Exploring How Electricity Tariff in Nigeria Can be Reduced, Probably (Pt I)

Is it possible for reliable power supply to be an unwelcome development?

For energy consumers in Nigeria, particularly those in Band A who pay a cost-reflective tariff, it may seem so. This is because the cost-reflective tariff is widely perceived as expensive.

Let me explain what a cost-reflective tariff is.

“A cost-reflective tariff is one which reflects the true cost of supplying electricity and removes the reliance on State Government subsidies to cover the variance between the current tariff and the true cost of supply of electricity.”(Source: What is cost-reflective pricing?)

In clearer terms, a cost-reflective tariff means that the costs associated with generating, transmitting, and distributing electricity—as well as a profit margin—are fully borne by the consumer. Zero government subsidy.?

On a granular level, what this tells us is that every link in the electricity value chain influences the final price paid by consumers. So, with rising costs of electricity and cost of living generally speaking, the pressing question, which this article intends to answer, becomes: How can electricity prices in Nigeria be reduced and made more affordable for all consumers?

Finding an answer to this question becomes even more pressing when you consider that the Federal Government of Nigeria plans to convert the entire power sector into a single band in 3 years by effecting a cost-reflective tariff for every consumer who has access to on-grid electricity. If this cost-reflective tariff remains expensive when this happens, then we can expect more people to fall into energy poverty.

In this article, I propose three (3) relatively non-capital-intensive approaches to reducing electricity costs: Community Energy, Education and Circular Economy. I discuss the first two in this post, as they are the low-hanging fruits. In the second part of this article, I will discuss how? Circular Economy can be applied.

Before I proceed, I would like to make a disclaimer by borrowing Milika Mushota AMEI 's words partly: By no means are the submissions in this article definitive or non-retractable. So I welcome criticisms. I welcome a good discussion.

Let’s proceed

Reducing Electricity Costs by Leveraging Community Energy Projects

Community energy projects involve groups of people coming together to purchase, manage, generate, or reduce consumption of energy (Gov.UK). These projects operate independent of the central national grid and are usually owned or managed by local communities, individuals or private entities.?

Because they are decentralised, they do not add to the operational or running cost of the national grid.?

Now that local governments in Nigeria have financial autonomy, I propose that community energy projects should be something they execute or fund—especially in rural areas, where most communities are not connected to the national grid.

Communities connected to the national grid can also benefit greatly from community energy projects.?

Imagine you live in an estate with solar or mini-grid systems that supply power to every house. As a homeowner in such an estate, you will enjoy a more reliable power supply, won’t have to bear the cost of setting up and servicing a solar system alone, and will save money by not having to buy fuel to power your generator.?

Admittedly, community energy projects cost money to develop. But because most community energy projects are powered by renewable energy and “renewables are by far the cheapest form of power” (Francesco La Camera, Director-General of IRENA), they reduce electricity costs when successfully implemented.?

Community energy would also reduce transmission losses since the energy is consumed close to the point of generation.

In January and February alone, 4,724MWs of generated electricity was stranded. To put this in context, assuming each household in Nigeria consumes about 1,500 kWh annually, 4,724MW will power over 27.5 million homes in a year (I will show workings in the comment section). Although the electricity didn’t get to homes, it cost money to generate it and that cost is factored into the cost-reflective tariff.?

Nigeria’s power sector policy encourages community energy projects with the recent enactment of the Electricity Act 2023.?

A core objective of the Electricity Act, 2023 (the “Act”) is to provide a holistic integrated policy plan that recognizes all sources for the generation, transmission, and distribution of electricity, including the integration of renewable energy into Nigeria’s energy mix (A Review of the Electricity Act, 2023)

If you are an entrepreneur and you have the means, do you think collaborating with real estate companies to set up community energy projects in their estates could be a business opportunity for you?

Education

How we use energy is often a reflection of how knowledgeable we are about energy. By teaching consumers how to use energy more efficiently, we can reduce energy demand, reduce the strain on the grid and even help more people have access to energy.?

Energy waste among consumers is common, and I would say this is mostly due to lack of education on how certain behaviours are wasteful and inconsiderate. For example, using inefficient appliances, not turning off electrical appliances when not in use, turning on the AC for the room to cool before you come in, using the microwave to defrost food when you should have brought it out earlier to defrost, etc., contribute significantly to energy waste at home and in the office.

I believe energy education should be a collaborative effort, not solely the government's responsibility- though they can certainly take the lead. I recognize that some effort is already being made to educate the public, and that is applaudable. (I posted about the webinar organised by the office of the Ministry of Petroleum Resources (Gas) I joined online a few months ago here). But I think there is still a lot that needs to be done.

As an individual, if you see someone wasting energy, correct the person politely, even if you are not the one paying the energy bills. Being able to afford electricity does not give anyone the right to waste it.

Conclusion

The first attempt I made at writing this piece on how Nigeria’s electricity costs can be reduced focused only on consumers. However, a friend pointed out that there is only so much consumers can do to lower their tariffs, and I agree. No matter how energy-conservative consumers become, if the electricity tariffs are high, people will still pay a premium to access energy.?

This revised version has taken a look at things holistically by i.) recognising that the entire value chain of the Nigerian power sector faces significant challenges and ii.) proposing solutions that can mitigate the challenges at several stages. Community energy projects can help alleviate challenges at the generation, transmission, and distribution stages, while education can address issues at the consumption stage. The exciting thing about both solutions? They are relatively cheap to implement and are not government-dependent.

If you were asked how Nigeria's electricity tariff can be reduced, what solutions would you propose?

Exploring How Electricity Tariff in Nigeria Can be Reduced, Probably (Pt 2)- Snippet

Reducing Electricity Costs by Applying the Principles of Circular Economy (CE)

If you are not familiar with the concept, Circular Economy, welcome to class.

Oxford Languages defines a Circular or Closed-loop Economy as “an economic system based on the reuse and regeneration of materials or products, especially as a means of continuing production in a sustainable or environmentally friendly way”.

The summary of the gospel Circular Economy preaches is that of creating sustainable production through waste minimisation.

TBC...