Why Nigeria’s Electricity Market Is Facing Challenges - And What Must Change

Nigeria’s electricity sector has been the subject of sustained reform efforts over the past two decades. From the enactment of the Electric Power Sector Reform Act to the unbundling of the national utility and the privatization of generation and distribution assets, there has been no shortage of intent, policy direction, or institutional effort.

Yet, the outcome remains far from the original vision.

Installed capacity exists but is underutilized. Investments have been made but have not translated into reliable supply. Contracts have been signed, yet confidence in the market remains fragile.

This raises an important question: What exactly is broken—and what must now change?

A Necessary Starting Point: Recognizing What Has Worked

Before diagnosing the structural issues, it is important to acknowledge the progress that has been made.

The creation of a contract-based electricity market, anchored by institutions such as the Nigerian Bulk Electricity Trading Plc (NBET), was a necessary transitional step. It enabled the sector to move from a purely government-run system to one where private capital could participate with some degree of comfort.

Indeed, this framework supported landmark investments such as the 450Mw Azura-Edo Independent Power Project, demonstrating that with the right contractual and credit structures, private capital is willing to participate.

The Core Problem: A Market Without True Market Discipline

At its core, Nigeria’s electricity sector is not failing because of a lack of assets. It is failing because it does not yet function as a true market.

Three structural issues stand out.

1. A Liquidity Crisis That Undermines the Entire Value Chain

The electricity market is fundamentally a chain of financial obligations.

• Consumers pay distribution Companies (DisCos).

• DisCos pay Generation Companies (GenCos).

• GenCos maintain generation capacity, while thermal GenCos also pay Gas Companies (GasCos) for gas supply.

When one link fails, the entire system weakens. Today, the sector is trapped in a persistent liquidity crisis driven by:

• Under-collection of revenues

• Tariffs that do not fully reflect cost

• Weak payment discipline across market participants

The result is predictable: GenCos and GasCos are not fully paid, debts accumulate, and investor confidence erodes.

What must change?

• Enforcement of strict payment discipline across the value chain

• Gradual but firm alignment of tariffs with economic realities, with targeted support for vulnerable consumers rather than broad subsidies

• Deployment of transparent, technology-driven revenue assurance systems

A viable electricity market cannot exist where payment is uncertain.

2. Misalignment Between Market Structure and Commercial Reality

The current structure still reflects a single-buyer, government-backed model, even though the sector has been privatized.

NBET has played a critical role in bridging this gap. However, continued reliance on a central intermediary is not sustainable in the long term.

A functioning market requires:

• Buyers who can pay

• Sellers who can contract freely

• Risks allocated to those best able to manage them

What must change?

• A gradual transition from a centralized trading model to bilateral contracting between GenCos and DisCos (and eligible customers)

• A multi-pronged approach to dealing with the problem of underpaying DisCos based on a combination of contractual remedies and regulatory enforcement mechanisms

• Development of credit support mechanisms that reduce reliance on sovereign guarantees

The goal is not to remove government abruptly, but to reposition it—from a market participant to a market enabler.

3. Infrastructure Constraints That Distort Market Outcomes

Even where power is capable of being generated, there are constraints to efficient delivery to end users.

Key challenges include:

• Transmission constraints limiting evacuation of generated power

• High technical and commercial losses within distribution networks

• Significant metering gaps, leading to revenue leakage and weak accountability

This creates a paradox: capacity exists, but supply remains inadequate. To buttress the point, the country has a grid generation capacity of about 13,000 – 14,000Mw. Of this, the available generation capacity stands at 7,000 – 8,000Mw.

The highest peak generation ever attained is 5,801.84Mw however, actual generation typically swings between 3,500Mw and 5,000Mw depending on variables such as grid and gas availability.

This suboptimal situation results in many domestic and industrial customers being forced to endure erratic and unreliable power supply.

What must change?

• Targeted investment in transmission and distribution infrastructure

• Performance-based regulation that incentivizes loss reduction by DisCos

• Accelerated deployment of smart metering to close the revenue gap

Infrastructure is not merely a technical issue. It is a commercial one. Without it, even the best-designed market will underperform.

The Deeper Issue: Fragmentation Across the Value Chain

Perhaps the most fundamental structural weakness is the fragmentation of responsibilities across generation, transmission, and distribution.

Each segment operates with its own constraints, incentives, and financial realities. Yet, the performance of each depends on the others.

Furthermore, while about two thirds of power generation is gas-based, the gas and electricity sectors have separate regulatory bodies, with their different mandates.

This misalignment leads to:

• Moral hazard

• Limited accountability

• Suboptimal investment decisions

• Regulatory mialignment

What must change?

There is a compelling case for greater integration and coordination across the value chain, including:

• Encouraging closer commercial alignment between GenCos and DisCos

• Creating ring-fenced operational zones where performance can be measured transparently

• Structuring transactions that align incentives across generation and distribution

In practical terms, this may involve new models of integrated utilities or structured partnerships that ensure electricity produced is electricity paid for. Also, there is a case for integrating gas and electricity regulation, somewhat similar to the United Kingdom where the Office of Gas and Electricity Markets (OFGEM) is an independent energy regulator that regulates both gas and electricity.

The Role of Government: From Financier to Enabler

It is important to state clearly: the challenges in the sector are not a reflection of lack of effort by government. The reform journey has been complex, and significant progress has been made under difficult macroeconomic conditions.

However, the next phase requires a shift in approach.

Government’s role must increasingly focus on:

• Policy clarity and consistency

• Regulatory enforcement

• Market facilitation, not market substitution

Public funding and guarantees played an essential role in stabilizing the sector. But long-term sustainability will come from private capital operating within a disciplined market framework.

A Practical Path Forward

A viable electricity market in Nigeria is achievable. However, it requires a deliberate and coordinated shift along five key fronts:

1. Restore payment discipline across the value chain

2. Transition to bilateral market structures while strengthening counterparties

3. Invest in transmission and distribution infrastructure to unlock stranded capacity

4. Align incentives across the value chain through better structuring and integration

5. Reposition government as an enabler, not the primary risk bearer

Conclusion: From Reform to Functionality

Nigeria does not lack reform initiatives. What is now required is functional alignment - ensuring that policy, contracts, infrastructure, and incentives all point in the same direction.

The objective is clear: A self-sustaining electricity market where investments are driven by commercial logic, risks are properly allocated, and electricity flows reliably from producer to consumer.

This is not a distant aspiration. It is a practical outcome if the next phase of reform is approached with clarity, discipline, and a willingness to evolve beyond transitional structures.