Nigeria’s Plans for a New Power Plant on Shaky Ground
Nigeria has resumed plans toward building a 3050MW hydropower plant which will boost the energy sector and the broader economy. Yet standing in the way of widening electricity access to the 20m Nigerians without stable power, is an ongoing legal tussle involving this 3050MW Mambilla plant, as well as the debilitating indebtedness of the existing independent power producers (IPPs).
Nigeria Power in Brief
12,522MW of installed capacity
Thermal: 10,142
Hydro:2,380
Current production levels: 4,000MW
64% of rural population without power
45% of urban population without power
10 power distributors and 26 generating plants rely on subsidies.
Situation Report
President Muhammadu Buhari set up two committees this month to resume work on the proposed 3050MW Mambilla plant to be situated in northern Taraba State. The first task for the committees is to figure out how to raise money for this project, intrinsically linked to the settling of a breach-of-contract dispute with a local firm, Sunrise Power. Already, the China Export-Import Bank has pressed pause in financing the USD6bn project until the dispute between the government and Sunrise is settled. Sunrise is claiming the government has been duplicitous in the award of a contract to a Chinese consortium, China Gezhouba Group Corporation (CGGCC) and China Geo-Engineering Group Corporation (CGGC) after an original contract award to Sunrise in 2003. There is the risk that Nigeria could be fined $2.3 billion, if it is found to have abrogated its 2003 contract.
Nigeria's power generation capacity is about 13,000MW, but actual output is typically around 3,500MW[2], while peak demand is 19,100MW[3]. The massive shortfalls in power supply have much to do with the unstable cash flow in the industry.
The state-owned Nigerian Bulk Electricity Trading Company (NBET) acts as a middleman between the plant owners and the distributors. The plant owners sell energy to NBET. This middleman then sells it to the distributors, and finally the distributors sell it to homes and offices.
However, 60% of these consumers don't have a meter and are billed the following month for energy already used—and many of them don’t pay the bills regularly. This makes it difficult for the distributors to settle arrears with NBET. The middleman gets only about a third of payments due, and so it struggles to pay the plant owners for their wholesale supply. Under these circumstances, there’s little economic incentive to increase supply. “The customers aren’t paying their bills and it’s made it difficult to operate. The main problems are the customers and the tariffs. If the customers don’t pay up and the tariffs remain unprofitable, there can’t be much forward movement.”
In 2013, Nigeria partly privatized the sector and it set regulations that specify how power firms will be allowed to raise tariffs to offset inflation and currency depreciation. The naira has since halved in value while inflation has doubled, but the government has blocked a tariff review and pegged prices—choosing instead to pay the firms subsidies from an intervention fund.
Meanwhile, there's been political indecision regarding the way forward. The government has considered reverting to nationalization or compelling existing private firms to partially sell their stake to new entrants. Policymakers are struggling to work out a viable industry model and communicate a clear plan for improving the overall investment climate—and internal friction has not made this task easy. This month for instance, President Buhari overruled the power minister Sale Mamman after Mamman ordered the NBET boss, Marilyn Amobi, and the Rural Electrification Agency boss, Damilola Ogunbiyi, to 'sanitize' the system.
Outlook
The Mambilla project is not feasible for the foreseeable future considering the estimated cost of almost USD6 billion to bring it to life. This year the government budget for Mambilla is less than 0.1% of that, and the government likely won't be capable of committing a more significant amount to this project in the medium term while it struggles to keep the industry alive with subsidies.
To implement industry reforms (notably on pricing), the government has about a two-year window before the 2023 election season, but we expect that the government will maintain its interventionist approach even though the regulator has suggested that it will allow a gradual move toward cost-reflective pricing. The closer it is to 2023, the less likely any changes will take place as the administration looks to preserve political capital and determine Buhari's successor. Meanwhile, policy direction will be held back by a lack of cohesion among policymakers, with no government figure emerging to lead the way forward decisively.
[1]https://www.thisdaylive.com/index.php/2018/05/05/30-years-of-living-and-working-in-lagos/
[2]https://www.ft.com/content/43c7cc52-7e12-11e9-81d2-f785092ab560
[3]https://www.premiumtimesng.com/news/top-news/309349-nigerias-power-generation-increases-in-january-tcn.html