Nigeria: Nigeria’s power sector goes private

The privatisation of Nigeria’s power generation and distribution assets has paved the way for an increase in electrification, although ongoing issues with gas supply and distribution are proving a challenge.

The government is looking for better private sector involvement to boost investment in the sector, which needs some $65bn worth of capital spending to reach the country’s target of 40,000 MW of generation capacity by 2020, according to Nigerian Bulk Electricity Trading.

Window of opportunity

The rationale behind the privatisation push – which was several years in the planning but finally materialised in 2013 – is clear: inefficiencies in Nigeria’s power sector have traditionally been a major constraint to increase, costing the 170m-person economy as much as $100bn per year, according to government estimates.

With only two-thirds of the people currently receiving electricity, Nigeria ranks part the worst performers in the world at the same time as it comes to power, according to the World Bank’s most recent “Doing Business” statement. Nigeria placed 182nd out of 189 nations surveyed in terms of relieve of getting electricity, behind South Africa (168th) and Kenya (127th). Meanwhile, request increase is continuing apace, estimate to rise by 10% per annum through to 2020.

The lack of a reliable supply of electricity is seen as an impediment to increase in Nigeria’s industrial sector in particular, adding to the cost of doing business for a lot of firms. Companies frequently need to rely on backup diesel-fuelled generators, which run at a cost of $0.30-0.50 per KWh, compared to the average grid tariff of $0.13.

While Nigeria has additional than three times the people of South Africa, it has just one-ninth of the installed generation capacity. Output traditionally has not exceeded 5000 MW, according to local media reports, which is roughly one-third of peak request.

Private successes

To help address generation concerns and encourage private investment , in 2013 the government began a partial privatisation process that led to the sale of 15 national generation and distribution companies, before included under the umbrella of the Power Holding Company of Nigeria. The sale generated additional than $3bn, according to local media reports.

The privatisation was something of a landmark moment for the country, and should provide significant long-term benefits in terms of power provision. However, it has not been completely smooth sailing: the Central Bank of Nigeria launched a NGN213bn ($1.1bn) bailout package in September 2014 to cover revenue shortfalls and help with deficit servicing on NGN500bn ($2.5bn) of bank loans across the sector.

Nonetheless, certain power plants have seen improvements as a result of the scheme. In particular, the Ughelli Power Plant – the country’s major fossil fuel generation plant – has increased power generation additional than five-fold in the completed two years, and is expected to deliver an extra 760 MW by the end of 2015, according to Adeoe Fadeyibi, CEO of Transcorp Power, which manages the plant.

The country’s major power plant, the 30-year-old Egbin Power Plant in Lagos, has as well boosted its output, from less than 50% of capacity to 85% since Nigeria’s Sahara Group and Korea Electricity Power took over management in 2013. The plant presently generates an average of 1100 MW, according to the company.

The privatisation of existing assets has as well been complemented by the arrival of new producers, with the Nigerian Electricity Regulatory Commission having recently issued 70 licences for independent power plants (IPPs). In August the federal government announced that the 450-MW Azura-Edo IPP – an open-cycle gas turbine project that is part of a larger 1500-MW IPP facility planned for Edo National – had reached financial close and is expected approaching on-stream in 2018.

Additional scope for reform

To maintain the current momentum, efficiency in other parts of the supply chain will as well need to be improved. For example, access to gas remains a challenge, limiting a source of key inputs for power generators.

Despite boasting 180trn cu feet of proven gas reserves – the major store on the continent – the guaranteed supply of gas to existing thermal generation plants in Nigeria, which account for 80% of the country’s on-grid power, remains a key concern for industry stakeholders.

Currently, only 14% of domestically produced gas is sold to the local market, with 38% exported as liquefied natural gas, an extra 24% flared and the remainder re-injected to be used as fuel or processed into other liquids, according to Philip Ihenacho, CEO of local oil and gas company Seven Energy.

Gas producers sell a set quota of gas to the domestic market at a fixed non-commercial rate, which reduces the incentive to invest in costly gas infrastructure upgrades. Pipeline vandalisation as well serves as a deterrent to further investment , due to the cost of repairs and additional security measures needed to guard the vulnerable spots along the network.

According to Michael Larbie, CEO of Rand Merchant Bank Nigeria and West Africa, a additional liberal pricing regime could create the fiscal space needed for private investment to flourish. “The regulator must allow market dynamics to dictate the optimal tariff levels, as this will enable investors to get a return on their investment and put additional money into the system,” he told OBG.