Making power sector reform work

It is not a secret that all is not well with Nigeria’s power sector reform. Blackouts have continued to be the norm even after the first phase of power privatisation, as sporadic power cuts continue to hobble Africa’s largest economy.

Lack of investments and inept management of the government-owned power monopoly for decades meant Nigerian homes and businesses had been unable to benefit from the upside of efficient and stable electricity supply.

The government’s solution was to begin a privatisation process through the sale of 18 companies unbundled from the former Power Holding Company of Nigeria (PHCN), comprising six generation companies (Gencos), 11 distribution companies (Discos), and a transmission company (TCN), which were expected to provide a steady flow of electricity to homes and businesses.

The first phase of the process was concluded in November 2013, but the expected gains from the privatisation of the power sector have failed to materialise.

The first obvious problem is lack of adequate capital expenditure (capex) by Discos, Gencos and the TCN post privatisation. It is estimated that Nigeria needs an annual investment of $3.5 billion to achieve its generation capacity target of 40,000 megawatts (MW) by 2020.

Nigeria’s current peak grid power generation stands at about 3,874.5 MW (February 27) with a per capita electricity usage of 136 kilowatt hour (KWH). This compares with an average per capita electricity usage of 4,803 KWH in South Africa, which generates about 41,000 MW but is also recently grappling with blackouts.

It must be noted that the Nigerian generation figures are abysmal and completely inadequate to power its $450 billion economy.

To work around the inadequate power supply, Nigerians have resorted to generating electricity themselves using diesel- and petrol‐powered generating sets. The Ministry of Power estimates that total electricity generated through these methods accounts for up to about 6,000 MW, more than the total commercial power generated and supplied to the grid. Global Business Intelligence (GBI), a research firm, estimates that Nigerians spent about $455 million (N70.5 billion) on generators in 2011.

To get around this low capex spend, most of the new private power owners need to trim bloated staff strength, and refocus on improving services on which they mostly based their winning bids. The government, on its part, should also expand assistance to the sector through the use of soft loans and grants.

The Central Bank of Nigeria recently disbursed a total of N57.72 billion to the private power firms, including Eko, Enugu, Kano and Port Harcourt Discos, through the N213 billion Nigerian Electricity Market Stabilisation Facility (NEMSF). The FG should ensure that such funds are monitored and deployed strictly for capex by the power firms.

Another major problem holding back the gains of the privatisation is absence of gas to the Gencos. It is bewildering to us that a country which has one of the largest gas reserves in Africa and indeed the world is unable to tap that gas for its power needs.

Some issues affecting gas supply include vandalism of pipelines and improper tariffs that could entice private sector investments. However, the biggest issue impeding progress in the gas to power industry is the suffocating role the government, through Nigerian National Petroleum Corporation (NNPC), is playing in the sector.

Our investigations show that the country can end the blackouts by simply liberalising gas prices and going to a willing buyer-willing seller model based on market prices.

A third major issue holding back the sector is low electricity tariffs, which is inimical to a viable power sector. We believe tariffs must be raised to reflect the current realities of a devalued currency, higher inflation, and to enable Discos pay for power supplied and Gencos pay for gas.

It must be borne in mind that the power sector is a complex chain that involves many actors (Discos, Gencos, gas producers, TCN, NERC, NELMCO, bulk trader, etc), and the reforms are only as good as the weakest link in the chain.