Funding challenges in powering Nigeria

“Access to electricity is fundamental to opportunity in this age. It’s the light that children study by; the energy that allows an idea to be transformed into a real business. And it’s the connection that’s needed to plug Africa into the grid of the global economy. You’ve got to have power.” – Barack Obama – 2015.

Currently rated as Africa’s largest economy, Nigeria has an installed electricity generation capacity estimated at 12,522MW but has an available capacity of only approximately 4,500 – 5,000MW, to meet the needs of a population of more than 170 million and a country with a GDP growth rate of 2.11%, as of January, 2016.

South Africa, which Nigeria overtook as the largest economy, relatively, has an installed electricity generation capacity of approximately 50,000 MW, with a population of about 53 million – a little over one-third of Nigeria’s.

A 2009 study has found out that over 97% of Nigeria’s firms experience over 196 hours of power outage per month. This is equivalent to eight full days of lack of productivity. For firms that depend on power, it means they have to service their power needs for one-third of the month, using very expensive self-generated power. It is important to highlight that, even with the new tariffs, on-grid power is still cheaper than all self-generated power. Industrial and Commercial electricity tariffs are N40.70 and N35.80 per kWh, respectively and averagely. Self-generated electricity is estimated to cost between N59 and N83/kWh.

Thus, the deficiency of the lack of constant power supply will continue to remain a significant draw-back to the growth of our domestic economy and its attractiveness to investors. Prices of goods and services from those who take the risk to go into business in this environment will remain relatively high compared to the same in business environments that are not burdened with this challenge, thereby rendering our products and services uncompetitive.

Our electrification objective as a nation should therefore be beyond meeting the estimated need of those currently connected to the grid but also address those who will need power in five years’ time, due to population increase.
Experts have projected that for our economy to grow at a rate of 10%, our power requirement must reach 30,000MW by 2020. An objective that seems to be so out of sight and maybe unrealistic, when we remember that we barely manage to generate 5,000MW today.

Very few sectors are as capital intensive as the power sector globally. Nigeria spent approximately $30 billion, between 1999 and 2013, to bring generation from about 2,000MW to the current levels.

A more conservative estimate that will see Nigerians who are currently connected to the grid receiving approximately 18 hours of uninterrupted power by 2020 is for our generating capacity to be boosted to 20,000MW, with the requisite gas supply and transmission infrastructure in place and complemented by an expansive and reliable distribution network.

The power sector reform process in Nigeria has recorded successes on many levels but this is not easily evident, because the final product, power in homes and businesses, still remains as elusive as ever. The frustration of Nigerians is, therefore, understandable. To attain even the conservative 20,000MW by 2020, it is estimated that the sector will need investments to the tune of $40 billion. Of course, since this is now a privatised sector, the funds have to come from private investors who, as a reasonable expectation, need to see where the value lies for them, in terms of the recovery on their investment.

So what is the role of the new tariff in all this? For many Nigerians, the perception surrounding the new tariff has largely been driven by a view that it is to help fund the business of the current new owners who did not have enough funds before buying up the assets or who seek to exploit the consumers. However, like other commodities, to produce electricity requires investment in infrastructure and operating expenses; which is universally driven by the operator’s access to debt funding (because equity funding is typically more expensive and would drive the tariff higher). For lenders to provide such financing, the underlying transaction must be bankable: The lender must be assured that the operator can pay back the borrowed funds. Otherwise, it would be virtually impossible for operators to access financing.

More importantly, the requirement for a market-priced tariff is not specific to only the distribution companies. Indeed, only 24% of the market revenues go to the distribution companies. The balance of the revenues goes upstream to the other market participants in the value chain – transmission, generators (who take the lion share), gas suppliers, the regulator, etc. Other sector players such as the regulator, the Market Operator, NBET’s sustainability are also tied to the revenues that are generated from a market-priced tariff.

As long as the market continues to suffer liquidity issues that are tied to whether or not the tariff is one that will commercially sustain the value chain, it is difficult to see how the sorely needed investment that is needed to rectify the decades old negligence of electricity infrastructure; the increased generation that will lead to both improved supply and lower tariffs; increased gas supply that will drive the increase in electricity generation, etc. will come to pass.

The electricity market in Nigeria has so much potential for investors and for consumers too. For the win-win that we all need to be created, however, we need to look beyond the teething problems currently being experienced as part of exiting an old inefficient and corrupt system, to one that will eventually take us to the goal of increased 24/7 uninterrupted power supply.

• Biu writes from Kano.