Nigeria’s Power Sector Reforms Face Challenges of Liquidity, Governance – CPPE

The Centre for the Promotion of Private Enterprise (CPPE) says Nigeria’s power sector remains one of the most complex and fragile components of the country’s economic reform agenda, warning that deep-rooted structural, financial and political economy constraints continue to undermine sustainable progress.

In a policy brief signed by the CEO, Dr. Muda Yusuf, CPPE highlighted that despite several reform attempts over the years, the electricity sector is still grappling with tariff distortions, weak investor capacity, transmission bottlenecks and a persistent liquidity crisis across the value chain.

The full CPPE policy signed by Dr. Muda Yusuf, read:

1. Introduction

Nigeria’s power sector remains one of the most challenging areas of the country’s economic reform agenda. Despite multiple reform efforts over the years, the sector continues to face deep structural, financial, and governance challenges. These challenges are multi-dimensional, spanning political economy constraints, tariff distortions, weak investor capacity, transmission bottlenecks, and a persistent liquidity crisis across the value chain.

The inability to implement a fully cost-reflective tariff regime—largely due to social and political sensitivities following recent macroeconomic reforms—has entrenched subsidy dependence and widened the sector’s financing gap. As a result, government intervention has become unavoidable in the short term to prevent system collapse and sustain electricity supply. However, the current trajectory, characterised by rising sector debt currently at about ₦4 trillion, is fiscally unsustainable without deeper structural corrections, improved transparency, and gradual but credible reform implementation.

2. Background and Context

Power sector reform has long been recognised as central to Nigeria’s economic competitiveness, industrial growth, and social welfare. Yet progress has been slow and uneven. Unlike other reform areas, the power sector presents a unique challenge due to the tightly interconnected nature of its value chain—gas supply, generation, transmission, and distribution—where weaknesses in one segment undermine the entire system.

Recent macroeconomic reforms, including foreign exchange unification and fuel subsidy removal, have further complicated the reform environment by heightening cost-of-living pressures and intensifying resistance to tariff adjustments in the power sector.

3. Political Economy of Tariff Reform

A major constraint to power sector reform is the difficulty of establishing a fully cost-reflective tariff regime. Electricity tariffs remain capped, largely due to concerns over affordability and the social impact of reforms on households and businesses.

However, without cost-reflective pricing, the sector is unable to generate sufficient liquidity to sustain operations or attract new investment. The resulting subsidy burden has forced government to repeatedly intervene financially, effectively transferring inefficiencies and revenue shortfalls onto the public balance sheet.

Power sector reform, therefore, represents one of the most politically sensitive and technically demanding components of Nigeria’s current reform programme.

4. Structural Weaknesses and Privatisation Challenges

Beyond tariff issues, the sector suffers from inherent structural weaknesses, particularly in the aftermath of privatisation. Concerns remain regarding:

• The technical and financial capacity of some private investors
• Transparency and due diligence gaps during the privatisation process
• Weak governance and operational inefficiencies, especially among distribution companies (Discos) and the TCN

These challenges have limited service quality, constrained revenue collection, and reduced the ability of operators to invest in network upgrades and loss reduction.

5. Transmission Constraints and Public Ownership

The Transmission Company of Nigeria (TCN) remains under full government ownership and management. Public sector control of this critical infrastructure has been associated with operational inefficiencies, inadequate investment, and slow network expansion.

Transmission remains a key bottleneck, constraining generation capacity utilisation and reducing system reliability. Weaknesses in this segment further exacerbate liquidity and service delivery challenges across the value chain. However, recent efforts under the Presidential Power Initiative has reduced the frequency of grid collapse.

6. Liquidity Crisis Across the Power Value Chain

The power sector operates as a tightly linked chain. Financial distress in one segment quickly transmits to others. Currently:

• Generating companies (Gencos) struggle to pay gas suppliers
• Distribution companies (Discos) are unable to generate sufficient revenues to meet obligations to Gencos
• Transmission infrastructure suffers from underinvestment and governance challenges

These conditions have entrenched a systemic liquidity crisis, undermining sector confidence and sustainability.

7. Rationale for Government Financial Intervention

Given the scale and urgency of the crisis, government intervention to bridge the sector’s financing gap has become inevitable in the short term. Recent actions, including bond issuances to settle outstanding obligations—particularly to gas suppliers and Gencos—are aimed at preventing a breakdown of the electricity supply system.

Such interventions are necessary to maintain power availability for households and businesses while longer-term reforms are gradually implemented.

8. Gradual Reform and Emerging Positive Developments

While a rapid transition to full subsidy removal may be politically unrealistic, there is a strong case for phased and incremental reform. Recent developments indicate cautious progress, including:

• Introduction of differentiated tariff bands, such as Band A
• Increased decentralisation, with states playing greater regulatory and operational roles
• Expansion of independent power projects
• Rising adoption of renewable energy solutions at household and enterprise levels

These trends suggest that, despite current challenges, the sector is slowly moving toward greater diversification and resilience.

9. Fiscal Sustainability, Debt, and Transparency Risks

The current financing model is not sustainable. Sector liabilities have risen to nearly ₦4 trillion and continue to grow. There is an urgent need to ensure that all outstanding claims are:

• Properly verified
• Subjected to rigorous audit
• Managed transparently and credibly

Nigeria’s experience with fuel subsidy regimes demonstrates the vulnerability of subsidy systems to abuse and malpractice. Strong oversight and accountability mechanisms are therefore essential to prevent similar outcomes in the power sector.

10. Policy Implications and Recommendations
11. Adopt a Clear Roadmap to Cost-Reflective Tariffs
    Implement a phased and predictable transition toward cost-reflective pricing, with targeted social protection for vulnerable consumers.
12. Strengthen Governance and Accountability
    Improve transparency in subsidy management, debt verification, and financial settlements.
13. Address Distribution Sector Weaknesses
    Enforce performance benchmarks for Discos, including recapitalisation, technical upgrades, and loss reduction.
14. Reform Transmission Management
    Explore alternative management or concession models for TCN to improve efficiency and investment.
15. Support Decentralisation and Renewables
    Encourage state-level initiatives, independent power projects, and renewable energy adoption to reduce pressure on the national grid.
16. Limit Fiscal Exposure
    Government financial support should be clearly time-bound and linked to measurable reform milestones.

11. Conclusion

Power sector reform in Nigeria is a long-term and incremental process rather than a quick fix. The sector’s complexity, political economy constraints, and institutional weaknesses mean that progress will be gradual. However, without decisive action to address structural inefficiencies, improve governance, and ensure fiscal discipline, the current trajectory will remain unsustainable.

A balanced approach—combining short-term government support with medium- to long-term structural reform—is essential to building a financially viable, reliable, and inclusive power sector that can support Nigeria’s economic growth and development.