Energy & Mining

Nigeria – Energy

Updates from the Niger Delta

As Nigeria emerges from depression, there is limited funding available for power generation.

With depressed oil prices for the past three years, financing has become less and less available in Nigeria, meaning new investments in power infrastructure require private capital.

Despite having an electrification rate of 96%, one of the highest on the continent, its power supply reliability hovers around 18%, with long blackouts that restrict industrial, commercial, and social development.

As the need for new and improved generation and distribution capacity becomes ever more apparent, some new projects are coming to fruition to help raise the country’s ability to offer power to its 186 million inhabitants.

In September 2017, according to officials, the country achieved its highest capacity ever at 7GW, with effective transmission reaching 6.25GW. The main challenge in attracting investment to the sector seems clear to most of those involved.

With some of the continent’s lowest power tariffs, lower than the actual generation costs, attracting investment seems all but impossible while the situation remains as it is.

Low tariffs, high costs

Artificially low electricity tariffs are hardly a new topic in Nigeria, but while years of high oil prices have allowed the government to sustain subsidies, the latest oil crisis has shown how difficult the situation is becoming.

Following a total systems collapse on September 28 (the second in a month), the Transmission Company of Nigeria (TCN) filed an application to the Nigerian Electricity Regulatory Commission (NERC) to provide an extraordinary tariff hike aimed at guaranteeing that power generation companies were capable of providing enough power to keep the national grid functioning.

The TCN is not alone. Earlier in August, Andrew Alli, the Head of Advisory of the Africa Finance Corporation (AFC), a multilateral development finance institution focused on the African continent, voiced concerns over the lack of attractiveness of the Nigerian power generation, transmission, and distribution sectors due to the lack of cost-reflective tariffs. According to the AFC, Nigerian power infrastructure needs around NGN3 trillion over the next 30 years, or NGN100 billion per year, in investment to be able to meet demand, a sum much beyond the capabilities of the central government, which is growing increasingly indebted.

“The truth is that in order to supply power in a reliable and consistent fashion then we need to see its true cost. Electricity is not a social product; it is an economic product. If you insist that the price should be lower than the cost of supply then the differential must be covered or there will be shortages. We know that the average price should be between NGN58 and 60 but the current market price is between NGN25 and 38, making achieving established agreements largely unthinkable.”
Kola Adesina, Managing Director of Sahara Power Group

Government authorities seem growingly aware of the need to review the tariff system in order to attract private investors. The Permanent Secretary under the Ministry of Power, Louise Edozien, speaking at the third National Council on Power (NACOP) meeting held in the city of Jos, on September 19, stated that, “The tariff is too low, and some consumers still don’t pay their bills, in part because the distribution companies (DisCos) have not metered them; so they are not sure they are paying for only what they have consumed. So, the DisCos do not pay Nigeria Bulk Electricity Trading (NBET) its full invoice. NBET in turn defaults in payment to the generation companies.”

In the midst of these power tariff wars, some positive news has emerged. The ever-diversifying Dangote Group, which has interests ranging from cement production to telecoms to food and beverages, is entering the power generation sector in its native Nigeria.

In mid-August, the company and its global partner the Black Rhino Group signed an MoU with the government of Kano State. Aliko Dangote himself, though largely based in Lagos, is from Kano in northern Nigeria and over the years has spent billions of naira on philanthropic projects in the state.

According to Dangote’s representative at the ceremony, Executive Director, Mansur Ahmed, the project aims to contribute to efforts to restore the economy’s vibrancy for the benefit of the people of Kano. He explained, that the state has been losing its “preeminent status as a great entrepí´t and center of commerce in the Sub-Saharan region” due to insufficient power supply. The agreement envisions the construction of a 100MW solar park to be connected to the state’s grid. The project is to be fully financed by the two private players, Dangote Industries Limited and Black Rhino Group. The agreement comes at a time when Nigerian government officials are pushing states to move ahead with their own power-generation initiatives.

Another piece of good news came with the announcement of the end of the refurbishment of Kainji hydro power plant, a dam built in 1968 in Niger State that was in dire need of maintenance works. The work was financed and concluded by the World Bank under the Water Resources Development and Sustainable Ecosystems Management Programme (WRDSEMP), and resulted in the recovery of 340MW in generation capacity.

Nigeria has an installed generating capacity of 11.8GW, but around 2GW is lost daily due to inadequate transmission and distribution capacity. Despite having reserves estimated at 192 trillion cubic feet of natural gas, enough to power the country for centuries, attacks on oil and gas infrastructure, particularly the Forcados export terminal, have greatly damaged the country’s gas distribution network.

It is estimated that Nigeria loses NGN534 billion per year due to power-sector inefficiencies. Nonetheless, the new record generation capacity bodes well for the fulfillment of the government’s plan to raise effective power generation up to 10GW by 2020.

Indeed, companies such as AITEO are looking to gas as a future source of revenue. Chike Onyejekwe, Group Managing Director of AITEO, told TBY that at the moment the lack of infrastructure is making the sector unattractive, but that nonetheless the company is one of many that wants to incorporate better downstream, upstream, and power into their business model. At the moment the company is paying great attention to seeing how exploration and production can be fed directly into power plant infrastructure. As their company increases oil production, gas will increase alongside it, discrepancies that will need to be addressed going forward.

*This content is an updated excerpt from TBY Intelligence’s 3Q2017 report on Nigeria’s energy sector