Over the years, the Federal Government (FGN) has adopted a different subsidy arrangement that involves the payment of huge amounts to cater for tariff shortfalls.
For instance, it was reported that the Federal Government spent about N120 billion on electricity subsidy in 2022.
Other interventions that have produced minimal results include the N213 billion loan to DISCOs in 2014 as part of the Nigeria Electricity Market Stabilization Facility (NEMSF) by the CBN, the N701 billion CBN facility in March 2017 as a power assurance guarantee for two (2) years.
Most recently, the FGN announced that due to the high cost of living, it will be paying as much as N1.6 trillion to subsidize electricity in the year 2024 with an average monthly pay of N120 billion.
This subsidy approach has been greatly criticized for several reasons including competition for the limited resources of the Government that could otherwise be used to deliver other essential services.
In addition to widening the scope for rent-seeking and commercial malpractice, the current subsidy arrangement discourages both supply‐side and demand‐side efficiency, promotes non-economic consumption of energy, and makes new forms of renewable energy uncompetitive.
More worrisome is the fact that these interventions are not targeted to underprivileged Nigerians, they are regressive and politically difficult to phase out.
The Power Consumer Assistance Fund (PCAF) established under the repealed Electric Power Sector Reform Act, of 2005 is yet to be operational after 19 (Nineteen) years.
This paper discusses the writer’s research on key components necessary to set up an effective subsidy scheme whilst providing some insight into suitable eligibility criteria and framework for the PCAF.
Overview of the PCAF
The PCAF was created pursuant to section 122 of the Electricity Act to subsidize underprivileged consumers as may be specified by the Minister and will be funded by contributions from eligible customers and consumers, as well as subsidies received by the FGN as appropriated by the National Assembly.
Funds in the PCAF will be managed and disbursed by NERC in accordance with policy directions issued by the Minister.
Contributions to the PCAF will be made by all consumers including eligible customers at rates and for the duration to be specified by the Commission.
Eligible customers are expected to make contributions directly to the PCAF while other consumers or classes of consumers make contributions to their respective distribution licensees or supply licensees.
Distribution licensees are mandated to compile the contributions and remit to the PCAF, and disbursements will be made by the Commission following a policy directive from the Minister.
Failure to make contributions is a punishable offence with a fine not exceeding three times of the amount owed. In addition, the PCAF is to be funded by “any subsidies received from the Federal Government of Nigeria as appropriated by the National Assembly”.
Proposed Structure of the PCAF -Targeted Subsidy Scheme
The fact that the PCAF is created to benefit the underprivileged presupposes that it should be structured as a targeted subsidy.
By international standards, to phase out unstructured subsidies linked to the price of electricity, there should be alternative policies that can provide direct assistance to the poor who would be adversely affected by the subsidy removal.
These policies are generally regarded as social safety nets, and this is where the implementation of the PCAF plays a vital role.
The advantage of policies such as PCAF is its ability to be well-targeted to the poor, resulting in lower costs to the government. In simple terms, the full implementation of the PCAF will operate as a subsidy reform of the electricity sector.
According to the World Bank, the measurement of the performance of a consumer subsidy scheme such as PCAF can be summarized as follows:
- Benefit incidence: This relates to how well the subsidy targets benefits to poor citizens.
- Beneficiary incidence: This relates to the proportion of poor citizens who receive the subsidy.
- Materiality: This relates to the significance of the amount or value of subsidy received by the poor citizens.
From the indices above, it is possible to have a scheme where subsidies are well targeted to the poor (i.e., a positive benefit incidence) but beneficiary incidence is low because only a few poor beneficiaries receive the subsidy.
On the flip side, a subsidy may have a wider reach to most poor households but may be small in value relative to household income. Thus, it is important that PCAF is well structured to mostly satisfy these criteria.
Targeting subsidies to the poor has three main benefits. First, it has the potential to reduce the subsidy budget or the cost of providing the subsidy such that only a portion of the population (i.e. the underprivileged) benefit from the subsidy with the ripple effect of largely reducing the financial requirement to fund the PCAF.
Secondly, targeting portends a greater impact on the underprivileged, for whose benefit the fund was set up.
Thirdly, subsidies that are targeted to fewer demographics have the potential to cause fewer distortions in consumption decisions than untargeted or poorly targeted subsidies.
It is proposed that the PCAF will operate on a volume-differentiated basis. This means that the PCAF subsidy will be granted based on a cap on the volume of electricity consumed.
Features of volume differentiation include:
- It allows for good targeting of the poor if the volume limit is set at a small size. It is presumed that the poor consume less power due to few appliances compared to the rich.
- Metering is required and the possibility of exclusion error will be low if there is a high rate of meter connections.
- Fiscal costs on the government can be contained by setting a volume limit relatively small.
- It does have a natural phaseout as households gradually raise consumption above the volume limit.
- Volume limit or cap is relatively easy to change depending on circumstance.
- It allows for a natural situation for cross‐subsidy from higher‐use to low‐use customers
In addition to other criteria, as will be discussed below, the PCAF will essentially operate as a targeted subsidy determined on a volume-differentiated basis.
