The Nigerian Electricity Sector Report
Industry Overview
Power is a critical infrastructure needed for the economic, industrial, technological and social development of any country. Electricity consumption has become one of the indices for measuring the standard of living of a country.
Electric power supply in Nigeria was the responsibility of the federal government owned National Electric Power Authority (NEPA), which has been restructured into a holding company named Power Holding Company of Nigeria, (PHCN) in 2000 and broken down into 18 business units. Suffice it to say that NEPA enjoyed a legal monopoly, butlike most state-owned enterprises, NEPA suffered from severe under funding, under-capitalization, inappropriate capital structure, excessive executive interference, and sub-optimality in decision-making.
From 1972-2005 the Nigeria Power Sector was managed by NEPA as a vertically integrated utility with generation, transmission and distribution all in the same organization. “The national electricity grid consists of nine generating stations (3 hydro and 6 thermal) with a total installed generating capacity of 5951MW. The Transmission network is made up of 5000km of 330KV lines, 6000km of 132KV lines, 23 of 330/132KV sub–stations and 91 of 132/33KV sub-stations. The Distribution sector is comprised of 23,753km of 33kv lines, 19,226km of 11kv lines, 679 of 33/11kv sub–station. There are also 1790 distribution transformers and 680 injection substations”[1]
Most of the generating units have broken down due to limited resources to enable the needed level of maintenance, the transmission lines are radial and overloaded, and switchgears are obsolete while power transformers have not been maintained for a long time. The distribution sub-sector is in dire need of upgrading as many of its distribution transformers are overloaded. Overall, transmission and distribution losses are in the mega range of 30–40%.The consequence of this trend is a structural unbalance between electricity power demand (estimated at 10000MW in 2005, forecasted to rise to 20,000MW by 2010), and supply. Little wonder the electricity network has been characterized by constant system collapses as a result of low generating capacity by the few generating stations presently in service.
Although the installed capacity of the existing power stations is 5951MW, the maximum load ever recorded was 3083MW combined with a 40% transmission and distribution losses, the resultant power outages cost the nation an estimated $1 billion per year about 0.5% of GDP(OluAde Amoda, 2007).For a country of about 140 million people, this indeed is grossly inadequate to meet the consumers’ electricity demand. It is hoped that the estimated 10,000MW would be achieved through Independent Power Producers (IPPs) as soon as a liberalized Electricity Supply Industry is established in Nigeria. Massive injection of funds would be needed to expand the generation, distribution and transmission networks to adequately supply electricity to Nigerians.
Lack of adequate electric power has caused the collapse of many industries that rely heavily on power supply to function. Small businesses and heavily machined manufacturers are severely affected by the abysmal performance of NEPA. The people in general are also affected socially, psychologically and physically due to inadequate and unstable power supply. It is estimated that only about 36% of Nigerians have access to electricity and these are essentially people living in the urban areas. Overall NEPA has contributed in no small way to the stagnation of theNigerian economy.
In sum, the current status of electricity supply in Nigeria reflects that of an electricity supply crisis in which industrial growth and socio-economic development paces are kept below what is attainable by the economy. That is, the existence of an abnormal electricity supply situation in which supply cannot catch up with electricity demand, thereby, creating an electricity supply-cum-demand imbalance in the Nigerian electricity market.
Chapter 3: Outlook for Supply and Demand of Electricity in Nigeria
Structurally, the supply side of this market is a state monopoly (backed by the Electricity Act of 1972) until 2006 when PHCN was unbundled into 18 distinct units (one transmission, six generation and eleven distributions) companies. As at 1972 when the Electricity Act took effect, supply of electricity cannot be otherwise attained due to its high capital intensive nature. This explains how and why competition was completely ruled out till recently when government is moved to deregulate and privatize the sector to ensure the benefits of a market system.
From 1972 to 2005, NEPA controlled about 94% of the generation capacity and 100% of the transmission, system operation, distribution and marketing sector of the industry. The transmission lines and generators are interconnected in a common grid, with a single control center.
With an installed capacity of 5951.6 MW it is sad to note the current available capacity from generators is 2536.6MW, less than 50% of the install capacity. The transmission grids are heavily overloaded, because transmission capability was not expanded with increasing MW added to the transmission grid and even if expansion is possible, it is limited to a load supply of 4000MW. If all the available capacity of 5951.6MW is injected into the transmission, total system collapse will occur. Transmission losses are estimated to be about 30-40% annually (Olu Ade Amoda, 2007) It can be seen that although generation was grossly inadequate, transmission was limited by scope right from installation and distribution was not any better.
NEPA has always struggled to meet its side of the bargain to supply electricity to Nigerians. It supplied through a hostile regime of load shedding, suppressed demand and rationing. Power outages at high rates and power quality delivered in most area is very low. Currently, all major newly established privately or even publicly owned commercial/industrial enterprises under take substantial investment in private supply substitution of electricity relying on privately owned generating plants at high costs which tend to aggravate the high cost of production and subsequently the country’s high rate of inflation.
During the inglorious days of military dictatorship in Nigeriaespecially 1983-1999, generation, transmission and distribution apparatus were operated for several years without the necessary turn around maintenance required to keep them operating efficiently and prevent them from collapse. As a result a lot of apparatus cannot be operated efficiently or outrightly inoperable. Also substantial amount of the machineries have outlived their useful life, deteriorated beyond repair or rendered obsolete due to better technology.
NEPA (renamed PHCN) equipments are subjected to vandalism and theft by group of cabals in different parts of the country. The hydro power stations suffer from low water level during dry season and the generation output capabilities of thermal stations are often hampered by shortage of fuel. Equipments are expensive to repair, mostly due to their obsolete status.
Although Nigeria is one of the countries that flares enormous amount of gas, it is only Shell Nigeria Company which generates about 4% of electricity that uses gas - a byproduct from crude exploration. Electricity outages from supply inadequacy, especially 1998 were at alarming frequencies in the face of abundant primary electricity resources - coal, natural gas, geothermal, tide, solar, biogas, etc.
It is evident that the aggregate volumes of electricity sales to consumers do not in reality reflect in any form the actual demand for electricity in the country. At best it merely connotes what NEPA could supply.
Given the foregoing supply status and its implications for the economy, government recognized the need to rehabilitate the electricity infrastructure in order to meet the aspiration of citizens especially as the dividend of democracy, reduce the high cost of doing business, and subsequently, attract genuine foreign investors to the sector. To this effect, a stupendous amount of $9.63billion has been invested into electricity infrastructure from 1999-2005.(Vanguard Newspapers, April 17th 2007)
The next stage, of government actionis the introduction of competition by privatizing, deregulate and liberalize electricity supply system and subsequently re-orientate the bureaucracy and create an enabling environment for investments via adequate supply of electricity and other infrastructural facilities. These are slated for 2007. It is not certain to what extent the government have carried out this plan, but a lot of private power companies local and foreign have indicated interest in participating in the supply of electricity in Nigeria.
Dr Ransome Owan, the chairman of National Electricity Restructure Committee, has announced 20 licenses for power stations with an estimated generation capacity of 8,237MW. Despite the massive investment of US$9.63 billion, Owan has said that the electricity sector will not stabilize for another four years, given the long lead times it takes for new Independent Power Producers to come online, but the new administration is serious about transforming Nigeria’s power sector.(Global Insight, 2007).
Electricity demand has always exceeded the supply in Nigeria even in the face of an obvious demand suppression which characterized the sector. The pre 1999-generation level of about 1,500MW was much below the estimated demand of 4,500MW. There was about 2,400MW of self-generation in the form of small diesel and petrol generating sets. The estimated percentage of Nigerians having access to electricity from NEPA is only 36%. The forecasted load for the year 2001 is 4,833.7MW. In order to meet this demand, a generating capacity of about 6000MW is required. Furthermore, the estimated demand for power in 2005 and 2010 are respectively 9780MW and 20,000MW. These will require generating capacities of 12,700MW and 25,000MW by the respective years. Thus the necessity to fully rehabilitate the existing power stations (which will provide a maximum of 5400MW generating capacity) rehabilitate some critical transmission and distribution lines and their associated substations and add new generating, transmission and distribution capacity to the grid, in the immediateand foreseeable future (Amodu, 2007)
Industry Conduct
The crisis of government managed electricity sector hit the economies of several countries hard and the countries tried various measures of reform with varying degrees of success. The privatization of the power sector is one of such recent, but internationally widespread trend, which has placed greater reliance on market forces and less dependence on government in the allocation of resources. The privatization of the power sector has been made possible after recognition that the sector could be separated into generation, transmission and distribution sectors and even these sectors could be broken into several companies, without compromising the economic advantages of a vertically integrated government monopoly, which earlier existed in most countries.
Necessitated by the unsatisfactory performance of NEPA therefore, the government of Nigeria embarked on a program of reforming its electricity industry as a means of improving efficiency and productivity.
The National Committee on Privatization has defined the objectives for this reform as follows:
To promote competition to facilitate more rapid provision of service throughout the country;
To create a new legal and regulatory environment for the sector that establishes a level playing field, encourage private investment and expertise, and meet social goals;
To restructure and privatize the National Electric Power Authority (NEPA); and
To encourage the successors to NEPA to undertake an ambitious investment programme.
The Electric Power Sector Reform (EPSR) Act 2005 was then drafted to provide a legislative framework for the reform of the Nigerian power sector in accordance with the policies set out in the National Electric Power Policy. The Act removes operational and regulatory responsibilities of the electricity industry from the Federal Government. It provides the legal backing for the unbundling of NEPA, formation of successor companies to take over the various functions, assets, liabilities and staff of NEPA.
The stage is now set for market system to emerge and competition the order of the day.
Industry Performance
In assessing the performance of the electricity supply industry, it is important to bear in mind that the electricity industry is highly capital intensive and that capital comes in large, bulky increments which are larger than are needed to satisfy demand when first commissioned. This makes large variations in productivity in the electricity industry unavoidable in the short term. Therefore, it is best to assess performance on the basis of trends rather than year-to-year performance. We present trends in productivity performance of the generation, distribution and transmission sectors of the ESI. In recent time the industry has seen quite substantial changes and it will be early to evaluate the industry performance in the light of these changes.
However, the following changes are note worthy:
The ESI has moved from the point of providing electricity to about 36% of the population to 40% since the new wave of change in 2001.
There are no legislative or regulatory barriers to entry or exit in the sector except transmission which has a natural monopoly. This has resulted in 20 new licenses issued to new firms.
As a result of the latter, installed capacity has risen from 5951mw in 1999 to over 8000mw in 2007. Though actual generation has lagged behind installed capacity, the gap was essentially due not capacity but other factors like low water levels for hydro power stations, vandalization of electric installations, and the high cost of gas after the privatization of the down stream oil in Nigeria.
There is a marginal improvement which has reflected mainly the effect of a deliberate policies and increased government funding to the sector since 1999, especially for the installation of new equipment and the rehabilitation of transmission and distribution facilities in the electric power sector. The generation sector now ensures effective competition, with participants facing pressure to improve productivity in order to remain viable.
Electricity Generation and Consumption chart 2004 - Q2 2007capacity / Generation / Consumption / Loss
2003 / 6180.0 / 2569.3 / 1460.4 / 36.7
2004 / 6130.0 / 2763.6 / 1825.5 / 33.6
2005 / 6100.0 / 2687.1 / 1973.1 / 33.4
2006 / 7011.6 / 2638.1 / 1742.9 / 34.0
2007 / 7011.6 / 2794.1 / 1617.0 / 29.7
Source: Various CBN Annual and Mid year Reports 2003-Q2 2007
Governments, regulatory institutions, and the industry itself aredesigning and implementing new industry structures, competitive energy markets, and appropriate regulatory concepts.Changemeans new challenges,it also meansnew opportunities. Success in the deregulated energy market requires careful analysis of the new environment and its impact on your operations.The key is to identify and solve potential market and regulatory barriers in a restructured market through strategic planning, design, management and evaluation.
References
Vanguard Newspapers, April 17, 2007: Nigeria’s Electricity Reforms Bogus Claims in the Dark.
Global Insight, 2007: Power Sector to Receive US$8billion Investment in Nigeria.
OluAde Amoda, Deregulation in Nigeria: Historical Overview, Motivation, Status and Recommendations.
FederalRepublic of Nigeria: National Electricity Power Reform Policy, 2003
OluAde Amoda, Deregulation in Nigeria: Historical Overview, Motivation, Status and Recommendations. July 2007
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