Energy is a critical element in achieving economic growth, reducing inequality and boosting employment. It is essential to every economy as water is to fish. It is, perhaps, most critical for industries. Show us any industrialised economy and we will show you an economy that is energy efficient.
Recognising the importance of energy, most industrialised economies in the world today, including emerging markets like India, take bold steps to achieve energy efficiency.
India’s energy sector is one of the most diversified in the world today. Apart from conventional sources such as coal, lignite, natural gas, oil, hydro and nuclear power, the country has gone unto non-conventional sources such as wind, solar, and agricultural and domestic waste, according to India Brand Equity Foundation, an arm of the Indian government’s ministry of commerce.
For fixing the power problem, its rank in the World Bank’s Ease of doing business’ ‘Getting Electricity’ segment rose from 137 in 2014 to 24 in 2018.
As of 2017, India generated around 1,160.1 billion units of electricity, up 4.72 percent from the previous year. The country is behind only to China which produced 6,015 terrawatt hours (TWH. 1 TW = 1,000,000 megawatts) and the US (4,327 TWH), and is ahead of Russia, Japan, Germany, and Canada.
The impact is felt by industries. India is world’s biggest exporter of beef and several finished products. Just like China, India is a leading exporter of leather, sugar, aluminium, textile and several other products. It earned $16.37 billion from garment in 2018—more than five times what Nigeria earned from all the non-oil export products put together.
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This is not the same story with Africa’s biggest economy that generates about 5,000 megawatts (MW) and distributes between 2,000 and 3,5000MW.
A report by the United States Agency for International Development (USAID) says that Nigeria has the capacity to use oil, gas, hydro and solar as sources of power. It adds that it has the potential to generate 12,522 megawatts (MW) of electric power, but it is doing far less.
In combination with other manmade gridlocks, local manufacturers bear ballooning costs of production which make their products uncompetitive in both local and global markets. Many of them cannot produce on a larger scale and export to other markets because they struggle to get cheap energy sources in the face of poor power supply from energy distribution companies.
In 2017, manufacturing companies in Nigeria spent as much as N117.38 billion in fuelling their plants to run daily operations, according to data from the Manufacturers Association of Nigeria (MAN).
An analysis of the financials of Dangote group, a key player in the manufacturing industry, shows that in five years, the group spent N485 billion on fuel and power consumption, accounting for 35 percent of the group’s production cost over the years. Many manufacturers have been unable to expand operations, acquire new machinery and produce more to give juicy returns to shareholders owing to energy issues.
“The biggest challenge facing manufacturing companies as well as small- and medium-scale enterprises is power. This has led the deaths of many businesses in the country,” Muda Yusuf, director-general, Lagos Chamber of Commerce and Industry, told Businessday.
The nexus between increased power supply and productivity is clear. When there is steady energy supply, operating costs of manufacturers fall, leading to the production of cheap products that can compete. This is not the case today as locally made products are much more expensive that imported ones owing to high production costs borne by few manufacturers that still have the courage to remain in business. When manufacturers produce competitively, they export and earn foreign exchange. Rather than seek foreign exchange to import inputs, they earn enough to buy inputs and also free it for the economy.
Today, Nigerian manufacturers are in a dilemma as they face cash strapped and poverty-ravaged consumers, half of who earn N21, 000 or less a month. All the poverty indices show that Nigerian consumers are getting poorer.
Brookings Institute said in 2018 that 87 million Nigerians, or around half of the country’s population, were extremely poor or lived on less than $1.90 a day. Just recently, the United Nations Development Programme (UNDP) said slightly over 98 million Nigerians are living in multidimensional poverty.
Data from the National Bureau of Statistics on Gross Domestic Product (GDP) by Income and Expenditure approach at 2010 purchaser’s values show that consumption expenditure of households has been declining at varying pace since it rose by 1.5 per cent in 2015. This has a far reaching implication for these companies with regard to sales.
Final consumption of households has declined by 8 percent from N43.1 trillion in 2014 to N39.66 trillion in 2018. Regular power supply cuts manufacturers’ production costs and enable them to meet the needs of a majorly poor population.
It would traditionally enable these firms to employ more people in an economy where almost one out of four people are jobless.
Currently, manufacturers self generate a little over 13,000MW through alternative sources of energy in order to stay afloat.
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In 2016, the Manufacturers Association of Nigeria, through its recently formed MAN Power Development Company, signed an agreement with Tower Energy Solution & Systems Limited for the supply of six to 10 megawatts (MW) of electricity to Henry Carr Industrial Cluster in Ikeja, Lagos. The impact of these agreements is yet to be known.
In major advanced economies of the world, the manufacturing sector takes the front burner in driving investment, creating jobs and reducing poverty. The reverse has been the case for Africa’s largest economy as many firms have either been squeezed out of business, or produce below capacity.
In the first quarter of 2019, growth in the manufacturing sector slowed to 0.18 percent from the 2.35 percent growth in the previous quarter, based on NBS data. Even though the percentage share of foreign exchange earnings got from the sector grew, it still accounts for a meagre 10.9 percent of total foreign receipt in the period under review. Analysts argue that the sector has a great potential to grow if the challenge of power is fixed.
They add that it is time to embrace the energy mix, just like India.
In September 2017, a report by David Gardiner and Associates, a strategic advisor to organisations seeking a sustainable future, reviewed 160 of the largest global manufacturing firms in the United States. According to the report, entitled, ‘The Growing Demand for Renewable Energy Among Major US and Global Manufacturers’, 25 percent of manufacturers, including General Motors, Anheuser-busch Inbev, and Mars, have renewable energy targets while 83 percent have greenhouse gas reduction goals.
The report says that renewable energy, particularly wind and solar, is now among the cheapest and cleanest generation resources. It stated that manufacturers were pursuing that type of energy to help reduce costs.
As reported by Alyssa Danigelis of energymanagertoday.com, of the 160 companies surveyed, 18 have 100 percent renewable energy targets. Even though some may dismiss this as an American example, the fact remains that this is happening across the world and manufacturing concerns world over are working towards being energy efficient.
The International Energy Agency predicts that renewable energy will comprise 40 percent of global power generation by 2040.
Nigeria has an advantage over the US, China and many countries in Europe, in that it is located in the sub-saharan Africa where sunshine and wind are not in short supply. More so, solar panels are becoming increasingly cheaper, though the reduction in cost will be determined by how much number Nigerian businesses and homes can buy.
Experts say Nigerian manufacturers must begin to take energy mix more seriously to bring down costs in the long-term.
Renewable energy may have shortcomings, but it is the future.
As the African Continental Free Trade Area draws near, only the competitive will survive. And Nigerian manufacturers need to be in this mix.
