Middle East & Africa

From power-hungry to power for the people?

Issue 5 and Volume 20.

After years of corruption and underinvestment in the power sector of Africa’s most populous nation, an ambitious scheme is implementing changes to ensure demand will be met – both now and in the future.

Nicholas Newman

The Nigerian flag
The Nigerian flag’s bold green-and-white design signals the country’s renewables potential and the promise of power-sector reform under the current ‘Vision for Nigeria’ roadmap

Nigeria is a perfect example of years of energy leadership failure — a situation currently being overturned with an ambitious power-sector reform plan.

Under President Goodluck Jonathan, who came to power in 2010, ‘Vision for Nigeria’ targets achieving an output of 40 000 MW by 2020. This requires an investment in power-generating capacity alone of at least $10 billion a year over the next decade, as well as substantial investments in transmission and distribution.

Despite holding the world’s seventh-largest gas reserves and enjoying oil revenues of $40 billion a year, Nigeria only produces sufficient electricity to power a medium-sized European city. Of Nigeria’s 160 million people – making it Africa’s most-populous country – only 40 per cent have access to electricity. Blackouts are a daily occurrence, with the public saying that the acronym for state-owned power supply company Power Holding Company of Nigeria (PHCN) should stand for ‘Please Hold Candles Now’.

But under the ‘Vision for Nigeria’ roadmap, power-sector reforms aim to end 50 years of neglect, mismanagement and under-investment by bringing in private and foreign cash and management know-how to aid the generation, transmission and distribution of the country’s electricity. The Presidential Task Force on Power claims that the roadmap and current reform drive “provides light at the end of a long, dark tunnel”.

Power generation

Currently, Nigeria’s estimated generating capacity is some 6 GW, although in practice only between 3 GW and 4 GW is actually generated — an output that is equivalent to 25 watts per head. Nigeria’s performance as an electricity producer compares poorly with South Africa, which produces some 826 watts per head, or its Atlantic neighbour, Brazil, which has an output of 84 GW for its 191 million population, or 486 watts per head.

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Nigerian waste heat being utilised for fuel at a cement plant Source: Thermax

According to the International Energy Agency, in 2009, the Nigerian power- generation mix relied on three main sources. These were power stations using oil (2533 GWh), natural gas (12 715 GWh) and hydro (4529 GWh). With little or no investment in the 1990s and erratic finance in the following decade, much of the available investment went towards replacing damaged equipment instead of funding expansion and upgrades.

Load shedding is frequent in many areas, due to the failure to update transformers. In addition, many of the country’s power stations are between 20 and 30 years old – indeed, no new power plants were built in the decade after 1989.

This unloved power sector is characterised by significant managerial inefficiencies, high staff costs – which account for nearly 80 per cent of costs – high energy losses (30–35 per cent from generation to billing), poor revenue collection, where between 30–40 per cent of power supplied was not even billed, and an electricity tariff below the cost of service. It does not help that only around 75 per cent of customers bother to pay their bills.

For example, in southeast Nigeria, an area supplied by Benin Electricity Distribution Company (a subsidiary of PHCN), consumers owe the soon-to-be privatised power utility some $81 399. There is insufficient cash generation because of these serious endemic inefficiencies, and the National Electric Power Authority (NEPA) is consequently reliant on huge fuel subsidies and government funding. It is this situation, and the constraints imposed by power shortages on economic development, which the reforms are designed to tackle.

Backyard generators

In 2010, Nigerian President Goodluck Jonathan revealed that “generating power from generators adds more than 40 per cent to the cost of goods and services in Nigeria”, and that Nigeria spends about $13 billion annually in fuelling generators.

For example, Wärtsilä supplied a 100 MW power plant that can use oil or gas to the Lafarge Cement WAPCO cement plant in order to free it from dependence on fluctuating power supplies. It is not surprising that Chinese companies such as Jinan Diesel Engine Company (JDEC) are supplying natural gas powered gensets ranging from 20 kW to 7 MW to large Nigerian businesses.

The task of national power reform is not only to meet current demand, but also to be able to match future demand. Nigeria’s population is the world’s seventh largest, and accounts for 15 per cent of Africa’s population. It is also growing rapidly, and is forecast to reach 230 million within 20 years.

Insufficient power also inhibits Nigeria’s current economic growth and threatens its future development. A 2011 report by the Nigerian Senate Committee on Power and Steel Development noted that none of the plants it investigated worked at more than 60 per cent capacity.

For example, the western Nigerian power stations at Jebba, Kainji and Shiroro were not fully operational. Many new plants have failed to start up as planned due to the unavailability of sufficient gas supplies at their locations. It has not helped that past natural gas tariffs have provided little incentive to prevent natural gas being flared off or exported, instead of being used domestically.

Former PHCN chief Sikiru Salami asks: “Why do we build power stations in places where we know gas supply would be a constraint? In fact, who were the people who advised the government on these projects? These are question that we must ask ourselves.”

It also does not help that there is insufficient power grid to cope with the maximum output of the power plant. In addition, there are logistics failures in the collection of vital parts from ports. In one case, 22 containers had not been delivered to the power-plant construction site due to failure to clear customs.

Otis Anyaeji, chairman of the Electric Power Foundation, said at the recent second WorldStage National Power Conference in Lagos: “The greatest hurdles against the implementation of NIPP [National Integrated Power Projects] were the difficulties encountered in the clearing of imported equipment. Many government agencies are working at cross purposes.”

The start-up of new gas fuelled power plants has also been held up by delays in completion of the national gas transmission grid to link power plants with gas fields, according to David Ige, group executive director for gas and power at the Nigerian National Petroleum Corporation. But once it is completed, the grid is designed to deliver 99 million m3 of gas per day to 30 existing and proposed gas fuelled plants.

Then there is the perennial problem of failures to pay for services. As Nigerian National Petroleum Corporation spokesman Levi Ajuonuma succinctly states, “The problem is that PHCN is not paying for gas, and the oil companies are not happy about it.” In addition, the country’s power-distribution grid capacity is proving insufficient to meet both existing and planned needs.

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Enugu State’s abundant coal deposits have remained unexploited since 1967 but the Minister of Power Professor Barth Nnaji has recently announced plans for three new coal fired power plant projects

Nor is the situation helped by the systematic vandalising and pilfering of PHCN equipment by criminal gangs, which has contributed to regular power outages. According to Dr Effiong Umoren, chief executive officer of Benin Electricity Distribution Company, in the six months up to September 2011, there were 118 reported cases in Delta State and four cases in Ekiti State.

It has been estimated by the Economist Intelligence Unit that Nigeria’s need for power is likely to increase by 15.2 per cent a year during the period 2012–20. However, under President Jonathan, it appears that at last Nigeria has a political leadership that is leading power sector reform.

Government reform drive

Essentially, the government’s invigorated power-reform drive, first initiated in 2005, has three main goals. The first is to restructure the industry by dividing it into autonomous functional units of generation, transmission and distribution. The federal government already empowered the chief executive officers of the successor companies to take decisions to develop the sector instead of having to travel to Abuja to get clearance.

The second goal is to develop the market so that costs are reflected in tariffs under a strong, market-oriented regulator, the Nigerian Electricity Regulatory Commission (NERC).

The third goal is to create partial privatisation by bringing in private sector management and investment. Within power generation, thermal power plants will be privatised. In power transmission, the government will retain ownership but introduce private sector management. Power distribution will result in a transfer of distribution company ownership to the private sector, as envisaged in the 2005 Electrical Power Sector Reform Act.

The present Nigerian government plans to break up PHCN into 18 successor companies – 1 transmission company, 6 generation companies and 11 regional distribution companies – as a first step towards partial divestment of government assets.

In April this year, Manitoba Hydro of Canada won the contract to run Transmission Company of Nigeria (TCN) after a bidding process that lasted five years, at a negotiable fee of $23.7 million for three years.

Bolanle Onagoruwa, director-general of the state privatisation agency, Bureau of Public Enterprises (BPE), said Manitoba came top in the World Bank quality- and cost-based selection method used for the transaction.

As part of the ongoing reform programme, independent power plants managed by Agip, Shell and AES are already supplying power to the grid. Also, to incentivise further investment, the government has given the go-ahead for a 700 kV supergrid.

At present, 70 per cent of power supply in Nigeria comes from state-owned plants. In the next three to four years, 70 per cent of power consumption will be generated by private companies.

reform opposition

Originally, the government had planned to achieve this stage of privatisation by the end of 2012. But many industry experts suggest that this process will not be completed before 2015. The delay is due partly to opposition from various vested interests, including unions, businesses and politicians that have benefited from keeping Nigeria’s power sector in its dysfunctional state.

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President Jonathan and officials at Papalanto power plant in Ogun State. China’s SEPCO won the EPC contract to build the 335 MW gas turbine power project ten years ago; it was put into operation in 2007

Opponents of reform have exploited Nigeria’s traditional dislike of foreign ownership as a rallying point against President Jonathan’s reforms. Opposition has come in many forms, including strikes by power-station workers and death threats to decision-makers such as Ngozi Okonjo-Iweala, who is currently in her second term as Nigeria’s Co-ordinating Minister for the Economy and Minister of Finance. Known as the country’s ‘Iron Lady’, Okonjo-Iweala also heads Nigeria’s Bulk Electricity Trading Company (BETC).

BETC is expected to buy up the power generated by new and old-generation companies and assure investors of stability in the sector. As Finance Minister, Okonjo-Iweala is leading efforts to reform the business and regulatory environment to attract foreign investment.

“People will be supportive of anything we can do in the power sector to disband the power authority [PHCN] because it has not proven capable of supplying power,” says Okonjo-Iweala.

In her role at BETC, Okonjo-Iweala has pledged: “This very difficult area [the power sector] in the economy will be given the utmost attention, and will receive the support that it needs to make visible difference.”

Meeting the hunger for power

To encourage investment, NERC has introduced a new tariff regime. In June 2012, power bills will increase by a maximum of 11 per cent for rich residential customers and large industrial users. Under the old tariff, the government subsidised power to the tune of $1.1 million in 2009 alone; currently, $381 558 has been set aside to subsidise electricity consumption by the poor and rural populations in 2012, and an additional 50 billion naira ($318 billion) will be spent for the same purpose in 2013.

Nevertheless, under the new pricing structure, consumers will still pay less for their electricity from distribution companies than they will pay in running their home-based microgenerators.

The new tariff structure is based on two types of user, one residential and the other commercial. The residential tariff is divided into three categories: R1 low income, R2 middle income and R3 high earners. For commercial users, the categories are C1 for micro and small businesses, C2 for medium-scale enterprises and C3 for large-scale industrial concerns. However, the R1 user’s power prices would be heavily subsidised by the federal government to keep bills affordable, while R3 users would pay the full market rate. In addition, there would be local variations in the power prices paid.

Sam Amadi, chief executive of the Nigerian Electricity Regulatory Commission, said an RI user in the federal capital of Abuja would pay $0.019 per kWh and less in a city like Port Harcourt. The regional differences in prices for the same type of user would depend on location and local factors such as the number of customers and cost of production.

As a result of the ongoing reform process, a number of foreign investors have expressed interest in purchasing and investing in the 18 companies to be unbundled from PHCN. In February, US Assistant Secretary of State for African Affairs Johnnie Carson led an energy trade mission to Nigeria that declared a readiness to invest as much as $1.5 billion.

US giant GE also signed a memorandum of understanding in March to invest in power plants with a combined capacity of 10 000 MW, with GE taking a 15 per cent equity position in each plant.

Jeff Immelt, chief executive of GE, said at the time: “For GE, Africa today is bigger than China was ten years ago.”

The Nigerian Ministry of Power and Steel estimates it will require an investment of $10 billion a year for ten years to meet the country’s energy needs. Nigeria possesses the world’s sixth-largest reserves of crude oil, with a proven gas reserve estimated to be about 5000 billion m3. Also, coal and lignite reserves are estimated at 2.7 billion tonnes, while tar-sand reserves represent 31 billion barrels of oil equivalent.

There are exciting ongoing plans to develop new power plants fuelled by oil, gas, coal and hydro. Siemens is supplying plant for the completion of the gas-fuelled Geregu Power Plant Phase 2 Project in the Nigerian Midlands region, which involves supplying and installing three Siemens gas turbines (SGT800) and ancillary equipment.

With an estimated 14 250 MW of undeveloped hydro capacity, Nigeria’s plans for development include the $1 billion 2600 MW Mambilla Plateau Hydropower Project in eastern Nigeria, which has attracted interest from China’s Exim Bank, China Geo-engineering Corporation and China Gezhouba Group Corporation. Several European and Chinese banks, including the European Investment Bank, have offered to help finance hydro schemes in the Economic Community Of West African States region.

Other renewables, apart from much discussion at seminars, have seen little meaningful action. The Energy Commission of Nigeria has had tentative plans since 2010 to raise the profiles of both wind and solar, which are now non-existent. The proposals target 40 MW for wind and 500 MW for solar by 2025. Plans are also afoot to import power from planned hydro and gas projects in West Africa using the West African Power Pool.

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‘Unloved’: Nigeria has an estimated 14 250 MW of undeveloped hydropower, although this may change as the 2600 MW Mambilla Plateau hydropower project in eastern Nigeria has attracted Chinese investors. Several Chinese and European banks have also offered to finance ECOWAS hydro schemes

In addition, there are ongoing plans to develop coal power plants. Minister of Power Prof. Barth Nnaji recently announced plans for three coal fired plants, each with a 3 GW capacity, to come online in Enugu, Kogi and Gombe states by 2015, with construction costs underwritten by up to 25 per cent by the federal government.

Many plants being constructed in Nigeria are designed to use domestic gas as a result of the completion of the first phase of the West African subsea pipeline linking Nigerian gas fields with Ghana, Benin and Togo. Power companies in those countries have begun to exploit the use of cheaper and environmentally cleaner gas from Nigeria in lieu of solid and liquid fuels for power generation.

Future significant reforms

Nigeria’s current political leadership appears to have taken charge to drive through substantial reforms with the help of foreign investment and management know-how, although it faces multiple hurdles in implementing these.

It is not surprising that, given its massive oil and gas reserves, the country’s energy leadership is at best only paying lip service to the potential that non-hydro renewables could play in delivering affordable, sustainable and reliable power supplies to its large and growing population, as well as to its industry.

It is clear that President Jonathan’s administration will have to make further significant reforms in Nigeria’s energy policy before its domestic energy consumers will experience the levels of light and power enjoyed by consumers in South Africa.

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