By Yange Ikyaa
There have been media reports in recent times that the Federal Government of Nigeria is planning to end subsidies on electricity in the country.
Energy subsidies are measures that keep prices for customers below market levels, or for suppliers above market levels, or reduce costs for customers and suppliers. They may be direct cash transfers to suppliers, customers, or related bodies, as well as indirect support mechanisms, such as tax exemptions and rebates, price controls, trade restrictions, and strategic limits on market access.
However, if such reports of planned subsidy abolition in Nigeria are anything to go by, this will certainly represent a drastic policy shift from the decades-long practice of government spending on making cheaper electrical energy available to Nigerian citizens. But what has informed this swift policy shift on electricity supply in Nigeria?
According to findings by Valuechain, the abolition of subsidy payments by government on electricity is intended to tackle economic challenges, such as the monumental electricity subsidy debt which continues to perennially eat a dip hole into the government’s pocket. It is also expected that reforming the energy sector and improving fiscal sustainability in Nigeria could encourage private investments into the nation’s electricity sector.
Industry data show that the government of Nigeria at different tiers has continued to contend with huge debts to electricity generating companies. These debts have been estimated at more than NN1.3 trillion ($870 million), while the electricity subsidy budget for the year 2024 was set at N450 billion ($30 million), which is much below the N2 billion ($1.3 billion) needed to close the gap. In addition, the Nigerian government is also said to owe $1.3 billion to different gas companies around the country. This is because the government covers the gap between the cost-reflective tariffs and the actual end-user tariffs payable by customers, representing about 11% of the final cost.
According to Nigerian Electricity Regulatory Commission (NERC), generation costs represented 49% of end-use tariffs in 2022, followed by distribution costs (24%), efficiency losses (18%), and transmission costs (18%).
The International Renewable Energy Agency tracked some $634 billion in energy-sector subsidies in 2020, and found that around 70% were fossil fuel subsidies, about 20% went to renewable power generation, 6% to biofuels, and just over 3% to nuclear energy production.
The main arguments for energy subsidies include security of supply, where subsidies are used to ensure adequate domestic supply by supporting indigenous fuel production in order to reduce import dependency, or supporting overseas activities of national energy companies, or to secure the electricity grid.
Another argument for it is environmental and health improvement, where subsidies are used to improve health by reducing air pollution, and to fulfill international climate pledges. For example, the International Energy Administration (IEA) maintains that the purchase price of heat pumps should be subsidized.
Yet others support subsidies for economic benefits, insisting that subsidies in the form of reduced prices are used to stimulate particular economic sectors or segments of the population, such as in alleviating poverty and increasing access to energy in developing countries.
With regards to fossil fuel prices in particular, Ian Parry, the lead author of a 2021 IMF report, said that “some countries are reluctant to raise energy prices because they think it will harm the poor. But holding down fossil fuel prices is a highly inefficient way to help the poor, because most of the benefits accrue to wealthier households. It would be better to target resources towards helping poor and vulnerable people directly.”
Furthermore, there are those who still believe that subsidies come with employment and social benefits, where they are used to maintain employment, especially in periods of economic transition.
In 2021, with regards to fossil fuel prices in particular, Ipek Gençsü, at the Overseas Development Institute, said that “subsidy reform requires support for vulnerable consumers who will be impacted by rising costs, as well for workers in industries which simply have to shut down.
“It also requires information campaigns, showing how the savings will be redistributed to society in the form of healthcare, education and other social services. Many people oppose subsidy reform because they see it solely as governments taking something away, and not giving back.”
But there are also those who oppose subsidies and their main arguments against energy subsidies are that some energy subsidies, such as fossil fuel subsidies, counter the goal of sustainable development, as they may lead to higher consumption and waste, exacerbating the harmful effects of energy use on the environment, or creating a heavy burden on government finances and weakening the potential for economies to grow by undermining private and public investment in the energy sector.
The opponents of energy subsidies have also argued that, most benefits from fossil fuel subsidies in developing countries go to the richest 20% of households, yet fossil fuels are very critical in the production of electricity worldwide.
Again energy subsidies are accused of impeding the expansion of distribution networks and the development of more environmentally benign energy technologies, and do not always help the people that need them most.
A study conducted by the World Bank finds that subsidies to the large commercial businesses that dominate the energy sector are not justified. However, some experts have insisted that under some circumstances, it is reasonable to use subsidies to promote access to energy for the poorest households in developing countries. Although they further argued that energy subsidies should encourage access to modern energy sources, but not to cover operating costs of companies. Another study conducted by the World Resources Institute found that energy subsidies often go to capital intensive projects at the expense of smaller or distributed alternatives.
The Energy Information Administration (EIA), an independent agency of the U.S. Department of Energy, evaluated the amount of subsidies that the federal government provides energy producers for fiscal years 2016 through 2022, in its report on Federal Financial Interventions and Subsidies in Energy, updating its previous subsidy reports.
According to that report, federal subsidies to support renewable energy formed nearly half of all federal energy-related support between fiscal years 2016 and 2022, while traditional fuels (coal, natural gas, oil and nuclear) received just 15 per cent of all subsidies between 2016 and 2022, with renewables, conservation and end use receiving a whopping 85 per cent.
Renewable subsidies more than doubled between 2016 and 2022, increasing to $15.6 billion in fiscal year 2022 from $7.4 billion in fiscal year 2016. Federal subsidies and incentives to support renewable energy in fiscal year 2022 were almost 5 times higher than those for fossil energy, which totaled $3.2 billion in subsidies. The subsidies in EIA’s report do not include state and local subsidies, mandates or incentives that in many cases are quite substantial, especially for renewable energy sources.
EIA also did not include the massive subsidies authorized in the Inflation Reduction Act (IRA) since it was passed in August 2022. Goldman Sachs has estimated the costs of that bill at $1.2 trillion.
Overall, it could be said that energy subsidies require coordination and integrated implementation, especially in light of globalization and increased interconnectedness of energy policies, thus, their regulation at the World Trade Organization is often seen as necessary.