The World Bank labelled Nigeria as the country with the world’s largest energy access deficit in 2021, with 43% (or 85 million Nigerians) of the country’s population without access to grid-connected electricity. In addition, Nigeria’s electric power consumption per capita of 145KwH falls behind those of select peers, South Africa (4,198) and Ghana (351KwH), as well as the average for lower middle-income countries of 811KwH.
Following the unbundling and subsequent privatization of the long-standing government-owned monopoly in the power sector, as part of the power sector reform of 2004, honest and objective evaluations of the Nigerian Electricity Supply Industry’s (‘NESI’) performance in the post-power privatization era have ranged from ‘minimal improvement’ to ‘more of the same’. The entire NESI value chain is fraught with structural impediments, which have continued to impede optimal performance, with operators consistently ‘passing the buck’.
As of 31 December 2022, the generating segment of the market comprised 29 operational generating plants with a combined installed capacity of 13,014MW and an average operational capacity of 4,523MW – down 29% from 6,371.9MW in 2019. There were 12 Independent Power Plants (IPPs) in Nigeria in 2022, accounting for 31.2% of the country’s total power generating capacity, a 300 basis points decline from 2021 – due largely to gas constraints and faulty machinery. For Clarity, Agusto & Co. defines IPPs as power plants managed by the private sector prior to privatization process. On average, and due largely to gas constraints only five IPPs: Azura-Edo (26%), Odukpani (19%), Okpai (16%), Afam VI (15%) and Rivers IPP (8%) jointly accounted for circa 84% of power generated from the 12 IPPs in the last four years.
Lingering Gas Shortages
Gas constraints remain prevalent despite the fact that Nigeria has the world’s ninth-largest proven gas reserves, estimated at 204 trillion cubic feet in 2022. The domestic gas market in Nigeria has been plagued by chronic underinvestment in generating and distribution infrastructure. At the same time, under the domestic supply obligation framework within the Gas Master Plan (GMP), all gas companies are required to supply an assigned quota of gas to critical sectors (including electric power) at prices ($2.18mscf) lower than what is obtainable in international markets (average of $7.52mscf in the US market in 2022) As a result, operators of thermal plants struggle to secure viable gas contracts at the approved price. As at the end of 2022, 25 of the country’s 29 GenCos were gas-powered, underscoring the urgency of finding a long-term solution to gas supply constraints.
Transmission Losses
Perhaps the weakest link in the NESI value chain is the Transmission Company of Nigeria (TCN), which is still entirely government-owned. The national grid has a wheeling capacity of circa 8,100MW, which pales in comparison to the nation’s peak electricity demand of 19,798 MW. This implication is that even with an increase in the generating capacity of the grid-connected IPPs, the TCN is unable to evacuate more than 8,100MW. Agusto & Co. believes that this is a critical bottleneck in the supply of electricity and has stalled investment in power generation. On the other hand, the TCN continues to blame load rejection by distribution companies, particularly during the rainy season, for the high frequency of grid collapses.
Nonetheless, Agusto & Co. anticipates that the current Nigerian Electricity Grid Maintenance Expansion and Rehabilitation Program (NEGMERP), which aims to expand the country’s grid network through the diligent execution of network expansion projects funded by both the Federal Government and donors, will result in some growth in NESI in the short term. This is in addition to the Presidential Power Initiative signed with Siemens AG, which is expected to result in an additional 25,000MW of operational capacity from the national grid. The completion of such projects will assure prospective power generation companies that the TCN has ample capacity to receive generated electricity. With a more efficient TCN, Nigeria can achieve self-sufficiency in power supply, making electricity exports easier through the West African Power Pool’s (WAPP) future Regional Electricity Market (REM).
Decentralization – Legislation to the Rescue?
President Muhammadu Buhari recently assented to the Fifth Alteration Bill No. 33, 2022 (the “Electricity Constitutional Amendment”), which allows Nigeria’s 36 States to generate, transmit, and distribute electricity in areas covered by the national grid. This has significant implications for the country’s struggling power sector, as it could lead to increased investment in power generation and distribution infrastructure, as well as increased competition among power providers. By devolving power to the States, Agusto & Co. believes the bill could also lead to more efficient and effective management of the power sector, as States will have greater control over their power supply. This could lead to more targeted investment in power infrastructure and more responsive management of power supply and demand.
However, the bill also raises concerns about the potential for fragmentation of the power sector, as different States may have different priorities and approaches to power generation and distribution, leading some, to possibly bypass the national grid entirely. Furthermore, States deemed to lack a sufficient economic base may be unable to attract investors in their electricity generation, transmission, or distribution, causing them to fall behind other States in terms of electricity supply. This could constrain the business environments in these States, thereby eroding investor confidence, discouraging investment, and limiting economic growth and development.
Outlook
The NESI is currently in the second stage – the transitional electricity market (TEM) – on its evolutionary path, where the state-owned special purpose vehicle (the Nigerian Bulk Electricity Trading Plc – ‘NBET’) buys electricity in bulk from the generating companies and independent power producers (IPPs) and resells to the distribution companies (DisCos) under vesting contracts. As it transitions to the medium-term market, Agusto & Co. expects more IPPs to become operational, which will significantly raise the Industry’s generation capacity over the medium term.
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