Africa's Largest Economy Struggles to Keep the Lights On
WHY YOU SHOULD CARE
Whether Nigeria can improve its power generation could determine the future of Africa’s largest economy.
By Neil Munshi
Babatunde Fashola’s office was buzzing like so many Nigerian workplaces, humming and whirring as diesel generators and batteries clicked on when the power cut out. That he is Nigeria’s power minister was an irony not lost on him. The fact that even the Power, Works & Housing Ministry cannot secure a reliable electricity supply from the national grid is a consequence of decades of underinvestment by the state. For critics of the government, it is proof of President Muhammadu Buhari’s failure to fulfill his promise to bolster Nigeria’s decrepit infrastructure.
The Buhari administration argues that it has done more than previous governments. But as it begins a second term this month, supporters and critics alike say it must intensify efforts to fix the power shortages that make Nigeria one of the least electrified countries in the world per capita and serve as a brake on Africa’s largest economy.
Fashola said his ministry was following the advice it gave Nigerians by going off-grid. “Hopefully by this time next year, all of these buildings will be completely solar,” he says. It is part of a plan by the government to bypass the moribund power sector with a “massive deployment of off-grid systems,” with policies that encourage the private sector to do the same.
We’re just expanding the transmission network now that was installed 40 years ago so it’s serving five, six times what it was installed to serve.
Babatunde Fashola, Federal Minister of Power
The ministry has also partnered with the private sector to electrify markets containing tens of thousands of family-run shops and secured $550 million in funding from the African Development Bank and World Bank for rural electrification.
Even critics agree that the government has good policies but implementation has been slow. A potential $1 billion World Bank loan to fund reforms is in limbo because it is linked to structural changes to the sector.
“The plan is good on paper, but as always, [there’s been] poor implementation,” says Cheta Nwanze, partner at consultancy SBM Intelligence.
Nigeria has the capacity to produce 13,000 megawatts of power, compared with more than 50,000MW for South Africa, which has a similar-size economy and a quarter of the population. But Nigeria’s aging grid delivers only about 4,000MW of power to its 200 million citizens — roughly what the city of Edinburgh provides for 500,000 residents. Nigeria’s grid has collapsed at least six times this year, including twice in May.
Diesel generators are the staple coping mechanism not just of Nigerian ministries, but of industrial estates, housing developments and shopkeepers, spewing pollutants while costing more than twice what power from the national grid would. The International Monetary Fund estimates that Nigeria’s economy loses about $29 billion a year because of electricity supply problems. Ninety percent of industry provides its own power. The Manufacturers Association of Nigeria (MAN) says that roughly 40 percent of the cost of production goes to power.
“The inadequacy of electricity supply is one of the biggest impediments to the competitiveness of the manufacturing sector,” says Mansur Ahmed, head of MAN.
At every point along the power chain, Nigeria suffers from lack of investment. It does not have adequate pipeline infrastructure to transfer some of the world’s largest natural gas reserves to power plants. Distribution companies are so deeply indebted and underpaid — to the tune of nearly $4 billion, according to their trade association — that they do not invest in plants or meters that would enable them to collect from customers and improve collection rates of about 60 percent.
Fashola says the Buhari administration is trying to improve supply. It has approved a N27 billion ($75 million) payment to the 11 distribution companies for the government’s unpaid power bills and another N72 billion ($200 million) for equipment, along with a N701 billion ($1.9 billion) payment guarantee for the power producers, among other measures.
“We’re just expanding the transmission network now that was installed 40 years ago so it’s serving five, six times what it was installed to serve,” he says.
This year, Tony Elumelu, one of Nigeria’s richest men, announced plans to invest $2.5 billion in power. His company Transcorp won a $293 million bid in May for a second power plant, in which it plans to invest $190 million, roughly doubling the firm’s capacity to about 2,000MW.
“We can do a lot more — we just want the sector to be totally in an economic way a free market,” says Elumelu. “Nigeria is a huge market. If we can create the right environment, capital will come to Nigeria.”
Since Nigeria privatized the power sector in 2013, the price set for electricity has not increased even as the naira has fallen by half against the dollar and inflation has hit double digits. It is so low that distributors operate at huge losses, according to the Association of Nigerian Electricity Distributors.
“We are compelled by law to sell electricity below the cost price and every day, there is a shortfall that goes on and on,” Sunday Oduntan, spokesman for the trade group, told Punch Newspapers last month.
Fashola dismisses the complaints of the distributors. If the companies are unable to invest or expand, he says, they should sell or be relieved of their licenses. As part of its off-grid push, the government has passed rules that allow power companies to strike deals directly with large industrial groups.
But the pace of reform has been glacial and will not solve the broader problem, says Deepak Khilnani, chief executive of Cummins Cogeneration, which produces more than 100MW at its power plants in Nigeria.
“What they’ve been trying to do is come up with schemes or regulations to bypass the condition,” he says. “If your arteries are firming up with cholesterol, you can either try to exercise and go on a diet or you get a bypass … but the thing about bypasses is they’re never as good as the original, and there’s only so many you can do before the system collapses.”
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