The energy sector powers up

Tunde Obadina

Millions of Nigerians who have for decades endured epileptic electricity supplies, or none at all, are hoping for a brighter future as government reform of the country’s troubled power sector enters a crucial stage.

The privatisation of the power sector is expected to lead to one of the biggest advancements in the Nigerian economy since Africa’s most populous nation first embarked on its structural adjustment programme in the mid-1980s.

“Today is a very significant day for Nigeria, significant because this is the issue of public-private partnership in action,” Tony Elumelu, the chief executive officer of Transcorp/Woodrock, the preferred bidder for the Ughelli Power Plc generating plant, said in February 2013 at the signing of agreements between power companies and the state-owned Nigerian Bulk Electricity Trading Plc.

President Goodluck Jonathan’s administration last year appointed the Canadian firm, Manitoba Hydro International, to manage the national grid under a three-year contract to operate the state-owned Transmission Company of Nigeria (TCN). And now, the government is in the final stages of concluding the sales of five power generation plants and ten distribution companies to private investors. Officials expect that these utilities, unbundled from the notoriously inefficient Power Holding Company of Nigeria (PHCN), will be in the hands of the foreign and local companies approved by the National Privatisation Council as the preferred bidders for the assets by mid-2013.

Although Nigeria is Africa’s second biggest economy and its leading oil producer, more than half the population have no access to electricity. For households and businesses connected to the grid the experience has been an endurance of frequent and often long daily power outages. Most companies and wealthy households must rely on private electricity generators for backup, which can be expensive in fuel costs.

Despite spending, on average, US$2 billion annually on the power sector, successive federal governments have struggled to find a lasting solution to the underperformance of the PHCN, which until recently did not produce much above 3,000 MW for a nation with an estimated demand of more than 10,000 MW. But since President Jonathan launched his administration’s Roadmap for the Power Sector reform in August 2010, on-grid generation is now above 4,000 MW. There has been more gas to fuel thermal generation plants as well as additional output from four new plants under the National Integrated Power Project (NIPP).

The government hopes the reforms will boost supplies to 14,000 MW by the end of 2013 and 40,000 MW by 2020. This may seem over-ambitious, given current levels of production, but officials say it is feasible, given that more than 40 new electricity generation plants are currently under construction or have been licensed to be built. There are investment and financing agreements for the power sector with a number of major international companies and financial organisations, including USA’s General Electric and Germany’s Siemens, as well as the export import banks of the US and China. Last year, South Korea’s Daewoo Engineering and Construction signed a memorandum of understanding to facilitate the production of 10,000 MW while China-based Sinohydro CNEEC Corporation agreed to build a 700 MW hydro power station in Niger State at a cost of about $1 billion.

The government has also taken steps to make the power sector more attractive to private investors by adjusting existing pricing regimes that hitherto limited the ability of producers to make a profit. In June 2012 the authorities launched a new Multi-Year Tariff Order (MYTO) that provides for a phased increase of electricity retail tariffs over the next five years. Sam Amadi, chief executive officer of the Nigerian Electricity Regulatory Commission, said: “The MYTO has restored confidence in the Nigerian electricity supply industry. This confidence is more important than the increase in generation because it is confidence in Nigerian electricity market that will spur investment in sustenance and sustainability of electricity supply.”

Disappointments are likely as the realities of transforming a sector that has been impaired by decades of neglect and mismanagement become more evident. The biggest challenge could arise in getting the available energy to consumers. Although existing power plants can produce about 6,000 MW, the poorly maintained transmission infrastructure struggles to deliver more than 4,000 MW. Unlike generation and distribution companies that will be partly privately owned, the transmission system will remain under state ownership. Officials are aware of the financial implications of this and are exploring ways to involve private investors in financing transmission infrastructure projects.

Less progress is visible in implementing long-standing plans to reform Nigeria’s inefficient downstream oil sector to end decades of dependence on imported petroleum products and perennial fuel shortages.

Strong opposition from powerful trade unions and politicians seeking to maintain the status quo have thwarted attempts to privatise state-owned refineries and abolish fuel subsidies. The failure to deregulate has stopped many private investors from building new refineries, despite the government having issued several licences to private companies in recent years.

The Minister of Petroleum Resources, Diezani Allison-Madueke, said in October 2012 that government plans to spend around $1.6 billion on the turnaround maintenance and upgrade of its three refineries.

It aims for the repairs to be completed by the fourth quarter of 2014. The state-owned Nigerian National Petroleum Corporation (NNPC) is also working on a $23 billion deal reached with the China State Construction Engineering Corporation in May 2010 to build three new refineries in Nigeria with total capacity of 750,000 barrels per day, as well as a petrochemical complex.

Nonetheless, many economists remain sceptical about the prospects of the government achieving its twin objectives of getting private investors to build refineries and turning Nigeria into a net fuel exporter.

These changes are unlikely to occur without Nigeria’s rulers mustering the political will to push through controversial reform of the downstream sector. Deregulation and liberalisation of the sector is one of the objectives of the Petroleum Industry Bill (PIB) currently with the National Assembly. Initially introduced to parliament in 2008 and presented again in modified form in July 2012, the PIB also aims to restructure the NNPC into a profitable concern, raise taxes paid by international oil companies and increase development funding for petroleum host communities. This crucial and complex legislation has been delayed in parliament, largely as a result of differences between the various stakeholders vying for bigger slices of the nation’s oil profits.

About the author:

Tunde Obadina is an economist and freelance writer


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