NIGERIA'S POWER SECTOR'S INVESTMENT: PROSPECTS AND CHALLENGES
Author: O. M. Atoyebi S.A.N FCIArb. (U.K.)., Contributor: CHIBUEZE. K. JAMES
The Nigerian Electricity Supply Company, founded in 1929, marked the country’s first utility venture. Although electricity generation in Nigeria began over a decade and a half earlier, in 1896,[1] [1] predating the establishment of the first utility, and despite the state-owned efforts to regulate the sector and provide electricity as a monopoly, it became evident by the late 1990s that Nigeria’s electricity infrastructure was failing to meet the country’s power needs. Consequently, in 2001, the National Electric Power Policy initiated Nigeria’s power sector reform, leading to various changes over the past decade.[2] [2]
Over the next decade, the government made significant strides in reforming the power sector, with the Nigerian power sector privatization standing out as one of the boldest initiatives in the global power sector.[3] [3] These strides included the enactment of the Electric Power Sector Reform Act, the establishment of the National Electricity Regulatory Commission (NERC), the formation of the Power Holding Company of Nigeria (PHCN) to assume the assets and liabilities of NEPA, the management of the privatization process by the Bureau of Public Enterprises (BPE), and the enactment of an Electricity Act; this legislation paved the way for the creation of a state electricity market.[4] [4]
This article sets out to examine the status quo of the power sector, the impact these significant strides made in the reform of the power sector by the government, and the challenges faced by investors in Nigeria’s power sector.
OVERVIEW OF THE NIGERIA’S POWER SECTOR. (STATUS QUO)
The power sector in Nigeria is made up of three sub-sectors which are generation, transmission, and distribution. At the moment, Nigeria’s national system is connected to 23 electricity-generating units, with a total generating capacity of 11,165.4 Megawatts (MW), although it only produces roughly 4,000 MW of that amount.[5] [1] In addition, 11 energy distribution companies (discos) have been operating throughout Nigeria’s 36 states since the privatization of the power sector in 2015.[6] [2]
It’s important to keep in mind that Nigeria mostly generates big amounts of power using gas while limiting the usage of other fossil fuels, which is not surprising considering Nigeria’s massive gas reserves, the majority of which are still unexplored.
However, despite Nigeria’s seeming abundance of hydrocarbons, gas, and oil, the country’s power sector is frequently hampered by challenges, such as gas flaring, regulatory uncertainty, inadequate infrastructure, equipment vandalism, etc.[7] [3] These among other challenges have limited the output and contributed to the poor energy situation in Nigeria.
SIGNIFICANT REFORM IN THE POWER SECTOR (INVESTMENT PROSPECT)
The 33-year monopoly of NEPA was broken in 2005 by the Power Holding Company of Nigeria (PHCN), opening doors for various players in the energy sector. Although power generation and distribution are now primarily in private hands, transmission remained under federal government control until the introduction of the new Electricity Act, which established the state electricity market.[8] [1] This change led to the availability of the Power Purchase Agreement, encompassing engineering, procurement, and construction contracts, as well as gas sale contracts. These agreements are crucial for all stakeholders in the industry, serving as preconditions and primary motivation for financiers.[9] [2]
According to estimates from the Rural Electrification Agency (REA), around 90 million Nigerians, or nearly 50% of the country’s population, lack access to grid energy, and millions of those who do have access to it only get less than 12 hours of electricity every day[10] [3]. This current energy predicament presents both a difficulty and an opportunity to stakeholders and new investors at large,
Investment prospects in the Nigerian power sector can be categorized into the following areas:
1. Investment in Gas/Gas Power Plant[11] [4]: The pipeline infrastructure that currently exists is grossly inadequate, particularly when it comes to the recently constructed power plants, prospective IPPs, and industries. To match current gas use, pipelines spanning thousands of miles would be required.
2. Investment in Hydro Power Generation[12] [5]: Converting existing dams into hydropower plants is the quickest approach to invest in small hydro in Nigeria. To do this, there are already more than 25 small dams spread around Nigeria that, if turned into hydroelectric plants, could produce roughly 30MW. These plants can feed into the embedded generation system, giving the distribution businesses in their respective localities more power.
3. Investment in Coal–Fired Power Generation[13] [6]: Nigeria is estimated to have a coal deposit of approximately two billion metric tonnes. 12.8 million tonnes of sub-bituminous coal, sufficient to fuel a 10,000 MW power station for 30 years. Interested investors may approach the Federal Ministry of Solid Minerals Development and state government for more information on project implementation.
4. Investment in Solar Energy[14] [7]: Solar investments would primarily focus on the construction of power facilities and feasibility studies in high-yielding locations. Solar power procurement is progressing to the competitive stage, where capacity is acquired competitively. This allows more investors to join, thereby increasing its popularity in Nigeria by lowering the cost.
5. Investment Opportunities in Transmission & Distribution[15] [8]: Due to a shortage of funds from the Federal Government’s budgetary funding, this sector is looking for alternative financing models such as contractor financing of new transmission projects, Rehabilitate Operate and Transfer (ROT), and Management contracts. Investments are expected in refurbishing existing facilities, restoring the network to its original capacity, completing ongoing projects in various stages of construction, initiating the construction of over 120 newlines and substations, and many new voltage control facilities and expand the network.
CHALLENGES PLAGUING INVESTMENT IN THE NIGERIA POWER SECTOR
Every subsector in the power sector has unique challenges, but regardless of their location or type, some universal challenges impact the investment performance in Nigeria’s Power sector. They include;
1. Political Interference: This is the most obvious and difficult economic issue confronting Nigeria’s electricity sector reform. One of the main arguments made for awarding MHI a US$23 million three-year contract to manage TCN was the desire to free up government interference and streamline the bureaucracy surrounding the enterprise’s public management to increase operational efficiency.[16] [1]
Furthermore, MHI was supposed to restructure the organization so that the Transmission System Provider became independent of the Market Operator and System Operator in order to facilitate the development of a TCN that would ultimately turn into a private commercial enterprise. Despite this, the TCN’s management seems to be heavily influenced by politics, which tends to hinder the organization’s capacity to carry out its declared purpose and restrict its ability to operate effectively.
2. Weak Institutions: Before the earlier power sector reform, there has been structural weakness in the institutional framework which stemmed from the clear inconsistencies, ambiguities, and gaps in the enabling laws’ descriptions of these institutions’ roles and interactions with one another.[17] [2]
However, with the creation of the state electricity market, these particular challenges could be mitigated and each state government could put in place institutions that could benefit its market, which would further attract investment.
3. Poor Maintenance of Power Equipment: Poor infrastructural maintenance culture resulting in an ineffective transmission network has been one of the challenges frustrating the power sector. This situation was reported to have partly resulted in the decision of the power distribution companies (DISCOs) and core investors to declare “force majeure”, a situation that could have made the federal government take back more power assets worth $2.5 billion.[18] [3]
4. Low Rate of Tariff and Billing: This presents the distribution companies (DISCOs) with yet another significant obstacle in the recent past. All other organizations involved in the power industry, including GENCOs and DISCOs, are impacted by this difficulty.
CONCLUSION
In conclusion, the history of Nigeria’s power industry, from the establishment of the Nigerian Electricity Supply Company in 1929 to the most recent changes and difficulties, illustrates a dynamic and changing environment, with significant strides made to attract both local and international investments. Despite these encouraging advancements, problems still exist. Issues with tariff rates and billing, inadequate maintenance of electrical equipment, political meddling, and weak institutions all persist in affecting the investment climate in this sector. Nevertheless, the establishment of the state electricity market[19] [1] has given state governments the chance to solve institutional flaws and tailor solutions for their particular markets
[1] KPMG, “A Guide to the Nigerian Power Sector” [2016] available at https://assets.kpmg.com/content/dam/kpmg/za/pdf/Guide-to-the-Nigerian-Power-Sector.pdf [9]
[2] Ibid, pg6.
[3] Ibid, pg6.
[4] Electricity Act 2023, Section 2(2), 63(1).
[5] Shado Olayinka “The Global Energy Transition: Implications for Nigeria Power Sector” [2022] Available at https://ssrn.com/abstract=4543594 [10]
[6] KPMG, “A Guide to the Nigerian Power Sector” [2016] available at https://assets.kpmg.com/content/dam/kpmg/za/pdf/Guide-to-the-Nigerian-Power-Sector.pdf [9]
[7] USAID, “Nigeria: Power Africa Fact Sheet” (2022) Available at https://www.usaid.gov/powerafrica/nigeria [11]
[8] Section 2(2), 63(1) Electricity Act 2023.
[9] Oshodi, Basheer A. and Oshodi, Basheer A., Energy Economics and Project Financing Options in Nigeria (2014). Available at https://ssrn.com/abstract=2434220 [12]
[10] USAID, “Nigeria: Power Africa Fact Sheet” (2022) Available at https://www.usaid.gov/powerafrica/nigeria [11]
[11] Federal Ministry of Power, Work & Housing, “The Nigerian Power Sector Investment Opportunities & Guidelines” (2016) Available at https://worksandhousing.gov.ng/themes/front_end_themes_01/images/download/15378184714037.pdf [13]
[12] Ibid, pg 23.
[13] Ibid, pg 32.
[14] Ibid, pg 35.
[15] Ibid, pg 38.
[16] S.E Nwani &Others “An Overview of the Nigerian Energy Sector: Prospect & Challenges (2018) Available at https://d1wqtxts1xzle7.cloudfront.net/57836664/NIGERIAN_POWER_SECTOR-_EVOLUTION__CHALLENGES_AND_PANACEA-libre.pdf?1542970737=&response-content-disposition=inline%3B+filename%3DAN_OVERVIEW_OF_NIGERIAN_ENERGY_SECTOR_PR.pdf&Expires=1700477530&Signature=DkfR~RRNAwTYP0w0VEZbW65J-g6Ks6fWVMrb8XsfV0EcYd7OVCADp35QnhP7dRT~YUP07bvA8MxJ3TmnS-D9niz-Qess41Tdx5QmKkBo3VVpDVC6iu2jYU2TVWPTkOCrPUT5ZndAjAUB2QQmE-hk9Wqr7KO9~fELLsMxplg6sbdUcv7RkMq9BzYr0B251IkzUQtLbKpVoREx0xa1bVRFW9mULPRoJnzt7-BuLLM6LlVZmgfpTLa7BEcjeqXYOAKoiVmyZkSrytZbPKAFkq1hhmsc~HwEqI44RH6MMIQKQKIPAugieFQTjd0RttYXxZ6aMb1mcPRNA4pQOtkloB1IGQ__&Key-Pair-Id=APKAJLOHF5GGSLRBV4ZA [14]
[17] Ibid, Pg 29.
[18] Ibid, Pg 30.
[19] Electricity Act, 2023. S 2(2), 63(1).