States face subsidy burden as Lagos leads with $10b deal, legislation

•  Tariff implementation, N2.4trillion subsidy burden threatens Electricity Act
•  Lagos faces 8,000MW electricity shortfall
•  NSERC’s bilateral market remains elusive, NBET maintains reign in the market

Lagos and over 10 states pushing to realise the opportunities in the Electricity Act that enables sub-national governments to generate and distribute electricity may face the transfer of the burden of electricity subsidies as cost-reflective tariffs may remain a mirage in Nigeria’s domestic customers dominated by electricity markets.

With subsidies growing by N260 billion monthly and reaching about N1.9 trillion as of November, most states like Lagos, Oyo, Edo, Kogi and Enugu that are taking over the regulation of their respective territories may need to work out a cost-reflective tariff or face the burden of carrying subsidies for the masses within their states.

This comes as the bills being charged on band A customers continue to unsettle a lot of homes and institutions. For the states to thrive, they may need to expand the tariff across the board to avoid bearing tariff shortfall.

The development could be worsened by the weak capacity of domestic customers to pay amidst poor payment structures, irregular dispatch and lack of access to foreign exchange (FX) windows.

Lagos, Nigeria’s commercial hub, whose electricity bill is progressing at the State House of Assembly has a demand of about 12,000 megawatts (MW) of electricity. That is about 90 per cent of the current national installed 13,000MW capacity.

Last year, Lagos said about $10 billion would be invested through the private sector for electricity generation. Some days ago, the state invited bids for the construction of up to 4,000 MW gas-fired power plants.

Governor of Lagos, Babajide Sanwo-Olu said: “We’re trying to grow our power requirement and based on the energy needs, it will be about 10,000 to 12,000 megawatts of power. So it could be an investment opportunity of up to $10 billion. So, we are going to put that in front of investors.”

The current 4,000MW being targeted by the government is only 13.33 per cent of the actual needs of the commercial city.

The economic cost of power shortages in Nigeria according to the World Bank stands at about $28 billion yearly. That is about two per cent of the gross domestic product (GDP) and almost all of the proposed 2025 budget which is $28.18 billion.

Currently, energy demand, especially the load only from the grid peaks at about 6 to 9pm, implying that most electricity users in Nigeria are domestic as commercial customers source alternative energy because of the reliability issue with the grid.

The Nigerian Electricity Regulatory Commission (NERC), which has planned to implement the other segments of the Electricity Act, especially in ushering in a bilateral trading market has also been held by multiple issues with the Transmission Company of Nigeria (TCN) and Nigerian Bulk Electricity Trading Company (NBET), whose license has expired but remained in market awaiting a decision from the regulator.

Executive Secretary of the Association of Power Generation Companies, Dr Joy Ogaji, emphasised the need for states to tread carefully, stressing that “states must focus on creating an enabling environment rather than an enabling one”.

Ogaji noted that for states to attract power generation companies, they must implement investor-friendly policies, bankable off-takers and apolitical laws.

Drawing from challenges GenCOs have faced in the federal market since 2013 – including poor payment structures, irregular dispatch and lack of access to dedicated foreign exchange windows, Ogaji stressed the importance of clear financial security for investments.

“States that prioritise bankable guarantees, knowledgeable regulators and sustainable policies will be the ones to attract GenCOs and other investors,” she said.

Energy analyst Lanre Elatuyi said the significant hurdles that could impede states success in attracting investors and managing operations effectively remained subsidy.

“One major challenge is how states will regulate distribution tariffs without bearing the burden of subsidies,” Elatuyi explained.

“It will be difficult to implement cost-reflective tariffs for end-users in states without facing resistance or financial strain,” he said.

He noted that some states have invited potential investors to build power plants but without offering guarantees to support the projects.

“The bankability of these projects is in question. Without guarantees from the states, it will be a tough sell to investors,” he added.

Elatuyi also pointed out ambiguities in the Act regarding state participation in the competitive wholesale market.

“For now, states will still operate within the wholesale market regulated by NERC. In reality, they won’t have true state electricity markets as envisioned.”

Executive Director of Power Up Initiative, Adetayo Adegbemle, doubted the willingness and commitment of states to charge cost-reflective tariffs.

“It will be too heavy on their expenditures; these are states that are presently owing DisCos billions of naira for their consumption. This is part of the challenges we have envisaged, and none of the 10 States that have domesticated the Electricity Act has shown or displayed any capacity to answer that riddle,” he said.

The Lagos State House of Assembly has passed the Lagos Electricity Bill 2024 to establish an independent electricity market and regulatory framework, replacing the 2018 law. While promising a competitive market and renewable energy initiatives, experts warn that outdated infrastructure and unclear policies could hinder its success.

The bill’s provisions include the establishment of regulatory bodies, such as the Lagos State Electricity Regulatory Commission and strategies for renewable energy development. It also mandates the development of a Lagos Integrated Electricity Policy and Strategic Implementation Plan within six months of its enactment to guide the state’s electricity market.

Also, Lagos’ electricity sector entities must obtain licences from the regulatory commission within three months, while existing distribution company assets will be transferred to subsidiaries under a transitional framework.

Experts welcomed the bill as a progressive initiative but raised concerns over its practical implementation.

Peter Oluseyi, a professor of electrical engineering at the University of Lagos, described the legislation as forward-thinking but warned about Lagos’ continued reliance on the outdated national grid. He noted that the absence of state-owned power facilities, such as generation and distribution infrastructure, indicates that Lagos will still depend on inadequate national infrastructure. Oluseyi also highlighted the prevalence of estimated billing, which undermines financial sustainability in the electricity sector, stressing the importance of comprehensive metering.

The National Institute for Legislative and Democratic Studies (NILDS), in a review obtained by The Guardian, pointed out that the bill’s proposed commercial framework lacks clarity. It noted that a truly competitive electricity market requires cost-reflective tariffs, which must account for all factors contributing to electricity supply costs.

However, given the prevailing economic conditions, such tariffs could pose affordability challenges for Lagos residents. The institute also observed that implementing the bill would require substantial investments in infrastructure, technology, and human resources, alongside a significant restructuring of existing frameworks.

CEO of the Association of Nigerian Electricity Distributors (ANED), Sunday Oduntan, praised the bill as a step in the right direction, stating that it positions Lagos to regulate electricity generation, transmission, and distribution, ultimately increasing power availability.

However, he stressed that legislation alone would not resolve the sector’s challenges, underscoring the need for a conducive environment to attract investments and ensure investors can recoup their costs. Oduntan also acknowledged the likelihood of future amendments to address gaps in the bill, adding that effective implementation remains crucial to achieving a consistent electricity supply.

Another concern raised by experts is the potential for regulatory conflicts. NILDS flagged the possibility of overlaps between the proposed Lagos electricity market and the licences held by existing distribution companies, notably Eko and Ikeja DisCos. It recommended a clearer framework to ensure alignment and avoid encroachments on existing operations.

The Director of the Centre for Petroleum, Energy Economics and Law at the University of Ibadan, Prof. Adeola Adenikinju, emphasised the importance of collaboration between the legislature and executive to resolve contradictions in the bill’s implementation.

The bill includes provisions for renewable energy development, requiring electricity-generating plants to transition to gas or renewable energy sources within 24 months. It also mandates creating a renewable energy, energy efficiency, and demand side management strategy within 18 months.

However, Oluseyi criticised the lack of emphasis on waste-to-energy programmes and solar thermal systems, which could provide alternative energy options and reduce reliance on traditional electricity sources. He cited examples from other African countries like Ghana and Uganda, where such systems are used to lower electricity consumption in heating applications.

Despite these criticisms, stakeholders see the bill as vital to addressing Lagos’ energy challenges.

Oduntan expressed confidence in the state’s ability to attract foreign direct investment, attributing this to Lagos’ favourable investment climate. However, he cautioned that end users must be prepared for the realities of pricing, given the high costs associated with electricity production.

The NILDS review also acknowledged the bill’s potential to deepen economic development and enhance energy sustainability. It recommended that Lagos State conduct detailed technical and commercial feasibility studies to prepare for full implementation. Additionally, the institute urged the state to appraise its electricity market and network infrastructure comprehensively to address existing gaps.

Oluseyi called for a clear framework to harmonise the roles of Lagos’ proposed regulatory bodies with those of national authorities to avoid jurisdictional conflicts. He also recommended prioritising the construction of state-owned power facilities to reduce dependence on the national grid.

Looking ahead, experts agree that the success of the Lagos Electricity Bill 2024 will hinge on effective implementation, stakeholder collaboration, and significant investment in infrastructure and technology.

Meanwhile, stakeholders called on the Lagos State Government to address the growing metering gap in the state, which has left over 600,000 electricity consumers without prepaid meters.

The metering deficit, they argue, continues to fuel estimated billing practices, and undermines efforts to improve transparency and efficiency in power distribution.

The bill will establish the Lagos State Electricity Regulatory Commission to superintend over the legal, commercial and administrative framework of the State electricity market.

The functions and powers of the Commission in the proposed Bill include the grant, renewal, modification, withdrawal, suspension, cancellation, termination or revocation of licenses and permits for the generation, transmission and distribution of power.

Already in Lagos State the metering gap according to the second quarter 2024 report of the Nigerian Electricity Regulatory Commission (NERC). is over 600, 000 as Eko Electricity Distribution Company has registered customers of 773,171 and metered customers of 438,462 with a gap of 334,709 customers unmetered while Ikeja Electric (IE) has total registered customers of 1,208,581 and metered customers of 926,272 with a gap of 282,309 unmetered customers leaving the total unmetered customers in Lagos at 617,018.

Experts note that as the country’s commercial hub, bridging the gap will not only enhance consumer satisfaction but also boost revenue collection for electricity distribution companies.

They stressed that with over 20 million Lagosians, the number of registered customers is too small and there is a need for the bill to address it and improve the metering rate.

They suggest that the Lagos Electricity Bill, currently under consideration, should incorporate provisions to incentivise metering initiatives, enforce compliance from power distributors, and prioritize equitable access to metering devices across the state.
Stakeholders, however, emphasised that the state has an opportunity to lead by example in addressing the metering crisis and setting the pace for other States to follow.

Adegbemle mentioned that with the expression of Interest (EOI) by the State, there is no sign of metering, noting that there is no point committing huge resources to power generation and measures on what gets to end consumers is not included.

“So, if the EOI says power generation, they are not talking about how to close over the metering gap, or how to take care of the metering end of the investment, then they should start thinking about it now, but apart from that, there is nothing else that tells us what Lagos state is thinking about,” he said.

Adegbemle stressed that Lagos needs to come up with policies or ideas on how to close the metering gap, and emphasised how the states are planning on how to use the power it would generate.

He added that if metering is included, there is no action yet towards resolving the issue of metering gap which is germane and important.

“Edo state is taking a different route, Enugu has done the mainland, taking all their resources away from Enugu Disco and launching mainland electricity. So, until we see the act or the bill, then we can speak to the details or the implementation of the thing. For now, we don’t have any indication. It’s good to lay this foundation because now we have seen the EOI for energy generation, but we have not seen that there is a need to evacuate. Let us assume that all the EOI that they did is working tomorrow morning, they need to evacuate the energy, they need to distribute it, and they need to account for the energy along the line, which needs metering. So, all this is a resource plan that should be put into consideration, even before anybody does anything,” he added.

National Coordinator of All Electricity Consumers Protection Forum (AECPF), Adeola Samuel-Ilori, mentioned that the bill if well implemented would be applauded as it has lingered for over six years.

He stressed that with the over 600,000 metering gaps in the state, the bill would bring in completion as Eko DisCo and Ikeja Electric need the competition to improve in their operations.