Achieving Self-Sufficiency in Nigeria’s Power Sector

Introduction

From the inception of the Nigerian power sector in 1886, when the first power was generated, till date, the government has played a fundamental role in keeping the lights on, leading to general customer apathy towards payment for electricity. These non-payments, among other industry challenges, impact the entire electricity value chain, leading to the sector’s increasing non-viability. That notwithstanding, the industry must continue, and the federal government of Nigeria desires that sustainability is achieved within the shortest time possible. Therefore, there is a need to chart the course for the self-sufficiency of the sector, independent of government support

Background

Nigeria possesses abundant energy resources; however, there is a need to bridge the gap in accessing reliable and affordable energy. The country faces significant challenges in every arm of the electricity value chain: generation, transmission, and distribution, resulting in a near failure of the sector, with little hope in sight for its future due to prolonged struggles. Before the industry’s privatization, the Federal Government of Nigeria sought to scale power generation and distribution in the nation to meet the energy needs of its citizens by implementing various interventions and reforms, including the Almighty Electric Power Sector Reform Act 2005. The same led to the unbundling of the then National Electric Power Agency (NEPA) and the subsequent privatization of the generation and distribution sub-sectors. Despite these interventions, the sector is yet to achieve the desired success, evidenced by the persistence of power cuts, low quality, and insufficient and unreliable power supply. A diagnosis of the challenges reveals a lack of substantial private sector investment contrary to the government’s intent at privatization (Power Sector Performance Assessment Report 2022) and negatively impacting the availability and quality of electricity supplied to consumers. This lack of private sector investment is sponsored by various historical issues, including:

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a. Inconsistencies in the baseline data upon which the privatization was done. Years after privatization, investors decried that the baseline data varied significantly from the market realities.

b. Market and tariff shortfalls arising from the lack of electricity tariff review for five years (2015 to 2020) led to a shortfall of over N2.4 trillion in the financial books of operators as of 2021.

c. Lack of cost-reflective tariffs: In 2015, electricity tariffs were relatively cost reflective however, due to political intervention, there was no will to increase tariffs even with the change in macroeconomic variables such as foreign exchange rates, leading to a massive imbalance in the market and an ever-widening gap with tariffs.

d. Gas constraints resulting from the prolonged neglect of the non-associated gas supplier infrastructure. The nature of gas utilized for power generation in Nigeria is associated with gas derived from crude oil. Nigeria has a rich reserve of non-associated gas, but not enough has been exploited.
e. Energy theft and high collection losses arise from customers’ unwillingness and inability to pay for power supply.

f. Regulatory uncertainties

Analysis

Due to the above reasons, operators are plunged neck-deep in debt to the market, scraping by to maintain operations and keep the lights on, with little or nothing left for reinvestment into the networks. Moreso, Nigerian electricity supply industry operators cannot access loans to improve their facilities and operations because of the bad debts on their financial books, leaving the power sector in a vicious cycle of inefficiency. While the government has shored up the sector for the last decade, it is eager to allow the forces of demand and supply to determine the tide of the electricity market in Nigeria by withdrawing its support. This move is essential; however, it is critical to note that removing the federal government’s support at this time will only worsen its situation. Establishing an electricity market that is sustainable and independent of government support would require a proper transition plan that involves:

a. Adequate protection for customers unable to pay who are unwilling to pay for electricity. According to the National Bureau of Statistics 2019 Poverty and Inequality in Nigeria Report, almost 83 million people live below the country’s poverty line of N137,430 ($381.75) per year. Under the Electric Power Sector Act, 2005 (EPSRA), the Act established a Power Consumer Assistance Fund to provide relief for those unable to pay for electricity. The tariff for this class of people has been maintained at rock bottom. The government may withdraw this support in tariffs, but there should be cross-subsidization where the more able should pay a little more so the less able can access power. This process has, however, begun with the commencement of the service-based tariffs (SBT) by the Nigerian Electricity Regulatory Commission (NERC), where customers in higher bands cross-subsidize for customers in lower bands. However, the sustainability of this approach concerning the protection of customers unable to pay is firmly in doubt as NERC has directed all electricity distribution companies to migrate 80% of their customers to higher bands (bands A, B, and C). Therefore, efforts must be directed toward improving the earning capacity of the masses. Income is a critical factor that drives macroeconomic growth, without which no sector can break even.

b. Purposeful upgrading and extension of electricity infrastructure across the transmission and distribution

sub-sectors. Given the peculiarity of the Nigerian grid, extending electricity to totally unserved areas will be an
arduous task for obvious reasons. Therefore, the government has a role in developing power infrastructure to reach unserved areas, especially when the sector suffers a liquidity crisis. This venture is capital intensive as other power investment projects; however, beyond addressing the power needs of the Nigerian populace, it would foster credibility and legitimacy of the government, showing substantial proof of its commitment to the nation’s and its citizens’ development. The government can invest in major infrastructures like large-scale solar plants for off-grid power. These investments can then be clawed back over some time via tax or other means as the government deems appropriate. The government may also invest in gas extraction through gas supply infrastructure to seed the industry and provide gas for improved power generation, given that gas constraint is one of Nigeria’s significant challenges with power generation.

c. Creating a competitive retail electricity market that allows customers to choose their suppliers is critical to achieving sustainability in the power sector. The recent constitutional amendment by President Muhammadu Buhari has created the hope for a competitive electricity market against the initial assumption post-privatization that the electricity distribution companies own franchises and are monopolies. This assumption was based on the fact that they were the wire providers, and this role cannot be easily fragmented due to issues of network delineation. However, a disintegration of the power distribution operation into wire providers and energy sales can better simplify the road to a competitive market.

Conclusion

It is critical that the Nigerian power sector transits from its current life-line situation to a sustainable market independent of government support; however, this transition, like in other industries in the country, should be gradual, ushered in by targeted investments, and preserved by enabling environments. This is because an abrupt withdrawal of support will rattle the delicate building blocks of the sector, exacerbating the already existing imbalances in the industry.