Cost-reflective tariffs top barriers to large scale investment in Nigeria’s power sector – PwC

Failure to implement cost-reflective tariffs tops the list of barriers militating against large scale investment in Nigeria’s power sector. In addition, is the overall difficulty of raising finance which, in part, arises from failure to implement cost reflective tariff, according to the PwC Africa Power and Utilities Sector survey released recently in Lagos by PriceWater Coopers.

About 83 percent of the respondents in the survey said that moving to cost-reflective tariffs would have a very high impact on increasing electrification and improving reliability.   

“Cost-reflective tariffs top the list of the challenges in the power sector and it is also envisaged to top the list of challenges in the next five years”, PwC stated.

The survey report stated that market reforms is rated above ageing or badly maintained infrastructure looking at the industry today though this is expected to significantly reduce in the next five years compared to ageing and badly maintained infrastructure which is also expected to have had significant improvements.

Insufficient generation and creaking infrastructure mean that planned power outages and load shedding is well established feature of life for many power consumers in the country. In fact, Nigeria is going to play lot of catch-up in meeting up with its power deficits. The power deficit challenge is a huge one but can be dealt with one step at a time.

About 56 percent of the respondents in Nigeria indicated that the energy policy makers have produced a significant amount of policy uncertainty and they believe that they can do a better job of fast-tracking legislation on new policies.

Security of supply which comes as the fourth major challenge is expected to significantly reduce by 2020. Access to primary energy resources, grid access rates and access to skills also emerged as significant challenges to the industry.

Other identified barriers include by the survey include government interference, political uncertainty, access to finance amongst others.

According to the survey report, “Nigera paints a slightly different picture in terms of the challenges experienced in the power industry compared to the rest of Africa”.

For instance, in terms of collaboration with the industry to promote investments and protect customers, energy policy makers in Nigeria have performed low at 38 percent compared to other peers in the African continent at 63 percent.

While population growth is expected to have the most significant impact on Nigeria’s power sector as indicated by 75 percent of the respondents, this, however, differs from the African survey where climate change and water scarcity were identified as the most significant factor by 70 percent of African respondents. Also, 69 percent of the Nigerian participants identified the emergence of megacities as the next most impacting trend after population growth while in Africa; about 52 percent of the respondents regarded the impact of megacities as significant.

This is the first edition of the Power and Utilities Sector Survey report by PwC which seeks to examine industry opinion and wide range of challenges facing the power sector in the period ahead.  The survey covers 15 African countries.

While policy reforms are a key requirement, many African power utility companies are conscious of the need to reform their own organisations. Making limited resources go further is an essential part of maximising power availability and adding to investor confidence. The vast majority (70 percent) report that cost base savings and efficiency improvements of more than 10 per cent are possible and many (42 percent) say there is scope for African power and utility companies to achieve savings in excess of 20 per cent. Between 70 and 80 per cent of all survey participants see high or very high scope for performance improvement in asset risk management, customer service and capital project management. Around two-thirds see the same big scope for improvement in loss reduction and in the development of local skills.

Many of the essential prerequisites are in place for an increase in private investment and participation in the sector but there is still a considerable way to go. As well as the big issue of the need for cost-reflective tariffs, between a third and two-fifths of our survey participants reported that they did not feel there was sufficient transparency around the procurement of new power capacity and sufficient certainty on government backing for power purchase agreements (PPAs). Only six per cent felt that the local commercial banking industry had sufficient liquidity to finance new power projects without some form of credit enhancement being available. Indeed half said that even then such finance was not possible.