What General Buhari Must do to fix Power in Nigeria (A Must Read)

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As General Buhari assumes office as president of Nigeria on May 29, 2015, one of the biggest challenges his incoming government would face would be how to improve reliability and quality of electricity Supply in Nigeria. The World economic forum ranked Nigeria 141 out of 144 countries in its 2014 quality of electricity supply index [1]. Poor electricity supply has negative impacts on economic growth and Job creation. The quality of electricity supply has a positive correlation with the Gross Domestic Product (GDP) per capita. The scatter plot below shows the relationship between the quality of electricity and the GDP per capita of 148 countries in 2013.

Quality of electricity

Figure 1: Relationship between Quality of electricity Supply and GDP

The plot shows that countries with greater quality of electricity supply generally have greater GDP per capita. The prospect of economic growth through the development of electricity infrastructure is a great incentive for  Nigeria’s  new government to find a solution to the power problem.

Currently , electricity generation stands between 2,500-3, 500 MW,  grossly inadequate  for a population of 170 million people. The unbundling of  the Power Holding Company of Nigeria (PHCN) and the privatisation of generation and distribution has not resulted in improved electricity supply.  It has been a bumpy ride since the privatisation exercise as the industry still faces numerous challenges in the generation,transmission and distribution of electric power.  This is in spite of the enormous investment by the current and previous governments.

I read the All Progressive Congress (APC) manifesto to find out their plans to improve the sector  and address its many challenges  but I did not find anything in terms of actual plans. The problems faced by the sector need a comprehensive,  all encompassing approach, this is what informed this piece.

In the next few paragraphs, some of the challenges faced by the power sector will be outlined and solutions proffered.

Generation

Current State

The biggest problem facing electricity generation in Nigeria is the unavailability of gas for powering the power plants. The power sector has developed at a much faster rate than the gas sub-sector  but most of the plants been built need to be powered by gas.  Consequently, many power plants are inoperational or operating at below their capacities because of a lack of gas.

Nigeria has a gas reserve  of 187 trillion cubic feet, the 7th largest in the world and a huge potential revenue earner for the country. However, the sector remains largely underdeveloped due to the lack of investment caused by the government controlled  prices and a poor regulatory environment.  As a result, most of the gas currently produced is flared  resulting in the loss of billions of dollars. The poor gas infrastructure and constant pipeline vandalisation are the most important challenges faced by Generation companies (GENCOs).  Reported cases of pipeline vandisation has been on the rise in recent years after falling consistently between 2006 and 2009. These vandalisatons affect crude oil, gas and other products and result in significant financial loses. The graph below show cases of pipeline vandalisation annually in Nigeria as reported by the NNPC Annual Statistical Bulletin.

Pipeline Vandalisation

Figure 2: Annual cases of Pipeline Vandalisation

In November 2014, the Central Bank of Nigeria (CBN) signed an agreement with power and gas firms to release a sum of N213 billion  over a period of 10 years at 10% interest rate  to start the implementation of the Nigeria Electricity Market Stabilisation Facility (NEMSF)[2]. This loan was necessary because tariffs a re currently not profitable and too low to cover the cost of generating power.  This facility would also to help the industry keep on track with the Multi – Year Tariff Order (MYTO) model for generation designed by the Nigerian Electricity Regulatory Commission (NERC).The MYTO is a model drawn up by the NERC to project electricity generation and cost of generation for the next few years.

The shortfall in electricity supply is usually compensated by diesel generators employed by companies and private individuals for their daily activities. The cost of generating  power for  many companies  and individuals gulps a major part of their operating expenses and reduces their profit margins.  This has a negative impact on economic and industrial growth as many small and medium enterprises find it difficult to cope with the high cost of private generation.  As a result, many close shop or run at a smaller scale to minimise expenses.

Currently, most of the power generation come from Gas, Hydro and Oil. The chart below shows the distribution of electricity generation by fuel as estimated by the International Energy Agency in 2011. [3]

Electricity fuel

Figure 3: Electricity fuel-mix Nigeria (2011)

There is a need to improve this fuel mix and encourage investments into renewable, nuclear and other technologies to boost electricity generation across the country.

The demand for electricity is estimated to be about 12,800 MW [4] but as at the 13th of May, 2015, generation stood at  3,381.47 MW [5], more than three times less than what is required to meet the demand.  There is a need for urgent and decisive intervention to change the situation.

Proffered Solutions

  1. The gas problem

On February 1, 2015, the Transitional Electricity Market (TEM) took off as part of the continuous evolution of Nigeria electricity market. This move is projected to improve gas supply as gas will be supplied to GENCOs on a contractual basis and there will be legally binding consequences for defaults in gas supply. This is a good step but there  is more that can be done to ensure that gas supply is regular and reliable.

There needs to be  a critical look at the regulatory aspect of gas production and delivery.  I believe that there has to be a separation of the regulatory, licencing and policy environments of petroleum and Gas. Currently, the Department of gas resources under the Federal ministry of petroleum resources is responsible for regulating the gas sector.  I believe that the gas sector must be given its own priority separate from petroleum for it to thrive. The Petroleum Industry Bill (PIB) makes important recommendations about the gas sector that could significantly improve the situation. The creation of separate licencing and authorization for gas and the unbundling of the NNPC  represent positive steps for the future  of gas in Nigeria. The incoming government must push for the passage of the PIB to improve the current condition of the gas industry.

The need to promote investment and private participation in the development of gas facilities is imperative to boost the sector. Private investors are encouraged to invest by the prospect of high profitability and the incoming government can support this by making and supporting  policies to restructure the industry  and by the introduction incentives such as incentive pricing and tax credits.  The government could  also consider deregulating the gas market so that the free market determines the price of gas. This could have the impact of higher tariff rates but it would ensure the reliability of gas supply to power  plants. The influx of investors into Nigeria’s gas industry could significantly boost Nigerian revenue earnings and create jobs for many Nigerians.

Another major area which must be tackled to improve gas supply is pipeline vandalism. There is a need to develop effective strategies to tackle pipeline vandalisation by all stake holders in the Gas industry.  The government must empower security agencies with the tools, training and encouragement  to fight vandalism effectively.  There should be stiffer penalties  for pipeline vandals  because of the losses they inflict on electricity generation and its attendant effects on  economic activities. The NNPC and gas companies must employ technology in the surveillance  of pipelines so as to prevent  pipeline  vandalisation  and help with early detection.

Also, Nigeria needs to take the issue of gas flaring more seriously.  Nigeria recently shunned  the World bank’s ‘Zero routine flaring by 2030’ summit. The summit was organised to get countries, oil companies and development institution to make a commitment to stop gas flaring by the year 2030. Nigeria is the second  largest gas flaring country in the world, flaring 13 billion cubic metres (bcm) annually [6]. The incoming administration must take this seriously and work hard towards ending gas flaring so that Nigeria’s gas can be used for its economic benefit of Nigerians.

    2. Decentralise Electricity generation by attracting investment in renewable energy

The government should introduce renewable energy policies that ensures that utilities obtain an increasing annual percentage of their power from renewable energy.  They can achieve the requirement by buying renewable energy credits  from private individuals andcompanies.This would serve as an incentive to promote small scale renewable energy units for homes and small businesses as well as encourage investment in utility level renewable energy technologies. Individuals would gain credits by feeding power into the grid, the number of credits obtained by power fed into the grid can be bought by Utilities to fulfill their obligations.

Tax rebates and low interest loans can be offered to support small renewable energy GENCOs. There are Feed in Tariff for renewable energy generators currently but more must be done to  further the industry. A vibrant renewable energy industry would boost employment by providing  jobs  (both direct and indirect) and promote economic activities

Renewable technologies can be very important for remote  areas with no connection to the grid as  they can easily be deployed there with the right policies in place. For instance,  Solar Photovotaics (PV) can be promoted in rural areas by giving subsidies or making credit facilities available to  residents. The government must look into this as it could quickly boost electricity accessibility in the country.

Transmission

Current State

The transmission capacity in Nigeria today, is estimated to be about 7000 MW according to the Minister of state for Power [7]. In order to boost the reliability and economy of electric supply, there must be constant investment in transmission lines to meet up with growing demand. The Nigerian  Minister of power estimated that an annual investment of $1 billion will be required to grow the national grid [8]. Currently, the system is plagued with high loses,vandalisation, low capacity, poor, inadequate and aging infrastructure and a lack of funding.  The location of transmission lines can be quite contentious  and could lead to lead to disputes with local communities.

The government-run Transmission Company of Nigeria (TCN) doubles as the system operator and the transmission service provider. This means that they develop the transmission grid and operate the whole system to ensure reliability and security (i.e resistance to shocks).  There are 8 transmission regions in Nigeria: the Kaduna region, the Shiroro region, the Bauchi region, the Osogbo region, the Benin region,  the Portharcourt region and the Lagos region.  The TCN develops and maintains the facilities in each region.   The transmission regions are shown below:

Transmission regions

Figure 4: Transmission regions in Nigeria (Source: Transmission Commission of Nigeria (TCN))

Proffered Solutions

The major question with the transmission grid is: How does the government support the needed investment needed to build Nigeria’s transmission grid?

I believe that the best way to go about this is to grant private transmission companies (Transco), monopoly rights to transmission lines in each of the eight regions. The Trancos need to be properly regulated and given the incentive to build more lines. This has impacts on costs  and tariffs, so it is important that the access costs to lines are regulated  in such a way that the Trancos makes sufficient profits and reliability is assured.

Generating plants should also be installed in areas where there is less need for transmission. I believe that National Integrated Power Project (NIPP) plants should be located close to industries and commercial centers to power economic activities there.

Distribution

Current State

The world bank ranked Nigeria 187 out of 189 in the  getting electricity category of its “ease of doing business’ survey of 2015 [9]. Nigeria is ranked 46th out of the 47 Sub-Saharan countries included in the survey. This means that the regulatory environment is not conducive for the starting and operation of a local business. For local businesses, electricity is very valuable and getting access to it is vital but the survey shows that it takes 9 steps , 257 days and 478% of income per capital to get connected in Lagos by the Eko distribution Company (Eko Disco).

The chart below shows the days for each of the 9 procedures and the cost as a percentage of income per capita to get connected in Lagos by the Eko Disco:

Disco connection

Figure 2: Getting Electricity in  Lagos, days and cost (Source: World Bank, Doing Business 2015 report on Nigeria)

The time lag is not conducive to promote business operations. The Discos must increase efficiency in connecting business to electrical power. According to the survey, 120 days is taken between application and obtaining a clearance letter from the Disco. That is not acceptable for a country willing to grow its economy and create employment for its citizens. The business environment must be improved upon  and made more conducive for entrepreneurs.

The Discos face challenges with customer relations (as a result of poor power supply),  metering  , poor and overloaded infrastructure, vandalisation,  low tariffs, poor collection rate of tariffs and poor funding.

Proffered Solutions

The NERC must ensure the Discos fulfill their obligations to customers and make the necessary investment needed to improve their capacity so as to reduce the load on already existing equipment. The NERC must also ensure that the Discos respond more efficiently to applications for electricity connection by empowering the consumer to take action against the Discos for unexplained prolonged delays. The consumer’s rights must be protected at all times .

Conclusion

The Nigerian electricity sector is beset with many challenges and would present one of the biggest battles for the Buhari administration. I am convinced that some of these suggestions would improve the situation in the next years if taken on board.

What do you think?  What must be done to improve Power  in Nigeria?

Join the conversation

Babatunde Idrisu has a masters in energy management and policy from the Pennsylvania State University and has conducted multiple research work on renewable energy, energy policy and electricity markets.

 

Source: Westafricanenergy