Despite government efforts to enhance efficiency and attract investment in the Nigerian energy sector through privatization, energy supply has fallen short due to aging assets, grid mismanagement, and financial issues.
Investment in the sector has failed to generate anticipated returns, as electricity distribution and generating companies were heavily leveraged to service loans granted by financial institutions, leading to lenders taking over many Nigerian distribution companies.
A renewed focus on the power sector would contribute to a significant increase in Nigeria’s gross domestic product and economic development. The current administration is therefore striving to establish a functional system by fostering productivity across all sectors.
Initiatives have been implemented to promote investment in renewable energy, non-renewable energy, and off-grid power systems, aiming to ensure sufficient energy supply for both businesses and households.
The Nigerian government has also implemented a set of fiscal incentives aimed at fostering growth and development of the power sector. Recognizing the pivotal role a robust power infrastructure plays in driving economic activities, the government has strategically designed these incentives to attract investment, spur innovation, and enhance the overall efficiency and reliability of the power industry.
A long-awaited Electricity Act was promulgated on June 8 by President Bola Ahmed Tinubu to provide a comprehensive legal framework to regulate administration and operation of the energy sector.
Tax and Regulatory Incentives
To encourage investment, the government has offered tax incentives to companies looking to invest or operate in the power sector.
The tax incentives for electricity generation companies and distribution companies are mainly covered by the enabling statute governing the taxation of companies in Nigeria—the Companies Income Tax Act, or CITA, as amended in the Finance Acts (2019 to 2023). This statute therefore impacts the operations of power supply companies in Nigeria.
Some of the tax and regulatory incentives provided are:
Value-added tax exemption. In line with the Value Added Tax (Modification) Order 2021, which modifies the first schedule of the VAT Act, transactions relating to the following are exempt from VAT: gas supplied by gas producing companies to electricity generating companies, electricity generated by companies and supplied to the national grid or Nigerian Electricity Trading Plc, and electricity transmitted by the Transmission Company of Nigeria to distribution companies. The acquisition of equipment for renewable energy is also exempt.
Import Duty Exemption. Operators in the power industry are granted exemption from payment of customs and import duties in respect of plant, machinery, equipment, and accessories imported specifically and exclusively for generating off-grid power using renewable or clean energy sources.
Tax relief period. According to Section 10 of the Industrial Development (Income Tax Relief) Act, generating companies and distribution companies are eligible for a tax relief period. The period is three years, with possible extension for another two years through the ministry of trade and investment, if it is satisfied with the rate of expansion, standard of efficiency, and level of development of the company in the energy value chain.
Gas utilization. A tax holiday in line with Section 39 of CITA will apply to companies engaging in gas utilization, which involves marketing and distribution of natural gas for commercial purposes and includes power plant, liquefied natural gas, gas transmission, and distribution pipelines. Section 39 also provides for an annual allowance of 90%, with 10% retention for investment in the plant and machines used for off-grid power operation.
The Electricity Act. The 2023 Electricity Act expands the power sector by granting the state government, private entities, and individuals the authority to engage in the energy value chain, diminishing the exclusive control previously held by the federal government of Nigeria.
The act fosters broad public and private involvement for a sustainable energy future in Nigeria, offering investment openings in state electricity markets. State governments can license new entities for electricity operations within their regions.
This act opens doors for new players in the electricity trading industry, permitting private individuals to finance the acquisition of distribution facilities for easier electricity access.
The act also implements various measures to counter electricity theft and misconduct.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Adewole Orobiyi is senior manager, and Saheed Shanu is a senior tax consultant, business tax services, EY Nigeria.
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