The future of Nigeria’s power sector

by Ubohmhe Glenn Olowojaiye

October 24, 2013 | 12:00 am
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Seismic change is coming to Nigeria, on a scale never witnessed in the history of this country, envisaged to percolate every sector (especially the real sector) of the economy and triggering a quantum leap in employment generation. The power sector is the expected catalyst for this change. Without a doubt, the transition to a private sector led power sector represents a paradigm shift from the dysfunctional performance of state- owned power utilities. This optimism may not be shared by all and could easily be dismissed as wishful thinking but there are emprical evidence to suggest the existence of a positive functional relationship between economic development on the one hand and power adequacy and reliability on the other .

Crucially though, one will have to concede that the new epoch in the Nigerian power sector may not automatically deliver adequate and reliable power supply unless critical binding constraints along the entire value chain are removed Not a few could have agreed more with Mr. Atedo Peterside that there are still some “unfinished businesses” in our quest to make the electricity market deliver the long awaited results stakeholders expect.

Important and determined steps have been taken but not enough. If the potentials of the sector is to fully unfold, past relics that are not consistent with the realities of the future have to be destroyed while buiding on the pillars being laid today and being proactive on tomorrow’s challenges. Hopefully, the country can begin to harbour real.istic dreams of being among the top twenty countries in the world and more importantly provide the tailwind for real sector development and employment generation.

So far, the government appears to be on the right track with major reform initiatives which have generated unprecedented enthusiam from private sector investors, evidenced by private capital inflow of over US$3 billion as proceeds from sale of PHCN assets. The new tariff framework and the regulatory environment played a major role in this regard. At the heart of electricity pricing policy in the past lies a fundamental socio-political and economic conflict which did not reflect reasoned economic considerations. Commendably, NERC – the industry regulator, developed a new pricing framework as encapsulated in the Multi-Year Tariff Order (MYTO) that would govern electricity pricing in the country in order to remove the major obstacle to private sector investment.

Nothwithsatnding the giant strides, yet it is clear that the sector requires much more concerted effort. The future of the power sector may not be as clear as the sordid past but a number of observations can be made on the key success factors that will define the industry.

The first, and most obvious, factor is availability of fuel for power generation. Just like some countries, Nigeria tends towards single dominant fuel or technology model for power generation. Clearly, the policy choice of gas as preferred fuel for power generation, for obvious reasons, implies that adequate consideration must be given to investment in upstream gas production and the development of a downstream gas market capable of reaching the desired level of capacity that will provide adequate supply of input for power generatioon in the country.

But the reality on ground raises pertinent questions and fundamental concerns on the readiness of the Nigerian gas market. Inspite of the abundant gas resources in Nigeria, estimated at 182 trillion cubic feet as at December 2012 according to BP Statitistical Review of World Energy, why is gas availability still a major operational bottleneck to existing power plants? Are upstream gas producers enthusiatsic about the current commercial framework for gas and does it provide economic imperative for upstream investment? will gas market be successfully liberalised to engender competition? are the new investors in the power sector likely to enter the natural gas business as a part of an overall strategy to secure gas supply and what will be the implication of vertical integration on electricity tariff?

A potential risk of the dominant fuel policy is that the total electricity generation system could become too dependent on natural gas. Therefore we must recognise the immediate and remote economic consequences inherent in such policy choice such as supply disruptions and market manipulation. Coal may not be as attractive as gas, however, the often neglected point is that a supportive government policy is at least as important, and probably even more crucial, to the attractiveness of any fuel option in any country. Government verbal commitment to fuel diversification has not been matched with concrete action.

Of no less importance is the transmission network. The transmission grid is an important link between the generators and distribution value-chain. Post-privatisation, there is a compelling and urgent need to prioritise the upgrade of the transmission grid for improved efficiency and enhanced operational capacity without which the immediate gains in additional capacity from the Nigerian Independent Power Projects (NIPPs) will be lost.

Making sure that transmission capacity does not limit the evacuation of power and responsiveness of supply may require changing the ownership structure of the grid and how transmission services are regulated to create appropriate incentives for investment. The relevant authorities may consider adopting the United Kingdom model where the transmission grid was transferred to the Regional Electricity Companies as part of the steps in UK lelctricity market liberalisation. Concerns over the ability of the new DISCOs to finance a huge project like the transmission grid, has to an extent, been dispelled by the sheer volume of capital inflow from the recent privatisation excersise.

Government’s business is not business and its tenacious claim to the transmission network may not bode well. The suspicion here is that government overbearing influence, as owners of the grid though concessioned, may frustrate meaningful progress in the sector on the back of government poor track record in utility ownership . The state should be a facilitator, responsible for setting the ground rules and establishing the framework controlling the structure of the industry.

Of no less importance or perhaps more crucial is the role of regulation. Strong, consistent, independent and responsive regulation will be needed. NERC must be seen to be independent from both government and the regulated iondustry. Striking a balance between over-regulation to avoid the California type of electricity crisis and lax regulation to prevent regulatory capture is not only required but necessary .

Power generation in a capacity short jurisdiction like Nigeria has a monoplist market character and the electricity distribution companies as presently constuted are regional monopolies. Therefore, policy makers can and indeed should improve market efficiency, through the concept of “regulation for competition”, timely market intervention and ensure proper functioning of the market for efficient outcomes. This implies that electricty tariff should neither diminish the incentive for consumption erfficiency nor accentuate investors desire to exploit consumers. Ultimately, consumers care about price of electricity and quality of service.

Inspite of the enormous challenges ahead, optimism for a better future in the power sector has never been this upbeat. We have crossed and hopefully destroyed the bridge behind us, but more importantly the future of the Nigerian electricity sector is dependent on a more determined, systematic and transparent effort so that there may be light and adequately too.

Ubohmhe Glenn Olowojaiye is a banker and a recipient of the Society of Petroleum Engineers (SPE) International Outstanding Service Award as SPE Economics and Management Journal Technical Editor in 2013.

by Ubohmhe Glenn Olowojaiye

October 24, 2013 | 12:00 am
12893  |   93   |   0  |   Start Conversation

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