Following the federal government’s decisive withdrawal as the sole bearer of electricity subsidies, a profound wave of fiscal realignment and economic anxiety has begun rippling across the country.
By mandating that the 36 state governments and the Federal Capital Territory (FCT) co-fund affordability interventions under their newly acquired regulatory autonomy, the apex government has structurally altered the landscape of the Nigerian Electricity Supply Industry (NESI).
As subnational regions scramble to establish their independent electricity markets, the pressing questions on the lips of many Nigerians remain: how prepared are states to absorb these massive financial shocks? And what does a truly cost-reflective tariff mean for the average citizen already gasping under inflationary pressures?
Are states, FCT prepared?
Analysts said this decision has thrown up fresh uncertainties for consumers, state governments and operators in the power sector, as questions persist over how prepared the 36 states and the FCT are to absorb costs that have run into trillions of naira annually.
For years, the gap between what Nigerians pay for electricity and the actual cost of generating, transmitting and distributing it was treated as a federal liability, settled through deductions paid to the Nigerian Bulk Electricity Trading Plc. (NBET) on behalf of distribution companies. That arrangement has now changed.
The Director-General of the Budget Office of the Federation, Mr. Tanimu Yakubu, disclosed in February that President Bola Tinubu had directed a clearer framework for sharing the cost of electricity subsidy across all tiers of government, insisting the burdens could no longer be treated as an open-ended federal responsibility.
He said state governments that benefited politically from holding tariffs below cost-reflective levels must now fund the resulting shortfall.
“When tariffs are held below cost, a gap is created,” Yakubu said, explaining further that the gap amounts to a subsidy, and the subsidy, in turn, becomes a bill that must be paid by somebody.
According to the 2026–2028 Medium-Term Expenditure Framework, the federal government has earmarked about N1.2 trillion annually for electricity subsidy transfers to NBET, to be deducted directly from the federation account before allocations are shared among the federal, state and local governments.
Figures from the Nigerian Electricity Regulatory Commission (NERC) showed that the government spent roughly N1.98 trillion on subsidies between the fourth quarter of 2024 and the third quarter of 2025, even after a 2024 tariff adjustment exempted Band A customers who enjoy, at least, 20 hours of daily supply.
More than 18 states, including Lagos, Edo, Ondo, Delta, Bayelsa, Akwa Ibom, Cross River, Abia, Anambra, Imo, Kogi, Niger, Nasarawa, Plateau, Gombe and Jigawa, have either established their own electricity regulatory commissions or are in the process of doing so, exercising powers granted under the Electricity Act 2023. Enugu, Ondo, Ekiti, Imo, Oyo, Edo and Kogi have already taken over full regulatory oversight of their intrastate markets from NERC.
Fiscal dilemma
For decades, the central government absorbed the astronomical multi-billion naira tariff shortfalls – the disparity between what it actually costs to generate, transmit, and distribute a kilowatt-hour of electricity and what consumers are legally mandated to pay. However, under the updated framework authorised by the Electricity Act, the burden of funding consumer cushions has been transferred down the fiscal ladder.
For the 36 states, this policy change represents a double-edged sword. While it grants them unprecedented legislative and regulatory autonomy over their internal power grids, it simultaneously introduces a severe fiscal obligation. Experts argue that very few states possess the liquidity to match the capital-intensive nature of power sector interventions.
The Federal Ministry of Finance said, “The fiscal reality of the federation could no longer sustain a centralised electricity subsidy that disproportionately benefited elite urban corridors while draining our national reserves. By transferring this responsibility, we are forcing a decentralised accountability structure. States must now sit down with their respective distribution companies to figure out what their citizens can afford and what their internal budgets can tolerate.”
However, this policy creates a stark disparity between states with robust Internally Generated Revenue (IGR) and those heavily dependent on monthly allocations from the Federation Account Allocation Committee (FAAC). While financially viable states like Lagos, Rivers, and Delta might seamlessly incorporate energy affordability partnerships into their budgets, landlocked or industrially nascent states face a potential fiscal crisis.
Pressure on subnational revenue
Integrating electricity subsidy payments into state finances threatens to cannibalise funding for critical social infrastructure, such as healthcare, basic education, and rural roads. To prevent a complete breakdown in local electricity supply, states are being forced to explore subnational bond markets or enter precarious Public-Private Partnerships (PPPs).
There is already anxiety regarding the FG’s move.
If a state refuses to co-fund the tariff gap, local DisCo will simply cut off supply or hike tariffs to unlivable levels, sparking civil unrest.
Deciphering “cost-reflective tariff”
At the heart of this policy shift is the transition toward a ‘cost-reflective tariff’ – a pricing mechanism designed to ensure that the utility provider recovers its full operational costs, capital expenditures, and an approved return on investment.
According to data monitored from NERC, a cost-reflective pricing model is the only definitive pathway to unlocking private sector investment in a grid plagued by frequent collapses and distribution bottlenecks.
The implication, according to the DisCos, is that the sector cannot survive on corporate charity, stressing the need for operational necessity of the tariff structure.
For years, the liquidity crunch in the NESI has prevented them from aggressively investing in asset modernization, metering, and network expansion, they said.
They also added that a cost-reflective tariff means we can finally bill what the product actually costs to deliver. If state governments want to keep tariffs artificially low for political reasons, they must cut us a check to cover the variance.
Consumers caught in the crossfire
For the average Nigerian, the academic definition of a ‘cost-reflective tariff’ translates directly to an immediate, harsh escalation in the cost of living. Coming on the heels of prolonged fuel subsidy removal and currency fluctuations, the localised upward adjustment of electricity bills is squeezing small businesses and households alike.
A business man who runs a cold room in Jikwoyi, a suburb of the FCT, Joseph Nnamdi, said the business’ rising operational costs has become a major challenge for him.
“I don’t understand what they mean by state autonomy or cost reflection,” Nnamdi lamented. “All I know is that my monthly electricity bill has more than doubled over the last year. The power is still erratic; yet; the local DisCo expects me to pay premium rates. If the government stops helping us in paying for this light, I will have to shut down my business and lay off my three boys. We are paying more for darkness.”
Expert speak
Energy economists and power sector consultants warned that a chaotic transition could lead to fragmented energy markets, where electricity access becomes a luxury strictly dictated by geography.
Speaking on the regulatory implications of the shift, power sector analyst, Efetobor Fred, pointed out the systemic risks of the current implementation strategy.
“The intention behind the Electricity Act is sound, but the execution strategy is fraught with vulnerability. We are pushing states into a sophisticated regulatory arena without the necessary institutional capacity or financial buffers.
“NERC must maintain a strict supervisory oversight role during this transitional phase. If left completely checkmated, we might see some DisCos declare bankruptcy or completely abandon less-viable states that cannot meet their co-funding obligations,” he noted.
However, the NERC insisted that it would work to ensure that subnational markets do not fail.
“Our role is to manage the transition smoothly. We are working closely with the state electricity boards to design customised Multi-Year Tariff Orders (MYTO) that reflect local economic peculiarities. No state is being left to drown, but the era of a blanket, federally funded free-for-all is permanently over,” the regulator stated.
Way forward
As the deadlines for full states’ compliance fast approach, the initial optimism that surrounded the decentralisation of the Nigerian power sector is being tempered by harsh economic realities.
While regulatory autonomy theoretically allows states to build localised mini-grids, exploit renewable energy zones, and bypass the fragile national grid, the short-term financial transition remains highly disruptive.
Without an emergency fiscal stabilisation framework – potentially via a conditional grant system from the federal government to less-viable states – the gap between energy-rich and energy-deprived states will widen dramatically.
For the average Nigerian consumer, the shift represents yet another painful adjustment in an economy undergoing profound, unforgiving structural reforms. Until subnational governments can successfully turn their power sectors into self-sustaining commercial hubs, the immediate future of electricity across Nigeria will remain overshadowed by financial uncertainty.
What remains unresolved is how the mechanics of cost-sharing will actually work in practice: whether states will negotiate individual subsidy allocations, whether the Power Consumer Assistance Fund will be ring-fenced for vulnerable households as intended, and whether the Federation Account deduction will scale up if subsidy obligations exceed the N1.2 trillion currently budgeted.
Until those details are settled, both governors managing tighter allocations and households watching their bills are left navigating a transition whose final cost is still unknown.
SOURCE: Blueprint
