Aspiring to join the ranks of the world’s top-20 economies by 2020, Nigeria’s growth trajectory is currently being impeded by one thing above all others: its small and dated electric power system. Government officials are aware of this, however, and solutions are high on the national “to-do” list, with some remedies already well in progress.

POWER VACUUM: According to figures from a World Bank study, Nigeria produced 124 KWh per year in 2010, compared to other African OPEC members such as Angola, with 238 kWh, and Libya, with 3360 kWh. Another concern for officials is the current generating capacity, with Nigeria’s effective “available” capacity at around 3500 MW in 2010, well below the corresponding figure for the much -less-populous South Africa, which was approximately 47,000 MW. The question has not been just one of quantity, but also of reliability. Much of Nigeria’s power generation, transmission and distribution capacity is ageing and poorly maintained. At present, around 70% of national capacity, which works on natural gas, has either failed or proven to be insufficient. Compounding the problem, poor water management at the country’s large hydroelectric plants has created several problems recently. Nigeria’s biggest cities are chronically plagued with daily and generally unpredictable power cuts, while smaller and rural locations are sometimes deprived of power for days.

CONSUMER COSTS: This is hugely inconvenient for both individuals and businesses, as inadequate supply has lead to the widespread use of back-up generators. Although there are no official statistics, estimates of generator sales from vendors range from 60,000 to 80,000 new units per year. They range from large models designed for factories’ to the small 1-KW generators. One calculation put aggregate capacity in 2008 at 2500 MW – about equivalent to the national power company’s available capacity at the time.

Such costs proliferate, and according to the Central Bank of Nigeria, in 2010 60m Nigerians relied on generators and spent $13bn on keeping them fuelled, which seems to exclude the presumably larger amounts used by industry. Speaking in 2010 President Goodluck Jonathan asserted that use of private generators adds 40% to the cost of goods and services. Fuel costs have even been known to rule out double shifts at some factories. Charles Robertson, an economist at Renaissance Capital, an investment bank, recently estimated that GDP growth could be boosted from 7-8% to 10-11% if proper power supplies were available.

REFORMS & PROGRAMMES: The spate of energy problems are not new and officials have been working on remedies for some time. Nigeria entered the past decade with an almost entirely state-owned electricity system, with generation, transmission and distribution combined under the National Electric Power Authority (NEPA). The past dozen years have seen several schemes for independent power producers (IPPs) that would produce power at agreed tariffs for the national grid. In 2005 a complete overhaul of the system, including modernisation efforts, was undertaken.

The Electric Power Sector Reform Act (EPSRA) oversaw the separation of generation, transmission and distribution, and in the case of generation and distribution, fragmentation into different companies. There were six generation companies, corresponding to the national utility’s major power plants, and 11 distribution companies, each representing a region. The nation’s grid and its operation remained under unitary control, though it also assumed corporate form as the Transmission Company of Nigeria (TCN). Corporatisation was seen as a prelude to privatisation of 17 of these 18 companies. TCN, the exception to this, was expected to be controlled by a private firm under a management contract. However, all 18 remained in state hands under the control of NEPA’s successor, the government-owned Power Holding Company of Nigeria (PHCN).

DELAYED PLANS: While the scope for private IPPs was increased and regulated under the EPSRA, the authorities recognised the need for a quick solution to the problem of insufficient capacity until the private sector had time to have an impact. As a result, in 2005 the government initiated the National Integrated Power Project (NIPP) under the newly incorporated state-owned Niger Delta Power Holding Company (NDPHC), with its initial funding of $2.5bn from surplus oil revenues greatly expanded later. Originally envisaging rapid construction of seven medium-sized, gas-fired power plants, this was expanded to include four more plants. Total capacity was expected to reach 5200 MW and incorporate much work on the transmission and distribution grids.

Progress on the project faced delays, however. Bids for the TCN management contract were received in 2007, but put on hold as high-level federal bodies reconsidered the power reform process. The NDPHC’s activity was frozen for two years in 2007, as administrative changes on the federal and state levels prompted lengthy scrutiny of the programme’s funding amid suspicions of cronyism and massive fraud by contractors.

Former President Umaru Yar’Adua predicted new momentum for power, however, promising capacity of 6000 MW by the end of 2009. Between 2007 and 2008, three sizeable PHCN plants were commissioned at Geregu, with a capacity of 414 MW, Omotoshu (304 MW) and Olorunsogo (304 MW). However, 2009 ended with capacity actually peaking at around 3500 MW.

More infrastructure and capacity upgrades may be needed before IPPs start attracting widespread interest. “I estimate that it will take up to three or four more years to see the interest in IPPs materialising; infrastructural issues need to be approached first such as right of way and gas supplies,” said Adedayo Olowoniyi, the country manager of power technologies firm ABB.

MAPPING THE FUTURE: Yar’Adua’s successor, Jonathan, declared remedies for the sector to be a top priority. After assuming office at the beginning of 2010, Jonathan promulgated a sectoral road map in August of the same year. Topping his agenda were actions to fix problems with the decrepit transmission systems, widen bottlenecks, revitalise the country’s large hydro plants, and ensure that the PHCN and NIPP projects in progress were actually finished, which would add 7700 MW of generating capacity to the available 3800 MW by the end of 2013. The private sector’s involvement was also seen as key for development of the power sector, particularly in the form of privatising the 17 PHCN companies, pushing ahead with the TCN management contract and encouraging IPPs.

Also recognised in the plan was the need for incentive mechanisms to allow private enterprise to work in the sector that would take into account cost-reflective pricing, as well as the need to put in place arrangements that could “hold the line” until price mechanisms could become truly effective. The road map also incorporated the long view. In accordance with Nigeria’s Vision 20:2020, it put forth the aim of reaching 40,000 MW worth of generating capacity by the end of the decade, with diversification into coal and renewables to follow. In a bid to attract investors to generating capacity, bulk trader the Nigerian Bulk Electricity Trading (NBET) was established, chaired by the minister of finance and economic planning and operating under a World Bank partial risk guarantee, which protects private lenders from the risk of a public entity failing to perform its obligations for a private project. The road map also called for the creation of a 765-KV “supergrid”. In June 2012 Bart Nnaji, the former minister of power, estimated that fresh investments of $10bn per year in the sector, with $3.5bn going to generation capacity, would be necessary to meet that 40,000-MW target.

CURRENT PROGRESS: With production averaging around 2800 MW in 2010 and an all-time record broken in August of that year when production hit 3800 MW, the system was comfortably working at well over 4100 MW by the early months of 2012.

However, following a period of difficulty with a gas pipeline and a leak at the ill-maintained Kainji hydro plant, output plummeted by around 1000 MW in March 2012, before reaching 4480 MW by late August. While this figure was short of the promised stable power supply, Nnaji was predicted that output would reach 5500 MW by year-end. There is good reason for this: increasing supplies and improving infrastructure are making more gas available. Moreover, gas has become available in the right places. As of January 2012 there was a serious “stranded capacity” problem, with capacity standing at around 5500 MW, but only 4400 MW of it operable, as many gas-fired plants are located in unsupplied locations. However, a solution is expected in 2013, when the major east-west gas pipeline is set to come on-line. Nuhu Yakubu, managing director of Banner Energy, said, “The national gas infrastructure shows many deficiencies with supply irregularities as a result; onsite liquefied petroleum gas tanks can offset these by seamlessly compensating for the drop in gas.”

The view of capacity looks promising as well. Capacity expectations for the end of 2012 considerably exceed those for year-end output. Comparing figures from May 2012 with full-year projections, available capacity at established IPPs was to remain stable (at around 430 MW), while that at plants run by Agip and Shell was to rise somewhat (from 850 MW to 930 MW). More dramatic progress was anticipated elsewhere. Available capacity at the PHCN’s existing gas-fired plants at the start of May 2012 was just 2131 MW, but officials said that year-end, work on the plants will have raised available capacity by almost 1000 MW. At the start of May 2012, installed capacity at NIPP plants was just 750 MW, but with the benefit of a large project pipeline, the operational total was expected to rise to 2464 MW by year-end, with 1025 MW of the incremental capacity finished in June. Under the second version of the Multiple Year Tariff Order, introduced in May 2012 and applicable for five years, electricity prices were raised significantly in June 2012. Going forward the rates will be reviewed biannually taking into consideration inflation, the naira-dollar exchange rate, daily generation capacity, and accompanying capital and operation expenditure of generating companies. With expressions of interest solicited in 2011, July 2012 saw both the entry into force of a TCN management contract with Canada’s Manitoba Hydro. Numerous offers for the privatisation of the PHCN’s generation firms and distribution companies were also received. The results of the bid were announced on October 16, 2012. (see analysis). The provisional winners of the bid for three thermal and two hydro-power generation companies was announced by the end of September, attracting an accumulated total of over $1bn. The assets included the 832-MW Ughelli power plant that was won by a consortium including Nigerian investment conglomerate Transcorp and US-based Symbion Power, at a price of $300m. The 1020-MW Sapele plant, another thermal generator, was awarded to a consortium of Nigerian, Chinese and British investors at a bid of $201m. Amperion Power Distribution, a consortium, which includes Forte Oil, owned by Nigerian oil magnate Femi Otedola, offered $132m for the 434-MW Geregu plant, in partnership with Shanghai Municipal Electric Power Company and Israel-based BSG Power. The preferred bidder for the 600-MW Shiroro hydropower plant was a consortium named North-South Power Company, including the Niger State government, which won with an offer of $111m. Finally, the bid for Kainji hydropower plant, with a capacity of 760 MW, was awarded to a consortium including Nigerian businessman Sani Bello, at an offer of $257m. Under the terms of the National Council on Privatisations, the bidders are required to pay 25% of the financial offers within 15 business days of signing of the concession agreement while the remaining 75% must be paid within six months or at a date agreed on by both parties. The announcements will be followed by due diligence on the bidders carried out by the Economic and Financial Crimes Commission, the Central Bank of Nigeria, the Nigerian Electricity Regulatory Commission, the Federal Inland Revenue Service and the Asset Management Company of Nigeria. Allocation of the sixth and final generation company, Afam, had been delayed after it appeared that the then-minister of power, Nnaji, had business interests in one of the bidding parties. The controversy arose shortly before the announcements were made and caused Nnaji to resign from his post. Speaking to concerned stakeholders following Nnaji’s resignation, Minister of State Power Darius Ishaku said, “I want to reassure you that this government will continue to build on and nurture all the institutions he had put in place. Privatisation is ongoing with all the timelines. Continue to give us your support, as we have no choice but to continue from where he left off.”

MORE GOOD NEWS: Besides the progress on liberalisation of generation capacity, there also appears to be improvement in the transmission grid. In January TCN officials estimated the grid’s evacuation capacity at around 5000 MW on its 330-KV network and 8000 MW on its 132-KV network. The volume of work under way on the grid under the aegis of the TCN and NIPP, moreover, is very large indeed; as of January 2012, this amounted to around 8000 MW of capacity and 4100 km of lines on the 330-kV network, and 6800 MW and 2800 km on the 132-kV network. When added to the existing TCN network, with 5650 km of 330-kV line and 6687 km of 132-kV lines, this is no small expansion.

REMAINING ISSUES: An NIPP meeting convened in July 2012 by federal Vice-President Namadi Sambo aired assorted issues. One was alleged obstructionism by local communities over right-of-way for transmission lines. Another was the difficulty arising from an annual budgeting cycle that was not suitable for projects expected to take three to five years to complete.

Much remains to be completed as well. At present, grid losses are high, perhaps as high as 40% if distribution grids and the high-voltage transmission network are included. Additionally, the country is implementing the so-called “10,000-MW evacuation plan”. Longer-term TCN plans run to 15, 000-20,000 MW, although since the long-term question of funding is open neither has been finalised.

Aside from simply increasing capacity, development of the nation’s grid need to address two problems: disproportionate concentration of generation capacity in the south and the grid’s “radial” structure, which makes it more vulnerable to failure. “Power will lack in Nigeria for a long time,” Tosin Tomori, the director of Cummins West Africa, a generation company, told OBG. “Even if the grid improves, rising expectations will maintain a demand on power as the standard of living increases.”

OUTLOOK: Nigeria’s power sector has attracted some interest. Germany-based Siemens, for example, has been active in the country for 40 years, recently building the 414-MW Geregu power plant and currently engaged in the development of the NIPP project at Geregu-2 (430 MW). Siemens also appears keen to build more — a figure of 10,000 MW was given in a memorandum of understanding (MoU) signed in April 2012. A 10,000-MW figure had also been mentioned in an MoU signed in February 2012 by the ministry of power and visiting officials of US-based General Electric. This is little surprise, as Nigeria is a vast market, and the country will benefit greatly from further growth.