Getting electricity in Nigeria can be very difficult. The World Bank ranks the country 176 out of 183 as one of the worst places in the world to get electricity. Electricity supply is unreliable and power outages are frequent numbering more than 320 days per year.
As a result, businesses largely generate their own power from diesel generators which run on fuel. Both the outages and the generators increase operational costs as blackouts harm machinery while the cost of generators, including maintenance, fuel, and its transport, is high.
Already in January, with the reduction of fuel subsidies, the cost of fuel increased 50%. But now, businesses will again be hit by higher operational costs as the government increased electricity tariffs on June 1. Large businesses will see their electricity bills increase up to 50%, depending on geographic location.
Consumers are also impacted by the new tariffs as they will face higher prices as increased production costs are passed down. Coupled with the reduction of the fuel subsidy in January, this will cause consumer purchasing power to decline further, forcing consumers to be more cautious with discretionary purchases.
Electricity prices will continue to rise, with new price increases planned for early 2013. The prices of both, electricity and fuel, are distorted by government subsidies. The subsidies are likely to be further reduced in the short-term and removed altogether in the medium-to-long term.
The reductions of subsidies are part of the government’s plans to attract private investors to the power sector. If successful, this could benefit businesses operating in Nigeria as market-rate prices will allow private competition to enter, ultimately increasing the consistency of energy supply and bringing down prices as the market matures.
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