Privatisation: Purveyor of improved power supply in Nigeria, says Oxford group
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 Oxford Business Group (OBG) has said in its latest report on the economy.
The noted that as government is looking for greater private sector involvement to boost investment in the sector, it needs some $65billion worth of capital expenditure 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 report noted that “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 growth, costing the 170m-person economy as much as $100 billion per year, according to government estimates.
“With only two-thirds of the population currently receiving electricity, Nigeria ranks among the worst performers in the world when it comes to power, according to the World Bank’s most recent ‘Doing Business’ report. Nigeria placed 182nd out of 189 countries surveyed in terms of ease of getting electricity, behind South Africa (168th) and Kenya(127th).Meanwhile, demand growth is continuing apace, forecast to rise by 10 per cent per annum through to 2020.
“The lack of a reliable supply of electricity is seen as an impediment to growth in Nigeria’s industrial sector in particular, adding to the cost of doing business for many 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 more than three times the population 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 demand.”
The report added that “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 state generation and distribution companies, previously included under the umbrella of the Power Holding Company of Nigeria. The sale generated more than $3 billion, 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 debt servicing on NGN 500 billion ($2.5 billion) 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 nation’s largest fossil fuel generation plant – has increased power generation more than five-fold in the past two years, and is expected to deliver another 760 MW by the end of 2015, according to Adeoe Fadeyibi, CEO of Transcorp Power, which manages the plant.
“The country’s largest power plant, the 30-year-old Egbin Power Plant in Lagos, has also boosted its output, from less than 50 per cent of capacity to 85 per cent since Nigeria’s Sahara Group and Korea Electricity Power took over management in 2013. The plant now generates an average of 1100 MW, according to the company.
“The privatisation of existing assets has also 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 State – had reached financial close and is expected to come on-stream in 2018.”
More scope for reform
OBG stressed that “to maintain the current momentum, efficiency in other parts of the supply chain will also need to be improved. For example, access to gas remains a challenge, limiting a source of key inputs for power generators.
“Despite boasting 180 trillion cubic feet of proven gas reserves – the largest store on the continent – the guaranteed supply of gas to existing thermal generation plants in Nigeria, which account for 80 per cent of the country’s on-grid power, remains a key concern for industry stakeholders.
“Currently, only 14 per cent of domestically produced gas is sold to the local market, with 38 per cent exported as liquefied natural gas, another 24 per cent 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 also 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 more 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 more money into the system,” he told OBG.