In the February installment of our monthly polls, Nigerians were very critical of the Buhari government’s performance in the power sector. After over $20 billion dollars of spending in about 2 decades, Nigeria remains embarrassingly stagnated with only about 5,000 MW of power generation capacity.
The Nigerian power sector has acquired a reputation as the graveyard for performers, and it is littered with the tattered remains of the résumés of some of Nigeria’s best minds. Bola Ige, an erudite and accomplished lawyer and politician, struggled to get a grasp on the sector. Professor Bart Nnaji, a well-respected academic with private sector experience in the energy sector was bogged down in the miasma swamps of Nigeria’s power sector. The latest accomplished performer that Nigerians have sent to the power sector is Raji Fashola. He too comes to the sector with some solid credentials. He was governor of Lagos state, and in that capacity raked up some relevant experience managing the Lekki-Epe Expressway Toll Road Project and midwifing a number of state supported power sector projects. Over the last few days, the Buhari government has publicly apologized to Nigerians for the slow pace of progress and have now publicly acknowledged that they too are bedeviled by the seemingly intractable challenges in the Nigerian power sector.
The Three (3) Major Challenges in the Nigerian Power Sector
Why is the Nigerian power sector plagued by issues that do not seem to exist in any other nation – sabotage of gas pipelines, sabotage of generation, transmission and distribution equipment, and intractable labor crises?
To answer that question, we must ask ourselves who the true stakeholders in the Nigerian power sector truly are. To accurately identify them, we will need answers to this straightforward question: If Nigeria’s power sector stabilizes, who will the winners and losers be?
There are five (5) clear classes of winners, these being: (i) 170 million Nigerians who will have stable electricity (ii) manufacturers and businesses that will benefit from having stable and reliable power (iii) law enforcement and security operatives – who will not need to battle crime as well as darkness in carrying out their duties (iv) workers in the power sector – who will benefit from increased jobs and enhanced job security and (v) owners of the power firms and distribution companies, who will benefit financially from growth in the sector.
Now that we know who the lucky winners will be, we should spare some thought for the likely losers from the provision of stable power. The losses will be of two major types - economic and political. The economic losers are those who stand to make monetary losses from the emergence of stability on the public power sector.
Nigerians buy about $500 million (about N100 billion) worth of electrical generating equipment per year in an industry with annual global sales of about $18 billion i.e., we are 3% of the global generator market by consumption! We also consume about 23 million liters of diesel and petrol per day exclusively for private power generation, costing a staggering N600 billion per year. This implies that there are Nigerians that are making almost N700 billion a year of wealth from their investments in the private power generation market. They will be the major economic losers if the government is successful in creating a strong, robust, reliable public power sector.
The political losers are those with a vested interest in seeing the failure of this government. Success in the power sector will be a crowning achievement for the Buhari administration. It would benefit majority of Nigerians, and have a significant booster effect on the economy,
Now that we’ve identified who the likely losers and winners are likely to be,
CHALLENGE 1: Sabotage of generation, distribution & transmission equipment
The Power sector is made up of three mutually exclusive, but necessary parts – generation, transmission, and distribution. An analogy to an electric generator will be appropriate. In every home that has an electricity generating set, three parts will be obvious – the generator itself (generation), an electrical cable or wire (transmission) that connects the generator to a control panel or fuse box through which the generated power is distributed (distribution).
In Nigeria, the generation (GENCOs) and distribution (DISCOs) companies have been privatized, while the transmission is still managed by the government.
Sabotage is a rampant issue in the Nigerian power sector, and it occurs more frequently than many Nigerians realize. Recently Nigerians awoke to a 50% drop in power generation, transmission and distribution capacity due to sabotage (http://www.premiumtimesng.com/news/headlines/199405-nigerias-electricity-output-sharp-fall-2800mw-regulator.html).
Why would anyone put themselves at risk by attempting to sabotage high voltage power generation, distribution or transmission equipment? It would make sense that the only people willing to take such a risk would be those that have a lot to gain, or lose, from changes in the sector. In project management parlance, such people would be termed stakeholders, i.e., everyone with an interest in the outcomes that result from the implementation of that project.
CHALLENGE 2: Security of gas transportation pipelines
Nigeria’s power strategy is based on the use of natural gas. Natural gas has many advantages - it is abundantly available in Nigeria, is relatively cheaper than using diesel and other fuel oils, and it burns cleaner too.
All of Nigeria’s natural gas comes from the South South region, and in order for it to get to power plants around the country, it must be transported in thousands of kilometers of pipelines that run from the South South region to the power plants that utilize the gas.
Who would want to blow up a pipeline? The answer is simple – economic or political stakeholders who will benefit from an epileptic power sector, or gain from the failure of the Buhari government. The list of political stakeholder suspects is long: Boko Haram insurgents, Niger Delta militants, political enemies of the administration, aggrieved people from communities affected by the pipelines, etc.
For anyone with intent for gas line sabotage, getting an opportunity to blow up a pipeline is remarkably easy. Most of the pipeline assets are in the middle of nowhere, making them extremely vullnerable to attacks and sabotage (http://www.vanguardngr.com/2016/01/ex-militants-bomb-escravos-warri-lagos-abuja-gas-pipeline/).
Here’s the problem - an attack on a pipeline will shut off the critical supply of fuel to any power plants that it supplies. Because gas is not stored, the affected power plants very quickly run out of the fuel they need for power generation. A gas fired power plant typically works strictly on gas, so the facility will have to stay offline until the pipeline is repaired and supply restored.
CHALLENGE 3: Time for completion of large (100 - 1,000 MW) projects
Nigeria has always had huge plans for power. The problem is that we do not have the enabling environment for the materialization of such grand schemes. Nigeria’s six legacy plants (Afam, Egbin, Kainji, Sapele, Shiroro, and Ughelli) have an average size of about 1,000 MW. The average size of the ten planned or commissioned National Integrated Power Projects is about 540 MW.
Power sector projects are not trivial endeavors. They take a long time to implement, and the timeframe from conceptualization to implementation can easily take about 2-4 years in the best environments for a typical 100-1,000 MW project – which is the scale of most of Nigeria’s planned projects. In Nigeria, that time could easily be twice the projected timelines observed in other environments due to some uniquely Nigerian constraints and factors. Add to that the complexity of constructing supporting gas pipeline infrastructure that will provide the fuel needed for the power plant to function, and we can potentially start looking at almost a decade of construction time for these large projects.
The Buhari government has only 3 years left to demonstrate to Nigerians that it can deliver on its promises. If their plans for increasing power capacity in Nigeria from the current level of about 5,000 MW are based on large scale power projects, then it is almost certain that those gains will not be seen during Buhari’s current term.
Three Proposed Solutions for Transforming the Power Sector
Any solutions that will provide long lasting solutions to the power sector problems in Nigeria must necessarily address the following: (i) satisfactorily and equitably resolve the concerns of all stakeholders (ii) devise strategies that effectively mitigate sabotage (iii) include a portfolio of short term projects that deliver tangible results in a timely manner of less than a year (iv) create a platform for system wide infrastructure development in ancillary sectors like transportation (v) directly facilitate economic multiplier effects and job creation.
SOLUTION 1: Gas Based Power Plan Must be supplemented with LNG & Rail Transportation Strategy
A power plan that relies exclusively on natural gas is naïve, given the reality of Nigeria’s current security and political situation. Who will guarantee the integrity and safety of the pipelines as they crisscross thousands of kilometers of unsecure territory? Who will prevent militants, saboteurs, and disgruntled political elements from blowing them up? No one can.
The alternative to Nigeria’s current one track gas strategy is to provide a supporting liquefied natural gas infrastructure. It will still be based on natural gas as a starting point. This approach will, however, require the conversion of some of the gas to a liquid form which can then be transported by road or rail to the power plants. That way, even if pipelines are blown up, power plants across the country will still be able to receive the fuel source they need.
To convert gas into a liquid, it needs to be compressed and cooled. The infrastructure needed to do this gets cheaper as it gets bigger due to economies of scale. The most effective approach would be to install these liquefaction facilities, as they are called, in cities like Port Harcourt and Lagos that are proximate to the gas recovery or transport sites.
For every 1,000 MW of power generated using Natural gas, Nigeria will require about 240 million cubic feet of Natural Gas per day. When gas is converted to liquid form, the volume is reduced by about 600 times. This means that to generate 1,000 MW, only 0.4 million cubic feet of Liquefied Natural Gas (LNG) per day will need to be transported (i.e., about 3 million gallons per day).
LNG is transported by tanker trucks that look very much like the vehicles that currently transport petroleum products across the country. A typical tanker trailer can haul 6,000 gallons of LNG. This means that about 500 trailers will be required on a daily basis to service the generation of 1,000 MW of power demand.
If Fashola were to strategically determine that a supply diversification strategy will be followed for about 1,000 – 2,000 MW currently (or planned) exclusively serviced by pipelines, industry will need to be created around the cryogenic transportation of petroleum products, employing thousands of Nigerians as drivers, auto mechanics, and facility engineers. Because of the similarities between the logistics of transporting petroleum products (diesel and petrol) and LNG, key stakeholders like the petroleum marketers who currently stand to lose about N600 billion per year if demand for private power generation disappears will have another industry that they can be aided to move into.
Another alternative or complementary approach would be to transport the LNG by rail cars. A single train head can easily haul 50-100 rail cars (trailers), each of which can hold about 6,000 gallons of LNG. This would mean that about 5-10 trains will be required to service 1,000 MW of power generation. It means in essence that if Nigeria’s next 5,000 MW of generation capacity was based on LNG, about 25-50 trains would provide all of the needed haulage capacity for the entire country.
Here, is where the power sector and transportation sector intersect, and success will require coordination across these two segments between the responsible ministers (Fashola & Amaechi).
SOLUTION 2: Localize Power Generation, Transmission & Distribution to save time, and enhance security
Despite the best intentions of Nigeria’s government, any new power capacity planned on a scale of 500 MW or higher, will likely not be completed under the Buhari government’s tenure. Nigerians want to see results now, and until the stability and availability of power improves for enough Nigerians, the government will be rated as a failure.
Here’s a simple way out. A 10-20 MW power plant can be built and turned on within about 6 months, and service about 1,000 to 5,000 households and industries. Nigeria’s power shortfall is about 20,000 MW. If 25% of that demand (i.e., 5,000 MW) were to be addressed using a small plant (20 MW average) approach, about 250 power plants would be needed across Nigeria. These power plants can be delivered within a year of their ground breaking – ensuring that Nigerians see the benefits of the efforts of the Buhari government in the power sector well within the duration of their term. Because the plants are embedded within host communities that will use the power, the citizens will help secure the plants. Transmission and distribution infrastructure costs can be kept to a minimum because the plants will be intentionally built and designed to service a local community. Localization also offers the opportunity to introduce leap frogging technology such as the use of buried underground power cables.
How would such a scheme be implemented? One approach would be for the government to develop a stratified approach to power sector development, by delineating all of Nigeria’s 774 local government areas into 3 tiers using a four (4) pronged classification system that is based on (i) economic contributions; (ii) presence of security institutions (military and police barracks); (iii) presence of life & skills critical infrastructure (hospitals, tertiary institutions, etc.) and (iv) geopolitical balance. This exercise would yield a prioritized list of project s across the country. The projects can then be rolled out by tier, with the tier 1 projects coming first.
How can 200 or more small to medium power plants be built across Nigeria at the same time? Simple – engage public, private partnerships (PPP). GE, Fuji, Siemens and other power plant manufacturers can be engaged as strategic partners. They will commit to building the plants as well as the associated localized transmission & distribution infrastructure with their own capital, and operating the facilities in return for commitments from the government (Federal, State and Local) to long terms contracts of 10-15 year duration. The government will pay monthly fees to the PPP firms, commensurate with the electricity tariffs for the power provided. The government or licensed private sector firms can then, in turn, collect the tariffs from the actual users. This way, the PPP operators are assured of payment, eliminating a huge source of risk that might prevent their enthusiastic participation in the program. Since the deployment of these units will be done at the local government level, the Federal Government can use straight deductions from monthly LGA allocations as a means of securing all or part of the monthly tariff payments.
Making this localization solution work will require significant modifications to Nigeria’s current power sector policy. Enhancements to the existing policy framework will also be needed to ensure State and LGA rights to engage in the power sector. Similarly, restitutive provisions will have to be made to address any potential shortfalls to revenues and returns that will accrue to the GENCOs and DISCOs that have already made investments in the power sector as a result of any modifications to the policies that were in place when they acquired their assets.
SOLUTION 3: Stakeholder inclusion needs to be enhanced
The average daily demand for diesel in Nigeria is about 15 million liters per day, a significant portion of which is used for power generation. Most estimates, including from the NNPC, indicate that about 60% of diesel use goes to power generation. Another 8 million liters of petrol consumed in Nigeria is estimated to be used for power generation. Combined, these refined fuel oils are used to generate about 2,500 MW of power at the household and business level. This section will repeat some points previously addressed because the importance of this stakeholder issue bears emphasizing.
If we assume that petrol retails for about N87/liter, while diesel, conservatively retails for about N100/liter, we come up with a value of almost N600 Billion per year spent on private power generation. Most of this money go to Oil Marketers – the people who import, transport, market and distribute oil in the country. Nigerians import about $500 million of electricity generating sets annually, which translates to about N100 Billion Naira of import value.
Here’s the point – if Fashola was 100% successful in transforming the power sector. If no Nigerian ever needed back up power generation sets. If the only use of diesel or petrol was for fueling cars, then certain individuals in Nigeria would see about N700 Billion per year of value disappear. If the potential losses to businesses in the auxiliary industry that has developed to service private power generation is counted – electricians, generator repair services, home diesel delivery - the amounts at stake could be closer to 1 trillion naira or more. Almost a trillion naira of wealth per year would be gone with the wind if Fashola is successful! We will not speculate about what people that are faced with such colossal losses in their fortunes would be inclined to do to prevent their losses, but we can safely surmise that they will not be active cheerleaders for a process that will devastate them financially.
To the best of my knowledge, no power sector plan has ever systematically sought to include the oil marketing and electricity generation distributors as co-developers. When Fashola and other Ministers that have gone before him talk about “Stakeholders” they mostly refer to the known players in the power sector – the new owners of the generating and distribution companies and power sector employees & trade unions. No one it appears, seems to think that people who will lose about 1 trillion Naira per year in value should be considered major stakeholders. Everyone talks about the value that will come to Nigeria – but no one talks about the loss of fortune that will inevitably be the lot of these Nigerians, who stepped in to fill a gap that successive governments had failed to address.
A holistic power sector plan must include these stakeholders. They must be supported to become invested in the plans for the future as investors in the generation companies (GENCOs) or distribution companies (DISCOs) and as potential enablers of an LNG-based fuel diversification strategy. Policies must be put in place that will encourage their unreserved participation in a transformation that might kill their existing businesses but offers them a stake in the new economic reality that will emerge. Until this is done, Nigeria will struggle to make headway with developing a virile and robust power sector.
As the recent challenges experienced in the power sector demonstrate, there will continue to be major consequences for systematically ignoring the interests of stakeholders in the current private power market and not developing alternative strategies to address the security vulnerabilities of a gas driven strategy for power generation. Time is running out, but the situation can still be salvaged with the right strategic imperatives.
Dr. Malcolm Fabiyi coordinates the Governance Advancement Initiative for Nigeria (GAIN) poll. He has served as a Visiting Professor at Lagos Business School, and previously worked as a managing consultant with McKinsey & Company.
Follow me on twitter @malcolmfabiyi ([email protected])