The lack of power has been among the biggest obstacles to higher levels of economic growth, and Nigeria is in the midst of a long and complex effort to increase electricity supply by more than fivefold by 2020, from the current level of about 3400 MW to 20,000 MW. The immediate result of this is a spike in demand for capital to rehabilitate existing capacity and add new supply, making foreign investment – through tenders and ancillary initiatives like the US Power Africa programme – crucial to the success of this reform effort.

Much Needed

Comparisons with developing markets the country benchmarks itself against show the scope of the problem. Nigeria produces about 40 KW per thousand people, according to government data. South Africa, which Nigeria surpassed in terms of overall GDP thanks to its April 2014 rebasing, produces 270 KW per thousand people, for example. India is at 145 KW, Brazil 530 KW and Indonesia 120 KW. The economic cost of power outages is estimated at just under 4% of GDP in Nigeria, whereas for others targeted in the US Power Africa programme – including Kenya, Ghana, Ethiopia and Tanzania – the figure is less than 1%, according to a 2011 study of sub-Saharan countries commissioned by the World Bank (the study results were published before the April 2014 GDP rebasing). In discussions with OBG, telecoms providers and manufacturers in Nigeria have said that the unreliability of grid electricity has translated to an increase in cost overheads by as much as 30%, a result of the cost of operating and fuelling diesel generators. Another way of measuring the size of opportunity is suppressed demand. Here, the figure was more than 10 times higher in Nigeria than in any other of those in the study, at 10,803 GWh.

To be sure, others in sub-Saharan Africa suffer bigger gaps in electricity supply, in particular in terms of widespread usage. In Nigeria 50.6% of the population has access to power at least some of the time, and that compares favourably. Just 16.1% of Kenyans enjoy the same, according to statistics compiled by the US Agency for International Development (USAID). In Ethiopia, the figure is 17%, and is 9% and 13%, respectively, in Uganda and Tanzania. However, the scope of work needed in Nigeria is not only bigger in absolute terms, but also presents some exceptional challenges. The size of the market is the first notable factor. Nigeria has the world’s seventh-largest population and is growing fast – the current population of 170m is expected to balloon to 440m by 2050, replacing the US as the world’s third-most populous country. As a result, supply will need to increase at a breakneck pace to keep up with demand.

While Nigeria holds the world’s eighth-largest reserves of natural gas, the preferred feedstock for power plants, financial irregularities and cash flow issues related to client payment have limited the power sector’s commercial appeal. Gas producers are sceptical about selling their output to the sector, in part because payment rates for electricity bills are low. This, in turn, hinders power producers’ solvency and thus their ability to pay for the gas. Price regulation also affects profitability: in December 2014 the government announced it will buy gas at $2.50 per million metric British thermal units (mmbtu) to resell to power producers, while the gas transport cost was raised to $0.80 per mmbtu.

Attracting Investors

Still, the potential returns in Nigeria, given its market size and volume of work needed, are immense, and despite the sector’s considerable complications it has drawn a spate of investors in recent months. Privatisation has been a major component of the state’s Roadmap for Power Sector Reform, first published in August 2010, although various proposals had been adopted earlier in the 2000s under the administration of President Olusegun Obasanjo. After decades of state monopoly over the electricity sector, the long-awaited landmark sale of state assets and distribution rights in 2013 may be followed by a second round of sales in 2015. In July 2014, the Ministry of Power began talks on privatisation of the state transmission firm, but as of early 2015 this had not materialised. The only asset that will remain in state hands is the transmission grid, as it is considered vital to national security.

Sector Size

As of March 2015, Nigeria’s power sector generates 4044.6 MW at peak generation, according to the Presidential Task Force on Power (PTFP), which publishes regular generation reports. The highest historic one-day total was 4517.6 MW on December 23, 2012. Daily output varies, and fell below 3000 MW earlier in 2014. That is less than its installed capacity of 10,396 MW – a result of technical problems and gas-supply challenges. There are 23 grid-connected power plants that provide 81% of the total, with the rest coming from three hydroelectricity plants. The PTFP estimates actual demand at 12,800 MW.

Not all of what is produced is used in-country, however. Nigeria has an export obligation of 150 MW to its two western neighbours, Benin and Togo, as part of its participation in the West Africa Power Pool (WAPP). A component of the Economic Community of West African States, of which Nigeria is one of 15 members, WAPP is a cross-border power-sharing scheme that aims to develop into a fully integrated regional electricity market, though several obstacles must be addressed. Ade Audifferen, managing director of Wärtsilä in Nigeria, a global supplier of gas and liquid-fired power plants, told OBG, “We need better planning as to where power assets are located. Units need to be closer to where people need them – for example, Lagos state has been especially responsive by locating generation units close to hospitals and water management services.”


The privatisation process of 2012 and 2013 saw the assets of the state’s Power Holding of Nigeria (PHCN) unbundled into 18 successor organisations – six generation companies, 11 for distribution and one to handle transmission, the Transmission Company of Nigeria (TCN). Majority stakes of about 60% were sold to private investors for all of the distributors and four of the six generation companies. The two with hydro assets were concessioned instead, to enable state control of its waterways. In line with the Power Sector Roadmap, the TCN was not privatised or concessioned because the national grid is deemed a strategic asset crucial to national security.

Three other gas-fired power plants have been transferred to private entities outside the PHCN privatisation. Egbin, serving the Lagos State area, is the largest in the country at 1320 MW of installed capacity, and was not a part of the privatisation process because a deal had already been in the works. That $407m sale was to a consortium of the indigenous Sahara Energy Group and Korea Electric Power Corporation (KEPCO). Two other power plants, at Omotosho and Olorunsogo, have an installed capacity of 335 MW each but were running far below that total in mid-2014. These plants were built in the early 2000s by China National Machinery and Equipment Import and Export Corporation, in an arrangement in which the firm would build and operate the plant and pay up front using a vendor-financing loan to be repaid by the government. In 2013 both sides agreed to convert that debt to equity instead.

Beyond the state generation and distribution assets that were or are being privatised, Nigeria is also home to an array of independent power producers (IPPs). A handful of major producers provided about 25% of power fed through the national grid as of 2012. Among the largest is Azura Power West Africa, a 450-MW IPP under construction as of April 2015 for an estimated cost of $1bn to produce for the national grid. The project’s mostly foreign investors are a mix of commercial and development agencies, including equity owners Amaya Capital Partners and American Capital Energy & Infrastructure; debt providers Standard Chartered and FMO, the Dutch development finance provider; and the World Bank’s Partial Risk Guarantee scheme.

As a result of the country’s irregular grid supply, there are also a number of captive IPPs – small plants that are owned by industrial users and produce electricity off-grid for their own needs. The Nigerian Electricity Regulatory Commission (NERC) has issued 99 generation licences for these purposes, although not all of the licenses have translated to new facilities. However, small plants of 20 MW or less are increasingly popular, a recent example being in Lagos, where the state government signed an agreement for a public-private partnership (PPP) with the domestic energy firm Oando to build a captive plant to service its operations that are clustered in the Lagos neighbourhood of Alausa.


Nigeria’s transmission grid, like its power plants, is in need of investment after decades of underfunding for expansion and maintenance. In April 2014, technical losses were estimated at up to 40% in some areas, according to Minister of Power Chinedu Nebo, though these have fallen to 7.9% as of February 2015, according to the system operator. Moving power from plants to users is considered a major obstacle to a healthy power supply chain that could attract foreign investment. “There is tremendous opportunity for manufacturing transmission towers domestically,” Tunde Gbajumo, CEO of Symbion Power Nigeria, told OBG. “As the towers are very complicated to build and expensive to import, manufacturing locally will provide training and employment for many Nigerians as well as a more cost-effective means of production, thereby helping lower the overall cost of transmission projects.”

The first step towards improving the performance of TCN and its grid was a management contract awarded to Manitoba Hydro, the Canadian province’s public utility, whose work included a blueprint for rehabilitating and expanding the grid. The government hopes to use a vendor-financing model, in which private investors or banks pay up-front and then receive compensation from the state in instalments. On that basis, TCN seeks to borrow at low rates and over long terms typically unseen in Nigeria – at less than 5% for 10-15 years.

What might make that easier is a sovereign guarantee. Nigeria has a mixed record at best with these types of “pay later” arrangements. The plants at Omotosho and Olorunsogo are examples in the power sector, but similar cases of payment irregularity have been seen in upstream energy, where the NNPC produces oil and gas via joint ventures with partner companies, directing them to front the money and then pay themselves back by keeping more of the output. However, investment in ancillary areas of the transmission sector, including manufacturing, is increasing. According to the Ministry of Power, 3500 km of transmission lines had been added as of the first quarter of 2015 via a recent injection of funds for infrastructure upgrades. Two foreign firms have also joined with a local investor to build a factory to make steel transmission towers. Partners in the venture, to be called the Western Sahara Transmission Company, are Symbion Power, a US-based builder of electricity assets in developing countries; Jyoti Structures, the US subsidiary of India’s equipment maker; and Iroko Capital, a Nigerian investment firm.


Nigeria’s 11 distribution companies range in size, with four receiving at least 11% of total power allocation, according to a review of the sector by the Benin Electricity Distribution Company (BEDC), itself a mid-sized distributor that gets 9%. In the past, technical losses and cash flow issues have made profitability difficult. BEDC’s post-privatisation market snapshot – prepared by the new owners, including Africa Finance Corporation, a Lagos-based private-equity and development finance firm – offers a sample of what conditions are like across the country. Collection rates are as low as 48% of the total in Edo State, one of the states in which it operates, and a backlog of 8000 accounts needs updating. Some customers had been billed more than they owed; others tap into the system illegally, which remains a problem. Accounts are done manually, instead of with software, and the physical assets are in need of an overhaul. In all, BEDC’s new owners estimate they need to spend N45bn ($270m) to modernise. Pre-paid electricity meters have been widely hailed as a solution to non-payment, and in order to secure supply distributors can also build their own power plants (see analysis). For now, the firms are expected to remit to the government only a part of what they owe for the power they take, and only at a later date will they be required to pay all of that obligation. The range is broad. Eko Distribution in Lagos is to pay 97.65% of its bill to Yola Distribution, which is covering parts of the country’s northeast and is not required to pay anything. BEDC’s rate is 38.88%, the fourth-lowest.

Water Safety

While the electricity segment is the public utility that dominates Nigeria’s energy sector, similar challenges loom for the provision of water, sewage services and waste removal. Like with power, collections are a challenge, in part due to low rates of payment and illegal or informal connections. An official reform effort, the Water Sector Road Map, was launched in 2011 and involves rehabilitating existing infrastructure and building more. Waste management is handled at the state level and investment opportunities exist for private providers to win contracts to provide this service in the larger ones, such as Lagos and Abuja. The Lagos State government is pursuing a range of other options to handle waste, such as a power plant that will capture and use the methane produced at the Olushosun landfill site, and composting and plastics buyback programmes. An estimated 10,000 metric tonnes of waste are generated daily in the state, which contains most of metropolitan Lagos.

Data from the UN, which tracks countries’ progress toward the Millennium Development Goals, indicate mixed results in water, sewerage and waste provision in recent decades. Access to potable water is increasing, mirroring the global trend; however access to sanitary facilities has fallen sharply in the past two decades. The UN’s annual data contain figures to 2012.

The percentage of Nigerians with access to clean water has climbed from 46% in 1991 to 64% in early 2015. However, the expansion of sanitary waste facilities has declined in recent years, falling to just 28% as of the end of 2014. In both cases the changes are happening mainly in rural areas. In urban areas, access to water rose one percentage point in the 21-year period, to 79%, while access to sanitary conditions dropped by 5 points to 31%. In rural areas, water availability was up from 28% to 49%, but sanitation access down from 37% to 25%. The rise in rural water access has been helped by donor funding, like a programme initiated in 2002 by the Japan International Cooperation Agency, which has built 250 water stations. Trends in the country indicate room for commercial investment as well.


After privatisation the next step for the power sector took place in September 2014: a system-wide audit of production and distribution assets. The results have been used to set production and distribution targets for new owners, as well as to determine the progress of the system overall. As of early 2015, the market had entered into what the road map calls a “transitional electricity market”. Over the next several years, two government-owned firms will act as intermediaries for transactions in the marketplace.

The Gas Allocation Company of Nigeria will match gas producers with gas buyers, facilitate negotiations for natural gas sale and aggregation agreements, and manage escrow accounts used as security for gas sellers. The Nigerian Bulk Electricity Trading Company will sign power purchase agreements with generators and sell to distributors. Both bodies are temporary actors in the market and will be closed once the electricity sector can stand on its own. For now, their presence is deemed necessary to facilitate the signing of long-term contractual relationships between parties along the value chain, and to limit defaults and volatility.