September 2, 2012
Professor Barth Nnaji should be credited with charting a plan and a path for the power sector. The Roadmap for Power Sector Reform is a 149 page document released in August 2010. It is a decently conceived document that provides milestones and projections that delineate Nigeria’s path towards reaching the vaunted goal of reliably providing 40,000 MW of power by the year 2020.
Professor Barth Nnaji should be credited with charting a plan and a path for the power sector. The Roadmap for Power Sector Reform is a 149 page document released in August 2010. It is a decently conceived document that provides milestones and projections that delineate Nigeria’s path towards reaching the vaunted goal of reliably providing 40,000 MW of power by the year 2020.
The Power sector Roadmap focuses on hydro, coal and natural gas as the framework around which Nigeria’s energy sector will be built. Natural gas is the cornerstone of the plan. Renewables like Solar, Wind, Nuclear Power and Biomass-to-Energy are de-emphasized, supposedly because of high capital costs and long lead times associated with their implementation. The Roadmap acknowledges that reaching the target of 40,000 MW by 2020, requires investments of at least $3.5 billion per annum and relies on private Investors for majority of all power sector funding. The Roadmap also calls for a sole bulk purchaser for power, a principal buyer that will purchase all generated power and resell to licensed distributors. This entity was established in July 2010 and is called the Nigerian Bulk Electricity Trading (NBET) Plc. Judged by its self-imposed targets, some critical short term milestones in the Roadmap have already been missed. For instance, the roadmap forecasted that by December 2011, there would be about 10,000 MW of installed generation capacity and about 12,000 MW by December 2012. The 2011 target was not achieved, not by a long shot, and the 2012 generation capacity target is unachievable. Despite its shortcomings – and these will be discussed in due course - the Roadmap marks an improvement over the prior situation where all that Nigerians had to hold onto were statements of intent and verbal palliatives about the government’s goals for the power sector, without a clear path for implementation. The goals of the Roadmap are lofty, as should any strategy that is aimed at providing the energy to power Nigeria into one of the top 20 global economies within the next 8 years. The strategy on which the Roadmap is premised is however flawed in several regards. The Roadmap makes assumptions about private sector adoption and buy-in into the National power sector reform agenda that are modeled on the Telecommunications experience. It presumes that once a semblance of a functional energy market is created in Nigeria, investors will pour in. It is utterly dismissive of Renewables and Nuclear energy and hinges about 75% of Nigeria’s energy sector on Natural Gas, a resource which is finite. To sustain the 30,000 MW of the 40,000 MW target that is hinged on the use of Natural Gas as a fuel source, Nigeria will need about 3 Trillion cubic feet per year of Natural Gas for power generation. When the fact that another 1.3 Trillion cubic feet of Natural gas will be produced as Liquefied Natural Gas (LNG) to meet export obligations, it is estimated that Nigeria’s current Natural Gas Reserves of about 186 Trillion cubic feet will be completely depleted by the year 2060. By focusing exclusively on the year 2020 target, the Roadmap is a shortsighted document that almost wholly ignores energy security and sacrifices sustainability and low energy costs on the altar of expediency. Of the major, non-renewable methods of energy generation available, Natural gas ranks highest in cost (N9/kWh), followed by Coal (N4/kWh), Nuclear (N3/kWh) and Hydroelectric (N1/kWh). In comparison, the cost for Renewables is higher, with Wind at N11/kWh and Solar at N31.5/kWh. The Major Issues with the Roadmap Overreliance on natural gas. In terms of costs, Natural gas is not the cheapest means for generating energy. It is abundant in Nigeria, and that is a good thing. However, the Natural gas to be utilized in local energy generation will not be provided at a subsidy to power generators. Because the Roadmap calls for Natural gas to be priced at parity with Liquefied Natural Gas (LNG) export prices to provide incentives to gas producers and transporters, there are no unique price advantages that will be on offer if Natural gas is used for power generation in Nigeria. Renewables and Nuclear energy are completely ignored. There are currently no considerations in the Roadmap for developing a sustainable and reliable energy portfolio that takes practical consideration of the economic, security and geo-political concerns. With the effective Tariff rate of N22/kWh set by the Roadmap, Wind (N11/kWh) becomes a viable energy source, which makes the absence of at least a Wind Energy based renewables platform in the Roadmap puzzling. It ignores Key Players and downplays incentives for Sabotage by Shortchanged Stakeholders. In the 40 years that the Nigerian government has failed in its duty of providing reliable power supply, an alternative market has grown to meet Nigerian’s power needs. The government spends about $2 billion annually on the power sector for upgrades to infrastructure that never materialize. The bulk of this money is misappropriated and shared between the contractors who run the projects and the politicians who use them as fronts. There is a generator purchase and repairs market which is worth about $700 million per annum. There is a large market of about 4,500 million liters a year in diesel sales for power generation worth about $5 billion per year. There is also a large labor force associated with the power sector. While the vast majority of the workers are hardworking and dedicated, there are some who have learned to exploit the current inefficiencies to generate inordinate rents and payoffs for themselves. The alternative power market is a large one, worth about $10 billion dollars per annum. If the power sector plan were to be successful, this market will disappear. It should therefore come as no surprise that the stakeholders in this market will resist any attempts at changing the status quo, using any and every means at their disposal. To ignore these stakeholders, as the National Power Sector Reform plan does, is to plan to fail. It assumes the Deregulation of the Telecommunications sector is an accurate model for the Power Sector. Given the centrality of private sector investment to the Roadmap, it is worth discussing why many of the milestones set in the Power Roadmap that are predicated on private sector participation might not be met. There is no doubt that the privatization of the Telecommunications sector was extremely successful. Participating firms in the Telecommunications sector have made record profits, and consumers have in turn been offered a wide menu of service providers as well as product and service options to choose from. However, Power is not Telecommunications, and to assume that the lessons from one are directly translatable to the other is an egregious error. There are three major differences between the Power sector and Telecommunications that the Roadmap ignores. (i) Telecommunications did not have government intermediaries as participants in the market. The government’s role, through the National Communications Commission (NCC) was simply that of a regulator. The NCC did not participate in the market. In the Power sector, a governmental entity (NBET) purchases power from providers; another governmental agency, the Nigerian Electricity Liability Management Company (NELMCO) will compete in the market and manage all non-transferred assets, liabilities and obligations of the PHCN; while a third government agency, the Transmission Company of Nigeria (TCN) manages the transmission infrastructure. The TCN is now being run under contract by a Canadian firm, Manitoba Hydro International, for an initial 3 year period. Furthermore, the government will retain minority stake holds in the 11 distribution companies. (ii) Investment Risk is extensively mitigated in Telecommunications, in ways that are not possible in the Power sector. In the Telecommunications sector, providers like MTN, ECONET, GLO and others did not build out full capacity all at once. They started their roll-out in high demand markets like Abuja, Lagos, Rivers and Oyo State; and within those states, they installed their first base stations in high values markets like Wuse (Abuja), Victoria Island (Lagos), Port Harcourt City (Rivers) and Ibadan (Oyo). Such limited roll-outs are not possible in the power sector. A power generating plant for 200 MW is built all at once otherwise cost benefits that come with economies of scale are lost. (iii) The Telecommunications firms can guarantee the security of their assets and supply sources directly. The Natural gas based power plan relies on government policies for enabling gas production and depends on the government for providing security to the Natural gas pipelines that will convey their primary raw material to the power generating plants. It is unclear how the government expects to guarantee the security of thousands of kilometers of natural gas pipelines crisscrossing the country. It is natural for investors to worry that such pipelines could be vulnerable to terrorist attack. In Telecommunications, the only assets that need securing are the base stations. The Telecommunications companies themselves are responsible for security at the base stations, and in the event that one station goes down, it does not drag down with it the entire network. One incident on a pipeline can bring to a halt all power generation that is reliant on gas supplies on that trunk. Suggestions for Moving the Nigerian Energy Sector Forward For reasons of strategy and security, an alternative LNG based plan should be developed to augment the existing gas plan. If terrorists blew up the Natural gas pipelines that the power roadmap relies on, about 75% of Nigeria’s energy infrastructure would be crippled. Given Nigeria’s recent experiences with MEND and Boko Haram, it would be foolish to ignore terrorist threats when developing strategies for a critical sector such as energy. Renewable energy sources should also be aggressively pursued, especially in the North, taking advantage of the remarkable wind and solar resources available there. At the N22/kWh effective tariff rate that the Roadmap sets, and which has now been implemented, Wind energy will be a viable platform. Given the potential vulnerabilities of a gas based power strategy, the power roadmap as it is currently structured strangely discourages the development of a LNG infrastructure for providing gas to power plants, and offers no strategic fallbacks in the case of sabotage of pipelines. By artificially setting the price of natural gas sold through the pipelines at the same cost as LNG the power plan has killed off the possibility that a viable back up LNG market for the power sector can develop. This error needs to be remedied. A Decentralized Model should be aggressively pursued as a means of accelerating growth in the sector. If there is any learning to be derived from the successes in the telecommunications sector, it is the idea that decentralization can offer ways to overcome some of the unique challenges associated with capital intensive and sabotage prone sectors like Power. Decentralization will require targeting generation, transmission and distribution assets to specific geographies. It might also require modifying the conventional power reform model which involves separating the transmission infrastructure from the generation and distribution sectors, to allow a single firm to vertically integrate across the three sub-sectors of the energy value chain. The localization of assets will curtail sabotage. The Nigerian Electricity Regulatory Commission has issued new regulation that enables such a decentralized model to be implemented at state and local government levels. The missing element is a comprehensive public private partnership policy framework that will clarify the nature of the partnerships between power sector investors and governments (state and local). There will also be a need to develop policy that will define the implications of the new decentralized model on the returns structure for investors who elect to engage at the national level by buying into the 11 distribution companies. With such a model, investors can choose to start small, or elect to opt out of engaging with government run entities in the value chain, allowing mitigated risk taking and faster roll-out. Nuclear energy is ignored completely in the power sector roadmap. There is no reason why Nuclear power cannot be responsibly developed in Nigeria by engaging firms from nations like Japan and France, who are leaders in the field of Nuclear power generation, to drive the process forward. There are many reasons for doing this. Firstly, Nigeria has Nuclear reserves that can be exploited to provide the fuel needed to support Nuclear power generation. Even if such reserves are not in commercial quantities or are still far from viable exploitation, about 5% of global Uranium reserves are located in Niger Republic, our Northern neighbor. Secondly, why would a cheap energy source like Nuclear power be neglected, given its ability to ensure energy security for Nigeria? Thirdly, Natural gas will not last forever, and by conservative estimates, by 2060 we might have completely depleted our Natural gas reserves. Nigeria’s nuclear energy goals are currently managed by a little known parastatal known as the Nigeria Atomic Energy Commission which has developed its own roadmap, with the goal of generating at least 1,000 MW by 2017 and 4,000 MW by 2027. The Nuclear Energy Roadmap needs to be integrated with the National Roadmap for Power Sector Reform. The Northern States might want to aggressively pursue Nuclear power generation as an economic resource. Nuclear energy is the cheapest energy source available, and the North’s proximity to Niger Republic provides an opportunity to produce cheap power at about N3/kWh, which they can sell to the bulk power purchaser at the equivalent of about N22/kWh. If the North commits to generating 10,000 MW to 20,000 MW using Nuclear Energy, this will yield Revenues of about $13 – $26 Billion per annum, and Net profits of about $11 – 22 Billion per year. To put matters in perspective, Nigeria’s annual revenues from Petroleum are about $50 billion annually. The North’s political and economic elites would be insane not to seriously consider the opportunities that the power sector reform project offers them for leveraging their geographical proximity to readily available sources of nuclear fuel to enhance Nigeria’s energy sector, and their region’s economic fortunes.googletag.cmd.push(function() { googletag.display('content1'); });
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