Nigeria’s power deficit holds back growth

Written byDianna Games

PublishedOctober 23, 2020

The energy sector in Nigeria has been a double-edged sword for the country. While oil has sustained government revenues for decades, it has also diverted attention from broader economic development, and power deficits have been a significant handbrake on the country’s ability to diversify and industrialise. Dianna Games reports.

Getting the energy sector right is critical for Nigeria to move forward in the future but it requires addressing historical legacies and entrenched policy dysfunction, according to many analysts.

The power sector highlights the scale of the challenges. While Nigeria is Africa’s top oil producer, about half of all people living in the country do not have access to the power grid and those that are connected do not have reliable supply. Nigeria has one of the lowest per capita power consumption rates in the world.

As a 2016 report on the sector by PwC in Nigeria says, “It seems counterintuitive that one of the largest oil-producing and natural gas strongholds in the world struggles with providing power to its population. No one is immune to the failings of the power sector in Nigeria – commuters have adapted to dim and sparse street lighting, businesses have factored in the impact of power losses and residences struggle to receive adequate power supply.”

Power sector turbulence

Nigeria’s power is generated by a mix of sources. Biomass and waste top the list, followed by oil and gas as well as hydropower. Solar energy is making its way slowly into the mix. But the reality is that most Nigerians still rely on fuel-powered generators, which, collectively, provide eight times more power than the national grid.

Nigerians spend an estimated $14bn a year to buy and run them, money that could be more usefully spent on clean energy options or paying for reliable grid power.

State power monopolies such as the National Electric Power Authority (NEPA), formed in the early 1970s, and its successor, the Power Holding Company of Nigeria, stood in the way of progress.

A combination of infrastructural decay, corruption, inefficiency and a lack of capacity have undermined reform efforts over decades. It is estimated that the Nigerian economy loses $29.3bn annually due to a lack of adequate power supply.

The privatisation process, which was put on the table in 2005, was only completed in 2013. It resulted in the sale of 11 distribution companies (Discos) and six generation companies (Gencos) by the Power Holding Company of Nigeria to private investors, most of them Nigerian companies supported by international partners.

The privatisation was expected to generate immense investment in the power sector and turbo-charge the economy.

However, it has been beset by intractable problems. In the first instance, the new owners took a leap of faith, underestimating how decrepit the assets were. This has proved to be costly and they have battled to attract new investment, and to get consumers to pay for power.

In addition, the bulk trader (NBET) that was set up as a conduit between private sector operators in the value chain and the privatised companies, owes them millions of dollars that it cannot pay, further eroding their performance.

The transmission utility, which runs the national grid, is another sticking point. Retained by government in the privatisation process, it suffers from the same bureaucratic inefficiency and under-investment that once plagued the entire system.

The previous administration of President Goodluck Jonathan set a power generation target of 40,000MW by 2020. However, the capacity is currently just 13,400MW. Of that, only 8,000MW is accessible but less than 4,000MW gets distributed to end users because of infrastructure challenges and gas supply constraints. For the billions spent on the power sector, consumers are, in effect, no better off than they have been for the past few decades.

In 2020, the country’s Senate called for the privatisation process to be reversed, citing a lack of progress under the reform programme. The Association of Power Generation Companies says this will not help and it has called on the government to address deep-seated structural issues instead.

Nigeria has called on global energy giants to help it solve its intractable issues over the years. GE’s involvement spans four decades and it has deep roots in the energy value chain.

A deal with German energy giant Siemens is expected to result in the production of at least 25,000MW of electricity by 2025. This follows a meeting between President Muhammadu Buhari and German Chancellor Angela Merkel in 2018. It involves the upgrading of more than 100 substations and the construction of 70 new ones.

“Our goal is simply to deliver electricity to Nigerian businesses and homes. Our intention is to ensure that our cooperation is structured under a government-to-government framework. No middlemen will be involved so that we can achieve value for money for Nigerians,” President Buhari said.

His government is starting to dismantle power and fuel subsidies under pressure from the IMF, which approved a $3.4bn support package for Nigeria in the wake of the Covid-19 pandemic. Previous efforts to remove subsidies have fallen on stony ground in the face of mass public and trade union resistance.

Consumers are once again up in arms, facing hikes in power tariffs and fuel prices of between 10% and 100%. But the government’s current revenue woes may keep this on track. Fuel subsidies alone cost the country nearly $30bn in the decade to 2018.

Gas in the spotlight

As the power sector grapples with its intractable problems, new solutions to the energy crisis are being sought. Nigeria is focusing strongly on its enormous gas reserves – it is ranked as the eighth-largest potential gas producer in the world – to drive the power sector.

The government declared 2020 to be the year of gas and is backing this up with a range of projects. Sowunmi Olabode, Senior Legislative Aide to the Senate President and founder of the Energy Hub, says the process is being driven by the Gas Master Plan.

“This is essentially an aggregation of policies targeting investments and the development of infrastructure to support the investments. The key areas for local development of gas include gas to power, gas-based industries and liquefied petroleum gas.”

The government has introduced measures to drastically reduce gas flaring by oil majors. The Nigerian Gas Flare Commercialisation Programme will license third parties to collect the gas from flare points and set up facilities to exploit it. Olabode says compliance with the programme will be a licence condition for the award and renewal of all oil mining leases and marginal fields.

Currently, there is a major pipeline that feeds into the Lagos axis and in 2020, the president flagged off the 614km Ajaokuta-Kaduna-Kano pipeline project, billed to be completed within two years.

Renewables inch forward

The shift to renewables is being driven largely by the Rural Electrification Agency of Nigeria (REA), which was set up by the government to work with the World Bank and others to drive the rollout of renewable energy, which forms part of the national energy master plan.

There are many challenges, however, and the country’s rural electrification rate was at 39% in 2019 against a target set about a decade ago of 75% by 2020.

In other areas of the economy, there has been keen uptake of solar options. Banks and petrol stations are starting to run their branches on solar power and providers are putting solar solutions into Nigeria’s enormous markets.