How Nigeria’s fuel subsidy reform is driving the shift towards green and resilient energy
In Nigeria, removing fossil-fuel subsidies and improving the access and affordability of solar systems has driven a huge increase in off-grid green energy. Nigeria’s experience suggests that the energy transition may increasingly be shaped by energy security and household finances as much as by environmental objectives.
Solar system installed in Bisanti community, Nigeria (Photo: ESMAP World Bank, via Flickr, CC BY-NC 4.0)
Why was subsidy reform needed?
Despite the size of Nigeria’s oil reserves, domestic electricity supplies are expensive and erratic. With its limited fuel-refining capacity, Nigeria has relied on imported petrol and diesel to meet its energy demands. However, in 2022, the Russia-Ukraine conflict caused significant global economic turmoil. This led to the depreciation of the naira in Nigeria, requiring savings in government expenditure, including on fuel subsidies.
Historically, the government has heavily subsidised imported fuels to keep prices low for consumers – but in 2022 alone, it spent around US$10 billion on petrol subsidies.
And Nigeria’s fuel subsidies are not only expensive: they are poorly targeted. Blanket subsidies programmes benefit better-off households that consume more energy – due to having larger generators and homes, and more appliances – while around 40% of Nigeria’s population still lacks access to electricity.
In addition, Nigeria’s national electricity grid only produces and distributes around 4,000 megawatts annually, which is insufficient for the approximately 220 million population. As a result, households, businesses and public organisations rely on expensive and polluting off-grid generators powered by petrol, diesel or gas for their electricity.
Off-grid generators produce an estimated 40,000 megawatts every year, costing consumers around $5 billion in fuel. They also have significant environmental impacts, varying widely in age and efficiency, and producing more carbon emissions per megawatt than large-scale power plants.
They also produce nitrous and sulphur oxides that contribute to acid rain and particulates, while noise pollution affects human health and wellbeing.
Nigeria’s fuel subsidies have also slowed down the uptake of renewable energy – particularly solar. Despite the multiple benefits that solar power could offer consumers, the high upfront costs of solar systems have been unable to compete with subsidised fuels.
However, Nigeria has committed to expand the use of renewables in its Nationally Determined Contribution (NDC) – and there is significant potential. Nigeria could produce an estimated 2,000kWh/m2 per year by 2030 – 23 times the domestic energy demand – thereby fostering domestic energy security, lower prices and energy equity.
How subsidies reform has driven investments in solar power
In 2023, the government scrapped fuel subsidies, leading to a threefold increase in price from 190 naira/litre to 625 naira/litre. In 2024, this was followed by retail power tariff increases from 68 naira/kWh to 225 naira/kWh. This scale of increase had a significant economic impact on consumers and was met with protests.
Nonetheless, the government did not reintroduce subsidies – and researchers and analysts have identified this reduction in subsidies and subsequent price increases as the driver of a huge increase in solar installations.
Following the subsidy removal, installed solar capacity reached 73 megawatts by 2024. This growth continued exponentially into 2025 with the installation of 803 megawatts of new solar capacity, making Nigeria the second-fastest growing solar market in Africa.
While this expansion is impressive, there are still many households who cannot afford the upfront costs of solar systems. Research carried out by Enzi Ijayo Africa Initiative (and he Africa Research initiative examined this significant scaling up of solar capacity (PDF).
They interviewed households and small business owners who cited diesel and petrol price increases as having the biggest impact on their choice of solar as a viable alternative to generators. However, they also said that barriers remain, including high upfront installation costs and sunk costs of existing generators.
Solar technologies have decreased in price significantly: The International Renewable Energy Agency estimates that solar costs fell by around 75% in US-dollar terms between the early 2010s and 2022.
But the fall in value of the naira has meant these price reductions have not translated domestically. This highlights the need for affordable options for particularly poorer consumers to switch to solar and for both public and private-sector initiatives.
Government programmes have included the Central Bank-backed $360 million Solar Power Naija programme, aiming to serve 25 million Nigerians in rural areas. However, the scheme has seen limited progress since its inception in 2020.
At the same time, domestic solar suppliers have worked with financial institutions to develop products to bring down the costs for poorer households.
Some of these are traditional lease-to-own initiatives that overcome the barrier of high upfront costs. For example, domestic solar companies including Arnergy, Ceesolar, Sunhive and Central Electric & Utilities have schemes for consumers to buy solar systems by paying in instalments for up to 36 months. They also work with e-commerce platforms and banks to distribute their products using affordable payment plans.
This combination of removing market distortions in the form of fossil-fuel subsidies and improving the access and affordability of solar systems for all consumers has driven a huge increase in off-grid green energy. This is part of a wider trend across the continent with off grid providing both increased use of renewables and increased access to electricity for underserved populations.
People walk past the gates of an oil refinery in Port Harcourt, Nigeria The removal of fuel subsidies has increased petrol and diesel prices, encouraging households and businesses to consider solar power as an alternative, although high upfront costs remain a barrier (Photo: sixoone, via Wikimedia Commons, CC BY 2.0)
Key lessons from Nigeria
Global crises expose the true economic costs of subsidies
Nigeria’s experience shows how a major economic shock can create the political and fiscal conditions for reforming environmentally harmful subsidies.
The removal of fuel subsidies, combined with the weakening of the naira, exposed consumers to the underlying high cost of fossil fuel-based energy generation. This helped reduce one of the key economic advantages of petrol and diesel generators over solar systems and strengthened the incentive to invest in alternatives.
The fiscal gains from reform are also significant. In August 2026, the government announced 15.8 trillion naira ($11.7 billion) had been saved through ending fossil-fuel subsidies and other financial reforms over the previous three years.
While the government has not provided a breakdown showing how much of this saving is attributable specifically to the subsidy phase-out, the scale of the reported saving illustrates the potential fiscal space created by reform. Using some of these resources for targeted incentives and supporting access to affordable clean energy could reinforce the shift away from fossil-fuel generation.
Subsidy reform alone cannot ensure an inclusive transition
Removing fossil-fuel subsidies can improve the relative economics of renewable energy, but it does not automatically make solar affordable for poorer households. In Nigeria, households and businesses identified higher petrol and diesel prices as an important factor in choosing solar, while high upfront installation costs and existing investments in generators remain significant barriers.
This suggests that subsidy reform needs to be accompanied by measures that address affordability. Targeted finance, instalment-based payment models, concessional lending and well-designed government programmes can help increase access to solar more effectively than a blanket, untargeted subsidy programme that reform sought to remove.
This is particularly important in a country where around 40% of the population still lacks access to electricity.
The cost of universal energy access based on small scale solar at the household level has been estimated at around $7.5 billion, with a combination of public and private finance required.
Local solar production incentives can help lower domestic costs
The global cost of solar technologies has fallen dramatically. However, the depreciation of the naira has limited the extent to which these global cost reductions have translated into lower prices for Nigerian consumers.
Nigeria’s experience therefore highlights the importance of looking beyond the headline cost of renewable technologies. Policies that support local manufacturing, assembly and changes to trade policies to support interregional trade in green technologies could help producers and consumers benefit more from the falling global prices of these technologies.
Volatile global energy markets create opportunities for reform
The Russia-Ukraine conflict and the resulting volatility in global food and energy prices demonstrated that even oil-producing countries can be highly exposed to international energy shocks. For Nigeria, these pressures contributed to both fiscal and balance-of-payments challenges that strengthened the case for reform.
This suggests a broader lesson for countries considering fossil-fuel subsidy reform: periods of energy-price volatility can raise the costs of maintaining subsidies and create an opportunity to accelerate investment in alternative energy sources.
But this has to be accompanied by credible measures to protect vulnerable consumers and maintain public support.
What happens next?
Nigeria’s experience suggests the economics of the energy transition may increasingly be shaped by energy security and household finances as much as by environmental objectives.
When petrol, diesel and grid electricity become more expensive or volatile, technologies that reduce exposure to these costs become more attractive. Nigeria’s rapid growth in solar capacity following subsidy reform provides an example of how environmentally harmful subsidies reform can accelerate adoption.
However, the Nigerian case also shows market signals alone will not deliver an equitable transition. High upfront costs, currency pressures and unequal access to finance can prevent poorer households from benefiting from the same economic incentives.
The policy challenge is therefore not simply to remove distortions that favour fossil fuels, but to create the financial and market conditions that allow all households to respond to new incentives.
For policymakers, this points towards a need for better price signals, targeted consumer support and measures that strengthen domestic renewable energy supply chains.
If these elements can be combined, subsidy reform can do more than reduce fiscal pressure: it can help shift investment and consumer behaviour towards cleaner and more resilient energy systems.
Further resources
News: How Nigeria’s off-grid solar revolution is bridging the 90 million electricity gap (2026), The Business Times
News: Tinubu govt finally gives breakdown of fuel subsidy removal savings (2026), Daily Post Nigeria
News: Dangote refinery gains ground, but Nigeria still imports large volumes of fuel (2026), Ecofin Agency
News: Nigeria emerges as Africa’s second-largest solar market (2026), NatureNews Africa
Nigeria’s path to green energy transition: insights from business preferences for solar PV adoption, Olayemi Akangbe, Ayyoob Sharif (2025), Renewable Energy, journal article
Scaling the adoption of solar technology in Nigeria: a demand led approach, Lai Yahaya, Ebipere Clarke (2025), Enzi Ijayo Africa Initiative and the Africa Policy Research Institute, research analysis
News: BREAKING: NERC hikes electricity tariff for Band A customers from N68/KWh to N225/kWh (2024), Vanguard News
News: Generator sets threaten Nigeria’s clean energy ambitions (2024), ESI Africa
Country focus report 2023 Nigeria: mobilizing private sector financing for climate and green growth (2023), African Development Bank
News: Nigeria’s NNPC spent $10 billion on fuel subsidy in 2022 (2023), Reuters
Renewable power generation costs in 2022 (2023), International Renewable Energy Agency
Premium motor spirit (petrol) price watch (September 2023), National Bureau of Statistics (2023)
Access to electricity (% of population) – Nigeria, World Bank Group
Author
Laura Kelly is an IIED consultant and former director of IIED’s Shaping Sustainable Markets research group
