The Revolution of Nigeria’s Power Industry Needs Funding

Without investment and reform in the power sector, Nigeria’s estimated annual loss in economic growth is as high as US$130 billion.
Published: Wed 11 Feb 2015

For decades, Nigerians have had to put up with an unreliable electricity service from the government-owned monopoly PHCN, the Power Holding Company of Nigeria. The figures speak for themselves: Nigeria, the most populous African country, generates less grid electricity than the Republic of Ireland. South Africans consume 55 times more energy per person, and Americans 100 times more. Over half of Nigeria's 160 million people have no access to grid electricity.

As one can imagine, the poor electricity supply, resulting in constant blackouts, has hit the country’s economy severely over the years. Many consumers have been forced to use alternative sources of energy such as diesel generation which can be extremely expensive, especially for manufacturers.

According to the president of the Manufacturers Association of Nigeria (MAN), Chief Kola Jamodu, 40% of the production cost of manufacturers goes into the provision of electricity, compared to 5-10% in other similar economies. This would clearly have a negative effect on their competitiveness in both the regional and global markets.

Director General, Energy Commission of Nigeria (ECN), Prof. Eli Jidere Bala, has announced that about 45,000MW installed capacity of electricity would be required by the country in year 2020 and about 120,000MW by 2030.

However, Bala noted that if the economy is to grow at double the current rate, the supply for electricity would have to reach about 90,000MW by 2020 and over 300,000MW by 2030.

The need for a reliable power supply is clearly becoming critical.

Attracting private sector investment

Annual public sector investment, averaging US$2 billion, has resulted in a limited increase in supply.

In an attempt to improve the reliability of supply, the Government started privatising the majority of its power sector assets a decade ago. In 2013, the president of Nigeria handed over share certificates and licenses to the purchasers of electricity generation and distribution companies.

The sector has had to undergo a number of major changes over the past few years in order to make it commercially viable and ready to receive private sector investment:

  • The tariff regime has been altered so that companies can raise enough funds to finance their activities

  • The government provided subsidies for the poor through lifeline tariffs

  • The government has supported a commercial framework of contracts to improve incentives for power supply — for example by covering gas supply and power purchase agreements — and is providing credit support for the time being.

  • Historical liabilities are ring-fenced in a government liability management vehicle.

  • Labour disputes have been resolved.

  • The establishment of a competitive and viable (wholesale) market structure for the procurement of electricity

But has enough been done to revolutionalize the country’s electricity industry and attract private investment? The handover of electricity assets to private sector operators has not seen the power supply improve significantly.

Most of the companies that produce electricity from gas and hydro sources, and all of the distribution companies that serve customers, are now privately owned. But, the link between them — the transmission company — is still owned by the federal government.

Kickstarting the power revolution

Adeoye Fadeyibi, CEO Transcorp Ughelli Power Ltd, who will be speaking at the upcoming Powering Africa Nigeria, believes that there are two key issues that must be addressed before this sector revolution can take place: Firstly, transmission lines must be upgraded in order to accommodate the increase in the country’s energy level. This will also help to reduce the heavy transmission losses that currently occur after electricity is generated and transmitted. Secondly, given that the majority of the power plants in Nigeria run on gas alone, there needs to be an increase in the amount of gas (as well as the quality) being supplied to the generation companies (gencos).

Fadeyibi points out that the Transmission Company of Nigeria (TCN) is already in the process of making plans to strengthen the national grid. Also, all the privatized companies have a minimum level of improvement that they have to carry out on the assets they acquired in line with the performance agreement signed.

“In due course, power supply will become what Nigerians can take for granted. We’re expanding investment in transmission sector through involvement of the private sector. The gencos are busy with upgrades, especially after the administration had addressed the gas to power issue. We’re installing electronic monitors to check incessant vandalism of gas pipelines by enemies of the nation,” explains the Minister of State for Power, Mr. Mohammed Wakil.

Maintaining progress in privatization

Engerati asked Fadeyibi what the gencos and disco’s are doing to enable and maintain progress in privatization. He says that the two entities are working together to ensure that the policies, currently being put into place, will support the progress of the power industry.

However, the gencos and discos still face a number of obstacles which must be overcome in order for them to reach their full potential. A new industry will present them with many teething problems which they will need to tackle, explains Fadeyibi. However, he adds that the most pressing challenge for them is to create profitability along the entire value chain of the industry.

According to Adam Smith International, a professional services business, the final improvement in electricity supply is reliant on a massive investment programme, estimated at around US$70 billion to reach the same level of supply in countries, such as Brazil and South Africa. The government will not be able to finance this amount and is therefore heavily reliant on private sector funds.

Without investment and reform in the power sector, the Nigerian government estimates that the annual lost economic growth is as high as US$130 billion — about half of Nigeria's 2012 GDP.

Local banks have invested a huge amount in the privatisation and the power sector to date but with large asset sheets and the drop in global oil prices devaluing other parts of their investments portfolio, they will be hard pushed to provide further funding and lending services to Nigeria’s power sector. What is currently required is international finance and that would come from international banks, development finance institutions and Private Equity players.