25 September 2017

Nigeria: Poor State of Energy Sector - Govt's Economic Recovery Growth Plan in Danger

There are strong indica- tions that the realisation of the Federal Government's 2017-2020 Economic and Recovery Growth Plan, ERGP, may be scuttled as a result of inadequate and unstable power supply in the country.

The ERGP, a medium-term structural reform to diversify Nigeria's economy, including expanding power sector infrastructure, was drawn based on the assumption that electricity supply would continue to grow, hitting 10,000 megawatts, MW, by 2020.

But the latest Presidency report obtained by Vanguard showed that Nigeria has consistently generated below 4,000 MW for a greater part of 2016 and 2017, barely three years to set target.

Investigations showed that the nation's power sector was haunted by many problems, including poor and limited facilities, inadequate gas, vandalism, energy theft and lack of funds.

It showed that even if these challenges, especially lack of funds were solved immediately, it would still require between three to five years to design, construct, import and install new power plants and other infrastructure needed to increase power generation, transmission and distribution in the nation.

Meanwhile, the Presidency report also stated that: "On September 21, 2017, average power sent out was 3,417 MWh/hour (down by 49.74MWh/h); the reported gas constraint was 747.5MW; reported line constraint was 0MW, while reported frequency management constraint due to loss of DisCo feeders was 2144MW.

"The water management constraint was 0MW. The power sector lost an estimated N1, 388,000,000 on September 21 2017, due to constraints. Gas constraint appears to be on the rise again after being fairly stable for several weeks."

Commenting on the poor state of the sector, Mr. Sunday Oduntan, Executive Director of Association of Nigerian Electricity Distributors, ANED, disclosed in an interview: "There are some challenges that need to be tackled by many stakeholders, especially the Federal Government, the DisCos and gas suppliers.

"These include lack of liquidity and energy theft which culminate in leakages and losses. The vandalism of facilities that occur too often is also a serious problem that leads to huge deficit. No bank would lend you money unless your business is bankable.

"Let me re-state for emphasis that this liquidity crisis is a major threat to the power sector. The revenue shortfalls adversely affect the ability of the DisCos to make capital investments in metering, network expansion, equipment rehabilitation and replacement that are critical for service delivery."

However, a copy of ERGP obtained by Vanguard, yesterday, stated that the Power Sector Recovery Programme, PSRP, a series of policy actions, operational, governance and financial interventions to be implemented by government over the next five years to restore the financial viability of Nigeria's power sector, improve transparency and service delivery, and reset the Nigerian Electricity Supply Industry, NESI, for future growth, was designed to enhance the ERGP.

According to the ERGP, it recognised the fundamental role of power to the development of all sectors of the economy.

"In addition, FGN, as documented in the ERGP, aims to improve Nigerian Bulk Electricity Trading Plc, NBET, financial capacity to support the electricity market, strengthen the governance and capacity of sector agencies, and improve the commercial viability of GenCos and DisCos.

"Nigeria has 13,400MW of installed power generation capacity, of which 8,000 MW is mechanically available. Less than 4,000MW was dispatched on average over the last two years due to constraints in gas supply, electricity transmission, and, distribution.

"As a result, the lack of constant electricity supply has discouraged consumers' willingness to pay, driven industries to pursue off-grid alternatives and contributed to an inherent shortfall in the tariff and the accrued sector cash deficit.

"The basis of DisCos' privatization is the incentive regulation regime whereby a cost reflective end-user tariff trajectory and methodology for adjustment is agreed and benefits of efficiency gains during the first regulatory period accrued to DisCos, with efficiency gains being shared with end customers over subsequent periods.

"However, the end user tariff has only been cost reflective for short periods since the Multi Year Tariff Order, MYTO, was reviewed in June 2012. As a result, in addition to contributing to huge sector cash deficit, it has also eliminated the incentives for the private sector owners of the DisCos to invest, such that efficiency can be improved."

Market, tariff shortfall

As a result of end user tariffs only reaching cost reflective levels for a very brief period since the initial MYTO 2 was introduced in 2012, the plan indicated that significant cash deficits have accumulated across the sector value chain.

Specifically, it stated that between February 2015 and December 2016, the market shortfall (amount owed by DisCos to the rest of the market) amounted to N473 billion (US$1.5 billion), while the tariff shortfall (amount owed by consumers in aggregate to the power sector) was estimated at N458 billion (US$1.4 billion).

It stated: "The design of the power sector reforms makes viability of DisCos critical to the long-term viability of the power sector. NERC key performance indicators show DisCos' performance declining between 2014 and 2016. This has been mainly as a result of the absence of tariffs that are not cost reflective.

"FGN's Ministries, Departments and Agencies, MDAs, in aggregate owed the electricity industry an estimated N 65 billion (US$206 million) at the end of 2016, contributing a significant portion of the accumulated cash deficit in the sector; and although the design of Nigeria's electricity industry and its regulations is sound, lack of sector governance has resulted in lack of enforcement of rules and policies, which has reinforced the challenges listed above.

"A critical part of this has been addressed with the inauguration of the NERC commissioners in February 2017."

Financial interventions

Already, Vanguard gathered that the development of the sector has attracted the attention of some local and foreign institutions.

For instance, the CBN stated that it has provided a N701 billion facility to assist the Nigerian Bulk Electricity Trading Plc, NBET, meet its payment obligations and ease its liquidity challenges.

But investigations showed that the financial commitment was inadequate, considering the high capital demands of the sector.

Also, the World Bank Group has expressed its willingness to assist the FGN in preparing and supporting a credible power sector recovery programme.

The World Bank Group also indicated potential support for the plan, totaling up to US$2.5 billon as well as IFC investment and MIGA support to unlock additional US$2.7 billion in private investments.

Mrs. Funke Oyewole, spokesperson of the Bank in Nigeria could not be reached for comments over the weekend as she did not take calls nor respond to text message.

But another source in the financial institution said the sum would not be released until the government emerged with a cost reflective tariff to guarantee investments and stability in the sector.

The source, who preferred not to be named, said: "The timing of World Bank Group support for the PSRP will depend on government and its agencies fulfilling actions in the PSRP. This might delay World Bank funding being made available."

Impact on economy

Investigations showed that the poor state of power supply has impacted very negatively on the economy.

Mr. Muda Yusuf, the Director General of the Lagos Chamber of Commerce and Industry, indicated in a telephone interview that the nation's poor power situation has crippled operations in many sectors of the nation's economy.

He said investors in many sectors, especially manufacturing, telecoms and agriculture, have been compelled to generate their independent power at higher cost.

Yusuf pointed out that the high cost of generating power has culminated in the high cost of goods and services, making locally produced goods uncompetitive in the global market.

This is mainly because Nigerians depend more on generators to generate power than on the power companies at higher cost.

Mr. Frank Jacobs, President, Manufacturers Association of Nigeria, MAN, said in his reaction: "It is possible to gauge the loss suffered by manufacturers, arising from paucity of electricity supply and high cost of alternative energy source. Capacity utilization in the sector has barely been above 50 per cent.

"This implies that production has been sub-optimal; production value in the sector was estimated at N8.38 trillion in 2016. Another way of measuring the loss to manufacturers, as a result of the challenges of electricity supply, is by looking at the huge cost of alternative energy which was estimated at N129.95 billion in 2016."

The way forward

The Minister of Power; Works and Housing, Babatunde Fashola, had said the sector needs substantial local and foreign investment.

According to Fashola, although the country has expended what may appear sizeable, the money so far spent was inadequate to address the current challenges.

He noted that in spite of the already installed 12,000MW power capacity, the country is only enjoying about 6,000MW because of sabotage resulting from broken gas pipelines, poor planning of gas supply and evacuation.

"When I hear that we have spent a lot of money on the power sector, I say that we haven't spent enough money and that is why we are still talking about the need for investments to come in.

"Yes, what we have spent may look sizeable but it doesn't provide enough power for our consumption as a nation."

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