Nigerias power sector goes private

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Nigerias power sector goes private

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The privatisation of Nigerias 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 government is looking for greater private sector involvement to
boost investment in the sector, which needs some $65bn worth of
capital expenditure to reach the countrys target of 40,000 MW of
generation capacity by 2020, according to Nigerian Bulk Electricity
Trading.

Window of opportunity
The rationale behind the privatisation push which was several
years in the planning but finally materialised in 2013 is clear:
inefficiencies in Nigerias power sector have traditionally been a
major constraint to growth, costing the 170m-person economy as
much as $100bn 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 Banks most recent Doing

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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 annum through to
2020.
The lack of a reliable supply of electricity is seen as an impediment
to growth in Nigerias 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.

Private successes
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 $3bn,
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)

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bailout package in September 2014 to cover revenue shortfalls and

help with debt servicing on NGN500bn ($2.5bn) 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
nations 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 countrys largest power plant, the 30-year-old Egbin Power
Plant in Lagos, has also boosted its output, from less than 50% of
capacity to 85% since Nigerias 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

To maintain the current momentum, efficiency in other parts of the

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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 180trn cu 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% of the countrys on-grid power, remains a key concern for
industry stakeholders.
Currently, only 14% of domestically produced gas is sold to the
local market, with 38% exported as liquefied natural gas, another
24% 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.

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