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Challenges and Interventions Needs in the Nigerian Electricity Supply Industry (NESI)

Although Nigeria has been generating electricity in commercial quantities for over a century, the pace of electricity infrastructure development in the county is very slow and power supply remains highly inadequate. In 2013, two segments of Nigeria’s power sector (generation and distribution) were privatized to resolve the challenges associated with the prior monopoly of government in power generation, transmission and distribution. However, privatization only changed the dimensions of the challenges and power supply remains largely inadequate, un-affordable and unreliable in the country.

Presently, seventy-six million Nigerians or 40.7% of the Nigerian population (more than twice the population of Canada) are not connected to the national power grid[1]. For those connected, power supply is a serious problem as approximately 90% of total power demanded is not supplied. Here is the problem: Presently, total installed generation capacity is 12,522 MW[2], but average operational generation capacity is just 3,879MW of which 7.4% is loss in transmission, and up to 27.7% load is rejected at distribution. This leaves Nigeria with just about 2,519MW. Yet, Nigeria’s electricity demand is estimated at 24,380 MW in 2015. As a result, Nigerians self-generate a significant portion of their electricity with highly polluting off-grid alternatives and at a cost that is more than twice the cost of grid-based power. How can the Nigerian people and industries be globally competitive without access to affordable and reliable power?

In the coming years, electricity demand is expected to rise significantly. Household electricity demand, which has the largest share, will rise due to growing urbanization (at a rate of 4.23% per annum) and population growth (estimated at 2.7% per annum, while global growth rate is 1.1%), at rates more than twice global averages. Industrial and commercial demand is also expected to increase as Nigeria slowly rise from the recent recession (with projected gross domestic product rates trending between 4.50% and 7%). A GIZ study estimates electricity demand to rise to 45,490 MW by 2020 and by 213,122 MW by 2040. Although the results of electricity demand studies vary widely, they all conclude that the current gap between supply and demand is already very substantial and that, it will become more entrenched under a ‘business as usual’ scenario.

Some of the key challenges in the NESI include:

  • Infrastructure Constraints across the entire value chain from fuel to power distribution chain, including undiversified energy sources for electricity (80% thermal and 20% hydro), insufficient gas pipelines, obsolete generation plants and equipment, as well as inadequate and poorly maintained transmission and distribution networks. All worsened by vandalism
  • Insufficient End-User Tariffs/Pricing: Due to rising supply cost (associated with inflation, currency devaluation, unexpected infrastructure constraints) that have not been accompanied by timely adjustments to tariffs.
  • Inability to Reduce Aggregate Technical, Commercial and Collection (ATC&C) Losses: The design of the power sector reform makes the viability of the distribution companies (DisCos) critical to the long-term sustainability of the sector. However, DisCos are unable to recover cash shortfall on account of the lack of investment in network rehabilitation and metering (partly due to low tariffs and inability to obtain loans from Nigerian banks due to unpaid debts).
  • Sector’s Cash Shortfalls: Total cash shortfall in the sector between 2015 and 2016 is estimated at $1.3 billion. Out of which $1.2 billion accounts for deficits caused by tariffs being lower than the cost of service delivery, and the remaining $100 million caused by DisCos inability to reduce ATC&C losses.
  • Debts, Electricity Theft, and Non-payment Culture of the Public: Especially government ministries, department and agencies who owe the industry an estimated $72 million as at the end of 2016 contribute to the sector’s cash shortfall.
  • Sector governance: Inconsistent enforcement of rules and policies reinforces aforementioned challenges.

While multilaterals (through initiatives with the World Bank and Power Africa) as well as the Nigerian government and private sector are making efforts to address key challenges in the Nigerian Electricity Supply Industry (NESI), the efforts are slow-paced and insufficient. For instance, the government has inaugurated several projects aimed at expanding thermal and hydro sources as well as extended two intervention facilities to GenCos and DisCos to ease their financial constraints. DisCos have also embarked upon mass metering of customers, as well as implemented maintenance and upgrades on their network by installing new transformers and building dedicated lines to commercial and industrial customers over the past years to reduce these losses and enhance service delivery. However, the investments are marginal compared to existing deficits and targets.

To enhance the effectiveness of service delivery in NESI, several interventions are needed to attract significant private sector capital, improve baseline power supply with data-driven innovations, and enhance sector governance. Specifically, Operational and Technical and Interventions are needed to improve baseline power supply (using data-driven, innovative on- and off- grid solutions); improve transmission wheeling capacity and redundancy; as well as improve grid design and electricity demand estimation. Governance Intervention is also necessary to improve sector governance and transparency; to make contracts fully effective; as well as to improve sector communication, coordination and monitoring. A clear and concise contractual, regulatory, and financial framework is a critical requirement for attracting private sector capital to the NESI. Lastly, Regulatory/Policy Interventions is also essential, especially related to tariff that balances the protection of electricity customers with the interests of investors, outlines a trajectory to cost-recovery tariff, and is implemented in a timely manner. Well-enforced policies that incentivize improvement in DISCOs performance, as well as fiscal and monetary policies aimed at encouraging private sector investments are also needed.

[1] See 2016 World Bank statistics on population and electricity access.

[2] Despite having a far larger population, Nigeria generates less electricity relative to other major African economies and failed to expand its power generation along with its growing population. For instance, South Africa with a population of 48 million generated 35,000MW out of an installed capacity of 52,000MW in 2015.