FOR THE SAKE OF A VIABLE ELECTRICITY MARKET
By Ishmael “The Word” Peters
Nigeria has reached a defining moment in the evolution of its electricity market. For years, the Nigerian electricity supply industry has operated under a system in which the cost of electricity was significantly higher than the price paid by a large proportion of consumers. Government consequently intervened through tariff subsidies, absorbing the difference between the cost-reflective tariff and the approved end-user tariff. That model was never going to be sustainable indefinitely.
The current movement towards reducing and ultimately eliminating electricity subsidies is therefore not only understandable; it is necessary. A viable electricity market cannot permanently depend on government intervention to bridge the gap between the cost of electricity and the price paid by consumers. But there is a fundamental principle that must accompany this transition:
“If Government is removing the subsidy, it must also remove the debts that Government itself has created in the electricity market.”
Otherwise, we are not creating a viable electricity market. We are simply transferring the burden from one part of the Government’s balance sheet to the balance sheets of the Distribution Companies.
The Subsidy Is Coming Down
The direction of travel is already clear. Under the Distribution Companies’ Remittance Obligation (DRO) framework, DisCos are required to remit only the portion of market invoices attributable to their allowed revenue recovery, while the Federal Government bears the tariff shortfall arising from electricity being sold below cost-reflective levels.
NERC reported that the Federal Government’s electricity subsidy obligation fell from **₦418.79 billion in Q4 2025 to ₦358.32 billion in Q1 2026**, a reduction of **₦60.46 billion or 14.44%**. Importantly, however, NERC noted that the reduction was driven principally by lower electricity offtake by DisCos, rather than a fundamental improvement in tariff recovery. ([PM News Nigeria][1])
Government’s Declining Subsidy Obligation
Period FGN tariff subsidy obligation Change
Q4 2025 ₦418.79bn –
Q1 2026 ₦358.32bn- ₦60.46bn (-14.44%)**
The implication is important. The market is moving, albeit gradually, towards a regime in which consumers are expected to pay a greater proportion of the true cost of electricity. This is the right direction if the objective is to establish a commercially sustainable electricity market. But a market cannot be made financially sustainable by changing only the **price side** of the equation. It must also address the **payment side**.
There Is No More “Free Electricity”
This is where Government must demonstrate the same determination that it is showing in the removal of electricity subsidies. There should no longer be any category of electricity consumer that receives electricity without a corresponding and identifiable funding arrangement.
I. Police formations consume electricity.
II. Military formations consume electricity.
III. Federal ministries consume electricity.
IV. Government hospitals consume electricity.
V. Schools and other public institutions consume electricity.
They are all legitimate consumers of electricity. But they are not free consumers. Electricity consumed by a Government institution has a cost. Somebody must pay for that electricity.
If Government determines that these institutions should receive electricity without paying directly, then the cost should be transparently appropriated and funded by Government. What should no longer happen is for the cost of electricity consumed by Ministries, Departments and Agencies to accumulate as unpaid receivables on the books of the DisCos. That is not subsidy reform. It is simply another form of subsidy—only this time the DisCo is financing the Government.
The MDA Debt Problem
This issue is particularly important because DisCos are already being asked to operate under a fundamentally different commercial environment. They are expected to:
a) improve energy supply;
b) reduce ATC&C losses;
c) invest in network infrastructure;
d) meter customers;
e) improve customer service;
f) comply with increasingly demanding regulatory performance standards;
g) meet their market remittance obligations; and
h) progressively operate under cost-reflective tariffs.
All of these objectives require liquidity. Yet when a Government institution consumes electricity and does not pay its bill, the DisCo effectively becomes the financier of that consumption. The problem becomes even more serious when the debt is allowed to accumulate over several years.
A DisCo cannot recover an unpaid MDA bill from another customer without distorting the market. Neither should the DisCo be expected to fund Government consumption indefinitely from the collections of paying customers. At a certain point, these receivables become an impairment on the DisCo’s balance sheet, weakening its ability to meet its obligations to the rest of the electricity value chain, and this is precisely what Nigeria is trying to avoid.
The Contradiction We Must Eliminate
We cannot simultaneously tell investors that Nigeria is creating a commercially viable electricity market while allowing one of the largest classes of electricity consumers—the Government itself—to operate outside normal commercial discipline.
We cannot demand that DisCos pay their market invoices while Government agencies accumulate billions of naira in unpaid electricity bills. We cannot insist on cost-reflective tariffs for households and businesses while permitting public institutions to consume electricity without an equally credible payment mechanism and we cannot expect DisCos to invest billions of naira in infrastructure while their balance sheets are weakened by receivables that arise from Government consumption.
The Same Commercial Discipline Being Demanded of the Private Sector Must Apply to Government.
Government must now make a clear commitment. The transition away from electricity subsidy therefore needs a second pillar:
A Government commitment to settle all verified MDA electricity debts.
This should not be treated merely as a bailout of the DisCos. It is a market-liquidity intervention. When Government pays its verified electricity debts:
1. DisCos receive cash.
2. DisCos can meet their market obligations.
3. GenCos receive improved cash flow.
4. Gas suppliers receive payment for gas supplied to power plants.
5. Generation availability improves.
6. DisCos have greater capacity to invest in their networks.
7. Banks and investors regain confidence in the sector.
8. The electricity market becomes more bankable.
In other words, paying Government’s electricity debt is not simply about settling an old liability.
It is about unlocking liquidity throughout the electricity value chain.
The market cannot survive on accounting entries. Nigeria’s electricity market has accumulated too many obligations that exist on paper but do not translate into cash.
A DisCo may have a receivable from an MDA.
The DisCo owes a market participant.
The market participant owes another supplier.
The supplier owes a gas company.
The gas company requires payment to continue supplying the fuel necessary for generation.
Everyone has an invoice.
Everyone has a claim.
But the system does not have enough cash.
That is the definition of a liquidity crisis, and liquidity cannot be solved by accounting alone. The Government’s movement towards subsidy removal is therefore an opportunity to reset the market around one fundamental principle:
*Electricity must be paid for by whoever consumes it.*
Where Government chooses to subsidise a particular consumer or institution, that subsidy should be explicitly appropriated and transparently funded. It should not be hidden as an unpaid electricity bill sitting on the balance sheet of a DisCo.
Subsidy removal must not become DisCo distress
There is also a danger that must be recognised. If subsidy removal happens faster than the market’s ability to recover the full cost of electricity, DisCos could face a sudden increase in their market payment obligations without a corresponding increase in cash collections. That would be counterproductive. The objective of reform should not simply be to reduce the Government’s subsidy bill.
The objective should be to create a “financially sustainable electricity market”.
These are not necessarily the same thing. A reduction in subsidy is positive only when the corresponding revenue is actually entering the electricity value chain. If subsidy falls because Government stops paying while DisCos are left carrying the unpaid obligations, then the apparent fiscal improvement is simply another accumulation of sector debt.
The recent NERC data provides an important warning in this regard. The decline in the Government’s subsidy obligation in Q1 2026 was significantly influenced by reduced energy offtake, rather than a fundamental improvement in tariff recovery. ([PM News Nigeria][1])
Nigeria must therefore distinguish between *subsidy reduction* and *market liquidity improvement*. They are not the same thing.
What should happen now?
I believe the next phase of electricity-sector reform should be built around five clear commitments.
1. Settle all verified Government electricity debts
The Federal Government should undertake a comprehensive reconciliation and verification of MDA electricity debts and establish a credible timetable for settlement. There should be no ambiguity about what is owed, by whom, to whom and when it will be paid.
2. Put all MDAs on a commercial footing
Going forward, every MDA should have a funded electricity budget. Electricity consumption should be metered, monitored and billed. Where an MDA cannot pay from its internally appropriated budget, Government should provide the necessary funding centrally. But the DisCo should not be expected to provide free electricity.
3. Ring-fence future MDA electricity payments
Government electricity bills should be treated as a priority statutory obligation, just like other essential public-sector expenditures. A mechanism should be established to ensure that electricity bills are paid monthly and do not become another source of accumulated sector debt.
4. Align subsidy removal with liquidity reform
As the Government reduces tariff subsidy, it should simultaneously ensure that the resulting increase in market obligations is matched by actual cash recovery from consumers. The transition must therefore be managed as a **market-liquidity programme**, not merely a fiscal subsidy-reduction programme.
5. Make every participant accountable
The electricity market must ultimately operate on a simple principle:
**Consume. Bill. Collect. Remit. Invest.**
Every participant must perform its part.
• Consumers must pay.
• DisCos must collect.
• DisCos must remit.
• GenCos must generate.
• Gas suppliers must supply.
• TCN must transmit.
Government must pay for the electricity consumed by its institutions and must honour its explicit subsidy commitments. No participant should be allowed to permanently transfer its financial obligations to another participant.
*The opportunity before us*
Nigeria has an opportunity to finally break the cycle of under-pricing, under-collection, unpaid Government obligations and chronic market illiquidity.
The movement towards cost-reflective electricity tariffs is a necessary part of that journey. But cost-reflective tariffs alone will not fix the electricity market.
**Liquidity will.**
And liquidity requires cash—not promises, not invoices, not regulatory adjustments and not accumulated receivables. If Government is asking Nigerians and businesses to pay more for electricity because the old subsidy regime is no longer sustainable, then Government must also lead by example. There should be no free electricity for anyone—not households, not businesses and certainly not Government institutions.
Where Government wants to support a particular consumer, it should do so transparently through the budget. Where Government consumes electricity, Government should pay for it. Where Government has accumulated legitimate electricity debts, Government should clear them and as the subsidy regime is progressively dismantled, the market must be given the liquidity necessary to survive and invest.
This is not an argument against subsidy reform. It is an argument *for completing the reform*, because the objective should not simply be to have a market with less subsidy. The objective must be to have a market that can pay its bills, finance its investments, attract capital and ultimately deliver reliable electricity to Nigerians. That is what a viable electricity market looks like.
For the sake of a viable electricity market, let us remove the subsidy—but let us also remove the unpaid Government debt that has become another hidden subsidy.
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