Policy Advisory: States Must Not Assume Federal Electricity Subsidy Liabilities
By Nick Agule
1. Introduction
Recent reports indicate that the Federal Government (FG) intends to allocate electricity subsidy obligations to state governments in the 2026 fiscal framework. The President has further directed Ministries, Departments, and Agencies (MDAs) to rely on existing legislation to facilitate a cost sharing arrangement among federal, state, and local governments.
This policy position asserts that state governments must reject any attempt to transfer electricity subsidy liabilities, as these obligations are the direct consequence of federal policy decisions and structural failures within the national electricity market.
2. Background: Federal Responsibility for the Subsidy Burden
The current electricity subsidy and debt overhang are products of the flawed 2013 privatisation exercise undertaken under the administration of President Goodluck Jonathan. That process entrenched systemic inefficiencies across the value chain and created the conditions for persistent liquidity shortfalls.
Rather than transferring the financial consequences of these failures to states, the FG must revisit and correct the structural defects of the privatisation framework.
3. Structural Inefficiencies Driving Sector Liquidity Challenges
Electricity consumers are not responsible for the liquidity crisis. Nigerians consistently demonstrate willingness to pay for reliable power, as evidenced by widespread reliance on expensive generators and solar alternatives. The real problem lies in inefficiencies across the generation, transmission, and distribution chain.
Illustrative Example of Systemic Losses
• Generation: 5,000 is generated but 1,500MW is stranded due to transmission constraints—yet still paid for under take or pay contracts (technical losses).
• Transmission: Of the 3,500MW that is injected in the grid, 1,000MW is lost to obsolete infrastructure; only 2,500MW reaches the market (technical losses).
• Distribution: Of the 2,500MW offered to DISCOs, 750MW is rejected by the DISCOs due to inadequate distribution capacity (technical losses). The claim that DISCOs reject power due to low demand is entirely misleading. Every household or business that has resorted to generators or solar systems represents unmet demand for public electricity – demand that DISCOs have failed to serve. Public grid power remains significantly cheaper than self generation, yet consumers are forced into costly alternatives because the distribution companies cannot deliver reliable supply.
• Billing: Of the 1,750MW accepted by the DISCOs, only 1,250MW is billed; 500MW is lost to theft or lack of metering (commercial losses).
• Collection: Of the 1,250 that is billed, only 800MW paid for; 450MW are customers who fail to pay their bills (collection losses).
Despite only 800MW being monetised, NBET is obligated to pay for the full 5,000MW. This is the root of the multi trillion naira debt now being shifted to states. States do not even have verified information on actual generation levels. Meanwhile, there is no independent confirmation that the so called 5,000MW was truly generated, raising legitimate concerns that these figures may be inflated or manipulated just to claim the subsidies – similar to past rent seeking practices seen in the petrol subsidy regime.
4. Federal Failures in Licensing and Infrastructure
Transmission
The Transmission Company of Nigeria (TCN) remains wholly federal owned despite lacking the capital required for grid modernisation. With a national budget of roughly $40 billion, the FG cannot fund the multi-billion-dollar upgrades required. Retaining exclusive federal control over transmission is therefore unjustifiable.
Distribution
The 11 Distribution Companies (DISCOs) were licensed without adequate financial, technical and managerial capacity. Their inability to invest in network expansion, metering, and loss reduction is the primary driver of commercial and collection losses. States cannot be held liable for the consequences of federal licensing decisions.
5. Debt Settlement Without Reform Is Unsustainable
Clearing accumulated debts without addressing structural inefficiencies will only perpetuate the cycle of losses. Subsidy obligations will continue to grow unless the underlying market design is corrected.
6. Misconceptions About Tariffs and Consumer Payments
Claims that Nigerian consumers underpay for electricity are inaccurate. Nigerian households pay more per unit relative to income than consumers in many advanced economies.
- Nigeria’s minimum wage buys ~335 units of electricity on band A.
- The UK’s minimum wage buys ~7,500 units.
Nigerians pay more for unreliable supply, not less.
7. Market Fragmentation Without Output Growth
Pre-privatisation, there was only 1 PHCN (NEPA). Post privatisation, the sector expanded from a single PHCN entity to:
- 33 GENCOs
- 11 DISCOs
- 1 TCN
- 1 NBET
Yet, national output has declined from 7,000MW pre-privatisation to ~5,000MW today. Consumers now bear the cost of 46 entities delivering less power than one unified utility once did. The FG continues to insist on cost-reflective tariffs, yet consumers are being compelled to pay significantly higher bills to cater for these 46 companies without any corresponding improvement in electricity supply. In effect, Nigerians are absorbing increased costs while receiving no additional power.
Banding of electricity tariffs is not a solution; it merely formalises inequity by pricing out low income consumers – the FG is basically saying electricity is not for the poor! – does that sound familiar to telephone until the sector was liberated? Electricity must equally be liberated!
8. Investment Requirements and Operator Capacity
Electricity infrastructure requires large scale capital investment. Global best practice relies on long term equity and debt financing, not internally generated revenues. Nigeria’s current operators lack the financial capacity to deliver the scale of investment required. Electricity needs premiership players (investors with deep pockets in billions of dollars) not Sunday Sunday football (who are waiting on tariffs to invest)!
9. Comparative Benchmark: The UAE Example
The UAE where the President recently returned from a business trip, with a population of 12 million, generates 45,000MW and produces a GDP of $570 billion.
Nigeria, with 240 million people, generates ~5,000MW and produces $285 billion.
Energy availability directly correlates with economic productivity. Nigeria cannot grow without fixing its power sector.
10. Policy Recommendations
A. Federal Government
- Revisit and correct the 2013 privatisation framework.
- Unbundle and liberalise TCN to attract private capital and improve grid capacity.
- Enforce performance standards for DISCOs or revoke non performing licences.
- End the practice of transferring federal liabilities to states.
B. State Governments
- Reject all attempts to impose federal electricity subsidy debts. States have not budgeted for this expenditure!
- Accelerate the establishment of state electricity markets under the Electricity Act 2023.
- Develop independent state level generation, transmission, and distribution frameworks to reduce reliance on the national grid.
11. Conclusion
The electricity subsidy burden is a direct consequence of federal policy failures, flawed privatisation, and persistent inefficiencies across the value chain. States must not assume liabilities they did not create. The FG must demonstrate leadership by reforming the sector, attracting capable investors, and restructuring the market to deliver reliable, affordable electricity at a profit than wasteful subsidies. Diverting scarce public funds away from critical sectors such as education, healthcare, and security to sustain a power system structurally designed to fail is neither prudent nor sustainable. Only a comprehensive overhaul – not cosmetic adjustments – will unlock Nigeria’s economic potential.
Nick Agule is an energy expert and policy analyst, Email: nick.agule@yahoo.co.uk
X: @NickAgule
Facebook: Nick Agule, FCA
6th February 2026
