July 2024 Tariff Freeze Leaves FG with ₦1.56trn Bill

Nigeria’s electricity tariff freeze has left the Federal Government with a ₦1.56 trillion subsidy bill within a year, exposing public finances to the rising cost of supplying electricity while consumers continue to pay rates fixed in July 2024.

A review of quarterly reports published by the Nigerian Electricity Regulatory Commission (NERC) shows that the government incurred a cumulative tariff subsidy obligation of ₦1.56 trillion between the third quarter of 2025 and the second quarter of 2026.

The amount covered 53.24 per cent of the ₦2.92 trillion wholesale electricity generation invoices issued during the period.

Although the government’s quarterly subsidy bill declined from ₦458.75 billion in Q3 2025 to ₦321.26 billion in Q2 2026, the reduction does not mean the underlying cost gap has disappeared; instead, the figures show that the government continues to shoulder a substantial share of electricity generation costs because approved consumer tariffs remain below the cost of supply.

The exposure stems from the Federal government’s decision to keep end-user electricity tariffs at July 2024 rates even as changes in inflation, foreign exchange rates and gas prices affect the cost of producing electricity.

As these underlying costs change, the difference between what consumers are allowed to pay and the cost of supply creates a subsidy obligation for the government.

The financial burden has declined over the past year, but it remains substantial.

The government’s subsidy fell from ₦458.75 billion in Q3 2025 to ₦418.79 billion in Q4 2025, ₦358.32 billion in Q1 2026 and ₦321.26 billion in Q2 2026.

The trend raises a critical question about the sustainability of the tariff policy. That is, how long can the government continue to absorb the difference between approved electricity prices and the cost of generation without exposing public finances to unpredictable liabilities?

Tariff freeze keeps subsidy obligation alive

The subsidy exists because the tariffs paid by consumers do not fully cover the cost of supplying electricity. In the absence of a tariff adjustment that closes the gap, the government pays the difference.

NERC explained the mechanism in its report, stating, “In the absence of cost-reflective tariffs, the Government undertakes to cover the resultant gap (between the cost-reflective and allowed tariff) in the form of tariff subsidies. For ease of administration, the subsidy is only applied to the generation cost payable by DisCos to NBET at source in the form of a DisCo’s Remittance Obligation (DRO).”

Pinnacle Daily reports that cost-reflective tariffs are prices that reflect the actual cost of supplying electricity, while the allowed tariff is the amount consumers are permitted to pay under the prevailing regulatory arrangement.

When the allowed tariff is lower than the cost of supply, the government covers the shortfall.

The tariff freeze therefore protects consumers from the full impact of changes in electricity supply costs, but transfers the financial difference to the government.

The pressure is not limited to a fixed amount, as NERC’s quarterly tariff reviews update the cost factors used in calculating electricity tariffs, including inflation, foreign exchange rates and gas prices.

However, while these underlying costs change, the government’s directive has kept consumer tariffs at the July 2024 levels.

This creates an ongoing gap between the cost of supplying electricity and the revenue that approved tariffs can generate. Unless the gap narrows through changes in costs, tariffs or the structure of the subsidy, the government remains responsible for the difference.

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A lower subsidy bill does not mean the problem is solved

The decline in government support over the four quarters partly reflects changes in how generation costs are shared between the government and electricity distribution companies.

A major shift occurred in Q4 2025, when the government increased the energy allocation to Band A customers from 40 per cent to 45 per cent. Band A customers pay higher tariffs designed to reflect the cost of supplying electricity to their category.

The change reduced the proportion of wholesale generation costs covered by the government, according to NERC.

“The government subsidy accounted for 52.30% of the total GenCo invoice, which is a 6.60pp decrease compared to 2025/Q3, when the subsidy accounted for 58.63% of the total GenCo invoice. The key driver of this reduction is the increase in energy allocated to Band A customers from 40% to 45% to reflect the strategic direction of the government to improve the quality of supply to consumers,” it stated.

The policy shift helped reduce the government’s share of the generation bill from 58.63 per cent in Q3 2025 to 52.30 per cent in Q4 2025. The government’s share declined further to 51.95 per cent in Q1 2026 and 49.60 per cent in Q2 2026.

By the second quarter of 2026, the government was paying less than half of the total wholesale generation bill for the first time in the period covered by the supplied figures.

Distribution companies’ remittance obligations rose to ₦326.46 billion, or 50.40 per cent of the ₦647.72 billion generation invoice, while the government contributed ₦321.26 billion.

This marked a shift from Q2 2025, when the government covered 59.60 per cent of the ₦863.02 billion generation bill, compared with 40.40 per cent paid through distribution companies’ obligations.

However, the change in the cost-sharing pattern should not be confused with the removal of the tariff subsidy.

The government still paid ₦321.26 billion in Q2 2026, while the total generation invoice declined from ₦863.02 billion in Q2 2025 to ₦647.72 billion.

Lower energy offtake by DisCos also contributed to the decline in the overall generation bill.

Pinnacle Daily reports that energy offtake refers to the amount of electricity distribution companies take from the wholesale market for delivery to customers. When they take less electricity, the total cost of the electricity supplied falls, reducing the amount billed to the market and the subsidy required from the government.

Open-ended subsidy exposes public finances

Beyond the size of the current bill, the more significant risk is the uncertainty surrounding future subsidy obligations.

NERC warned that the existing arrangement leaves the government exposed to financial commitments that can change with electricity consumption and the cost of generation.

“The current open-ended subsidy regime leaves the FGN exposed to indeterminate subsidy obligations because of volumetric risk; generation cost variation arising from changes in supply mix (more thermal = higher generation cost),” it warned.

Remittance performance complicates cost recovery

The way distribution companies meet their own payment obligations is another important part of the wholesale electricity market’s financial structure.

Under the DisCo Remittance Obligation (DRO) framework, distribution companies are billed for the portion of generation costs supported by approved end-user tariffs.

The remaining subsidy portion is invoiced directly by the Nigerian Bulk Electricity Trading Plc (NBET) to the Federal Ministry of Finance for settlement.

This arrangement prevents DisCos from having to carry the full difference between generation costs and approved tariffs as unpaid liabilities. But it does not remove the government’s responsibility for the subsidy portion.

A further look at the NERC report from Q2 2025 to Q2 2026 shows differences in payment performance among the DisCos.

Eko, Ikeja and Port Harcourt recorded 100 per cent remittance rates throughout the period, while Abuja and Enugu maintained rates close to full compliance.

Kaduna DisCo had the weakest performance, averaging 45.2 per cent, while Jos DisCo averaged 61.9 per cent. Kano DisCo’s remittance rate fell to 67.28 per cent in Q2 2026, following higher rates in earlier quarters.

These differences matter because the DRO framework determines the amount distribution companies are expected to remit, while actual remittance performance determines how much of their billed obligations they pay.

The subsidy and remittance figures therefore describe different sides of the market’s financial arrangements, which is that the government covers the tariff gap, while distribution companies remain responsible for their own approved obligations.