Following the unbundling and subsequent privatisation of the government monopoly in the power sector as part of the power sector reform of 2004, honest and objective evaluations of the Nigerian Electricity Supply Industry’s (NESI) performance in the post-power privatisation era have ranged from ‘minimal improvement’ to ‘more of the same’. The entire NESI value chain is fraught with structural impediments, which have continued to impede optimal performance, with operators consistently ‘passing the buck’.
The research report, conducted by Agusto & Co- a Pan-African Credit Rating Agency and a leading provider of industry research and knowledge in Nigeria & Sub-Saharan Africa, noted that as of December 31, 2022, the generating segment of the electricity market comprised 29 operational generating plants with a combined installed capacity of 13,014 megawatts (MW) and an average operational capacity of 4,523MW, a decline from 6,371.9MW, that is 29 percent in 2019.
It further noted that as at 2022, there were 12 Independent Power Plants (IPPs) in the country, accounting for 31.2 percent of the country’s total power generating capacity, which is also a 300 basis points decline from 2021, caused largely by gas constraints and faulty machinery.
For Clarity, Agusto & Co. in the report, observed that on the average and due largely to gas constraints, only five IPPs: Azura-Edo accounted for 26 percent; Odukpani, 19 percent; Okpai, 16 percent; Afam VI, 15 percent and Rivers IPP, eight percent, jointly accounted for circa 84 percent of power generated from the 12 IPPs in the last four years.
Lingering Gas Shortages
Gas constraints, the research said, remained prevalent despite the fact that the country has the world’s ninth-largest proven gas reserves, estimated at 204 trillion cubic feet (TCF) in 2022. The domestic gas market in the country, it noted, has been plagued by chronic underinvestment in generating and distribution infrastructure. At the same time, under the domestic supply obligation framework within the Gas Master Plan (GMP), all gas companies are required to supply an assigned quota of gas to critical sectors, including electric power, at prices, $2.18mscf, lower than what is obtainable in international markets whose price is an average of $7.52mscf in the US market in 2022.
This, it explained, is why operators of thermal plants struggle to secure viable gas contracts at the approved price. As at the end of 2022, 25 of the country’s 29 Generating Companies (GenCos) were gas-powered, a trend that underscores the urgency of finding a long-term solution to gas supply constraints.
Transmission Losses
Augusto & Co further disclosed that the weakest link in the NESI value chain is the Transmission Company of Nigeria (TCN), which is still entirely government-owned. The national grid, with its frequent collapses last year, has a wheeling capacity of circa 8,100MW, a figure that pales in comparison to the nation’s peak electricity demand of 19,798 MW. The implication of this, it said, is that even with an increase in the generating capacity of the grid-connected IPPs, the TCN is unable to evacuate more than 8,100MW.
“This is a critical bottleneck in the supply of electricity and has stalled investment in power generation. On the other hand, the TCN continues to blame load rejection by distribution companies, particularly during the rainy season, for the high frequency of grid collapses,” the report said.
Nonetheless, it is anticipated that the current Nigerian Electricity Grid Maintenance Expansion and Rehabilitation Program (NEGMERP), which aims to expand the country’s grid network through the diligent execution of network expansion projects funded by both the Federal Government and donors, will result in some growth in NESI in the short term. This is in addition to the Presidential Power Initiative signed with Siemens AG, which is expected to result in an additional 25,000MW of operational capacity from the national grid.
“The completion of such projects will assure prospective power generation companies that the TCN has ample capacity to receive generated electricity. With a more efficient TCN, Nigeria can achieve self-sufficiency in power supply, making electricity exports easier through the West African Power Pool’s (WAPP) future Regional Electricity Market (REM),” Augusto & Co submitted in the report.
Decentralisation – Legislation to the Rescue?
According to the researchers, the recent assented to the Fifth Alteration Bill No. 33, 2022 (the “Electricity Constitutional Amendment”), which allows Nigeria’s 36 States to generate, transmit, and distribute electricity in areas covered by the national grid by President Muhammadu Buhari, has significant implications for the country’s struggling power sector.
The amendment is believed could lead to increased investment in power generation and distribution infrastructure, as well as increased competition among power providers. By devolving power to the States, Agusto & Co. said, the bill could also lead to more efficient and effective management of the power sector, as States will have greater control over their power supply. This, they contended, could lead to more targeted investment in power infrastructure and more responsive management of power supply and demand.
However, the report warns that the Bill also raises concerns about the potential for fragmentation of the power sector, as different States may have different priorities and approaches to power generation and distribution, leading some, to possibly bypass the national grid entirely. Furthermore, it said States deemed to lack a sufficient economic base may be unable to attract investors in their electricity generation, transmission, or distribution, causing them to fall behind other States in terms of electricity supply. This, it further warned, could constrain the business environments in these States, thereby eroding investor confidence, discouraging investment, and limiting economic growth and development.
Outlook
The research report hinted that the NESI is currently in the second stage – the Transitional Electricity Market (TEM) – on its evolutionary path, where the state-owned special purpose vehicle (the Nigerian Bulk Electricity Trading Plc – ‘NBET’) buys electricity in bulk from the generating companies and IPPs and resells to the distribution companies (DisCos) under vesting contracts.
“As it transitions to the medium-term market, we expect more IPPs to become operational, which will significantly raise the industry’s generation capacity over the medium term,” Augsto & Co submitted.
