Nigerian power sector and its onerous challenges

Surmounting Nigeria's onerous power sector problems

Poor performance, inadequate access to electricity, unreliable supply and the inability of state-owned power companies to finance new investments in the power sector has plunged sub-Saharan Africa into a major power crisis. The region’s capacity for generating power is lower than that of any other world region, and growth in that capacity has stagnated for decades, impacting socio-economic growth and development negatively. Also, the average price of power in Sub-Saharan Africa is double that of other developing regions, yet new household connections in many countries does not correspond to population growth. Electrification rate, already low, is actually declining.

For more than a decade, reforming this ailing sector has become a public agenda in more than 24 sub-Saharan African countries, including Nigeria, with many kick starting the process of unbundling and privatization of state-owned power utilities, to allow private sector participation. As a result, private sector participation is now present in form of Independent Power Producers (IPPS), in countries such as Ghana, Tanzania and Nigeria. Uganda, however, remain one of the few countries from the region that has completed the transition to a fully unbundled, competitive, and private electricity sector. 

In Nigeria, for example, the wavering power sector reform only recently gained momentum through policy support from the present administration. Since 1972, electricity generation and supply in Nigeria has been monopolized by National Electric Power Authority (NEPA), a state-owned electric utility body which transmuted into Power Holding Company (PHCN), in 2006, following the passage of the Electric Power Reform Act 2005 by the National Assembly. The act stipulates that the assets and liabilities of NEPA will be transferred to PHCN under the surety and monitoring of the Federal Ministry of Finance with the aim to finally privatise it. 

Defunct NEPA was responsible for the generation, transmission, distribution and sale of electricity to customers and was run as a vertically integrated company. Lack of adequate funding and poor corporate governance resulted in the steady decline in the performance of the state-owned electricity company. A reflection of its sordid state was the recent disclosure by the Bureau of Public Enterprises (BPE), that an estimated 100 million Nigerians have no access to electricity, others receive irregular supply. 

Director-General of the BPE, Bolanle Onagoruwa, has however assured Nigerians that the problem is being resolved. According to her, the National Council on Privatisation (NCP) in 2000 constituted the Electric Power Reform Implementation Committee and mandated it to undertake a widespread study of the power industry and make recommendations for the promotion of a policy to steer in total liberalization, competition and private sector-led development of the sector. This, she said, was the rationale for the Electric Power Policy of 2001, and the Electric Power Sector Reform Act 2005, which identified the private sector as the key driver for the future of the electricity supply industry, while the government is to provide policy and independent regulation.

With the Electric Power Sector Reform Act 2005 removing operational and regulatory responsibilities of the electricity industry from the Federal Government, it provided legal backing for the unbundling of PHCN and the formation of successor companies to take over the various functiona and assets, liabilities and staff of PHCN. It is also the law that enables the development of competitive electricity market and has created the Nigerian Electricity Regulatory Commission (NERC), which licenses and regulates the generation, transmission and distribution of electricity. 

Government’s objective is to ensure cost reflective tariffs; attract private sector investments into the sector; create competitive electricity market; induce investments in new power generation facilities; rehabilitate existing power generation facilities; improve efficiency by increasing collections; reduce costs and technical and non-technical losses; and improve customer service.

To achieve government’s objectives, the private sector is expected to acquire interest or take over existing assets in the sector and develop green field projects. The ambition of Nigeria’s federal governmrnt is to meet the Vision 20:20 target of 40,000 megawatts which requires investment in power generating capacity alone of at least US1.3bn per annum for the next 10 years. This is in addition to large investments to bee made in power transmission and distribution.

The Federal Government had stated that the national electricity grid would be jointly financed with the private sector and development agencies. The BPE said once the bid was finalised, the management of the new super grid, expected to boost electricity generating capacity to over 14,000 megawatts (MW) by the end of 2013, would be handed over to the successful firm by the end of the year.

In spite of the huge infrastructure finance and business opportunities across the power sector spectrum in Nigeria, financial institutions, especially commercial banks in the country are wary of committing long-term funds to power projects. Reason for this is not farfetched, projects in the power sector are the most complex projects in terms of technology to be deployed and the risk involved in the sphere of infrastructural finance, with only railway projects nearing it in complexity. 

Also of concern to banks financial institutions, about establishment of the Nigerian Bulk Electricity Trading Company (NBET) as mandated by law, vesting contracts, as well as the stipulation of operational timelines for NBET structure. NBET is expected to address the concern of investors in the power generation sector on the credit worthiness of the distribution companies.

Useful links: 

How to attract investment to Nigeria’s power sector - Patrick Mgbenwelu

Technology, feedstock (fuel), standardization of power purchase agreements, environmental compliance, as well as loan and security agreements have been identified as key considerations for local and international banks intending to fund operations in Nigeria’s power sector. 

http://oritamefa.blogspot.com/2012/03/power-sector-attracting-investment.html

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