive power sector that can support Nigeria’s economic growth and development,” Yusuf said.
