Nigeria's electricity sector has accumulated a debt that is stifling supply, squeezing the public purse, and growing faster than any intervention yet designed to contain it. There is a debt figure that has begun to penetrate public consciousness, though not yet at the depth its scale demands. The accumulated payment arrears owed to the generation companies and gas suppliers that produce electricity for the national grid currently stand in excess of N6 trillion, growing at a rate of approximately N200 billion every month.
The Federal Government has recently committed to addressing this through a bond programme of up to N4 trillion – the largest financial intervention ever made in the electricity sector – and there is reason to welcome the commitment and the recognition it represents. But that welcome must be measured, because the N6 trillion plus, as alarming as it is, captures only a portion of the fiscal burden the electricity sector has placed on the Nigerian state.
When the full range of sovereign obligations – accumulated debts, legacy liabilities, government intervention facilities, sovereign loans for infrastructure, and contingent commitments of various kinds – are considered, the picture that begins to emerge suggests the total exposure is substantially larger than the figure currently in public discussion. That fuller picture has not been presented in consolidated form. This article is a step towards understanding the depth of the problem and its implications for power supply and the fiscal position of the government. The purpose here is not to raise an alarm. It is clarity.
Nigeria's electricity problem is routinely discussed as if it were primarily a generation problem – not enough megawatts, not enough gas, not enough transmission capacity. These are real constraints. But they are downstream consequences of a more fundamental problem that sits at the intersection of market design, commercial architecture, and fiscal management: the electricity sector has been operating, for more than a decade, in a manner that systematically generates sovereign debt as a structural output. Understanding how this happened, why the N6 trillion is the symptom and not the disease, and what a credible response must look like, is the essential conversation that public discourse has not yet fully had.
In the beginning: A reform and its unfinished journey
The Electric Power Sector Reform Act of 2005 was the product of years of careful and technically grounded design. Its architecture was a competitive wholesale electricity market: generation companies would sell power to distribution companies through direct bilateral contracts, transmission would transport electricity between them, and price signals would coordinate despatch, reward efficiency, and mobilise private investment. The design was technically sound, had solid precedent in international electricity liberalisation experience, and had a coherent internal logic – expose commercial decisions to commercial consequences, and commercial discipline follows.
Translating that design into institutional reality proved, as reform always does, more complex than the blueprint. Electricity sector liberalisation is a technically demanding undertaking in any environment. In Nigeria, it required building entirely new institutions, establishing an independent regulatory framework, developing market rules and trading arrangements, and managing a privatisation process – all simultaneously, against a backdrop of significant infrastructure deficits and limited market experience.
In navigating these complexities, a debate emerged within reform circles about the pace and sequencing of market development. One strand of thinking held that moving directly to bilateral contracting between generators and distributors was too large a step in the early years, and that a transitional central purchasing arrangement would provide the stability needed while market institutions matured. This was not an unreasonable position for its time – transitional arrangements have their place in sector reform, and the logic of gradual market development is well established in the international experience.
What was not adequately resolved, however, was the nature and duration of the transition. The central purchasing arrangement that was put in place to bridge the reform journey was established without sufficiently robust provisions governing its own evolution – without a clearly defined schedule for expanding bilateral trading alongside it, without automatic triggers that would progressively reduce the intermediary function as market capacity developed, without governance incentives to ensure the transitional phase remained genuinely transitional.
The risks inherent in a prolonged single-buyer structure were understood and articulated at the time: that concentrating all offtake risk in one government-owned entity, whose revenues depend entirely on what distributors collect and what the government disburses, would inevitably create fiscal pressure if the market failed to perform as anticipated. Those concerns did not find sufficient expression in the design of the transitional arrangements.
The bilateral trading market that the 2005 reform mandated has never been fully activated. The central purchasing function, intended to be a stepping stone, has carried the entire weight of the sector's commercial transactions for over two decades. The fiscal consequences of that unfinished journey are the central subject of this article.
The structural challenge was compounded during privatisation in 2013. Potential investors, lenders, and financiers expressed understandable concern about the commercial risks they were being asked to assume: a buyer whose payment capacity was uncertain, a regulatory regime still finding its operational footing, a grid with well-documented infrastructure deficits. Reassurances were provided in the form of payment guarantees and sovereign indemnities, designed to make the privatised companies sufficiently attractive to the market. The intention was constructive – without such assurances, the privatisation could not have been completed on the terms it was.
The consequence, however, was to create an open-ended sovereign backstop for the sector's commercial performance without a corresponding mechanism to ensure that performance would improve sufficiently over time to reduce the government's exposure. The liabilities were guaranteed. The structural improvements that would have reduced those liabilities over time remained aspirational.
With the benefit of hindsight, a fair question is whether the scale of fiscal accumulation that followed was fully anticipated, and whether the monitoring and risk management systems put in place were adequate to the task. The evidence of subsequent events – no consolidated liability tracking framework, limited early-warning mechanisms as payment shortfalls began to mount, and a long interval before a structured resolution programme was developed – suggests that the pace and scale of accumulation was not adequately foreseen. That is a governance observation, not an attribution of blame; reform design under conditions of institutional complexity and limited precedent is inherently imperfect. But it is a lesson that should inform how the sector is managed going forward.
The Trite Debate: Why the tariff argument is incomplete
Public discussion of the electricity sector's financial problems has, for most of the past decade, been dominated by a single framing: electricity tariffs are too low, and a cost-reflective tariff is the essential precondition for sector viability. There is something to this. Tariffs that do not recover costs do create a revenue shortfall. But the tariff debate has become the dominant lens through which the sector's problems are viewed, to the point where it has displaced rather than led to the harder questions about why cost recovery remains structurally elusive regardless of what tariff level is set.
The arithmetic tells a story the tariff debate tends to obscure. Approximately 45 to 50 per cent of all electricity generated in Nigeria never produces revenue. A portion is physically lost in transmission and distribution – through ageing conductors, overloaded transformers, and infrastructure that has not been adequately maintained. The rest is commercially lost: consumed but not metered, billed but not collected, or supplied to customers – including government institutions – whose accounts remain persistently in arrears.
Of every 100 units of electricity generated and injected into the grid, roughly 52 to 58 units are recovered as cash. The remainder dissipates without a financial trace. In this environment, the electricity regulator faces a difficult and constrained arithmetic. The volume of electricity reaching paying customers is essentially fixed – constrained by gas supply rationing, grid limitations, and plant availability problems that tariff adjustments cannot directly remedy. Costs, meanwhile, have been rising through naira depreciation, inflation, and the accumulated deferred maintenance of a decade of underinvestment.
With volume fixed and costs rising, the pressure to close the revenue gap falls entirely on price. Regulation becomes oriented, in practice, toward guaranteeing revenues to market participants rather than toward inducing efficiency and competitive discipline. This is not a satisfactory equilibrium. It is the predictable consequence of attempting to regulate a market in which the commercial fundamentals have not been adequately established.
The consequences of this dynamic fall most heavily on those at the upstream and non-customer-facing end of the supply chain. Gas suppliers and generation companies – who originate the electricity on which the entire economy depends – receive less than 30 per cent of what they invoice. That is not a cash flow fluctuation. It is a structural condition of chronic non-payment that has persisted for over a decade and has begun to reshape behaviour in ways that directly affect supply.
Gas is increasingly directed toward industrial customers and export markets that pay reliably and in full. The power sector, which has not been able to demonstrate consistent payment, receives gas rationed to the level of commercial risk that producers are willing to carry. Nigeria's operational generation – hovering persistently between 4,000 and 5,000 megawatts against an installed capacity of approximately 13,000 megawatts – is in large measure a creditworthiness problem, not an infrastructure problem. The gas exists. The plants exist. The commercial conditions necessary to attract fuel to those plants reliably are what the reform was designed to create and has not yet fully established.
The Fuller Debt: More than one number
The N6.8 trillion in payment arrears is the figure that has entered public consciousness, and it deserves the attention it is receiving. But it represents the most visible element of a debt and liability structure that is considerably more complex. A more complete account of the sovereign's fiscal exposure to the electricity sector would need to encompass several further categories of obligation, each arising from a different mechanism and each representing a real claim on government resources.
The Central Bank of Nigeria disbursed approximately N2.3 trillion in intervention facilities to the electricity sector between 2015 and 2023 – structured as loans to various sector entities intended to stabilise liquidity in a market whose revenue architecture was already under strain. Repayment has been partial and gradual because the underlying conditions that necessitated the interventions have not sufficiently improved.
The pre-privatisation liabilities of the former national utility were warehoused in a dedicated entity at the time of privatisation, enabling the successor companies to be sold without the burden of inherited debt. Those warehoused liabilities represent a further sovereign obligation in the process of being wound down, the current residual scale of which varies across different official accounts.
The Federal Government has also borrowed directly from multilateral development finance institutions – including the World Bank and the African Development Bank – to finance electricity sector programmes: grid rehabilitation, distribution infrastructure improvement, and off-grid electrification. These are sovereign loans registered at the Debt Management Office, obligating the Federal Government regardless of whether the financed infrastructure generates a commercial return sufficient to service them. The record of some of these programmes has been mixed, a reflection of the structural commercial conditions within which they have had to operate.
The broader point is this: a government that borrows at sovereign credit to build electricity infrastructure into a sector whose commercial architecture has not been adequately reformed does not create assets that service its own debt. It absorbs the sector's structural shortfall into the sovereign balance sheet in a different instrument.
Beyond these direct obligations, there are categories of contingent liability that are not prominently featured in any public accounting of the sector's fiscal footprint. Power purchase agreements with independent power producers carry contractual provisions that, under defined circumstances, can require the government to assume obligations at pre-agreed terms. Gas supply contracts carry take-or-pay commitments that run regardless of how much power is actually dispatched. Various capital programme commitments carry financial obligations of different kinds.
Taken together, these contingent instruments mean that the N6.8 trillion currently being addressed through the bond programme – significant and urgent as it is – does not represent the totality of what the government is exposed to on account of the electricity sector. If all instruments, facilities, liabilities, and contingent commitments were brought into a single consolidated account, the resulting picture would be substantially larger than the figure in current public discussion – how much larger is a question that only a full and transparent consolidation of all sovereign obligations can definitively answer. That consolidated account does not yet exist in the public domain. It should.
The cost the economy bears: Beyond the balance sheet
The fiscal dimension of the electricity sector's problems is serious. But it does not fully capture the economic cost that poor electricity imposes on the country as a whole. The World Bank has estimated that unreliable electricity costs Nigeria approximately $29 billion annually – roughly 2 per cent of GDP. An earlier and more comprehensive World Bank analysis placed the figure even higher, at between 5 and 7 per cent of GDP. On either estimate, the economic loss from electricity failure exceeds what Nigeria spends on health and education combined.
These are not abstract figures. They represent factories running below capacity, production lines interrupted mid-shift, cold chains broken, medicines spoiled, and an entire private sector carrying the cost of a public service that does not reliably arrive.
The response of households and businesses to unreliable grid power has itself become a significant economic burden. In 2023 alone, Nigerians spent an estimated N16 trillion on petrol and diesel to fuel private generators – a figure that covers only fuel costs and excludes the capital cost of generators and inverters, their maintenance, and the opportunity cost of time and attention devoted to managing electricity alternatives. Sixteen trillion naira spent on self-generation is N16 trillion not invested in productive capacity, not saved, not spent in ways that generate multiplier effects in the broader economy.
It is the price Nigerians pay, invisibly and without formal accounting, for the failure of a system that should quietly and reliably underpin economic activity. The manufacturer running diesel generators, the hospital managing its wards by torchlight, the small business whose output is permanently capped by the rhythm of load-shedding – these are not anecdotes. They are the micro-level expression of a macro-level failure whose aggregate cost the World Bank puts at $29 billion every year.
That cost falls on the economy regardless of what happens on the government's balance sheet. It compounds the fiscal problem by suppressing the economic activity – and therefore the tax revenues – that would otherwise create the fiscal headroom within which reform becomes easier to sustain. The scale of what has been built – in debt, in foregone economic output, and in the broader sovereign obligations that have yet to be fully mapped – is the foundation on which any credible response must be constructed. That response, and what it must contain to be equal to the challenge, is the subject of the second part of this article.
Continues in Part Two: “Necessary but Not Sufficient – The Limits of Debt Settlement and the Shape of a Credible Response”
Dr Babalola is a former Minister of Power and was one of the principal architects of Nigeria's electricity sector reform. Through Exenergia Limited, he works on infrastructure development, electricity industry policy, regulatory economics, and the macroeconomic dimensions of energy infrastructure failure. He also writes The Missing Markets, a Substack newsletter examining the markets, institutions, and infrastructure gaps that constrain growth in developing and emerging economies.
