The year 2014 is here and we have, in the last few years, witnessed a lot of activities in the electric power sector in Nigeria with reforms being at the core of such activities. In this edition and the next, we shall be considering the likely future trends, as far as the electric power sector in Nigeria, is concerned. Specifically, we shall be evaluating the current state of things along the electric power sector value chain, the challenges, what actions the government is currently taking, the opportunities for growth, general issues and also the likely areas for growth in the electric power sector.
With the completion of the payment by core investors and concessionaires, the natural expectation of the citizenry is to experience an improvement in electric power supply to their homes and businesses. What many Nigerians fail to realize, however, is that funds running into billions of dollars are still required to experience any sustainable improvement in electric power supply.
Investment Requirements for 2014 and Beyond:
The Federal Government of Nigeria’s Roadmap to the Power Sector Reform (“Roadmap”) specifies that, to meet Nigeria’s Vision of being a top 20 country by the year 2020 target of 40,000MW installed generation capacity will require investments in power generating capacity alone of at least US$ 35 billion per annum for the next 10 years beginning from the year 2010. Many have even argued that Nigeria requires an additional US$ 13 billion to the US$ 35 billion Roadmap 10 year estimate (totaling US$ 48 billion) as it is estimated that it costs an average of US$1.2 million to build a 1MW power plant in Nigeria.
Correspondingly, large investments are also required in the other parts of the electricity supply chain. Specifically, investment is needed to develop gas fields, gas processing facilities together with the requisite gas pipeline networks. A reasonable level of investment is also required to upgrade existing power stations, the electric power grid and distribution networks. A comprehensive systems study on the national grid is also requisite.
Weaknesses along the Electricity Value Chain:
The national grid has remained a weak link along the value chain, with a wheeling capacity of 4,800MW. According to official figures from the government, installed generation capacity is circa 6000MW whilst peak generation oscillates between 4,400MW and 4,600MW. With the expected addition of over 5, 000MW to the installed generation capacity by the National Integrated Power Project, no real improvement will be felt, if the national grid is not tremendously enhanced and forthwith too.
The good news, however, is that the Federal Government is already taking steps to enhance the transmission network through several contracts with engineering companies. The funds being used for the grid enhancement include those obtained from various sources such as the sum of US$ 500 million loan obtained from the African Development Bank (AfDB).
Gas supply which is another weak link; although classically, gas supply is typically not included as part of the electric power value chain. However, the importance of gas cannot be over-emphasized as over 80% of Nigeria’s currently installed generation capacity is gas-fired.
2014 Power Sector Outlook
The Transition Electricity Market (TEM) is expected to be declared by end of February/ March 1, 2014 and would usher in new generation capacity, more competition and electricity trading through (bilateral) industry agreements. With the declaration of TEM, the new owners of the power generation and distribution companies are expected to raise additional funds in form of equity and debt for capital expenditure and working capital in order to meet the performance targets they had pre-agreed to. It is also expected that the new owners would engage the Nigerian Electricity Regulatory Commission (NERC) with the aim of developing more credible baseline data for loss calculations and planning. They are also expected to engage NERC with a view to getting a tariff review and possible re-design.
Specifically, the newly privatized generation companies and other power generation companies are expected to optimally exploit available and untapped generation resources for the provision of electricity. They are also required to increase generation capacity and supply steady power to the national grid. Further, investments should be considered for the development of renewables particularly utilizing the embedded generation and independent electricity distribution networks regimes. Finally, companies operating in the power generation aspect of the electric power value chain should look to achieving energy efficiency.
The newly privatized electricity distribution companies should provide adequate and safe electricity to consumers, improve on the existing plan to provide meters to consumers and strive to ensure efficiency in supply of electric power to consumers with the ultimate aim of reducing the aggregate technical, commercial, collection loss levels.
It is pertinent to note that there are real challenges which could make it difficult for investors in power generation and distribution to achieve the desired goals, starting from the year 2014. These challenges, many of which have been highlighted above and in several other articles, include inadequate human capital and capacity, poor assets state and quality, high loss levels, poor operations and regulatory challenges.
Resolving the Issues
There are, nevertheless, a number of creative ideas which may be quite helpful in ameliorating these challenges. Some of these include managing old and decrepit electricity assets through asset strategy and planning, vigilance tools, technologies and measures. Smart metering technology must be embraced for reduction in commercial and collection loss levels. Effective human resources strategy, organizational structure review, skill set mapping, clear job description, training and skills transfer would in the short to medium term help reduce the human capital problem.
The operations of the power generation and distribution companies can also become more efficient if there is proper capital expenditure planning, effective procurement systems and customer service mapping.
Please look out for the continuing part of this discourse in a fortnight.
Ayodele Oni ([email protected]) specializes in international energy (oil, gas, electric power & renewables) investment law and has a mini MBA in Power & Electricity.
