Nigeria's power sector is rapidly consuming public cash, forcing the government to spend hundreds of billions of dollars on subsidies to keep power running, while decades of reforms and billions of dollars of investment have failed to deliver reliable supply.
President Bola Tinubu, who took office in May 2023 promising tough economic reforms, is caught between the political risk of higher electricity tariffs and the fiscal reality of a power market that can't pay its own bills.
While his administration ended petrol subsidies soon after taking office, triggering nationwide protests, it has moved far more cautiously on electricity pricing, wary of voter reaction ahead of the 2027 elections.
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The cost of the subsidy is being driven by an aging grid that loses up to 40 percent of the electricity produced, weak revenue collection, and tariffs that are well below the real cost of supply.
For example, between October 2024 and September 2025, the Nigerian Electricity Regulatory Commission (NERC) diverted cash at an average rate of N165 billion per month to bridge the gap between what consumers pay and the actual cost of generating electricity.
According to NERC data, subsidy expenditure remained high throughout the period.
In the fourth quarter (Q4) of 2024, it cost the government N471.69 billion in electricity subsidy. The figure increased to N536.4 billion in the first quarter (Q1) of 2025, while it decreased slightly to N514.35 billion in the second quarter (Q2).
There was some relief in the third quarter and subsidies declined to N458.75 billion, although the total still represents a heavy drain on public finances.
“In the absence of cost-reflected tariffs, the government acted to cover the resulting gap between cost-reflected and permitted tariffs in the form of tariff subsidies,” NERC said in its latest quarterly report.
The increase in subsidies comes as distribution companies, the crucial link between power generation and end consumers, continue to collect much less revenue than they bill customers, leaving a huge financial hole that the government is forced to fill.
By October 2025, Nigeria's 11 distribution companies billed N2.4 trillion to customers but collected only N1.9 trillion, leaving a 20 percent revenue gap that ripples through the entire electricity value chain.
Industry analysts say the subsidy regime has become politically toxic ahead of Nigeria's 2027 general elections, hindering the government's ability to implement painful but necessary reforms.
With memories of the protests over petrol subsidy removal still fresh, the federal government appears reluctant to impose a similar hardship on voters by raising electricity tariffs to cost-reflective levels, even as the fiscal burden becomes unsustainable.
“The government is stuck between a rock and a hard place,” said Chidi Okonkwo, an energy analyst at Lagos-based Frontier Economics. “They know the subsidy is draining the treasury, but they are afraid of the political backlash from removing it in a pre-election year. So, the problem is getting worse.”
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Production crisis increases subsidy burden
The financial crisis in Nigeria's power sector has been worsened by persistent poor performance at the generation level, where installed capacity far exceeds actual generation.
According to the latest NERC data, the combined installed capacity of the country's grid-connected power plants is 13,625 MW, yet the average plant availability is only 38 percent.
This means that on any given day, about two-thirds of Nigeria's theoretical generating capacity remains idle or unavailable.
Olorunsogo 2, with an installed capacity of 750 MW, offers only 23 MW of available capacity, working out at only three percent availability. Alaoji 1, designed for 500 MW, contributes nothing to the grid with zero available capacity in December.
Sapele Steam 1 reflects this dysfunction, supplying only 23 MW of its 720 MW capacity, a catastrophic three percent availability rate. Even among top performers, significant potential remains locked up. The largest single producer, Agbin 1, provides 545 MW from its 1,320 MW installed capacity, while Delta 1 provides 454 MW against its 900 MW capacity.
A handful of small plants demonstrate that full use is technically possible, underscoring systemic failures elsewhere.
Ikeja 1 operates at 100 percent availability, supplying all 110 MW of its installed capacity. Zungeru 1 similarly maximizes its 700 MW capacity at 100 percent availability. Yet these success stories only highlight the scale of poor performance in most facilities. Odukpani 1 supplies only 117 MW out of the installed 625 MW, while Ihovbor 1 manages only 39 MW from its 500 MW capacity.
the great industrial exodus
What makes the situation particularly precarious is the increasing flight from the national grid of Nigeria's largest electricity consumers.
Manufacturing giants, telecommunications companies and commercial enterprises have invested billions in captive power generation, installing diesel generators and increasingly solar installations to guarantee reliable power supply.
Dangote Group, Nestlé Nigeria, Nigerian breweries and dozens of other major corporations now generate most of their electricity needs independently. The telecom sector alone is estimated to spend more than $2 billion annually on diesel for generators powering more than 30,000 base stations spread across the country.
This industrial migration has fundamentally changed the economics of Nigeria's power sector. National Grid, originally designed to serve both high-paying industrial customers and subsidized residential users through cross-subsidization, now serves a customer base dominated by low-revenue households and small businesses.
“You have lost your major tenants,” explained Amina Bello, a former energy ministry adviser. “The customers who could pay cost-reflective tariffs and subsidize others are gone. Those who remain are residential customers, many of whom are struggling financially and cannot even afford the current rates.”
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Nigeria's power sector has long been Africa's most notorious infrastructure failure. Despite privatization in 2013, which was aimed at bringing efficiency and investment, the country of more than 200 million people produces less electricity than a small European nation.
Maximum output rarely exceeds 5,000 MW, a fraction of the estimated demand of 30,000 MW.
Under the current multi-year tariff order, most Nigerian electricity consumers pay rates that cover only a fraction of generation, transmission and distribution costs.
NERC has approved limited tariff increases for some customer categories, including a controversial increase for Band A customers, who get at least 20 hours of daily supply, but most consumers continue to be heavily subsidized.
Experts say the gap between what Nigerians pay and the actual cost of electricity has widened due to several factors. Naira devaluation has increased the local-currency cost of gas imports and equipment. Inflation has increased operating expenses.
Poor revenue collection by distribution companies means much of the electricity produced is never paid for, further distorting the economy.
political puzzle
Other experts said the subsidy trap has become particularly acute as Nigeria approaches the 2027 general elections.
“These subsidies are basically welfare payments disguised as infrastructure spending,” said Aisha Mohammed, an energy analyst at the Lagos-based Center for Development Studies.
“They don't improve service, they don't attract investment, and they certainly don't fix the fundamental problems in the power sector. They postpone the day of reckoning by draining resources that fund education, healthcare or real infrastructure,” Mohammed said.
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The timing of the subsidy increase is particularly problematic for a government already facing severe fiscal constraints.
Nigeria's budget deficit has widened in recent years, leading to increased borrowing at a time when debt service consumes more than 70 percent of federal revenues.
The removal of petrol subsidies in mid-2023 was intended to free up resources for development spending, but most of those savings appear to be flowing into the electricity subsidy rat hole.
International lenders, including the World Bank and International Monetary Fund, have repeatedly urged Nigeria to eliminate electricity subsidies and move towards cost-reflective pricing.
