Getting the energy to flow

Tunde Obadina

Private investors are gearing up to enter a promising market for electric power generation and downstream petroleum industries, once the long-promised reforms are fully in place.

Nigeria’s energy requirements are currently far greater than its capacity to deliver. Despite being the world’s seventh biggest crude oil exporting country, Nigeria imports most of its petroleum products, while the majority of its roughly 160 million inhabitants live without electricity. This energy deficit is undoubtedly one of the biggest obstacles to the rapid development of Africa’s most populous nation and second-biggest economy. 

Improving energy supplies has been a top priority of successive governments since the restoration of civilian rule in Nigeria in 1999, but various reforms devised to tackle the problems of the electricity and downstream oil sectors, including encouraging private investment, have yielded few results so far. With national demand for electricity far outstripping supply from the grid, most modern businesses and wealthier households rely on expensive diesel and petrol electricity generation, which is estimated to account for almost twice the amount of power provided by the network. 

Despite government spending of $2 billion, on average, per annum on the power sector, the state-run electricity utility has not managed to boost its output much above 3,000 MW for the past two decades. Although Nigeria now has an installed generation capacity of 8,644 MW, about 1,740 MW of which is provided by independent power producers (IPPs), little more than 3,000 MW of this is currently available. Most of the power stations belonging to the state-run Power Holding Company of Nigeria (PHCN) have been poorly managed. 

This situation could soon change. President Goodluck Jonathan’s new administration is pressing ahead with the power sector privatisation programme, which is pivotal to its Power Sector Reform blueprint launched in August 2010. Nigeria’s privatisation agency, the Bureau of Public Enterprises (BPE), is aiming to complete the sale of six power generation companies and 11 distribution firms, created from the PHCN, by the first quarter of 2012 in what is expected to be Nigeria’s biggest-ever divestiture of state assets. The government will retain ownership of transmission but put its operation under private management. 

In June this year, the BPE announced that it had shortlisted 87 companies to bid for majority stakes in four thermal generation plant; 40 firms were also picked to acquire two hydropower stations as concessionaires, while 80 firms were selected to buy the 11 distribution companies. Qualified investors are expected to submit final bids in January 2012. Nigerian officials have been buoyed by the positive response from both local and foreign investors – including India, China and South Korea. 

This initial interest is unsurprising considering that Nigeria is a fast-growing economy with one of the world’s lowest electricity consumption rates per capita. The potential financial return for investors is vast. Privatisation and other measures to encourage private investors to build new power plants in Nigeria could bring within reach the government’s ambitious targets of boosting supply to 14,000MW by the end of 2013, and 40,000MW by 2020. Officials hope for annual investment in the power sector of $10 billion over the next decade, though much depends on whether the government can create a conducive environment for private sector participation in this notoriously inefficient area of the economy. 

There is, for instance, the abysmal state of Nigeria’s power transmission and distribution networks. After years of neglect, this infrastructure is responsible for about 30 percent of the losses in output and will not be able to cope with the planned increases. The government is aware of the problem, and last year announced plans to construct a $3.5 billion national transmission super-grid to be jointly financed with the private sector and development agencies. The proposed 700 KV grid is to be completed within four years and is expected to be a vast improvement on the existing 330/132 KV lines. 

Although Nigeria has plentiful natural gas reserves, the existing IPPs have for years complained of shortages of gas to fuel their plants. To make more available, the government launched a Gas Master Plan in 2008 obliging gas producers to allocate certain amounts of their output to domestic users. Furthermore, in May 2010 a new gas-pricing regime was introduced to gradually raise the price paid by power producers and encourage gas companies to invest more in expanding capacity. 

Potential investors will be watching to see how the authorities resolve uncertainties over the regulatory framework. The long delay in the passage of the Petroleum Industry Bill, intended to overhaul Nigeria’s oil and gas industry, has resulted in billions of dollars of investments in hydrocarbons projects being put on hold as international oil companies wait for the new legal framework and fiscal terms for operators in the sector. 

One of the most daunting political challenges facing the government is establishing pricing systems that will encourage profit-seeking businesses to invest in building new facilities, while not incurring public anger at higher end-user prices. Even after recent increases in the multi-year tariff order that took average prices from NGN8.50 to NGN10 per kilowatt hour, electricity prices are still heavily subsidised. 

Opposition from the Nigeria Labour Congress, the powerful central trade union organisation, to the sale of state-owned oil refineries and the removal of fuel subsidies has been largely responsible for halting market reforms in the downstream oil sector. Earlier plans to privatise Nigeria’s four refineries were shelved after union and public outcry led to the reversal of the sale of three of the plants to a local consortium headed by multi-billionaire industrialist Aliko Dangote in 2007. The four existing refineries currently produce well below their combined installed capacity of 445,000 barrels a day (b/d), with the result that Nigeria imports large quantities of petroleum products. 

Shortly after his re-election, President Jonathan said his administration would phase out the importation of petroleum products by improving the capacity of existing refineries in the short term, and by constructing new plants in the long term. Last year, the Nigerian National Petroleum Corporation signed agreements with the China State Construction Engineering Corporation to build three refineries to add a total of 750,000 b/d to Nigeria’s refining capacity, as well as a petrochemical complex by 2014. 

It is too early to say whether this project will see the light of day. In recent years there have been several plans to build new refineries that have not materialised, partly because of the failure of the government to deregulate domestic fuel prices. Currently, the official pump price of petrol is NGN65 ($0.43) per litre, or less than half the cost of importing the fuel. The government has repeatedly signalled its intention to eliminate domestic fuel subsidies, which cost the state billions of dollars annually and encourages racketeering by some fuel marketers, but is yet to build up the political will to act.

About the author:

Tunde Obadina is an economist and freelance writer


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