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Nigeria’s reform plans for domestic power sector

Nigerian President
Goodluck Jonathan
30 August 2010 – Nigerian President Goodluck Jonathan presented a roadmap for reforms to the Nigerian power sector on Thursday, plans which could unlock billions of dollars of private sector investment and end chronic power shortages.

Following are some details on why the programme is important, and what the plans involve.

Africa’s most populous nation of more than 140 million is the continent’s biggest oil and gas producer, yet is blighted by persistent electricity outages which force business and individuals who can afford them to rely on diesel generators.

Generation sometimes plunges below 1,000 megawatts (MW), largely due to a lack of maintenance at power stations, around a tenth of the country’s basic needs. South Africa, with a third of Nigeria’s population, has ten times the capacity.

Power shortages are a major brake on growth in sub-Saharan Africa’s second-biggest economy, pushing up the cost of business for manufacturers and making Nigeria uncompetitive as an investment destination for industry despite a population which makes it one of the world’s largest untapped frontier markets.

It also perpetuates social inequality in a country where most of the population survive on $2 a day or less, depriving many of light at night or the ability to power water pumps, let alone recharge mobile phones or access the Internet.

The central bank says 60 million people rely on generators and spend $13 billion a year fuelling them.

President Goodluck Jonathan has announced plans for a $3.5 billion national electricity grid to be jointly financed with the private sector and development agencies.

The presidency has said the new "supergrid" will be completed within four years and boost Nigeria’s generating capacity to over 14,000 megawatts (MW) by the end of 2013.

His administration has promised to privatise electricity generation and distribution next year.

The central bank has said it is ready to release $2 billion from a fund earmarked to stimulate credit to the real economy, much of it meant for power sector projects.

But there are other structural challenges:

Nigeria has the world’s seventh-largest natural gas reserves, estimated at 180 trillion cubic feet, and wants to harness those reserves to boost domestic power supply. Gas demand from Nigeria’s power sector is expected to grow to 3 billion cubic feet per day by 2015 from 800 million currently.

In May it announced a new gas pricing regime, which will make it more attractive for energy partners such as Royal Dutch Shell and ExxonMobil to provide gas for power.

The price of gas paid by state-run Power Holding Company of Nigeria (PHCN) will increase to $1 per million British thermal units (mmbtu) by the end of 2010 from the current 20 cents if supplies total at least 4.7 gigawatts.

Prices will climb to $1.50 mmbtu by the end of 2011 if 6.2 gigawatts is attained, and $2 by the end of 2013 after 8.2 gigawatts is reached.

Oil Minister Diezani Allison-Madueke said last week a new commercial agreement template for gas supply and transmission had also been implemented and a $400 million World Bank Partial Risk Guarantee scheme introduced to assure gas suppliers that they would be paid for supplying government-owned power plants.

The World Bank has also committed a further $400 million, largely to help remove bottlenecks in transmission.

Finance Minister Olusegun Aganga said in July Nigeria was close to agreeing a framework to make private power generation for the national grid commercially viable.

The aim of the agreement is to guarantee that independent power producers (IPPs) will be able to sell power to a credit-worthy single off-taker, which will sell electricity on to distribution companies and in turn repay the IPPs.

The current intermediary, the Power Holding Company of Nigeria (PHCN), is not regarded as a credit-worthy buyer of power partly because it is failing to collect its own bills efficiently from consumers and partly because it is selling power at government-subsidised rather than market rates.

The African Finance Corporation, which funds infrastructure projects around Africa, says foreign investors are ready to pump billions of dollars into the power sector if the regulatory framework can be resolved.

Development institutions such as the World Bank and African Development Bank are also ready to provide debt financing if regulatory concerns can be overcome, industry experts say.

The power sector’s woes include mismanagement, poor billing and power "leakages" caused by poorly-maintained infrastructure and sometimes the illegal tapping of power lines.

Nigeria’s privatisation agency has said it is seeking core investors for 11 electricity distribution firms which currently operate under the PHCN umbrella.

Under the planned strategy, a private sector operator would acquire a controlling equity stake in any of the distribution companies with a view to rapidly improving its efficiency.