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Nigeria’s industrialization will require low cost energy, but is privatization of electricity the answer?

Experts insist that breaking the jinx of expensive self-generated power is a necessary condition for building a competitive local manufacturing sector
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In his first speech in office as the President of the Federal Republic of Nigeria, President Bola Ahmed Tinubu announced the removal of the age-long fuel subsidy and subsequently signed the country’s Electricity Bill (2021) into law, laying the groundwork for what some expect to be the beginning of the long-awaited energy revolution in Africa’s most populous nation.

Low energy cost, a prerequisite to industrialization

President Tinubu’s signing of the new electricity bill into law came less than two weeks after his oath of office during which he promised Nigerians “accessible and affordable electricity” as part of his plan to pull the economy out of the woods. While the Electricity Act 2023 was passed by the parliament in July 2022, former President Muhammadu Buhari, under whose tenure the country’s power generation average 3,400 megawatts (MWs), had held back the presidential assent, pushing back the prospect of liberalising this all-important sector.

For decades, individuals and corporate entities operating in the country have relied on self-generated power for domestic and industrial use. In the second half of last year alone, manufacturers in the country spent N76.7 billion ($166 million) on alternative power.  According to the latest economic review report by the Manufacturers Association of Nigeria (MAN), the amount is about 70 per cent higher than what the companies spent in the corresponding period in 2021.

Erratic power supply and load shedding characterise the power sector of Nigeria, a country considered the gateway to the African market. Hence, self-help is a norm for entrepreneurs who are starting businesses, which increases the cost of doing business. Dr Muda Yusuf, a renowned economist and former Director-General of the Lagos Chamber of Commerce and Industry (LCCI),  insists  that breaking the jinx of expensive self-generated power is a necessary condition for building a competitive local manufacturing sector, which would subsequently reduce reliance on importation.

Like many African countries, Nigeria relies on importation for almost everything – from consumables to fabrics – with China alone accounting for over 23 per cent of the value of first-quarter imports, according to data supplied by the National Bureau of Statistics (NBS). The record is not a random case but a reflection of a historical trend. The four-year average (2019 to 2022) of China’s share of the import years is 24.6 per cent, and according to available according to a report  Nigeria spent N19.12 trillion on imported commodities from China from January 2018 to September 2021.

Though Nigerians treat finished goods imported from China with suspicion in terms of quality, a choice between the influx of low-quality goods from the Asian giant and domestic products is like a choice between the jaw of a shark and the claw of a lion. Local products are not price competitive, and expensive energy accounts for much of the abnormally high cost of production. Sadly, with about 133 million citizens classified as multidimensionally poor, quality is not often considered a top consideration for many consumers.

The tortuous search for cost-efficient power

A decade after the then Power Holding Company of Nigeria (PHCN) was unbundled and privatised, electricity is still perceived by consumers as a public service, which should be free. A phased transition to a cost-reflective process was drafted into the privatisation agreement but there has been a push-and-pull narrative about its implementation with the organised labour opposing the move embodied by the failure of the private investors to fulfill their obligations in terms of network upgrade.

The distribution companies (DisCos) claim fresh capital is not forthcoming because of the poor commercial viability outlook of the sector and the lack of government’s commitment to the Multi-Year Tariff Order (MYTO) – an incentive-based billing process that seeks to reward performance above certain benchmarks while reducing technical/non-technical/commercial losses – instituted at the start of the commercialisation programme.

Consumers, who still have to fund the procurement of cables and transformers, while DisCos look the other way when there are breakdowns, have consistently pushed back on the demand for electricity tariff increase, arguing that a reasonable level of electricity supply must be attained to warrant a fair billing. DisCos have had to evade metering and opt for estimated billing to stay in business, a decision which Bala Zakka, an energy economist, described as criminal.

Cases of default in obligations are rampant. First, on the part of the consumers, most of whom refuse to pay their energy bills and insist they need to be metered to ensure that DisCos are not overbilling them. DisCos, in turn, renege on fulfilling their financial obligation to the Transmission Company of Nigeria (TCN), the inefficient backbone the government refused to let off during the privatisation exercise. The chains of nonattendance have serious implications for power generation as they serve as a disincentive to power-generating companies’ gas suppliers.

The new electricity law

Experts have long called for a law that would break this vicious cycle and increase competition, but successive administrations have refused to bite the bullet. Hence, the Electricity Bill signed by the new President is seen as a game changer.

Dr Sam Amadi, a former chairman of the Nigerian Electricity Regulatory Commission (NERC), admits the new law is not a silver bullet but that it lays a legal framework that would allow states and individuals to participate in the entire power value chain. According to the signed document, the new regime empowers any interested party to construct, own, or operate an undertaking for generating electricity not exceeding one megawatt in aggregate at a site, or an undertaking for distribution of electricity with a capacity not exceeding 100 kilowatts in aggregate at a site without a licence.

Individuals and sub-national units are also allowed to generate, transmit and distribute power under the regulation of relevant bodies, which could end the current captor arrangement operated by DisCos – a situation where consumers either put up with inefficient DisCos or disconnect from the grid.

Ultimately, the law has demonopolised not only the operation of the sector but also the regulation, with states (i.e., sub-national governments) expected to create their unique regulatory frameworks in line with their economic and investment aspirations and priorities.

Already, first-mover three states – Lagos, Edo and Kaduna – with electricity market laws will start regulating their respective sub-markets, while their counterparts may start the race to create their laws in no distant time. With the market still relatively unexplored and new governments in 18 states just assuming office with the desire to impress, there is hope that fresh investments would start flowing into the comatose power sector in the coming months. Besides, states are empowered to issue licences to private investors to operate mini-grids and power plants within the state.

On the heels of the fuel subsidy removal debate, the Nigerian Midstream and Downstream Regulatory Authority (NMDPRA) says it is ready to grant licences to companies and individuals to import petroleum products provided they meet the condition specified in the Petroleum Industry Act (PIA).

According to section 197 of PIA, only companies licensed to crude and/or condensate licences or holders of crude oil refining licences are eligible to supply wholesale petroleum liquids (including petrol importation) to Nigerians. For many analysts, this is the icing on the cake for an economy suffering the curse of commodity export like many other African countries.

Godwin Obaseki, a governor of Edo, a state in the Niger Delta region of the country, says the newly inaugurated 650,000 barrels per day (bpd) Dangote Refinery and Petrochemical Company will save Nigeria over $3 billion spent on imported petroleum products. With its production close to 40 per cent capacity excess of the country’s need, the refinery would transform the country from an importer of petroleum products to a net exporter.

But the plan, which is located in a free trade zone, targets the international market. Nigeria, Africa’s highest importer of refined products, according to Statista, is in a vantage position in West and Central African hydrocarbon markets. But poor commercial and market incentives, including opaque subsidy payments, have been blamed for poor investments.

With these two decisions, Nigeria seems to have announced its readiness to open the two most critical areas of its economy – power and the midstream sector of petroleum – for private equities. How the investment market responds in coming years, however, depends primarily on the government’s commitment to its purpose.

 

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