INTRODUCTION
One of the persistent challenges faced by Nigeria’s power sector is illiquidity. This issue, which has persisted since the privatisation of the sector in 2013, remains a formidable obstacle that continues to hinder the efficiency and growth of the electricity industry, leading to inconsistent power supply and financial instability among operators.
Financial sustainability remains a concern for Distribution Companies (DisCos) and Generation Companies (GenCos) due to poor revenue flows across the electricity value chain. The financial shortfalls caused by low invoice payments leave GenCos unable to meet their own obligations and generate adequate electricity for distribution. These pressures are compounded by the longstanding complaint that electricity tariffs do not reflect the actual cost of generation, transmission and distribution.
The Electricity Act 2023 sought to address systemic inefficiencies by decentralising power generation and distribution to States, making the sector more attractive to private investment. In furtherance of this federal framework, Lagos State enacted the Lagos State Electricity Law 2024 (LSEL), signed into law on 3 December 2024 by Governor Babajide Sanwo-Olu. The LSEL establishes the Lagos State Electricity Regulatory Commission (LASERC) as the sole regulator of the Lagos Electricity Market, creates the Lagos State Electrification Agency (LSEA), the Lagos Independent System Operator (Lagos ISO), and the Lagos State Electrification Fund (LSEF) together forming a comprehensive institutional architecture for energy reform.
While the LSEL promotes private sector participation and lays the groundwork for a commercially viable electricity market, it requires concrete financial incentives and funding structures to fully resolve liquidity constraints. Although the law grants market autonomy and supports renewable energy projects, mini-grids and rural electrification, it does not, on its own, directly cure the deep-rooted liquidity crisis in the sector. This article examines the nature of that crisis, the extent to which the LSEL addresses it, and the reforms still needed.
UNDERSTANDING ILLIQUIDITY IN THE NIGERIAN ELECTRICITY SECTOR
Illiquidity in Nigeria’s power sector manifests in several interconnected ways:
Revenue Collection Deficits
Many consumers, including government entities, fail to pay electricity bills on time or in full, creating persistent cash flow shortages for electricity companies. These shortfalls prevent operators from recovering costs, meeting financial obligations, or procuring essential consumables such as gas and spare parts. High incidences of electricity theft further worsen the liquidity position. The LSEL seeks to address this by establishing the Power Enforcement Unit (PEU) under the supervision of the Lagos State Electrification Agency, specifically charged with combating electricity theft and infrastructure vandalism, handling whistleblower reports, and collaborating with the Ministry of Justice to prosecute offences. While this is a welcome measure, the PEU’s effectiveness will depend on adequate resourcing, training and inter-agency cooperation.
High Operational Costs
Power generation and distribution require substantial capital investment. Without adequate financial backing, companies struggle to maintain and upgrade infrastructure. The costs of generation, transmission and distribution infrastructure remain disproportionately high relative to revenue recovery, further eroding the commercial viability of market participants.
Tariff Issues
The pricing of electricity remains contentious, with enduring tension between affordability and cost-reflective tariffs that would ensure sustainability. The LSEL directly addresses this by mandating that tariffs within the Lagos Electricity Market be fair, competitive and reflective of macroeconomic realities. LASERC is required to adhere to approved tariff methodologies, subject to periodic review. The law also empowers LASERC to approve negotiated transactions between licensees and specific consumer groups, provided these comply with the overall tariff methodology. However, the practical mechanisms for balancing consumer affordability with fair investor returns have yet to be fully operationalised; these will depend on the quality of subsidiary regulations and guidelines that LASERC is yet to issue.
Debts Across the Value Chain
DisCos owe GenCos significant amounts, and GenCos in turn owe gas suppliers, creating a financial bottleneck throughout the value chain. The electricity sector’s heavy reliance on gas means that unpaid debts to suppliers lead directly to fuel shortages and reduced power generation. Inefficient billing systems exacerbate this cycle. The LSEL’s disaggregation of licences—prohibiting any single licensee from simultaneously engaging in generation, trading, supply, transmission and distribution after the transitional period—is intended to introduce greater commercial discipline and transparency into the market, which may over time help clarify and reduce cross-sector debt exposure.
Limited Private Sector Investment
Due to the absence of adequate financial incentives and guarantees, private investors remain reluctant to commit capital to the power sector. The LSEL incorporates several investor protection measures, including a specialised dispute resolution mechanism and provisions ensuring fair treatment of private participants. Section 56(2) of the LSEL introduces an innovative licence agreement model, under which proposed licensees negotiate the terms of their licences with LASERC—a departure from the traditional regulatory approach of imposing predetermined terms. This collaborative framework has the potential to attract more tailored and commercially viable investment arrangements. The LSEL also empowers LASERC to monitor and control electricity-related investments and develop policies to attract investors to the Lagos market.
Foreign Exchange Fluctuations
Since many components of power generation and transmission depend on imported equipment and fuel, foreign exchange volatility significantly increases operational costs. The unstable macroeconomic environment, characterised by currency fluctuations, sustains a high-risk investment climate that deters long-term capital commitment. The LSEL does not directly address foreign exchange risk, meaning that complementary macroeconomic and fiscal policy measures remain essential.
LAGOS AS A CASE STUDY
Lagos State, as Nigeria’s commercial hub, requires a robust and efficient electricity supply to sustain its economic output. Despite hosting several independent power projects and mini-grid initiatives, the State continues to suffer from inadequate power supply driven by liquidity constraints. Against the backdrop of a national grid that collapsed six times in 2024, the imperative for a State-level solution has never been clearer.
The LSEL represents a landmark response to this challenge. Signed on 3 December 2024 as Law Nº 3 of 2024, it repeals the Lagos Electric Power Sector Reform Law 2018 and provides a comprehensive legal and regulatory framework for the generation, transmission, distribution, trading and supply of electricity within the State. The constitutional basis for this legislation is the Fifth Alteration Act Nº 33 of 2023, which placed electricity regulation on the Concurrent Legislative List, empowering states to legislate over their subnational electricity markets.
Key institutional and structural innovations under the LSEL with direct relevance to liquidity include:
- LASERC as Sole Regulator: LASERC is tasked with ensuring a commercially viable, physically safe, technically secure and economically efficient electricity market. Its powers over licensing and tariff-setting, if exercised transparently, can create the regulatory certainty necessary to attract investment and reduce market risk.
- Lagos State Electrification Fund: The Fund is designed to finance grid expansion and off-grid electricity projects across the State. Its sources include budget allocations, surplus Commission revenue, fines and penalties, electricity levies, and donations and grants. This dedicated financing vehicle could, if well-administered, reduce the capital constraints that fuel illiquidity.
- Host Community Development Trust Fund: Generation companies operating in Lagos are required to contribute a percentage of their annual operating expenditure to a Host Community Development (HCD) Trust Fund. While this is an innovative instrument for social licence, the cumulative obligation—potentially up to 7% of operating expenditure for GenCos also operating in other states—may increase operator costs and warrants careful calibration to avoid unintended liquidity consequences.
- Regulatory Sandbox: The LSEL empowers LASERC to establish a regulatory sandbox for the Lagos Electricity Market, allowing entities to test innovative products, services, solutions and business models. This provision could facilitate new financing models and technology-driven solutions to liquidity challenges.
- Lagos Integrated Electricity Policy and Strategic Implementation Plan: The Ministry of Energy and Mineral Resources, in consultation with LASERC and stakeholders, is required to develop and implement this plan to guide the orderly growth of the Lagos Electricity Market, leveraging public-private partnership for security and reliability of supply.
While these provisions are significant, the LSEL’s impact on liquidity will ultimately depend on effective operationalisation. LASERC only commenced operations in March 2026, following the inauguration of its board by Governor Sanwo-Olu. The Commission must now urgently issue the regulations, guidelines, rules and directives needed to set the provisions of the law in motion. Without this secondary regulatory layer, the structural advances in the LSEL will remain largely aspirational.
POSSIBLE SOLUTIONS TO ILLIQUIDITY IN THE ELECTRICITY SECTOR
To address the liquidity crisis in the Nigerian electricity sector, the following measures can be considered—several of which can be anchored within the framework of the LSEL:
Implementation of Cost-Reflective Tariffs
While balancing affordability for consumers with financial viability for operators and investors, the State must adopt transparent tariff methodologies based on accurate data on generation, distribution and service costs. The LSEL mandates that tariffs be fair, competitive and responsive to macroeconomic realities, and requires LASERC to adhere to periodically reviewed tariff methodologies. Regular tariff reviews, performance-based regulation and differentiated pricing for various consumer categories should be embedded in LASERC’s subsidiary regulations to give this mandate practical effect.
Strict Enforcement of Payment Collection
Strengthening metering and billing systems is essential to ensuring that consumers pay for electricity consumed. The data consistently shows that government is among the major defaulters in electricity payment. The Lagos State Government and LASERC could introduce a transparent revenue-offset mechanism that allows taxes, levies or statutory charges owed by electricity companies to be netted against verified receivables due from government. This can be achieved through legislative backing—either through an amendment to the LSEL or subsidiary regulation—to authorise such fiscal offsets, supported by transparent auditing and verification processes and a clear reconciliation framework between the Ministry of Finance, LASERC and electricity service providers. The PEU’s mandate to combat electricity theft also directly supports revenue recovery and should be fully resourced from the outset.
Improved Investor Confidence
Investor confidence is vital to the inflow of capital into this sector, and the government can enhance this through a mix of fiscal support, infrastructure investment and credible regulation that reduces risk and enhances commercial certainty. The following specific measures are recommended:
- Government Guarantees and Incentives: Partial risk guarantees, tax holidays and interest rebates can mitigate investor exposure to payment default risks and project delays. The LSEL’s investor protection provisions, including the specialised dispute resolution mechanism and the negotiated licence agreement model under Section 56(2), provide a strong platform upon which such incentives can be layered.
- Strategic Infrastructure Investment: Investment in grid modernisation, renewable energy integration and transmission upgrades can reduce technical losses, lower operating costs and improve supply reliability. The Lagos Integrated Electricity Policy and Strategic Implementation Plan, to be developed under the LSEL, should identify priority infrastructure projects and mechanisms for public-private co-investment.
- Policy and Regulatory Consistency: The LSEL’s framework for transparent licensing, periodic tariff-setting and structured dispute resolution is foundational to investor trust. LASERC must now translate this framework into coherent, predictable and enforceable regulations. Delays in issuing subsidiary legislation will undermine the commercial confidence the law is designed to inspire. The precedent of completed regulatory transfers in Enugu and Ondo states—where NERC has ceded regulatory authority—illustrates what is achievable and sets a benchmark for Lagos to meet.
Leveraging the Lagos State Electrification Fund
The LSEL’s establishment of the Lagos State Electrification Fund offers a concrete mechanism for addressing capital constraints in the sector. The Fund should be actively deployed to co-finance grid expansion, off-grid projects and rural electrification, with clear governance arrangements to ensure transparency and accountability in its administration. LASERC and the LSEA should work collaboratively to develop a Fund deployment framework that targets liquidity-constrained areas of the market.
CONCLUSION
The illiquidity crisis in Nigeria’s electricity sector is structural, persistent and multi-dimensional. It cannot be resolved by regulation alone. However, the Lagos State Electricity Law 2024 provides an important and serious regulatory framework that, if effectively implemented, can begin to address several of its root causes—particularly through transparent tariff-setting, investor protection, enforcement of payment obligations, and dedicated electrification financing.
The inauguration of LASERC’s board in March 2026 marks the beginning, not the end, of this reform journey. The Commission must now move with urgency to issue the subsidiary regulations and operational guidelines that will give the LSEL’s provisions practical effect. Simultaneously, the Lagos State Government must complement the legal framework with targeted fiscal measures, public investment in infrastructure, and a credible commitment to meeting its own payment obligations as a consumer of electricity.
Lagos has the institutional architecture, the constitutional mandate and the economic imperative to lead Nigeria’s subnational energy transition. Whether it does so will depend on the quality and consistency of implementation in the months and years ahead.
