Nigeria: Opportunities in private power

As evidenced by the constant hum of diesel generators across the country, electricity in Nigeria is a big issue, with low generating capacity having long hampered growth. However, sizable progress has been made over the past month to reverse this trend, with reforms to Nigeria’s power sector underway and efforts to almost double electricity production by the end of 2013 boding well for consumers. Nonetheless, the success of these efforts will depend on whether operators of the newly privatised generation and distribution companies are able to move quickly enough to make the necessary investments to upgrade the industry’s frayed infrastructure.

In late February, the final contracts for the privatisation of most of Nigeria’s generation and distribution capacity, formerly operated by the Power Holding Company of Nigeria (PHCN), were signed in Abuja. The former state monopoly has been broken up into a series of smaller companies, of which 15 – five generation and 10 distribution firms – have passed into the private sector, with a further two yet to attract a satisfactory bidder.

The privatisation process has been the cornerstone of the government’s efforts to reform the power sector and to increase investment and efficiency. In early 2013 the government announced it was looking to boost generation capacity to 10,000 MW by the end of the year, up from the 6442 MW of nominal capacity as of 2012.

If the government and private operators are to achieve their year-end goal, further investment will be needed to install the necessary infrastructure. This will be a costly endeavour, with some estimates suggesting up to $10bn will be needed to ensure the increased power output can reach clients.

There is also a question of whether the existing transmission grid has the capability to transmit the expected increase in production. In mid-February, Beks Dagogo-Jack, chairman of the Presidential Task Force on Power (PTFP), identified the transmission network as being a weak spot in the sector, compared to the upstream generation segment and downstream distribution.

“We need to have a bold and robust midstream; that means funding, because over time, there has been so much misalignment between the upstream and the midstream, between the midstream and the downstream,” Dagogo-Jack said on February 13.

It may take some time before power supply becomes more reliable. According to Edmund Martin-Lawson, managing director of Mantrac Nigeria, a firm that distributes Caterpillar products and power generation equipment, it could be up to five years and beyond before the electricity customer starts seeing the tangible benefits of privatisation. Fact-finding studies and surveys to determine issues such as load size, or ensuring that the distribution lines can handle added capacity, will need to be carried out before new investments can be made, said Martin-Lawson.

“With such a large population and industry to serve, the privatised electricity generation, transmission and distribution companies will need time to calibrate the demand and upgrade assets accordingly,” he told OBG.

While major improvements to the nation’s electricity supply will likely not be felt in 2013, Nigeria should certainly begin to see the benefits of privatisation in 2014. As the successor distribution companies to the PHCN begin to improve the assets they inherited, which should require large-scale investments, this will in turn increase business opportunities for original equipment manufacturers (OEMs) and service providers across the spectrum.

It is not just OEMs and direct service providers who are in line to gain from increased spending in Nigeria’s utilities sector. The construction industry is also set to benefit from power companies looking to strengthen their infrastructure backbone. However, expansion and upgrade efforts will depend on whether distribution firms will be able to recoup their expenses and raise funds for investment through billing. The PHCN has struggled in the past to collect due payments for power, with some estimates putting the unpaid bill rate at 50%.

Nigerian consumers have been warned that electricity prices will rise in the wake of privatisation, with new tariffs set to reflect production costs and do away with much of the price support when PHCN was the sole provider. This, combined with a compulsory metering system backed by the government as promised on March 15 by Chinedu Nebo, the minister of power, should boost earnings, and with them the funds to invest in the necessary expansion.