LAGOS, Nigeria (VOICE OF NAIJA)- The Federal Government through the Nigerian Electricity Regulatory Commission (NERC) approved a 240% hike in electricity tariffs for customers classified as Band A, mainly businesses, who receive between 20 and 24 hours of electricity supply daily.
Customers in Band A will now be charged 225 Nigerian nairas (€0.17, $0.18) per kilowatt-hour (kWh), a significant increase from the previous rate of 68 Naira.
However this increase has sparked concerns on how small and medium scale enterprises will be affected.
Companies are expressing displeasure at the tariff hike, with the manufacturing sector warning that many businesses could face bankruptcy while calling for a reversal.
Nigerian Minister of Power Adebayo Adelabu said the government’s decision on the new tariffs was final and irreversible, citing the significant subsidy the government already provides for the cost of electricity.
“Before the tariff increase, the government was subsidizing nothing less than 67% of the cost of producing, transmitting, and distributing electricity in Nigeria,” Adelabu explained.
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Before the tariff hike, Nigerians have been battling with epileptic power supply and have to rely on expensive PMS and diesel-powered generators for their electricity needs.
The increase in electricity tariffs in Nigeria would have several direct effects on businesses which include:
Increased Costs: It will directly raise operational costs, especially for businesses with high energy consumption like manufacturing industries or data centers.
Reduced Profit Margins: Businesses may need to absorb the increased costs or pass them on to consumers through higher prices, potentially reducing profit margins and competitiveness.
Impact on Production: Higher electricity costs can affect production processes, leading to decreased output or efficiency if businesses cannot maintain previous energy usage levels.
Investment Decisions: Businesses may reconsider investment decisions, such as expanding operations or investing in energy-intensive technologies, due to the higher cost of electricity.
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Shift to Renewable Energy: Some businesses may invest in renewable energy sources or energy efficiency measures to reduce reliance on expensive electricity and mitigate future tariff increases.
Consumer Spending: If businesses pass on increased costs to consumers, it could reduce disposable income and consumer spending, impacting businesses across various sectors.
The increase in electricity tariffs would also affect businesses by raising operating costs, potentially resulting in higher prices for goods and services as businesses pass on additional costs to consumers.
It could also impact business competitiveness, particularly for industries with high energy consumption.
Industries heavily reliant on electricity for operations could face increased production costs, leading to decreased output, layoffs, or even business closures, particularly for small and medium-sized enterprises.
Mr. Iheakanwah Felix Arinzeh, a financial expert and doctor of business administration, speaking with Voice of Naija, expressed concerns:
He said: “Electricity supply has not improved. Increasing the tariff will impact operational costs, running businesses, and profits. It can lead to unemployment and negatively impact end-users and consumers, raising the price of products and contributing to inflation.
“As the dollar is decreasing, everything is becoming more expensive. It’s as if we are only solving one part of the problem.
The government tried to remove subsidies on electricity, while trying to imitate Argentine president’s move to remove more subsidies and generate more revenue for the government. But they are going about it the wrong way. It is impacting the poor masses. They shouldn’t have increased the tariff. They should have solved the hike in exchange rate and inflation first before increasing electricity tariffs to mitigate the high effects.”
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A business analyst and scrum master, Liadi Jimoh
said rising electricity costs due to the removal of subsidy payment and other already removed subsidy on petrol, diesel and the currency floatation will cause numerous issues that will impact the economy in various ways.
He said: “Nigerian SMEs currently face significant operating costs, which include electricity bills. An increase in tariffs would drive up operating expenses even further, which might squeeze profit margins and impede initiatives to grow and invest. A lot of SMEs could find it difficult to cover the extra expenses, which would put a burden on their finances and make them less competitive in the market.”
Saying that electricity is a vital component for SMEs in a range of industries, including services and manufacturing, he said abrupt increases in electricity rates have the potential to cause manufacturing process disruptions, which could result in lost time, decreased output, and decreased productivity.
Jimoh noted that this might affect distributors, suppliers, and finally customers all the way down the supply chain.
“Increased electricity costs may make Nigerian SMEs less competitive, particularly when compared to overseas companies or imported items. SMEs may find it difficult to compete with counterparts in nations with lower energy prices on quality or price, which could result in market share losses and less export opportunities. This could jeopardize Nigeria’s attempts to encourage manufacturing and diversify its economy.
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“SMEs play a major role in creating jobs in Nigeria, especially in both urban and rural areas. An increase in tariffs may result in job losses when struggling companies are compelled to reduce staff or cease operations. Increased rates of underemployment and unemployment could exacerbate poverty and social unrest in local communities,” he added.
On business investment, he said Nigeria may not attract both global and domestic investment due to uncertainty around energy rates and utility expenses.
Noting that investors can see the erratic regulatory landscape as impeding long-term viability and corporate growth, he said this would hinder infrastructure development, stifle economic growth, and make it more difficult for Nigeria to draw in investment for vital industries like technology, agriculture, and manufacturing.
He called on the Nigerian government to understand that reforms and improving the economy is a gradual process and the only quick way to achieve that is through empowerment of small and medium scale enterprise. Putting pressure on them through removal of all subsidies will kill many businesses.
“They should put into practice a number of beneficial measures to lessen the negative effects of energy tariff increases on SMEs and the economy,” he said.
Mr Jimoh said when it comes to changing power tariffs, the government need to aim for predictability and transparency as he noted that the ongoing on and off and switch for different bands must be addressed.
He said if tariff structures, increases’ justifications, and stakeholder engagement procedures are communicated clearly customers and companies will feel more confident and less uncertain.
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“Put in place targeted subsidies or programs of assistance to lessen the impact of tariff hikes on sectors that are particularly susceptible, such as SMEs. Energy-intensive industries, small companies operating in neglected areas, and micro enterprises with little ability to withstand cost increases could all benefit from subsidies.
“The government should encourage the use of renewable energy sources like biomass, solar, wind, and hydroelectric power to diversify Nigeria’s energy mix and quicken the pace of energy infrastructure spending to lower transmission losses, provide accessibility to reasonably priced electricity across the country, and enhance reliability. In order to maximize energy efficiency, this entails modernizing power producing facilities, improving transmission and distribution networks, and implementing smart grid technology.
“Encourage SMEs to implement energy-saving techniques in order to cut operational expenses and their use of electricity. Businesses should be given financial incentives, training opportunities, and technical support to help them adopt energy-efficient machinery, put best practices into effect, and maximize their usage of energy.
“Encourage cooperation between the public and private sectors as well as development partners to address issues with electricity from an all-encompassing perspective. For SMEs and other stakeholders, public-private partnerships can help increase energy access, affordability, and reliability by bringing together resources, knowledge, and creativity,” he added.