Nigerians have resorted to other means of generating electricity, with diesel generators supplying electricity to nearly 70% of Nigerian firms. These firms spend over $14 billion on diesel-powered electricity annually.
The Nigerian president assented to a series of constitutional amendments as part of his administration’s final act. Among the bills signed into law include amendments that empower states to generate, transmit, and distribute electricity as well as operate railways. A longstanding request, the recent amendments are likely to create new opportunities (and challenges) for the Nigerian economy and interested investors. This article sheds light on the electricity sector.
Data on Nigeria’s electricity sector paint a gloomy picture. Nigeria’s installed electricity capacity is estimated at 10,396 MW, a far cry from the estimated 30,000 MW required for stable electricity. More so, periodic difficulty in accessing adequate natural gas supplies as well as transmission woes put actual generation figures at a little below 5,000 MW. Thus, Nigerians have resorted to other means of generating electricity, with diesel generators supplying electricity to nearly 70% of Nigerian firms. These firms spend over $14 billion on diesel-powered electricity annually. This private choice of electricity generation is both expensive and unhealthy, with a negative impact on the bottom line and worker health.
Beyond its impact on businesses, Nigeria’s paltry electricity generation impacts households. The World Bank estimates that nearly 46% of Nigerians do not have access to electricity, with a negative impact on health, education, and other human capital metrics. While the above statistics point to challenges, the $14 billion price tag on private electricity generation points to a sizeable market for investors, especially in states with a strong concentration of businesses. Among these are Lagos, Anambra, Oyo, Kano, etc. With state-level power to produce, transmit, and generate electricity, the opportunity exists to swap diesel-powered electricity for cheaper and cleaner sources.
In addition to the opportunity for profit, the devolution of power in the aforementioned sectors could help lower the entry barrier for intending investors. Foremost, the capital requirement for projects at the state level is likely to be lower, with increased interest in decentralized energy production, especially in sparsely populated states. Thus, a new class of energy investors (0.5-2 MW), including impact investors and small-ticket equity investors, are likely to find the ease of entry (in addition to other incentives) they had long lacked under the previous centralized generation regime. Depending on the policies set by individual states, there could be an explosion of decentralized energy projects, especially in rural and suburban areas, which would significantly increase access to electricity for households and SMEs, reduce the cost of transmission, and ensure relatively stable electricity in different locales across states in the country.
Finally, increased electricity generation will produce positive spillover effects in other sectors of states’ economies. Lack of access to stable, well-priced electricity remains a key impediment to cost-effective production in Nigeria. A case in point is Innoson motors, an automotive company that had long bemoaned the lack of access to stable, cost-effective electricity as a key impediment to producing relatively affordable cars in Nigeria. Notwithstanding the company’s low labor costs vis-a-vis foreign competitors, high energy costs (in addition to other challenges) have made locally-produced cars expensive and uncompetitive. Beyond large industrial states, Nigeria’s agro-dependent states stand to benefit from access to decentralized, stable electricity. Lack of electricity continues to impede the states’ ability to attract sizeable investments in high-value generating sectors such as horticulture, fish processing, and vegetable canning; sectors that require real-time temperature control and monitoring. Thus, if the electricity challenge is addressed (in addition to other infrastructure challenges), Nigerian states across the industrial spectrum stand to benefit enormously.
The foregoing section captures the potential positives of the regulatory change for all players; investors, businesses/households, and the states. However, the amendment is not without challenges, risks, and uncertainties. Foremost, the amendment, in its current form, creates duplicity (and potential conflict) of roles between the longstanding federal regulator and upcoming state-level regulatory agencies. The National Electricity Regulatory Commission (NERC) had long regulated the licensing and pricing regime for electricity in Nigeria. The new law which empowers states to generate, transmit, and distribute electricity within their territories says little about the new role, if any, of NERC. This creates short-term uncertainties that would have to be addressed in the coming months.
Beyond regulatory uncertainties, the devolution of powers to the state does not wish away an enduring challenge in Nigeria’s electricity sector; politically-motivated pricing. The federal government, either deliberately and/or in response to pressure from the labor unions and other stakeholders, has repeatedly failed to adjust the pricing regime in response to changing market dynamics. Thus DISCOs are forced to charge below-market prices, which negatively impacts their bottom line as well as negatively affects investment returns for all players across the value chain. The constitutional amendment exposes investors in state projects to the risk of politically-motivated pricing regimes by state governments, especially in electoral seasons. While clear agreements on pricing could be signed prior to project development, the risk remains. This could delay investment returns, lead to extended legal battles, and potential confiscation of assets. Nonetheless, the opportunities remain.
Finally, concerns remain over the economic viability of utility-scale projects in some states. While a ready market exists in the aforementioned industrial states, some Nigerian states do not currently have the underlying base (economic and demographic) for large utility projects. In addition to generation and distribution, a state-wide transmission network requires significant upfront capital costs that might rank low on the priority list of poorer states. Thus, these states might experience difficulty in attracting adequate financing for large-scale projects and/or struggle to service raised debts. These states may be faced with the choice of commissioning multiple small-scale decentralized projects or partnering with nearby states. This latter option would require harmonization of both states’ regulatory regimes; a walk-back on the independence celebrated by each state.
The president’s assent to the constitutional ammendements empowering states to generate, transmit, and distribute electricity could be a seismic event for the Nigerian economy. The change could reduce production costs for existing businesses as well as help states attract investments into electricity-dependent sectors. However, a sustainable state-based energy sector would require more than a few constitutional amendments. Key concerns remain over political risks, regulatory uncertainties, and the economic rationale, especially in smaller states. Kwakol Research closely monitors ongoing changes and opportunities in the sector and can help investors navigate this changing landscape. Contact Us
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