• diary political and General News Events from Feb 2

NIGERIA - Presidential and National Assembly elections.
SUNDAY, APRIL 22
FRANCE - First round of presidential elections.
LONDON - London Marathon. Link: www.london-marathon.co.uk
MONDAY, APRIL 23
BRUSSELS - EU Foreign Ministers Meeting.
STRASBOURG - EU parliament plenary session (to April 26).
CAMP PENDLETON, Calif. - Court-martial of Sgt. Lawrence G. Hutchins, a U.S. Marine suspected of being the ringleader in the kidnap and murder of an Iraqi grandfather.
LONDON - British singer George Michael scheduled for trial charged with being unfit to drive.
BERLIN - Lower-level bilateral talks between EU envoys on forging a new EU constitution expected to take place between April 23 and May 4.
TUESDAY, APRIL 24
BRUSSELS - Fraud Europe 2007, a conference dedicated to fraud detection, prevention & investigation/recovery across Europe from both a corporate and regulatory focus.
WEDNESDAY, APRIL 25
NEW YORK - 6th annual Tribeca Film Festival (to May 6). LINK: www.tribecafilmfestival.com
THURSDAY, APRIL 26
ANKARA - Deadline for candidates to register for Turkey's presidential election.
SATURDAY, APRIL 28
WEST INDIES - SPORT - CRICKET - World Cup Final.
SUNDAY, APRIL 29
MALI - Presidential elections.
MONDAY, APRIL 30
N.IRELAND - Northern Ireland smoking ban comes into effect.
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ANALYSIS: Nigeria power

Nigerian power reform – mission impossible? Nigeria accounts for a quarter of Africa's population, but the state electricity system's operational capacity is less than 4,000 MW, creating a severe constraint on the country's economic development. However, a wide range of new deals with IPPs and the government's privatization plans promise an influx of new capital to the sector. All depends, however, on a stable transition of power following April's presidential elections, argues Neil Ford.

3,559 words

1 February 2007

Energy Economist

ENEC

5

Issue 304

English

Copyright 2007 McGraw-Hill, Inc.
While the Nigerian oil and gas sectors go from strength to strength, the government's power sector reforms have met with far less success. Power parastatal the National Electric Power Authority has been transformed into the Power Holding Company of Nigeria, but unbundling has been delayed and the impact of the organizational change has yet to become apparent. The government is also banking on independent power producers, led partly by oil companies and others with interests in Nigeria's hydrocarbon riches. However, massive improvements in transmission and distribution infrastructure will be required if this investment is to pay dividends.
Nigeria's non-oil economy has long been constrained by the country's poorly performing power sector. Along with other vital infrastructure, such as the water sector, fixed line telecoms and transport, new generation capacity or transmission sector investment was rarely a priority for the various military governments that have ruled the West African giant since independence. Even the civilian administrations that managed to gain power in between the various coups had little energy or money available to dedicate to such projects, as all governments became obsessed with the oil sector and largely left the rest of the economy to decay.
NEPA struggled on during the 1980s and 1990s, trying to provide what electricity it could, but national generation capacity was always insufficient to meet demand, even when all plants were fully operational. Yet more often than not, hydroelectric dams were affected by silting and production at thermal power plants curtailed by a lack of spare parts. Funding for maintenance was limited and so developing new generation projects or seriously attempting an electrification program was out of the question.
As a result, even the small minority of Nigerians with access to electricity experienced frequent power rationing. Many businesses, large and small, opted for their own private generators, while many rich Nigerians also moved away from reliance on NEPA by installing generators at home. The power utility's acronym was widely interpreted as Never Expect Power Again by Nigerians sick of the lack of electricity and with little hope of any improvement.
Part of the reason for NEPA's poor reputation was the fact that customers were charged for being connected to the national grid even during long black out periods. In addition, in common with some other African countries, the proportion of the population with access to electricity actually fell several times over a sustained period during the 1980s and 1990s. Government figures claim that 40% of the population has access to electricity, but even taking into account the many homes with illegal connections this seems an overestimate.
Civilian reform
Upon gaining power in 1999, President Olusegun Obasanjo promised to reform the power sector to provide more reliable electricity supplies to an increasing proportion of the population. Faced with a series of huge problems, Obasanjo was always going to have an uphill task in turning the Nigerian economy around, while maintaining national cohesion in what is a deeply fractured and divided country.
He has largely achieved the latter and is now approaching the end of his second term of office, providing the longest sustained period of civilian rule in Nigerian history. Yet the desperate power supply situation remains a major disincentive to investment in the country and national generating capacity has barely changed over the past seven years, remaining at about 3,000 MW, depending on the state of repair of the nation's power plants in a country with a population of an estimated 140 million people.
However, it is hoped that the reforms that have been introduced could eventually yield fruit after Obasanjo stands down at April's presidential and legislative elections. The government's strategy has focused on two main areas: replacing the discredited NEPA with a new body, the PHCN, which should oversee the break up of state power assets in favor of a more competitive sector with more private sector participation; and attracting generation investment from foreign companies.
After a series of delays, the Electric Power Sector Reform Bill was passed in March 2005 and the PHCN took over NEPA's assets in July of that year. The public body with responsibility for the sale of public assets, the Bureau of Public Enterprises, is attempting to unbundle and break up the PHCN, which now owns and controls 18 different subsidiaries that will eventually become separate companies. The six generation offshoots will all be privatized and forced to compete with existing and future IPPs.
All transmission assets will remain in the hands of a single state-owned company, which will be the sole purchaser of all electricity from the generators. This will then be sold on to the eleven geographically distinct distributors. The unbundling and privatization of the PHCN is being supported by $100 million of World Bank funding, but the cost of the reform process will be a drop in the ocean in comparison with the investment required to install new generating capacity and rehabilitate power sector infrastructure as a whole.
The first privatization was due in July 2006, but the Ikeja region distribution company remains in PHCN hands. The precise details of each sale have not yet been concluded so the privatization had to be postponed. A number of disputes between the federal and state governments have also delayed privatization, as many states claim they should be compensated from the sale for the power sector investments they have made in recent years. Abuja has now suggested that the states in question could form joint ventures with foreign investors to take over the power assets in question. A federal government spokesperson indicated that the privatizations would begin in earnest this year, but the national elections are likely to provide yet another delay.
The National Electricity Regulatory Commission has been set up to oversee the new competitive market. The chairman of NERC, Ransome Owan, said: "Another key part in winning investor confidence is the setting up of a regulatory framework that is enforced and powerful. We are looking at ways of reducing risk in a market that has been seen as dysfunctional for many years." The commission has been instructed to expect the emergence of a reliable power sector with supply meeting demand within five years – a target that seems ambitious in the extreme.
Obstacles to reform
As with other privatization processes in Nigeria, the country's strong trade union movement opposes the sale of state assets on the grounds that jobs will be lost. Most Nigerian state-owned organizations suffer from severe over staffing and the number of people employed in the sector is indeed likely to fall. It is difficult to envisage a substantial improvement in the Nigerian power sector without greater private sector participation, so the size of the PHCN workforce may have to be cut. However, the overall expansion of a hopefully more efficient sector is likely to result in subsequent growth in employment.
A more difficult problem to overcome has been the timing of the elections. Obasanjo and his ruling People's Democratic Party government have left themselves insufficient time to see through the break up of the PHCN, so much will depend on the outcome of the polls. The favorite in the presidential race is the PDP candidate, the relatively unknown governor of Katsina Province, Umaru Musa Yar'Adua. He has a reputation for sound financial management and is one of the few Nigerian state governors not currently under investigation for financial irregularities. An ally of Obasanjo, he is likely to continue the current president's policies on economic reform.
A victory for either the Action Congress, in the form of current vice-president Atiku Abubakar, or former military ruler Muhammadu Buhari, who represents the All Nigeria People's Party, should also see reform of the power sector continue. Nigerian politics is divided by personality and to some extent religion, ethnicity and region, and there are relatively few major economic differences of opinion. The worst outcome, both for the country as a whole and for the power sector, would be a very close or disputed election result that could trigger widespread unrest or even the intervention of the army.
According to figures from the BPE and PHCN, effective national generating capacity currently stands at about 3,000 MW, while capacity of 7,600 MW would be required to meet demand. If all those who have been forced to install their own generators are included, total national generating demand would be about 12,000 MW. Yet even this does not seem a particularly high figure given the size of the Nigerian population and the potential of its economy.
Figures from the first Nigerian census in 15 years suggest that the population has now reached 140 million, by far the highest in Africa, and is set to continue rising rapidly for a long time to come. Under stable civilian rule and with the benefit of a booming oil and gas sector, the Nigerian economy has the potential to grow relatively rapidly over the next decade. If an industrial sector begins to emerge and more people gain access to electricity, demand could begin to take off. In any case, it is clear that a step increase in generating capacity is required.
While the government in Abuja has acknowledged that a competitive power sector needs to be created, the new generating companies will be unable to fund such a step increase. A BPE report in early 2006 estimated that doubling current generation capacity would cost about $10 billion and this is clearly beyond the resources of the state sector. Obasanjo has therefore looked to the private sector to provide almost all new generating capacity. At a Commonwealth Business Council meeting in London, BPE director general Irene Chigbue, made an appeal for power sector investment. She said: "We are looking for people who can inject large amounts of capital. There is a legacy issue of neglect in the sector."
New capacity
Any assessment of the current state of the Nigerian power sector is confused by the amount of generating capacity out of commission at any one time. Official generating capacity is 5,900 MW, but up to 50% of this figure appears to be out of action almost continuously, perhaps highlighting the lack of investment over many years. The main Afam, Delta and Egbin thermal power plants have suffered from poor maintenance, while silting and low water levels have hit the Kainji, Jebba, and Shiroro hydroelectric schemes.
There is some potential for further hydro schemes, but the lion's share of new generating capacity is likely to come from gas-fired thermal power plants. The federal government has a long standing commitment to ban routine gas flaring by 2008, so the oil majors that dominate the Nigerian oil and gas sector have been seeking out both domestic and export gas markets. The LNG sector based on Bonny Island, the West African Gas Pipeline project and other possible export projects can all absorb a large proportion of the associated gas that is currently flared, but there is plenty left over to supply a string of major thermal plants.
With the world's ninth largest gas reserves at 184.7 Tcf, Nigeria has plenty of non-associated gas fields that could also be tapped if required. Moreover, the power sector is likely to account for the bulk of domestic gas consumption for a long time to come. According to the Minister of State for Petroleum Resources, Edmund Daukoru, the power sector now accounts for 90% of all domestic gas consumption.
Over the past few years, international power companies have fought shy of investing in IPPs in Africa. The risks can be high and the challenges great. As a result, Abuja has tried to encourage oil companies to invest in generation, either by directly and openly tying upstream concessions to infrastructural projects or by indicating that the upstream ambitions of oil firms participating in the power sector will be viewed more favorably. For instance, Eni-Agip has developed a 450 MW gas-fired plant in Delta State, with part of the $480 million development costs provided by ConocoPhillips.
Another US oil firm, ExxonMobil, is building a 388 MW facility on Bonny Island, Chevron is to develop a 780 MW gas-fired plant in Lagos State, and the River State government has awarded Shell a contract to expand the generating capacity of the 700 MW Afam power plant. The participation of oil companies now also seems to be encouraging investment from power sector specialists. Eskom, ABB and Siemens are all helping to develop plants in the 250-450 MW range. A total of 14 new gas-fired or hydroelectric power plants are due for completion by 2010.
The governor of Rivers State, Peter Odili, commented: "When we embarked on the independent power program, there was a lot of criticism and it was understandable, considering the enormous capital outlay involved, the complexity of building power plants and the fact that stable power supply had eluded the nation over the years." Only concrete improvements will persuade the general public, but both investors and state governments are continuing to sign deals. In June 2006, Odili signed a deal with Agip to develop yet another IPP.
At end-November, the new Minister of Finance Nenadi Usman said that a total of $5.7 billion was being invested in gas to power projects in the Niger Delta. About $3.4 billion is dedicated to gas collection and transportation infrastructure and the rest on seven power plants. The Niger Delta is the closest area to many of the oil and gas fields, but is one of the most underdeveloped in Nigeria and should therefore benefit from improved access to electricity.
Also in November, the World Bank announced that a gas to power project was to be supported by the Global Gas Flaring Reduction partnership. The GGFR is a Clean Development Mechanism scheme designed to reduce global gas emissions and was launched at the World Summit on Sustainable Development in Johannesburg in 2002. The project in question is the Kwale joint venture between Agip Nigeria and the Nigerian National Petroleum Corporation. Gas will be piped to a combined cycle power plant in Okpi. GGFR Partnership Manager Bent Svensson said: "This mechanism creates an additional revenue flow from the sale of credits. There is major potential in Africa because so much gas is being flared there."
It remains to be seen whether another new source of funding could also provide part of the solution. China's interest in Africa has been well publicized over the past two years, as Beijing has signed a number of high profile bilateral deals with governments on the continent. It is obviously easier for Beijing to direct state-owned Chinese companies to back African infrastructural schemes than for Washington or London, for example, to persuade US and UK private companies to follow suit.
Yet many of the bilateral deals have been very broad in scope and short on detail, so development is by no means guaranteed. In the case of Nigeria, it has been announced that Sino Hydro and other Chinese firms will help the Nigerian authorities to develop the 2,600 MW Mambil and 950 MW Zungeru hydro schemes, as well as two thermal power plants. The Indian government has also agreed investment by Indian firms in the Nigerian power sector, but again the details are sketchy.
Nuclear sidetrack
Plans for the development of nuclear reactors have been much discussed in the Nigerian press over the past six months. The government has reformed the Nigeria Atomic Energy Commission, which was originally set up in August 1976, with a new board chaired by the president. Obasanjo argues that nuclear technology is vital if the country is to reach "scientific and technological maturity".
He commented: "In addition to the generation of electricity, nuclear energy finds ready peaceful applications in agriculture and food security, medicine, industry, and in basic and applied scientific research. We have activated the focal point and specialized agency of government, which will serve as the vehicle mandated by law to promote, coordinate and streamline the implementation of our national nuclear energy program. It also further confirms the strong belief that with sustained consistency, the frontiers of development are within the reach of any determined and committed society driven by science and technology, and imbued with the vision to uplift its citizenry to a state of prosperity."
In a country with so many pressing economic, social and political needs, opting for nuclear power makes little sense. A nuclear program would divert investment from other important areas and would not yield commercial reactors for perhaps 20 years. Nigeria has plenty of natural gas and the campaign to end flaring by 2008 means that oil companies are desperately seeking out new markets for associated gas in particular. Gas-fired power plants could be brought on stream much more quickly than nuclear reactors, so it seems that the announcement of a nuclear drive is more for domestic public relations consumption than providing public access to electricity.
It is also hoped that the two strands of the power sector reform program can be combined, by selling PHCN generation companies to foreign investors. A spokesperson for the BPE said that the subsidiaries will not necessarily be sold to the highest bidder, but according to the amount of new generating capacity to be developed and the speed at which it can be brought on stream. Arrangements could also be made for the purchase price to be paid several years down the line, in return for higher initial capital investment.
It remains to be seen whether Obasanjo's twin track approach to improving the power sector will succeed. The recent oil for power deals should help to inject more investment into IPPs and despite several false dawns in the past, national generating capacity must surely rise rapidly over the next decade. If the private sector can also be induced to take over PHCN generating subsidiaries, then this influx of capital could also help to make the reform program a success. Attracting investment into downstream infrastructure may be a more problematic task, but at least the government could concentrate its financial support on distribution and transmission.
At present, the entire sector is dilapidated, so it would make a welcome change to be able to identify a weak link in the power sector chain. Reform and particularly privatization are generally slow processes in Nigeria, but the government has had some recent success in attracting foreign investment in the gas, rail and port sectors. It is not beyond the bounds of possibility that a reasonably efficient and well-managed power sector could emerge within a decade. Yet maintaining the relative political security that the country has enjoyed over the past seven years is vital to the reform of every strand of the economy. Foreign companies are unlikely to