24 January 2013

Nigeria: The Global Energy Performance Index

Nigeria is not only resource -cursed, but its energy policy is ineffective

In the Global Energy Architecture Performance Index (EAPI) Report 2013 recently released, Nigeria ranked 89 out of 105 countries' energy systems analysed. The first ten countries on the chart include Norway, Sweden, France, Switzerand, New Zealand, Colombia, Latvia, Denmark, Spain and United Kingdom. The last ten countries are Ethiopia, Tanzania, Lebanon, Mozambique, Nepal, Mongolia, Bahrain, Cambodia, Zambia and Iran Islamic Republic.

The EAPI, released by the World Economic Forum, measures 16 indicators which are aggregated into baskets relating to the three imperatives of energy triangle - economic growth and development, environmental sustainability, and access and security of supply - that energy architecture should contribute to. Each country's current energy architecture is ranked based on how well it contributes to these imperatives. Key trends common to majority of countries analysed show that the lowest scorers face challenges around energy access, efficiency and sustainability, and are somehow located in Sub-Saharan Africa, developing countries in Asia or the highly resource-endowed countries of the Middle East. Also, because of the large energy requirements to be met and in order to meet demand, fast-growing, industrialised economies generally rely on cheaper or subsidised fossil fuels like coal, petroleum and natural gas.

Aside the foregoing, the EAPI report also established that a large natural energy resource endowment is not a critical performance factor as shown by the prevalence of countries without large endowments at the top of the chart. Again, while many of the countries analysed achieved high performance because they have a large provision of exploitable natural resources, the exceptional performance of countries without large endowment could be linked to the the vision and efficacy of each of the country's energy policy, which emphasises the importance of efficiency and sustainability measures, and effective access to energy markets.

Another key point in the report is what was described as the resource curse, which explains the inverse correlation between resource abundance and the economic development of a country, as shown in the decline in national manufacturing sector productivity due to the currency-strengthening effect of natural resource exploitation.

Fuel subsidy, an issue which has been dominating national debates in oil endowed nations like Nigeria also came under focus in the report, with a clear position that fossil fuels subsidies are detrimental to every angle of the energy triangle. Those negative implications include diversion of investment from other potentially more needful government departments, reduction of fuel consumption efficiency by industry and domestic consumers, encouraging rent-seeking by limiting the capital flow available to new energy infrastructure projects, and the fact that subsidies are difficult to target accurately. Also emphasised, was the need for policy-makers to address some big issues around fuel subsidies, water use for energy production and effective resource wealth management.

Using Nigeria as a case study, the report noted that with expenses on subsidy put at about 30 per cent of total Federal Government expenditure and 4 per cent of national income, it is economically inefficient. The irony of this situation, as the report clearly observed, is that Nigeria currently an oil exporter, reimports refined crude products, and by implication creating value and employment externally, while shouldering the burden of the cost of its fuel subsidy. It also observed that as a prerequisite for all sectors of an economy, energy cost is critical because price volatility and supply interruptions could destabilise economies, while reliable energy, on the other hand, promotes economic and social development.

The EAPI report which provides informed and actionable support for policy and investment decision making, rightly noted that the world is in a period of transition and decision-makers must understand the core objectives of energy architecture and how they are being impacted by changing dynamics. We believe that Nigerian policy makers could use the indepth work of this report to benchmark their policies with a view to achieving a transition to the new energy architecture.

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