NextierElectricity Subsidy Targeting for Nigeria’s Poor and Vulnerable
By Osayu Ogboghodo
The Harsh Reality: Electricity Subsidies in Nigeria
Subsidies are essential policy instruments adopted by the Nigerian government to achieve political, economic, social and environmental objectives. Depending on the political economy[1] landscape, subsidies are planned, prioritised and allocated to several sectors of the economy (including petroleum, electricity, security, agriculture, transportation, health, education, etc.) to achieve public good. However, these subsidies add to the fiscal burden on governments and create opportunity cost situations for other sectors that can also benefit the public. Moreover, some of these subsidies fail to reach their targets, the poorest and most vulnerable citizens.
Electricity subsidies in Nigeria can be categorised as producer and consumer subsidies. Producer subsidies support investor participation and increase electricity production and supply. Consumer subsidies support the consumption of electricity through price reductions in the sale of electricity. Both subsidies can be financed directly or indirectly[2] by the government, utility companies or the consumer.
Over the years, the Federal Government of Nigeria (FGN) has provided producer subsidies (including bailouts) to improve the financial situation of the power sector. Consumer subsidies have also been provided through subsidised tariffs. The most recent tranche of intervention funds (₦600 billion) in 2019 implies the Federal Government has spent about ₦1.5 trillion on subsidies since privatisation.
Liquidity problems linger despite the expensive subsidies through bailouts and intervention funds. These subsidies will continue except the government is willing to implement cost-reflective tariffs and turn-around the situation of the electricity market through policy and regulatory oversight.
Figure 1: Connection to the grid and beneficiaries from subsidies in Nigeria based on income quintile[3] (Data was sourced from The World Bank)
Above all, electricity subsidies do not effectively protect, target and benefit low-income consumers. Many low-income households are not connected to the grid, and electricity subsidies wrongly targeted to benefit high-income households. The irony. Many of these high-income households are connected to the grid and consume more electricity. As a result, about 60 percent of the subsidy benefits the richest 20 percent of the population, and 2 percent benefits the poorest 20 percent[4].
A Missed Opportunity: The Power Consumer Assistance Fund (PCAF)
Under sections 83-87 of the Electric Power Sector Reform Act (EPSRA), the Nigerian Electricity Regulatory Commission (NERC) is required to establish a Power Consumer Assistance Fund (PCAF). The objective of the PCAF is to subsidise lifeline/low-income consumers. Government grants and cross-subsidies (from high-income electricity consumers) are channelled to support low-income electricity consumers. The regulator is also required to take into account subsidies from the PCAF, or any other source when designing consumer tariffs. This regulatory action ensures that the subsidies reach their targeted beneficiaries.
Sometime in April 2020, a concerned citizen and electricity consumer posted a video that went viral. She complained about the poor electricity supply to Nigerians during the ongoing lockdown caused by COVID-19. In response, the Speaker of Nigeria’s House of Representatives met with the Minister of Power, National Electricity Regulatory Commission (NERC) representative and other stakeholders to find a solution to the insufficient electricity supply during the lockdown.
Subsequently, a plan to provide free and reliable electricity to Nigerians for two months was considered. However, there were concerns the free electricity would not get to targeted beneficiaries – the poorest and most vulnerable citizens. It was during these deliberations that the PCAF was revisited. Again, it was quickly realised that the PCAF has been non-existent since the establishment of the EPSRA in 2005. There were plans to establish and implement the fund in 2012, but it never happened. Suffice to say that the PCAF, if fully operational, would have been useful during the lockdown phase of the pandemic to aid the “free electricity” plan. The plan was estimated to cost the Federal Government ₦110 billion.
Hitting the Bullseye: What Can Nigeria Learn from India?
Design a Comprehensive Tariff System
Like Nigeria (before the recent tariff review[5]), most states in India use Inclining or Increasing Block Tariffs (IBT). Under the IBT, the unit cost of electricity consumption increases with additional electricity usage. Tariffs are subsidised at lower rates for initial electricity consumption and higher rates for additional consumption blocks. All consumer classes benefit from the subsidies on their initial consumption block. A Portion of their tariff bands is subsidised.
Volume-Differentiated Tariffs (VDT) are also adopted in a few states to reduce subsidy costs. Here, there are no consumption blocks with subsidised and higher rates. Consumers pay a single rate for their total consumption. This tariff arrangement often results in the rich paying more and the poor paying less. Moreover, only consumers in a particular tariff band can benefit from subsidies. VDT is useful for targeted subsidies when poor consumers are appropriately identified. Otherwise, low-consumption consumers can easily be mistaken for poor consumers.
Nigeria now adopts a similar tariff structure to VDTs. The new service-reflective tariffs allow consumers to pay for electricity based on how long they receive electricity daily. Consumers have also been divided into tariff bands that commensurate the quality of services offered.
Improve Electricity Access
India is home to over 1.3 billion people. Of this number, 95 percent of Indians have access to electricity. This situation was not always the case. In 2001, India had about the same electricity access rate (55.8 percent) as present-day Nigeria (56.5 percent), but nine times the population[6]. How did India turn its fortune around? Well, the country was aggressive in providing electricity to low-income consumers. India also targeted subsidies at the poor.
Identify the Poor
For a country with so many people, how were below the poverty line (BPL) and above poverty line (APL) consumers identified? The country identified BPL and APL through household surveys. Households were grouped based on income quintile and poverty rates[7] which varied for each state.
Connect and Subsidise the Poor
India’s 2005 rural electrification programme ensured that distribution companies expanded their franchise areas to include consumers without electricity access. The programme also aimed to improve revenue collection from beneficiaries by using Non-Governmental Organisations (NGOs) and consumer support groups. Several state governments provided targeted subsidies to the poor. The union government provided oversight of the programme. To date, free electricity connection and subsidised tariffs are provided to BPL consumers.
Acknowledge Underperforming Subsidies
India’s long-term plan for effective electricity subsidies met several difficulties. Electricity subsidies were regressive and underperforming. In the past, false identification of BPL consumers resulted in targeting subsidies at APL consumers. According to a World Bank study[8], 86 percent of subsidy payments were directed to APL households in 2010; 54 percent, directed to the richest 40 percent of the population. During the same period, the poorest 20 percent of India’s population accounted for 14 percent of subsidy payments.
Figure 3: Beneficiaries from subsidies in India and Nigeria based on income quintile
India’s tariff system was the main reason for the underperforming subsidies. Very few states use BPL tariffs. In most states, all consumer classes are beneficiaries since a portion of their tariffs is subsidised. Like Nigeria, richer consumers with electricity access are entitled to just as much, if not more, subsidies as poorer consumers. Many of these poor consumers are without access to electricity, and as such, unable to benefit from electricity subsidies.
Modify Subsidies to Improve Performance
Some states modified their subsidies to improve performance. They distributed subsidies to most BPL consumers. The direct subsidy costs were offset with cross-subsidies from APL consumers. This move was quite a simple approach to improve subsidy targeting and reduce subsidy cost. Nevertheless, it involved a rigorous process of identifying poor consumers (using socioeconomic indicators) and tariff adjustments.
Other states have also considered remodelling their tariffs to achieve high subsidy targeting and low subsidy cost. Some of these redesigns and adjustments include creating BPL or lifeline tariff bands and removing subsidies from other bands; reducing the range or limit of subsidised consumption blocks in IBTs, creating VDTs; direct cash transfers (in situations where tariff remodelling is challenging), and implementing prudent cross-subsidies.
Conclusion
Subsidy targeting schemes, like PCAF, can easily be implemented provided it is politically convenient for the Federal Government. However, this expediency presents a double-edged situation for the power sector. When poorly planned and implemented, it can add to the fiscal burden on the Federal Government and create opportunity cost situations for other sectors that can also benefit the public. When properly implemented, the Federal Government, vulnerable consumers and utility companies can benefit from better consumer targeting, reduced subsidy cost and other benefits.
India’s decade-long journey of providing subsidies to its citizens has provided a blueprint that can be adopted by Nigeria. Although India’s subsidy scheme met several challenges, it leveraged on the 2005 electrification programme to improve electricity access. In doing so, the programme created added opportunities to remodel tariff systems in many states, properly define poverty thresholds, connect and subsidise the poor consumers (mostly in rural areas) and modify underperforming subsidy schemes to improve performance.
As with India, reliable and affordable electricity to unserved and underserved Nigerian households[9] present opportunities for electrification programmes, tariff adjustments, effective subsidy schemes that can benefit the poor. Over time, the PCAF can be modified to reduce subsidy costs; improve targeting; promote energy efficiency, productive use and affordability of electricity; increase market revenue, and improve the viability of utility companies.
