The funny thing about electricity prices

First a little background….

This is how prices work to drive investment; if too many people want to buy a commodity, yams for example, and there is not enough supply of that commodity in the market then the price of that commodity increases. A lot of buyers competing for too few yams means the yams will go to the highest bidder. Higher prices for yams. Yam sellers make lots of extra profits. These profits serve as a signal to investors. If the yam farmers are making excess profits then we should invest our money in producing more yams to grab some of these profits. These new investments in yams increase the supply of yams to the market closing the gap between the high demand for yams and the relatively low supply of yams. The key driver of new investments in producing yams is the original increase in the price of yam.

Back to electricity. We know what the supply of electricity in Nigeria is like. Too small. Really really small. Not enough to meet the demand in Lagos alone talk less of the entire country. What should happen to electricity prices? It should be sky high. Think of how much electricity would cost if you auctioned the little capacity we have to the highest bidders. Should be somewhere around N80 per kWh ( It was increased to N22? per kWh). The few businesses who generate electricity should be making a killing. Producing something that everybody wants but that is also very scarce. These high prices should drive investment into power generation which should prop up the weak supply leading to lower prices and so on….

I know this. The government ( who have crowned themselves the the sole price decision maker in chief – a big problem on its own) also knows this. But what have the done?

They have increased electricity prices but only by a little. Too little to make any difference. The new prices are still lower than much of west Africa. In other words investors in power can do better investing elsewhere. The result? Little or no new investment in power generation.

The problem is politics. Politics politics politics. The government cares more about the politics than actually providing electricity. They are scared of the reaction to prices with good reason too. The Falanas and other civil society groups already have their knives out. People cant afford it they say. All a bit odd when you consider the fact that anybody who has a private generator (yes even the poorest have generators nowadays) spends about N80 per kWh on private electricity generation.

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