nigeria power

NIGERIAPOWER

CBC Investment Guides

Nigeria Privatises Power Unlocking the investment potential

by the Commonwealth Business Council

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2472 Nigeria Power.indd 1 23/02/2011 17:02

Nigeria Power 3

Power Sector Reform - His Excellency Goodluck Ebele Jonathan, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

President of the Federal Republic of Nigeria

Message from Mr Pascal Dozie, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Co-Chair Commonwealth Business Council and Chairman MTN Nigeria & Diamond Group Advisory Board .

Introduction – from Dr Mohan Kaul, Director General, Commonwealth Business Council . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

The background to the reforms

Generation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 - 12

Powering up

Transmission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 - 15

Developing Nigeria’s infrastructure

Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 - 19

Bringing power to the people

Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 - 22

Exploiting Nigeria’s ‘other hydrocarbon’

Coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 - 25

Nigeria digs deep to satisfy coal demand - Special report by Zuma Coal

Hydroelectric power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 - 27

Unleashing the rivers

Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 - 31

Investing in Nigerian power

Business Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 - 34

Doing business in Nigeria

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 - 37

Nigerian power going forward

Table of Contents

Program Directors: Coralie Castel & Daniela Severino

Editor: Matilda Clara Ní Thadhg

Research Director: Maureen Lee

Research Advisor: Chinedu Ebo

Graphic Design: Paul Thatcher and Sabrina Russo


i

NIGERIAPOWERIntroductionThe background to the reforms

by the Commonwealth Business Council


Nigeria Power 5

On 26 August 2010, we gathered in Lagos, Nigeria’s commercial capital, to launch the Roadmap for Power Sector Reform, a document that details my administration’s strategy for transforming Nigeria’s power sector into a dynamic, fast-growing industry .

One thing that struck Nigerians is the clarity of our strategy, especially the unequivocal acceptance of the fact that the only way to satisfy Nigeria’s yearning for stable power supply is to create an attractive regime for private sector investment .

We are very clear about what we want from the power sector reform . I believe that Nigeria is a power investors’ haven . With a population of more than 140 million people and the 7th largest deposits of natural gas, a major fuel for power, in the world, we are ready for business . Today, less than half of our citizens have access to electricity and according to our Central Bank we expend about $13 billion every year providing power from diesel generators when we require only about $10 billion per year in investment over the next few years to develop our generation, distribution and transmission capacities . Generating power from generators adds more than 40 percent to the cost of goods and services in Nigeria and this we can ill-afford . Our mission therefore is for Nigeria to reach power reliability and sustainability within the shortest possible time so as to catalyse the much needed development . Without a doubt, the revitalisation of Nigeria’s power industry would be the single most important economic development in Nigeria in the last 50 years .

We are fully aware of what is at stake . This Government created the Presidential Action Committee on Power (PACP) in which all Ministries and Agencies with mandates related to the power sector are represented; the PACP functions like a Special Cabinet on the power sector . The PACP has been described as a “War Cabinet” and you would agree that the fight to achieve sufficient power supply in Nigeria is indeed a war for economic development . The PACP sets policy guidelines for the Presidential Task Force on Power (PTFP), a multi-agency body that carries out the day-to-day work of fast-tracking the implementation of the 2005 Electric Sector Reform Act (ESRA) by removing legal and regulatory obstacles to private sector investment in the power industry . Membership of the PTFP comprises various ministries and agencies that are critical to attaining its objectives, such as the Bureau of Public Enterprises (BPE), the Nigerian Electricity Regulatory Commission (NERC), the Nigerian National Petroleum Corporation (NNPC), the Bureau of Public Procurement (BPP), the Federal Ministry of Power, the Ministry of National Planning, the Infrastructure regulatory Commission, and the Transmission Company of Nigeria (TCN) . The membership of the PACP and the PTFP reflects our recognition that a successful power sector reform requires policy input and change across several sectors .

Experience has been a very good teacher . In less than ten years, the liberalisation of the telecommunications sector has seen the

number of telephone lines rise from under 400,000 to over70 million in Nigeria . Our people now expect a second “economic revolution” that will have a much greater impact on economic growth and employment creation . As a nation, we have escaped the “ideas trap”, by which I mean the predilection to seek the solution to economic problems by making recourse to more of the same failed policies .

This administration is determined to implement the reform of Nigeria’s power sector in a way that Nigerians shall be proud of . We are determined to attract high quality investors with the track record that ensures they will bring world class expertise and industry best practices to our evolving power supply industry . We are looking for distribution companies with the experience to rapidly reduce commercial and technical losses on our network . We are looking for generation companies that can operate with great efficiency and rapidly expand services to underserved parts of Nigeria . This is a country with tens of millions of potential new power consumers . We need firms that can grow quickly . Our national interest dictates that we encourage investors who are willing to stand with us for the long term not those without the requisite pedigree in the sector .

An opinion poll sponsored by the World Bank has confirmed that Nigerians are willing to pay for cost reflective tariffs for electricity . This is hardly surprising given the fact that some of the poorest Nigerians, including artisans and small business people, spend considerable amounts on Petrol powered generators .

There are tremendous opportunities across Nigeria’s power value chain that need to be harnessed for the good of our people and investors .

We believe that to make Nigeria work better as an economic and political union, the power sector will play a major transformational role . I invite you to join us on this important mission (… .) Nigeria is open for business .

Excerpts from His Excellency’s address at the Presidential Retreat for Power Sector Investors, Abuja, Nigeria, 14th October 2010

Power Sector Reform: H .E . Dr . Goodluck Ebele Jonathan GCFRPresident of the Federal Republic of Nigeria


Nigeria Power6

The Commonwealth Business Council (CBC) provides leadership in increasing international trade and investment flows, creating new business opportunities, promoting good governance and corporate social responsibility, reducing the digital divide and integrating developing countries into the global market . In fulfilling its mission, CBC strives to provide a bridge between the private sector and governments, between emerging markets and developed markets and between small businesses and private sector .

CBC’s goal is to achieve economic empowerment for shared global prosperity through the enhancement of private sector contribution to social and economic development .

Nigeria is central to CBC achieving these goals . During the recent crisis the fall in oil revenues and a loss of confidence in the banking sector certainly hit Nigeria hard but it has responded with vigour . Indeed the Central Bank of Nigeria predicts GDP growth of more than 7 .5% during 2011 . Impressive though this growth is, we Nigerians are aware that it could be so much more . At present the country’s progress is being restricted by limitations in the power sector . Nigerian businesses, from large industrial groups to small artisans, are paying a premium to power their businesses due to the shortcomings in the electricity sector . It is even more galling that this should happen in a country blessed with so much energy resources . Everyone is aware of Nigeria’s oil but it also has 187 trillion cubic feet of proven natural gas reserves – an important feedstock for power plants .

At present Nigeria, a country with a population of more than 150million people, has an annual average electricity production of approximately 4000MW . To put that figure in perspective, South Africa, a country of 50million people, has 40,000MW . That’s ten times the electricity for a population a third of the size . For Nigeria to compete, both in Africa and in the world, it needs to improve its power infrastructure .

To that end the Government of President Jonathan has launched a reform of the power sector . The country is now striving to build 40,000MW of generating capacity by 2020 . Even the most conservative estimates place the total investment needed to meet this target at $10billion per year, across the value chain . With such massive sums involved the Government has decided to accelerate the liberalisation of the power sector and privatise the state-owned entity that currently controls Nigeria’s power infrastructure . The Government is also increasing the end-user electricity tariff so that investors will earn strong returns on their investments .

In short there are a host of opportunities for investors who are willing to partner Nigeria and meet the massive demands for electricity in its growing economy . While the successful privatisation of the Nigerian telecommunication industry suggests

that liberalising the power sector will create jobs, encourage competition and spur social and economic development . The one difference is that the power industry is more capital intensive . That is why it is so important that the Government and private sector investors work together .

The CBC is an ideal platform for Nigeria to showcase the potential and opportunities in the country’s power sector . Indeed in recent years the CBC has used conferences and investment guides to bridge the ‘communication gap’ between investors and emerging economies in the Commonwealth . The CBC took a lead role in last year’s Power Retreat in Abuja and will be arranging a seminal Power Summit in March this year . Such conferences, and this guide, are a chance for the CBC’s database of 20,000 investors and policymakers to understand the massive potential of the Nigerian power sector .

The continued interest and involvement of Commonwealth investors will be critical for the success of these efforts .

Thank you .

The CBC is an ideal platform for NigeriaMr Pascal Dozie, Co-Chair, Commonwealth Business CouncilChairman MTN Nigeria & Diamond Group Advisory Board .


Nigeria Power 7

Power is the key enabler and this investment guide aims to bring together a critical mass of Nigerian investors and operators together with potential international economic partners . Both investors and the Nigerian Government can benefit from partnership . With its wealth of natural resources, vibrant economy and large and growing domestic market Nigeria has a lot to offer investors . Meanwhile the country is keen to attract local and international private-sector companies that can help it improve its power infrastructure .

At present Nigerian power is not achieving its potential . Rich in conventional and renewable energy sources, Nigeria should have a secure and diversified power matrix but at present its electricity infrastructure is unable to meet demand . Yet that looks set to change . President Goodluck Jonathan has made improving Nigeria’s power system a priority and recently unveiled a privatisation program designed to attract the tens of billions of dollars needed to achieve that aim .

Nigeria’s nominal generating capacity is 6000MW but the country’s ageing power plants rarely produce that . Indeed in 2010 the average annual production was less than 4000MW . The problem is exacerbated by Nigeria’s large population . For example South Africa has an installed capacity of 40,000MW to provide power for a population of 40 million people . Nigeria on the other hand generates far less electricity to provide for more than 150 million citizens . The problem is not going to go away - the Nigerian population is projected to hit 230 million by 2030 .

This is not just a question of measuring megawatts . The lack of power creates social challenges . More than 80 million Nigerians - mostly the poor or rural dwellers - have no access to electricity . This restricts their access to advances in technology, such as the internet, that aid development . The power situation also creates environmental problems . In the north of the country environmentalists blame the accelerating deforestation and desertification on increased use of wood for household use . Diesel and petrol generators are also used to compensate for the lack of power . Their use increases air pollution as they create more ‘dirty emissions’ than a conventional thermal power station .

Yet perhaps the biggest impact of Nigeria’s poor power system is the effect it has on the economy . The Government estimates that a lack of power costs the Nigerian economy $100billion every year through lost output and higher costs for local businesses . Nigeria’s manufacturing sector has been particularly affected by higher operating costs . The Presidential Taskforce on Power (PTFP) and the World Bank have identified the lack of electricity as a major factor inhibiting development .

Yet there are reasons to be optimistic, after all, if any country can build a secure, diversified power system from purely local energy sources it should be Nigeria . It has the 10th biggest oil reserves and 8th biggest gas reserves in the world . It also has around 3billion tonnes of high-quality, low-pollutant coal and huge solar and hydro energy potential .

What’s more Nigeria’s power system has responded to major challenges in the past . In the years following independence Nigeria underwent massive changes . Growing oil revenues and population growth caused massive migration to urban areas . Rising oil prices in the ’60s and 70’s brought an influx of foreign capital which was used to create new manufacturing-based industries .

Unsurprisingly this pushed up demand for electricity . Successive governments invested considerable sums on Nigeria’s power infrastructure and by 1972 the country had a well diversified mix of hydro, gas, diesel and coal-fired plants providing a reliable supply of power . It was an era of heavy state-involvement in the economy and massive capital expenditure on grand infrastructure projects . The high oil price – especially after the oil crisis in 1973 – inflated Nigerian asset values and allowed the military governments in power at the time to raise large loans from international creditors . However, when oil prices fell in the second half of the 1970’s Nigeria found itself struggling to service the interest on these debts . The situation worsened in the 1980’s as Nigeria suffered a prolonged recession .

By the mid ’90s electricity output began to drop as decades of underinvestment led to falling plant performance . At the same time demand began to rise as Nigeria’s economy recovered and commodity prices shifted gradually upwards .

It is against this context that President Jonathan launched the Roadmap for power sector reform in summer 2010 . The need is clear - as it has been for decades . Every Nigerian business leader knows that the lack of secure and economic power is the biggest constraint on growth and economic development .

The plan is to overhaul the power sector and generate 40,000MW of electricity by 2020 . Indeed a reliable power system is a central plank of Vision 20:20:20 – Nigeria’s plan to be “among the first 20 countries in terms of industrialisation, democracy, human resources in the next 10 years” . The Government has made it clear that it is keen to attract local and international private sector players as it seeks the $85billion of investment that the power sector needs for Nigeria to hit the 40,000MW target .

The Nigerian people may be wary of hope . Too many times in the past they have seen the ‘false dawn’ of power sector reform . Yet there is a feeling both in the power sector and on the street that this time it might be different . Like many people I believe that despite huge current challenges, the business environment in Nigeria has changed significantly for the better . A decade or more of economic reform means that the private sector has a significantly expanded role, and many reforms have been undertaken . Growth has been strong despite weak infrastructure, and the potential for even faster growth has never been better . Privatisation has achieved more in the last year than it had in the last ten and there is a growing consensus in the industry and on the streets that finally, the sun may be about to shine on the Nigerian power sector .

Introduction

I am delighted to have the opportunity to introduce readers to the Commonwealth Business Council Nigeria Power Report .

I think that I can say there is no Commonwealth country with which we have a closer working relationship, than Nigeria, having collaborated on an extensive programme for investment promotion jointly with the Government and Private Sector over the past decade . We have witnessed a blossoming of the private sector, and a new attitude to public private cooperation which promises great benefits in terms of sustainable growth .

IntroductionDr Mohan KaulDirector General, Commonwealth Business Council


GenerationPowering up

The Dangote Group Obajana Cement Plant in Obajana, Kogi State, has an Independent Power Plant (IPP) of 135MW


Nigeria Power 9

These are only the opportunities on the generation side; there is

of course, potential for investors in distribution too . Privatisation

of the entire power sector will open tremendous opportunities to

domestic and international investors . At the Presidential Task Force

for Power (PTFP) we are working to develop the right environment

for private sector players . It is the combination of opportunity and

improving regulations that led President Goodluck Jonathan to

call Nigeria a “power investor’s haven” .

The Government has a set a 5-year target for Nigeria to privatise

the sector and improve its performance; how do you plan to

achieve this?

Our priorities are gas, coal and hydro . We have huge amounts of

all 3 resources that are practically untapped . We are especially

keen to exploit our reserves of natural gas and have set out a

detailed Gas Master Plan .

In the case of hydro we plan to build plants through public and

private partnerships . In some cases they will be financed by

contractors and build-operate-transfer (BOT) agreements . Coal

and gas power plants, however, will be constructed privately .

The Achilles’ heel of power investment is distribution . The

President has decided to improve distribution by privatising the

system into 11 separate firms . Our goal is that in a few years time

all these firms will be able to buy power from the generators via

bilateral agreements .

We recognize however that the distribution companies will not be

creditworthy for a few years . The government is therefore setting

up the Power Bulk trader to buy power from the generation

companies and mitigate their risk . This is a form of Partial Risk

Guarantee (PRG) supported by the Ministry of Finance and the

World Bank .

We are also addressing prices and tariffs to ensure that the sector

is market driven and that investors can recover their investments .

Some investors are concerned about the speed of reform; how

soon will the changes be implemented?

The government is committed to liberalise the power sector in

Nigeria and set up the PTFP to deliver change to the sector .

Privatisation can be completed by the third quarter of 2011 . The

government has hired third-party advisors for the transactions

and the expression of interests will start by January 2011 . The

bidding process will commence by the middle of the first quarter

of 2011 . We expect agreements to be signed by the second

quarter of 2011 . We expect that within a few months of signing

the agreements the firms will be handed over .

The Government’s plans require large amounts of capital; how do

you plan to attract foreign investors to Nigeria?

We have already presented a roadmap for the sector and

marketed Nigeria’s opportunities at the Presidential retreat last

October . Now that the advertisement is out there we will follow

with an investment road show to Europe, Africa America and the

Middle East .

We are also actively reviewing the tariff schemes to make sure

that they are appealing for investors .

The current administration has identified energy reforms as a

top priority . How important is energy reliability for the Nigerian

economy?

Nigeria’s aim to become a leading economy by 2020 hinges upon

Nigeria’s development of the power sector . Energy costs increase

operating costs in Nigeria by almost 40 per cent . This is a major

stumbling block to the development of our services and industries .

Power reliability will revolutionise Nigeria’s economy, generate

employment and help the development of small and medium

enterprises . We are very committed to promoting Nigeria’s power

sector and we are open to do business with new investors .

An interview withProf. Bart NnajiProf . Bart Nnaji, NNOM, CONSpecial Adviser to the President on PowerChairman, Presidential Task Force on Power

What opportunities does Nigeria’s power sector offer for investors?

Nigeria is a massive country yet its current generating capacity is a miniscule 3,500MW .

During the next five years we will boost that to 20,000MW as new plants come online .

By 2020, we hope to produce 40,000 MW . Our struggle to fill the massive gap in power

generation will create massive opportunities for investors .

30th November 2010


Nigeria Power10

The situation has improved slightly since then as plants have

been repaired and some local companies have built small plants .

Last year annual average output was 3,800MW, and in January

President Jonathan announced it hit 4000MW again, but Nigerian

generation capacity remains outdated and unable to meet

demand .

The sector’s poor performance in the 1980s and 1990s is no

mystery . Power generation was, after all, a state enterprise being

funded by a government battling recession . Often, even when

investments were made they were spent badly and the positive

effects of new power stations coming online were often countered

by the falling performance of older, poorly maintained units . Yet

since the late 90’s Nigeria’s economy has improved while laws

have been passed to allow private sector involvement, so why has

privatisation taken so long?

When President Obasanjo came to power in 1999 he pledged

to privatise the existing assets of the PHCN and encourage

independent power producers (IPPs) to build more plants . Yet

President Obasanjo, whose previous period in power was as a

military dictator in the 70’s, found it difficult to implement his

reforms in Nigeria’s nascent democracy . His National Electric

Policy (NEP) was published in 2001 while the Electricity Power

Sector Reform Act (EPSRA) was delayed by labour unions, vested

interests and party politics and not passed until 2005 . The new

legislation had two aims . The first was to privatise NEPA (which

was renamed PHCN); the second was to encourage IPPs to supply

the grid .

Of course passing the relevant legislation and actually making

something happen are two separate things . By 2009, more than

a decade after the ideas were first mooted the PHCN was still a

state body while very few IPP’s had started producing . This made

many would-be power investors cynical . “We had heard so much

talk of ‘new dawns in the power sector’ but nothing had happened

in ten years”, said the representative of one international IPP early

last year .

Of course, while politicians were debating the laws, Nigeria’s

power plants continued to age and, with the economy growing

at an average annual rate of 6% over the last six years, demand

continued to rise . The situation is now acute . Nigerians are

spending $13billion a year running oil-based generators and much

heavy industry has been paralysed . There is a growing political

consensus that the country must produce more power and the

‘Roadmap for Power Sector Reform’ launched by the Government

last summer has whetted investors’ appetites . Encouragingly the

administration is frank about past failure . It admits, for example,

that there is a “confidence-sapping and morale-destroying gap

between official rhetoric and market growth and development” .

“There are a number of serious challenges impeding reform of the

power sector . But finally it appears we have a government willing

to tackle them . I think we are on the brink of achieving something”

says Tunde Karim, Group Executive Director of Shoreline Energy

International .

One company that has achieved something is Geometric Power,

a local player that was the first IPP to build a power station in

the new reform environment . The firm built a 22MW emergency

power plant near Abuja . It was a small plant, especially in the

context of Nigeria’s 40,000MW target yet it was an important

example of an indigenous company helping to solve the Nigerian

power crisis .

Buoyed by its success the group applied for a license to build

a 188MW gas-powered plant in the city of Aba, in south-east

Nigeria but developing the project has not been easy . “We were

faced with significant challenges . For our project in Aba we had no

data, no guidance and very little funding . It was difficult to reach

out to the banks for such a new project”, remembers Managing

Director Agatha Nnaji .

GenerationPowering up

One early evening on New Year’s Eve 2003 Nigerian power generation hit a milestone . The PHCN managed to coax 4000MW of electricity

from the country’s fleet of ageing power plants – a national record . Yet while that evening was a triumph for the engineers and managers

of the PHCN it was also a symbol of the long-term failures of the Nigerian power system . Why? Well firstly because even that peak fell

far short of meeting demand . The majority of the country’s power needs still had to be met by oil-driven generators . Moreover, the peak

couldn’t last long . Two weeks later a fire at a Lagos power station sent output tumbling back down to 2,700MW .


Nigeria Power 11

Raising finance is a problem affecting the entire Nigerian power

infrastructure from generation through to distribution and it is

analysed in depth in the Finance chapter . However, one of the

specific problems for IPPs is that the length of government-

awarded generation licenses, ten years, is less than the time

needed to guarantee return of investment . After ten years the

National Electricity Regulatory Commission (NERC) can extend

the licence for a further five years but the uncertainty makes

many banks unwilling to finance power plants .

NERC, which was created by the 2005 reform act, has been

criticised in some quarters for not improving the licensing regime

and even the PTFP admitted that it had suffered from “a leadership

vacuum” till the Government appointed a new Chairman, Dr . Sam

Amadi, at the head of NERC . The regulator has been working to

resolve the licensing issue . They have created a new system which

clearly states the obligations an IPP must fulfil to be granted a

license extension . It is hoped that by setting out a clear procedure

banks and investors can be confident of having a licence extended .

Geometric was one of the few IPP’s that succeeded in sourcing the

necessary finance . It raised $400million from Diamond Bank and

Stanbic Bank and began work on the plant in late 2007 . .

It is a common challenge for IPPs in Nigeria . Power plants need

road, rail or pipes to supply them with fuel while an efficient grid

is needed to evacuate the power they produce . Many IPP projects

in the country have failed because the government has been

unable to provide the basic infrastructure needed to support a

power plant .

Dangote Group is a prime example . An industrial conglomerate,

Dangote began generating electricity to meet its own needs . It

was so successful that President Obasanjo asked it to ramp up

its output and sell its excess power to the grid . “The Government

needs to focus on improving the transmission and distribution

sectors . I have surplus power right now that I can not sell to

customers because the grid is not capable”, says Group Executive

Director, Edwin Devakumar . “We also need to improve the

transport of coal and gas – because we can not do our job as

generators if the right supply systems are not in place .”

“Luckily I think this administration understands the problem . For

example, the Gas Masterplan should solve some of the key fuel

supply issues .”

The Nigerian Government, World Bank and private sector have

already started projects that should improve the infrastructure

for power generation but there is another way . Prof . Bart Nnaji

wants Nigerian IPPs to use the “Island Power supply model” . The

idea is for power stations that just serve their surrounding area

and are not collected to the grid . “This model is used alongside

the grid model in countries like China and the US”, says Nnaji .

“If IPPs can find a site with the fuel and demand nearby then

they can begin generating power without waiting for national

infrastructure projects .” Geometric’s Aba project will be the first

dedicated power plant built in the island model .

Of course Nigeria is not just looking to build new power plants it

is also looking for private companies to revitalise the state-owned

plants . On paper there is almost 6000MW of installed capacity

in Nigeria and the Government hopes that private sector capital

and know-how can get some of the country’s defunct plants up

and running again . To this end the PHCN has been split into 18

successor companies, six of which are generation companies or

‘gencos’ . These assets are now in the hands of the Bureau of Public

Enterprises (BPE) – an agency that reforms and privatises Nigeria’s

public assets .

The Government is keen to privatise the plants individually as

it wants to avoid creating a monopoly . Moreover, licenses vary

depending on the type of power plant .

Shell Petroleum Development Company of Nigeria contributes to Power Development in Nigeria. Afam VI Gas Power Plant, courtesy of Shell Nigeria


Nigeria Power12

Afam VI Gas Power Plant, Courtesy of Shell Nigeria

For example, Nigeria’s three hydro power plants, Kainji, Jebba and

Shiroro, will not be fully privatised but leased on a concession basis .

The concession system is due to the impact the dams have on

other vital areas such as agriculture .

A string of new plants that are being developed as part of the

National Integrated Power Project (NIPPs) will only be available

for operation and maintenance concessions at first although this

may change with time . These much-delayed plants are yet to be

completed although it is hoped that when they come online they

will add almost 5000MW to Nigeria’s installed capacity .

As for the conventional thermal power plants, they will be privatised

via the sale of a minimum of 51% equity to “core investors” .

Many of these stations are in bad condition and the Government

is looking for partners with the “technical and financial ability to

operate and expand each plant” .

Yet any investor in an ex-PHCN plant will not just face technical

or financial challenges .

One of the issues is the workers’ pension schemes . Any units with

particularly worrying liabilities will be put under the control of the

Nigerian Electricity Liability Management Company (NELMCO) . In

many ways this organisation is like the ‘bad banks’ that were set

up in the West to handle toxic assets in the wake of the recent

financial crisis .

Yet even those investing in ‘good’ power plants will need a strategy

to develop the workforce they inherit . “Employees of the Power

Holding Company of Nigeria will have to be retrained”, an owner

of an IPP commented . “This will be a costly and long process .

Similarly the energy infrastructure used by the PHCN is ageing and

needs major rehabilitation .”

There is no doubt the challenges are significant, but so are the

rewards . It is estimated that Nigeria will spend $3 .5billion per year

on power generation capacity alone between now and 2020 as it

strives to meet its 40,000MW target . These targets might seem

ambitious but the population is growing quickly and expected to

add another 80million people in the next 20 years . The economy

is also expanding quickly – with economists expecting a 7 .5%

increase in GDP this year . Nigeria has a massive, growing demand

for power and, unlike many countries, it has the fuel to create it .

Now it is time for the indigenous and international IPPs to add

generation capacity and complete the equation .


TransmissionDeveloping Nigeria’s infrastructure


Nigeria Power14

Today that rule applies to the Nigerian power sector . With the

NIPP stations expected to come online during the next few years

Nigeria’s installed generating capacity will increase dramatically .

Yet, just as in Liebig’s law, those generators will be useless if there

is no way to transmit the power . The Government has identified

Nigeria’s fragile transmission network as one of the power sector

weak spots and experts are concerned about a transmission gap

that will stop new power plants from coming online . Upgrading

and rebuilding the transmission network is vital if President

Jonathan’s power reforms are to be successful .

The Transmission Company of Nigeria (TCN) controls a grid that

can transmit 6000MW of electricity . In practise the figure is much

lower, with all sorts of bottlenecks acting as limiting factors .

As a result the grid can only carry 4500MW of electricity . That

might seem sufficient, after all the annual average generation in

2010 was 3800MW, but it often depends on location . The grid

is stretched to breaking point in some areas but underused in

others . Indeed 600MW of power was stranded last year because

of inadequate transmission . Moreover generation is expected

to outstrip grid capacity next year – exacerbating the problem .

Indeed Government officials estimate that the transmission gap

could continue until 2020 .

The system badly needs investment, know-how and modern

technology . The Government accepts that privatisation is the

obvious solution but it is unwilling to give a private company a

monopoly over the entire national grid . As a result it has settled

on a compromise . It will retain ownership of the assets but lease

management of the grid to private companies for five-year

periods . The contract will have built-in investment requirements

and set a limit on the profits that the new transmission company

can make .

So what challenges will the new transmission operator face? The

most common problem is faulty, or badly configured transformers .

The Nigerian grid transports electricity at 330kV but this needs to

be converted down to 132kV to travel on the local distribution

networks . Many transformers and substations are overloaded

while others lie idle . Another basic problem is poor maintenance .

For example, in many rural areas power lines are overrun with

vegetation . These problems are well documented and in recent

years the PHCN has spent more than $730million improving the

grid .

It is not just a case of fixing and replacing broken components, the

fundamental design of the grid needs to change . TCN currently

operates a radial system, whereby one power source is responsible

for covering large areas or regions . If there is a problem with the

power source or the line it affects the whole region . The incoming

private grid operator will have to continue with the Government’s

plan to create an interconnected transmission network .

Interconnected systems involve many lines between multiple

power sources . That means that if one plant or connection fails it

is easier to isolate the affected area and avoid a regional blackout .

TCN has already started work new transmission circuits in the

north-east of the country . The new lines will link power plants in

Afam and Jos and when they are completed Nigeria will have a

much more interconnected system .

While the long-term targets attract the most attention there

are also a number of more attainable short-term measures

that are currently a priority for BPE and will be one of the chief

requirements for any incoming investor .

The ‘brains’ of the grid is the system operator (SO) . Currently based

in the National Control Centre in Oshogbo the system operator

manages the flow of power and co-ordinates the response to the

all-too frequent blackouts . To date the Nigerian system operator

has performed poorly . According to the PTFP part of the problem

is that despite “being the custodian and manager of the grid code

and the enforcer of its provisions” it is often powerless to act . This

is because it is “embedded” in the TCN and does not have the

freedom to act independently . As a result “numerous violations of

the SO’s instructions occur on a daily basis and the SO, at present,

is largely unable to do anything about this” . A more independent

system operator would improve grid performance .

The TCN recently allocated $15million to improving the NCC and

adding another regional base . But the PTFP believes that more

investment is needed as “additional generation and transmission

capacity is of little use unless the System Operator has the

capacity to manage the load flow and minimise outages” .

The reality is that for the foreseeable future outages will happen .

Similarly there will be times when demand falls suddenly and

power needs to be rationed . While it is not possible to stop these

events it is possible to manage them better . If TCN was able to

TransmissionDeveloping Nigeria’s infrastructure

In the mid-19th century brilliant German chemist Justus von Liebig, the ‘father of fertiliser’, discovered the ‘Law of the Minimum’ . Liebig

had been studying crops and realised that their growth was not determined by the total resources and nutrients available but by the

scarcest resource – the limiting factor . Or as he eloquently put it: “The availability of the most abundant nutrient in the soil is as available

as the availability of the least abundant nutrient in the soil .”


Nigeria Power 15

warn distributors when shortages are likely to happen, they in turn

could warn their customers .

To make this happen the SO needs more information . Yet at

present many of the metres and switches that form the grid’s

supervisory control and data acquisition (SCADA) system are

broken . By repairing these components the SO would be able to

offer Nigerian power customers a much more consistent service .

One of the grid’s chief problems is that it is not frequency reactive,

leading to instability and blackouts . When demand for power rises

the generators producing the electricity begin to labour and rotate

more slowly which causes the frequency to fall . Conversely, when

demand drops, they accelerate and push up the frequency . Yet

generators can not cope with volatile changes in speeds; ideally

they are set to operate at a speed of 50hz . Anything dramatically

above or below this, say 53hz or 47hz and they go so fast, or

so slow, that they stop working . End-users will notice when the

frequency goes up because lights will suddenly grow brighter,

while they dim if the frequency drops .

In most modern grids standby generators automatically react

to the change in demand and cut or raise power to ensure that

supply matches demand and the frequency remains consistent .

However, Nigerian power plants do not have this ability to react,

meaning that they often trip themselves from running too fast

or too slow . Not only does this cause a blackout, it also damages

the plant and is expensive to repair . The TCN has started a project

at Kanji power station that would make the grid more responsive

and it will no doubt be the priority for the private-sector successor

to TCN . This work will not improve the capacity of the grid but

the consistency of service, a key area highlighted by the PTFP .

The objective “is to ensure that the supply of power will not only

be significantly greater than ever before but that it will also be

much less erratic and unpredictable” . Ironically one benefit of

the transmission gap is that it will allow for the new transmission

company to have power stations on standby . Known as ‘spinning

reserve’ this should allow the SO adjust to changes in frequency,

cope with unexpected breakdowns and provide a more reliable

service .

In essence the goals for TCN and incoming investor are two-

fold . On one hand capacity needs to be almost quadrupled while

on the other the grid needs to become more sophisticated .

If privatisation is going to work the power sector needs a grid

intelligent and reliable enough to fulfil contractual obligations

and deliver electricity to the different distribution companies . As

President Jonathan said “investors will be reluctant to make large-

scale investments in the upstream and downstream sectors of the

electricity industry unless they are confident that commensurate

investments in the midstream sector will also take place” .

In 2006/2007, the BPE advertised for Expressions of Interest,

calling for interested parties and qualified firms for a five-year

management contract for TCN . Three firms responded but the

process stalled on the Government side . However, the National

Council on Privatisation (NCP) has directed the BPE to contact the

original bidders and continue the process from where it stopped .

With so much work to be done what is the incentive for investors?

Ultimately the privatisation rests on the end-user tariff that the

distribution companies can charge . If this is at the right level it will

allow capital to flow up the value chain and provide the return

needed to stimulate investment . The grid operator’s ‘slice of the

pie’ will be set in the form of Transmission Use of System (TUOS)

charges . Eventually Nigeria wants to build a 700kV ‘super grid’ .

This is because it is more efficient and cost-effective to transmit

electricity at higher voltages – i .e . 700kV instead of the current

330kV . But to upgrade the entire Nigerian grid to 700kV would

be very capital intensive . As a result policy makers are planning

to raise additional finance from a SEC-regulated Transmission

Network Development fund . This investment vehicle will be

registered in America and raise the sums needed for the upgrade .

Investors in the fund would receive a share of the TUOS charges . At

the moment, however, details of the fund have not been finalised .

While ‘smartgrids’ and ‘super grids’ are admirable goals for the

future the key objective for the BPE and the new operator will

be to create a stable, reliable network that can support Nigeria’s

growing generating capacity . As Leibeg discovered all those years

ago, a team is only as strong as its weakest member . The new

transmission company will have to work hard to make sure that

the grid is not the weakest link .


DistributionBringing power to the people


Nigeria Power 17

At present many Nigerians are spending more on kerosene lamps

than they would for electricity . At current prices power produced

from kerosene or candles costs around N80/kWh compared to

an electricity tariff of 8 .5kWh . It’s not just kerosene that looks

expensive . The Central Bank of Nigeria estimates that Nigerians

spend $13billion per year on generators (between 50-70N/kWh)

- that’s even more expensive than the $10billion per year of

investment needed to meet the 40,000MW target . Unsurprisingly,

a World Bank poll found that Nigerians were prepared to pay a

higher tariff if it brought better service . Rolling out an extensive,

fairly priced power distribution network is vital for both the

economy and social development .

But what’s a fair price? At present the average tariff is 8 .5N/kWh

but the Government often pays an extra subsidy of up to 4N/

kWh . Yet the median average for West Africa is between 24N/kWh

and 29N/kWh with countries like Liberia charging more than 50N/

kWh . At the moment the revenues collected by PHCN are unable

to cover its daily running costs, forcing the Government to step

in with emergency funds . The lack of funds does not just affect

the PHCN . Since 1999 IPPs have been free to invest in generation

and sell power to the grid but with such a low tariff few have felt

tempted .

“For many years the tariffs have been too low to encourage

investment”, says Agatha Nnaji, Managing Director of Geometric

Power . “The current price regime means that power generation

doesn’t offer decent return on investment . In the long-run that is

not sustainable .”

The Government is keen to introduce a “genuinely cost-reflective

tariff needed to encourage investment” but is also worried about

imposing a “rate shock” on lower-income consumers . As a result it

is developing a more sophisticated inclining block tariff that will

include more degrees of customer differentiation .

The Government’s current estimate is that it will cost at least

22N/kWh to produce electricity during the next four years . “If

investing in power is to be profitable the tariff would have to be

well north of that figure”, said Moses Amadasun, Deputy General

Manager of Total Nigeria’s Gas Business and Commercial - of Total

E&P Nigeria .

Not only is the tariff too low – the PHCN also struggled to collect

it . It is estimated that 20% of the electricity generated is lost

through theft and technical loss . Thanks to these issues the PHCN’s

average monthly collection capability of N10bn falls short of the

N15bn average monthly cost of power . The Government aims to

claw back 5% of this by April 2011 but it expects private-sector

partners to make bigger efficiency gains in the future .

One company that has already improved distribution efficiency

is Global Utilities Management Company (GUMCO) . In

recent years the PHCN subcontracted out various aspects of

distribution management to GUMCO . For example, the company

was responsible for a program of prepaid meters in the Benin

distribution zone . The firm bought and installed the meters

and then managed the systems . “This project is an example of

how private companies can use new technology to improve the

efficiency of the power industry”, affirms GUMCO Managing

Director Ms Lola Ogunbambi .

GUMCO also manages revenue collection in the Ikeja distribution

zone . It managed to raise PHCN revenue through a combination

of “modern technology, improved service delivery and marketing

efficiency” . Local Nigerian companies with distribution experience

will prove important partners for international players hoping to

take part in the privatisation .

The BPE has split the PHCN’s old distribution arm into 11

distribution companies, or ‘discos’ . But the PTFP has been at

pains to stress that bidders for the discos will have to bring more

than just money to the table . The Government has made it clear

that winning bidders will have the technical experience and

management know-how to improve revenue collection rates . To

this end the National Council on Privatisation – a think tank set up

DistributionBringing power to the people

The best place to understand the state of the Nigerian power industry is not in the boardrooms of the IPPs or in the chambers of the

National Assembly but in homes and businesses across the country . This is the point where the soon to be privatised PHCN meets its

customers – and it is the point where the positive effect of the reforms will have the most impact .

“This project is an example of how private companies can use new technology to improve the efficiency of the power industry”,

affirms Ms Lola Ogunbambi, Managing Director, Global Utilities Management Company


Nigeria Power18

to advise the Government on market liberalisation – has proposed

the Aggregate Technical, Commercial and Collection (ATC&C)

loss reduction model . Any interested companies must submit a

bid that “emphasizes the reduction of technical and commercial

losses and increased efficiency of collections” . While not an

official requirement it is thought that a bidder with ‘smartgrid’

experience would be preferred .

Smartgrid technology is essentially a way to improve the

communication between the end users, the grid and the power

plants . This improved communication means that energy can be

used more efficiently . In other countries distributors have played a

key part in implementing smartgrid . For example in the UK British

Gas is rolling out ‘intelligent meters’ to all of its customers .

The new discos will also need to demonstrate a strategy for

expanding the distribution network . With new generation coming

online new distribution capacity will have to be added . Moreover,

many areas are unevenly served – 60% of Nigerians do not have

access to electricity and the new distribution companies will play

a key role in amending this .

Prof . Nnaji has identified distribution as “the Achilles Heel of the

Nigerian power sector” and the ‘tariff question’, both its level

and its collection, is seen by many as the most important issue

of privatization . Everyone, not just those planning to buy into

distribution but also the IPPs, the infrastructure developers, the

gas producers and the service providers, are united in calling for a

higher tariff . That industry insiders are calling for more revenue is

no surprise . After all distribution is the gateway to the sector and

high tariffs should flow to the whole industry . What has caught

investors’ attention, however, is that the Government has joined

the calls for higher tariffs: “The Federal Government recognises

that the commercial viability of the distribution sector, being the

provider of an overwhelming proportion of industry revenues, is

the foundation of market stability and growth .”

Engr . Mansur Ahmed is Director General of the Infrastructure

Concession Regulatory Commission (ICRC), an organization that

is responsible for the improving the country’s infrastructure . As

such he is keen to see revenue flow through the discos through to

all parts of the industry . “In the past the Government has only put

money into the power sector and this approach failed . Now we

are putting money but we are also providing a strategy .”

Distribution is seen by many as the most important issue of privatisation . Map of distribution companies in Nigeria


Nigeria Power 19

One of the companies to benefit from the new approach is

Nigerian hydro producer Mabon Ltd . The company was awarded a

license to develop a 40MW project on the Gongola River in Gombe

Nigeria in 2006 . Yet progress was delayed when they failed to find

an economically viable power purchase agreement (PPA) .

“After signing the agreement in 2006 we were delayed because

successive governments were not able to enter into power

purchase agreement with us . There was no workable structure

for power developers . We were confident that things would come

round but it was difficult for PHCN to engage with us under

previous administrations . It was very frustrating and it is only with

the current Government’s recent policy reforms we have been

able to sign a power purchase agreement with a credible off-taker

and at realistic rates”, says Project Director Simon Anji .

Yet while Mabon’s success is encouraging, its project will only

provide 0 .1% of Nigeria’s 40,000MW target . If that goal is to

be achieved Nigeria will need a solid, extensive framework that

allows IPPs to bring electricity to the market through PPAs .

It is a problem that has been faced by many countries that have

privatised their power industries . At present Nigerian power is

a vertically integrated monopoly with very little private sector

involvement . In the long-term the Government wants to create a

fully privatised model with generators competing to offer the best

price to distributors who in turn compete for customers . Yet this

change can not happen overnight . One of the issues is that the

new distribution companies may not have the creditworthiness to

sign PPAs often worth hundreds of millions of dollars .

To this end the Government established the Nigerian Bulk Energy

Trader (NBET) in July 2010 . In essence NBET is designed to make

bulk purchases of power, which it then re-sells to distributors . The

advantage is that it offers IPPs more security than if they were

buying from a newly established distribution company with little

track record and no cash flow . If a distribution company becomes

insolvent the bulk trader will pay any outstanding balance to the

IPP . NBET will give the industry time to develop the settlement,

accounting, governance and management skills needed for a more

complex multi-buyer model . Another advantage of NBET is that

it can work alongside private companies . If there is a distribution

company with the size and experience to sign its own PPAs it can

compete in the market with NBET . The bulk trader is also scaleable

and the idea is that it will ramp up while new generation comes

online but gradually whither away as more distribution companies

are able to sign their own deals .

Yet as Nigerian and international investors have both asked: “How

can IPPs know that NBET is creditworthy?” Indeed it is not just

power producers that are worried . Companies being asked to build

infrastructure or train extra engineers to meet the 40,000MW

challenge want to see some type of guarantee that investment

will be forthcoming .

The situation places the Government in a difficult situation . Given

the financial market’s current focus on toxic sovereign debt few

think it would be wise for the Federal Government of Nigeria to

underwrite the billions of dollars of investment needed . However,

waiting for the market to gradually establish itself would probably

take three to four years . That is unpalatable for an administration

that has made power a key priority . Moreover analysts estimate

the delay and subsequent lack of power could cost the economy

$200billion in lost GDP growth .

As a result the Government has opted for a compromise . Final

details have yet to be officially announced but insiders say the

Government will offer a letter of credit to the bulk purchaser –

providing it with liquidity in case of emergency . In turn this will be

supported by a Partial Risk Guarantee (PRG) issued by the World

Bank . The PRG will undertake to repay 25% of any unfulfilled

obligations to IPPs .

As Tunde Karim, CEO of Shoreline Energy International said: “If the

World Bank is here we must be doing something right .” According

to Government estimates reaching the 40,000MW target will

require $10billion of investment across the power sector between

now and 2020 . That investment will only come with the right

tariff and the right revenue collection systems .

From a social development standpoint the new distribution

companies will play an important part in bringing power to the

people . During the next few years all eyes will be on distribution –

the gateway to Nigerian power .

Nigeria is trying to revive its power infrastructure


GasExploiting Nigeria’s ‘other hydrocarbon’


Nigeria Power 21

The problem is two-fold . A lack of gas transport and storage infrastructure means that Nigeria’s gas is either left in the ground, ‘stranded’ from the point of consumption, or flared (burned) by oil producers who have no use for it . The other issue is commercial . Heavy regulation distorts domestic gas prices causing the near oligopoly of export-focussed oil majors to sell Nigeria’s gas abroad .

Admittedly gas currently supplies around 65% of the country’s power generation . That might sound a lot but Nigeria actually flares more gas (532bcf) than it uses for power (430bcf) . To put that another way every year Nigeria burns around $1 .46billion worth of gas that could be used to fuel power stations .

In 2008 the Government of the late President Umaru Yar’Adua unveiled the Gas Masterplan – a detailed strategy to tackle the gas sector’s physical and commercial challenges . The plan has now been incorporated into Nigeria’s power changes . According to the PTFP, approximately 75% of the 40,000MW target capacity will come from gas-fired plants . It is estimated that gas production will have to rise eight-fold while billions of dollars will need to be spent on the supporting infrastructure, creating a host of opportunities for indigenous and international businesses . The NIPP plants are expected to come online during the next few years . They will add 5000MW to the country’s generating capacity and more than quadruple gas demand for the power sector between now and 2015 .

There are many parallels between Nigeria’s electricity sector and its gas industry . In both areas private investment has been limited by regulation and price setting . Until now many gas producers have been unwilling to supply power stations with gas because regulations force them to sell at a huge discount to global gas prices . According to the Central Bank of Nigeria the on-grid regulated price is $0 .43/mmbtu compared to a world average of $3 .3/mmbtu . That low price only applies to contracts with power stations providing power to the grid or consumers . It was set with good intentions as part of a plan to provide Nigerians with low-cost power . Yet just like the electricity tariff, it has failed to adapt to a changing market and is counter productive because it restricts private-sector investment . There is a separate price for industrial power users – i .e . those firms who want to produce their own power – yet, paradoxically, it is too high . The price is set to the price of Liquid Petroleum Fuel Oil (LPFO), a fuel often used for industrial power, and currently comes in at approximately $8 .7/mmbtu . The gas price means that there is no incentive for these industrial groups to produce extra power which could be sold to the grid .

The restrictive effect of the high industrial tariff on the development of off-grid capacity is a serious issue – especially given that the PTFP has highlighted off-grid producers as one of the quickest ways to boost Nigeria’s generating capacity . Those off-grid producers that have managed to succeed often have special circumstances that make it worthwhile . Notore is a chemicals group that manufactures fertilisers in the gas-rich south of the country . Gas is an important feedstock in the fertiliser manufacture process and Notore has secured supplies on a competitive long-term contract . Yet the amount of gas it needs to produce fertiliser varies according to demand, often leaving the firm with surplus gas . It decided to create a spin-off generating company – Notore Power .

Notore Power’s Managing Director, Femi Solebo, believes that the current price regime is restricting the industry: “Many industrial groups have the qualities to become important power producers . They have the scale, logistical strengths and finances to run power plants . Yet under the current price regime it doesn’t make sense for many to do so” . Buoyed by Notore Power’s success Mr . Solebo now plans to expand the group’s power portfolio and supply 200MW to the grid . “Luckily we sit on a network of pipelines, the East Gas Gathering system (a nexus of pipelines across Alakiri, Kapunchano and Okoloma) . We are also located less than 50 km from the national grid .”

Many IPPs who want to build gas-fired power plants often struggle to find a gas supplier . One reason for this is that the regulated price is too low . As a result gas-producers prefer to export their fuel and receive the higher international price . In 2009 500bcf was exported – more than was used to generate electric power .

GasExploiting Nigeria’s ‘other hydrocarbon’

Cheaper than oil and cleaner than coal, it is not surprising that natural gas has emerged as one of the world’s favourite fossil fuels . As countries battle with carbon emissions and volatile energy prices it is increasingly used to generate power, drive cars and heat homes . Indeed a recent Exxon Mobil report estimates that gas demand for electricity generation will have risen 85% between 2005 and 2035 . Yet shockingly, Nigeria – home to the 7th largest gas reserves in the world – is one of the few countries that isn’t exploiting the benefits of natural gas .

“More gas and more power will raise living standards, support sustainable economic growth and kick-start new industies,

Mutiu Sunmonu, Managing Director, Shell Petroleum Development Company of Nigeria Limited


Nigeria Power22

When the Gas Masterplan was launched in 2008 it aimed to reverse this process by creating new commercial framework that would “encourage investment in domestic gas transport, storage and production” . That new framework has not been fully established yet but significant progress has been made .

The price that suppliers receive when they sell gas to power companies is increasing incrementally and due to hit $2/mmbtu by the end of 2013 – more than quadruple what suppliers were receiving in mid 2010 . Another important step has been the development of a template for gas supply and transmission agreements . The first Gas Supply Aggregation Agreement (GSAA) was signed last year between Pan Ocean, the PHCN and Egbin Power Plant . The PTFP hailed the agreement as a landmark and saying that “signing of the GSAAs will provide confidence for gas suppliers to continue to invest on the understanding that the commercial operational environment is being entrenched in the industry” . However it also admitted that “further and rapid progress (with other GSAAs) is needed” if the gas sector is to help Nigeria meet its 40,000MW target .

One of the provisions of the Masterplan, which has since been made into law, was the Domestic Gas Supply Obligation . This regulation effectively forces gas producers to set aside a mandatory amount of gas for the domestic market . The amount rises each year and by 2015 will have more than doubled from the 2009 level .

This domestic supply is handled by the newly created Strategic Aggregator . The role of the Aggregator is to facilitate the agreements between suppliers and power plants – in effect it works as a non-profit middleman ensuring that the market functions smoothly . It makes life easier for gas producers and power stations by giving them one point of contact .

The World Bank is also helping to establish the commercial framework . Many gas producers fear that new power plants may be unable or unwilling to pay for the gas they use . Indeed the Minister for Petroleum Resources, Mrs . Diezani Alison-Madueke, recently highlighted the “legacy of non-payment by major consumers” as a “historical challenge” of the gas sector . To this end the World Bank will issue Partial Risk Guarantees that will repay 25% of an outstanding obligation in the event of a power plant default .

The combination of measures means that for many international oil companies, supplying the Nigerian power market with gas now seems like a much safer, and more profitable, investment .

For an example, IOCs need look no further than Shell Nigeria’s recent gas to power project . The Gbaran-Ubie development in the Niger Delta will produce approximately 1bscf/d when it becomes fully operational next year . Much of this will be for export yet a significant amount will be used to supply local power stations, including a new 225MW plant being built by PHCN plant in Gbaran . “This project will deliver substantial benefits for the country”, says Shell Petroleum Development Company of Nigeria (SPDC) Managing Director, Mutiu Sunmonu . It is thought that electrification powered by the project’s gas will supply 200,000 people .

One critical area that must be improved is the infrastructure for transporting gas . The Government agency responsible for this is the Nigerian Gas Company, which was spun off from the Nigerian National Petroleum Corporation in 1988 . Nigeria’s gas pipelines are organised into an Eastern Axis and a Western Axis but at present there are massive gaps in the system . Shell for example, built its own pipelines to supply its Afam VI power plant in the east because there was no NGC option . The problem in the east is particularly acute and the Central Bank of Nigeria estimates that approximately 300mcf/d of gas is ‘stranded’ there . Ibom Power plant, for instance, has a nameplate capacity of 180MW but only generates 80MW because of a lack of gas . The problem is made more galling by the fact that elsewhere in the region the Rivers State Power Plant has surplus gas that it is not using .

As more power plants come online in both the west and the east a larger network of pipelines will need to be laid . Encouragingly work has already started on many of these projects but in the words of the PTFP “their timely completion will be vital” if Nigeria is to meet the 40,000MW target . An expanded network of pipelines and processing plants will also be needed to use the associated gas currently being flared or vented by producers . It has proved a controversial issue and will require co-operation between the Government and the private sector .

Pipeline security is also a challenge . In the past, acts of sabotage to the Escravos-Lagos Pipeline System have caused serious and protracted interruptions to gas-fired plants on the Western Axis . Combating this challenge requires a two-pronged approach . In the short-term increased security and improved community relations should lessen the number of incidents . While looking further forward, it will be necessary to build storage facilities that can provide emergency supply in the event of an attack .

Nigeria’s gas to power sector has enormous potential but faces significant technical and commercial challenges . If these issues are to be resolved both the private sector and Government bodies will need to work in harmony . Many in the press have drawn attention to the disputed Petroleum Industry Bill and concerns that have been voiced by IOCs . It would be wrong to downplay those concerns but the concrete steps already taken by both IOCs and the Government with regards to gas to power in the last year shows that there is a real appetite to make progress . Indeed Shell Nigeria Chairman Mutiu Sunmonu recently expressed his support for gas to power . “I was delighted when President Goodluck Jonathan recently launched the ‘Roadmap for the Power Sector Reform’ . The great majority of Nigerians want dramatic improvements in their quality of life, whether to have modern appliances, or simply to have electricity so students can study for a brighter future . More gas and more power will raise living standards, support sustainable economic growth and kick-start new industries .”

Clean, secure, cheap and abundant – Nigeria will need to exploit its gas if it is to meet the 40,000MW target .


CoalNigeria digs deep to satisfy coal demand


Nigeria Power24

Nowadays when international investors think of Nigeria and energy their minds go straight to oil and gas . But Nigeria’s first energy export was actually coal . Discoveries in Enugu state in 1909 led to the opening of Nigeria’s first mine in 1915 . More exploration and mining followed and by the 1960s Nigeria was producing more than 900,000 tonnes of coal per year and the sector was a major part of the Nigerian economy supporting the railways and coal was also part of Nigeria’s energy mix .

In the following years, however, production plummeted as the industry was hit by a string of misfortunes . The first blow was the discovery of oil in 1956 . While it was good news for the country as a whole, it caused a shift from coal to oil-based power systems . Both the Nigerian Railways Corporation and the Electricity Corporation of Nigeria replaced coal with oil, shrinking the domestic market for Nigerian coal . These problems were compounded by a bitter civil war in the late 1960’s that left many mines abandoned and forced skilled mining personnel to leave the country . Production fell by 80% and despite attempts to mechanize mines in the 1970s and 1980’s coal exploration and mining - being highly capital intensive - has struggled to regain pre-war levels .

In many ways the history of the Nigerian coal sector mirrors that of the power industry . Both suffered lack of investment and mismanagement and both were run by inefficient state parastatals . In 1999 President Olusegun Obasanjo moved to revitalise coal mining by allowing private firms to work with the Nigerian Coal Corporation (NCC) {the state owned coal mining arm} . With inefficient processes and mounting debts the NCC through the Bureau of Public Enterprises {BPE} sold the rights to many of its key mining assets to private firms .

Many analysts predicted that Nigerian coal mining would return to the ‘golden age’ of the early 1960’s but the small private mining companies had little success . In 2009, with no visible progress in the sector, a Nigerian returnee from Diaspora and an entrepreneur Dr . Innocent Ezuma, the Executive Chairman of ETA-ZUMA GROUP LIMITED “an integrated Solid Minerals, Steel and Energy Group” moved to consolidate the industry . As CEO of Zuma Steel West Africa Limited based in Jos Nigeria, Dr . Ezuma had experienced the frustrations of Nigeria’s power problem first-hand . “Despite investing heavily in new equipment for our steel plant we have been unable to operate because of lack of power .” Realising that the unpopular coal sector offered a “logical solution to the power problem” Dr . Ezuma incorporated Western Goldfields Group Limited (WGG) as the “Minerals Assets Management Company” for the group to further explore the quantity and quality of Nigerian coal deposit .

“Being in the steel business I understood the coal industry – I could see that the Nigerian coal market had so much potential .” With backing from his Ukrainian partners, Dr . Ezuma went on the acquisition trail and snapped up nine companies with vast exploration licences in Coal . In addition to acquiring these

companies with massive mineral titles in Gold, Iron Ore and Coal deposits amounting up to 75% of Nigeria Coal reserve, Dr . Ezuma also targeted local service firm Energy and Metals Industries Limited {EMI} so that the new group could “handle its exploration activities in-house” . and have therefore invested heavily by importing Drilling Rigs, Mobile Laboratories and earth moving equipments amongst others . To realise the group’s dream of eventual coal mining, Zuma 828 Coal Limited was incorporated as the special purpose vehicle for the achievement of the vision .

At present, Zuma 828 Coal Limited has about 380million tonnes of proven reserves of coal and more than 2billion tonnes in inferred resources . “We are pursuing a two-pronged strategy . We have received three mining licenses so that we can develop the proven reserves while our exploration division continues exploration activities to further validate the inferred resources into proven reserves .

The company will open its first mine this year and expects to be producing about 500,000 tons within the first year of operations with plans to produce above five million tons per annum within the next 4 years to support Nigeria’s ever growing energy needs .

But the sector still faces many challenges . After decades of non-investment there is a massive ‘infrastructure gap’ . Roads, railways, power lines and port infrastructure need to be built if Nigeria is to exploit its coal resources to the fullest . “This is why the early private companies did not succeed - they did not have the capacity and the enabling environment for such large projects”, says Dr . Ezuma .

In response to above infrastructural inadequacy, ETA ZUMA GROUP is constructing an 18km dual carriage road to link the mine to the nearest “Express Road” that would be used to convey the coal produced to the proposed site of 1200MW Coal Fired Power Plant . At the Bank of the River Niger, ETA-ZUMA GROUP is also building a jetty to facilitate water transportation of coal to as far as Lagos in the South West, Warri in the Niger Delta and other cities along the water ways . Another member of the group “Zuma Energy Nigeria Limited” is also developing a coal fired power plant near the River Niger where the jetty is also situated . “These are huge investments and will be a barrier for many companies” . “It can also be difficult for Nigerian companies to raise project finance locally as most Nigerian Banks do not lend long term due

CoalNigeria digs deep to satisfy coal demand

With beautiful actresses and elaborate film sets it is no surprise that the bustling city of Enugu in south-eastern Nigeria has become the centre of Nollywood - the country’s thriving film industry . Yet Enugu was founded on a far less glamorous business - coal mining - and with Nigeria looking to revamp the power sector, coal is ready to play a lead role in Nigeria’s energy future .

“Being in the steel business I understood the coal industry – I could see that the Nigerian coal market had so much potential.” Dr Innocent Ezuma, Group Executive Chairman, ETA ZUMA GROUP


Nigeria Power 25

to the nature of their liabilities” . “Even the development banks are just recently being empowered to support such investments” . “In theory the energy bulk trader should help but the modalities are still being worked out .”

Yet Dr . Ezuma, who spent several years working in the Ukrainian power, coal and steel sectors, believes that it will not be long before international players move into the Nigerian coal market . Because, while Nigerian coal was “standing still” the fuel has become one of the most important commodities in the global market . Coal fires 42% of the world’s power plants and the International Energy Agency estimates that this will grow to 46% by 2030 . Meanwhile prices for thermal coal (the type used to generate electricity) are up 40% in the last 12 months . Coal is on a record high and the recent floods in Australia – the world’s largest coal exporter – have shown that new supplies are needed if the ever increasing energy need of the world is to be met .

That’s where Nigeria comes in . It has 640million tonnes of proven coal reserve excluding newly proven reserves and well in excess of 2 .75 billion tonnes of inferred reserves, and many experts predict that modern exploration techniques could unearth even more . Moreover Nigerian coal is generally good quality with a high-calorific value and low-sulphur content . Or to put it simply, Nigerian coal is high in energy and low in pollutants . That means it can be sold to markets with strict environmental guidelines, such as the EU .

Yet, despite the export potential, Dr . Ezuma’s priority is Nigeria . Policy has gone full circle and government planners once again feel that coal should play its part in powering the nation’s electricity demand along with gas and hydro . President Goodluck Jonathan

has highlighted coal as one of the key fuels for Nigeria’s power sector . Government officials believe coal can diversify the fuel matrix and provide energy security . Sources close to the President say that he is determined that Nigeria should not repeat the mistake of relying too heavily on one fuel . Another benefit is that coal does not just produce power – it also creates jobs . President Jonathan knows that a resurgent coal mining industry would provide direct and indirect employment to hundreds of thousands of Nigerians . Environmental elements in the government also want Zuma 828 Coal Limited to sell coal briquettes as home cooking fuel, which they hope will slow down the deforestation caused by people using wood-fired ovens and this in itself could be huge market awaiting to be developed . Many cement manufacturers are already in line to execute long term coal purchase agreement to secure their energy requirements for clinker manufacturing .

This high-profile support from policymakers will encourage international companies to draw up plans for Nigeria’s next generation of coal fired power plants . Indeed Daewoo and Total recently announced plans for a 420MW coal-fired power station while ETA ZUMA GROUP LIMITED through yet another subsidiary, ZUMA ENERGY NIGERIA LIMITED is planning a 1200MW coal fired power plant in 2 phases of 600MW each by deploying Circulating Fluidised Bed {CFB} technology in Itobe, Kogi State North Central, Nigeria .

The twists and turns in Nigerian coal’s story are like the plot for one of Enugu’s Nollywood films . Over the next few years the actions of the government, the IPPs and Nigerian players like ETA ZUMA GROUP will determine if it has a happy ending .

The group: Western Goldfield Group Limited “WGG” The Mineral Assets Management Company

Energy & Metal Industries Limited “EMI” The solid minerals exploration company

ZUMA 828 Coal Limited The Coal mining company

ZUMA Energy Nigeria Limited The power company developing 1200MW coal fired power plant in Itobe, Kogi State and another 400MW gas fired power plant in Egbema Imo State

ZUMA Steel (WA) Limited The steel plant based in Jos Plateau State

ETA ZUMA GROUP LIMITEDdedicated to facilitating Nigeria’s industrial growth

Nigeria’s emerging and integrated Power, Steel and Solid Minerals Exploration & Mining conglomerate

Zuma House, Plot 26, Sector Centre C, Gudu District, Abuja, Nigeria. • T. 234-9-2905232 • www.wggroup.org


RenewableUnleashing the rivers


Nigeria Power 27

Since work first began on Nigeria’s first hydro plant in the 1920s hydropower has played an important role in Nigeria’s power sector . Today hydro power generates 950MW and accounts for around 33% of total annual average output . Hydroelectric power is expected to contribute more in the future and as Nigeria strives towards the 40,000MW target thousands more megawatts are expected to be added over the coming decade .

Although hydro forms a significant part of the country’s electricity matrix Nigeria is still only using 5% of its total economically viable hydro potential . To give some international perspective to that figure, the U .S . utilizes 87%, Japan 78%, Norway 68%, and Canada 56% of their economically feasible hydropower potential . Officials estimate that there is up to 30,000MW of theoretical hydropower in the country . With current energy prices approximately 10,000 to 15,000 of that is economically feasible .

Hydropower is generally split into large hydro - greater than 30MW - and small hydro less than 30MW . Within small hydro, mini-hydro (<1MW) and micro-hydro (<100kW) are diminutive versions that often do not require a dam and are powered by the flow of the river .

It is estimated that there is 3,500MW of small hydro opportunities in the country . The biggest small hydro operator at present is the Nigerian Electricity Supply Company, Nigeria’s oldest IPP . It developed some of the first hydro electric power plants (HEPPs) 90 years ago and currently produces 19MW in the Jos plateau region of Nigeria .

Small hydro power has been targeted by the government as a means of delivering environmentally-friendly power to remote regions . Given the major strain on Nigeria’s transmission network, small hydro plants are decentralized sources of power that are seen as an ideal way to deliver power to rural communities quickly . To make small hydro more appealing to investors the government is considering a higher, differentiated tariff . In April last year Minister of State for Power, Arc Nuhu Somo Wya created a special inter-ministerial committee to identify small hydro opportunities . The committee will also try to examine licensing, commissioning and land rights procedures to make it easier for private investors to develop small hydro .

Despite the promise of Nigeria’s small projects the sector is dominated by large hydro . Understandably it has attracted the most investor and government attention . At present most of Nigeria’s hydroelectric power comes from three main plants . The plants have a combined nameplate capacity of almost 2000MW but in practise inconsistent water flows mean that they deliver approximately half of that . Kainji, Nigeria’s oldest hydroelectric dam was built in the 1960’s and at 10 kilometres across is one of the world’s longest dams . The dam spans the River Niger and has a nameplate capacity of 760MW . The Jebba HEPP was built further

down the river and has a nameplate capacity of 540MW while the Shiroro HEPP is on the Kaduna River and has a nameplate capacity of 600MW .

Over the next six years the government is planning to add a further 4000MW of hydro generation . A massive 2,600 MW hydro plant is being built in Mambilla and 700 MW hydro plant in Zungeru . Meanwhile the existing 30MW plant in Gurara will be expanded to a nameplate capacity of 300MW . The government is also building Nigeria’s first dual-fired hydro station in Kaduna . When water levels are low the 200MW facility will be able to switch to conventional thermal-fired generation units .

Of course the question for investors is how they can participate in the sector . The BPE has already made it clear that the privatization of the hydro plants will follow a different model to the thermal stations . The dams are of immense strategic value and involve water rights and the agricultural sector . Subsequently the government has decided that existing PHCN plants, and the new HEPPs being built, will be leased on five-year concession licenses . The concessions will be awarded via an open tender conducted by an independent transaction advisor .

As for new sites the government will be responsible for civil works while the IPP procures and installs the electromechanical equipment . One company to have already begun work on a HEPP using this model is Mabon Ltd . Project Director, Simon Anji, believes that the civil works is one of the most important part of the project . “Finding the right opportunity is crucial . We are very fortunate that the civil works have been completed and that we are free to deliver our side of the bargain . Any company looking to develop hydropower in Nigeria should think carefully about the civil works their project will entail .

The tariff question is also important . According to the PTFP the government “acknowledges that the support for such power generation technologies (like hydro) should, where possible, be in the form of differential wholesale tariffs” . A higher price for hydro energy would be an extra boost for the industry but the work of IPP’s like Mabon Energy shows that the right project can be profitable already .

Aside from a different tariff the government has shown its support for hydro power in a number of recent state visits . In January of this year Vice President Namadi Sambo announced that Brazil and Nigeria would partner to develop Nigeria’s hydro potential . While in a recent visit to Turkey President Jonathan revealed plans for a joint Turkish-Nigerian venture to manufacture electro-mechanical equipment for HEPPs in Nigeria .

It may seem inconceivable now but one day when investors talk of Nigerian energy they might be thinking of its rivers and streams .

RenewableUnleashing the rivers

To many international investors Nigeria is synonymous with one thing – oil . Yet the country is also home to the second largest network of rivers and streams in Africa . Thanks to Nigeria’s heavy rainfall and varied topography many of these rivers have significant hydroelectric power potential .


FinanceInvesting in Nigerian power


Nigeria Power 29

Yet amidst the success one serious problem remains - local banks are reluctant to lend to the ‘real economy’ . Even banks that survived the crisis without Government help focus their lending on blue-chip telecoms firms or those in the oil and gas sector . Many banks are wary about lending to other sectors such as construction, agriculture or power and stick to sectors and companies with proven track records and strong balance sheets . Borrowers in other sectors have to make do with interest rates of 15% or above, which eat into possible returns for investors . The subsequent lack of locally-obtained credit has restricted the development of power and other industries . Indeed a study by the World Bank found that formal sector businesses obtain 70% of their financing from retained earnings, 25% from suppliers’ credit or customers’ advances, 4% from family and friends, and just 1% from banks and other financial institutions

Yet Nigerian power has a strong, compelling investment case . “The most obvious point of attraction to power investors is Nigeria’s huge and under serviced population . We have a large and young population . More than 50% of our population is below 25 . This means demand is very large and will keep growing”, says Engr . Mansur Ahmed, Director General of the Infrastructure Commission Regulatory Commission (ICRC) . At current levels the per capita supply of electricity in the country is the equivalent to one light bulb per person . With economic growth at 7 .5%, Nigeria’s increasingly affluent population will need more electricity .

A standard benchmark of developed industrial countries is that they have 1000MW of electricity per million people - meaning that Nigeria would need 150,000MW . At present Nigeria’s per capita electricity consumption is 7% of Brazil’s and 3% of South Africa’s . In response the Government has pledged to raise generating capacity to 40,000MW by 2020, which would involve $10billion of investment per year across the sector .

As the head of the agency responsible for encouraging and shaping private investment in infrastructure Eng . Ahmed concedes that “although these factors are attractive to investors, alone, they are not enough . Investors also need to see an orderly economic environment as well as policies and programs that are open, pro-investment and stable . If investors are to pour billions of dollars into the Nigerian power sector they need to be sure that the risk is manageable and that the returns are generous .”

One of the factors restricting the power sector is that local banks want high interest rates . “At present the cost of borrowing from a commercial bank in Nigeria is so high that any project financed purely in this way is likely to fail”, says Dr . Innocent Ezuma,

Managing Director of Eta-Zuma Group . “The bank would probably end up being the owner of the project because the original investors would struggle to meet the interest obligations .” Another problem is that Nigerian commercial banks are not willing to lend for the long periods - e .g . 15 years - that a power plant would need to repay the loan .

Engr . Ahmed admits the length of loans is a problem . “Infrastructure projects are long term and we need to make sure that the banks

are also aligned in this sense . Currently you can get at most seven years investment from the banks but this is not enough . The banking sector is traditionally driven by short term solutions . The Bankers Committee, the Central Bank and the Ministry of Finance are working together to devise longer term financial tools .”

One of the few local banks to provide significant credit to the power industry has been Access Bank . The bank has invested in more than 200MW of generation projects so far and has more projects in the pipeline . “We focus on off-grid power producers that have surplus power . They are a sound investment because they already have a strong business and power generation capabilities . It is just a case of increasing power output and developing the infrastructure needed to evacuate the power”, says Aigboje Aig-Imoukhuede, Group Managing Director . Mr . Aig-Imoukhuede wants Access to become a leader in what will become a large and growing market . “People were surprised by the telecomm boom . The latest demands for power in Nigeria will be much more and power investors will reap exceptional returns .”

Unfortunately Access is the exception rather than the rule, with many banks still cautious to lend to Nigerian power projects . “Access to long-term funding is the biggest challenge to develop power infrastructure in Nigeria”, says Dr . Ezuma, echoing the views of almost everyone of the industry . In a bid to combat this

FinanceInvesting in Nigerian power

Nigerian Man of the Year’, ‘Central Banker of the Year’ – Lamido Sanusi, Governor of the Central Bank of Nigeria, has certainly won a lot of awards recently . His handling of the country’s bank crisis in 2009 combined a billion-dollar bailout with the sacking of some of Nigeria’s most powerful banking CEOs . The crisis emerged when low oil prices exposed lending practices and issues in financial regulation of Nigeria’s banking industry . Two years on it appears that Sanusi has succeeded in saving the sector, indeed he recently announced that the eight banks rescued by the Government in 2009 will be recapitalized later this year .

“People were surprised by the telecomm boom. The latest demands for power in Nigeria will be much more and power investors will reap exceptional returns”.

Aigboje Aig-Imoukhuede, Group Managing Director, Access Bank Plc


Nigeria Power30

problem the Central Bank of Nigeria has unveiled a N500bn credit facility to boost investment in the power industry .

The mechanism of the facility is fairly straightforward and involves co-operation between the CBN, the Bank of Industry (BOI) and Nigeria’s commercial banks . The BOI issues N500bn of debentures which are bought by the CBN . The bonds’ maturity is between 10-15 years and has no coupon . In effect this gives the BOI N500bn which it will loan to commercial banks for a fixed 1% interest rate . But commercial banks can only apply for the loans to fund power-related projects that meet the stringent eligibility criteria . It is the job of the commercial banks to find, screen and present power projects to the BOI . The incentive for them to undertake these tasks is that they can earn 7% interest on the loans to the power projects’ developers .

The African Finance Corporation has been appointed as a Technical Advisor to the process, and it will make sure that projects meet the eligibility criteria . The BOI will also inspect the projects every 90 days .

The scale of the facility is impressive yet the Federal Government and the CBN know that they can not fund the massive investment needed to meet the 40,000MW . Rather, the money is intended to stimulate private sector investment . Indeed the CBN has stated that priority will be given to projects that are combining the loan with other forms of private sector finance .

“Central to the philosophy of the Roadmap and the development of the sector is the need to incentivise the private sector to participate and invest in the sector”, explains Honourable Minister of Finance, Olusegun O . Aganga .

The big question is if local banks respond to the fund . “It will be difficult for the commercial banks”, says Dr . Ezuma . “Ultimately if a project fails the bank will have to foot the bill and repay the BOI . They will have to be cautious when assessing the projects and the companies applying for the loan but that will be tricky because very few Nigerian companies have a track record in power .”

Some Nigerian banks, however, have developed solid power expertise . Seven years ago Diamond Bank decided to enter the sector and created a specialised power financing desk . To date it has helped to finance important generation projects such as Ibom Power and Aba Power . Anya, Edmund Duroha, Head of the Specialised Industries Division believes that challenges notwithstanding, Nigerian power will prove very lucrative .

“Investors in the Nigerian power sector will have a lot of opportunities irrespective of the challenges . The projects we have already carried out prove this and show how high the returns can be . The new tariff scheme is very generous and makes the power sector a great opportunity . The Government supports and commitment is another plus for investors . Indeed, when you look at the calibre of people the Government has assigned to the power sector it is very encouraging .”

The organization responsible for the privatisation of the power sector is the Bureau of Public Enterprises . Its Director General, Ms . Bolanle Onagoruwa, recognises “that some investors may be put off by some of the perceived risks of investing in Nigeria . She

explains: “The investments in power generation are huge and it is important that investors are assured that they will get paid by the distribution companies . Distribution is the key to the whole value chain so if you get the distribution right you have a viable market .”

Along with other Government agencies the BPE is working with the World Bank to assuage investors’ fears through a Partial Risk Guarantee .

By assuming some of the distribution sector risk the PRG makes banks more willing to finance upstream and midstream power projects .

The PRG backed liquidity scheme would cover 3months of a 12 month power purchase agreement . This backing allows the NBET to issue a letter of credit for the amount of the entire 12month project . This gives NBET liquidity while the distribution companies are developing . In short it is a revolving facility that helps to plug the gap in distribution revenues . In the event of a default from the NBET or a distribution company the IPP and the local bank that had backed it would be eligible for the PRG .

The World Bank’s work in other developing countries has shown that the involvement of PRGs encourages banks to lend for longer periods of time and offer more competitive interest rates . The time-frame of a PRG can even extend past 15 years depending on the specifics of a particular project . PRGs also act as a catalyst encouraging other IPPs to invest in the sector . Indeed Erik Fernstrom, Senior Energy Specialist at the World Bank, calculates that on average every $1 of PRG helps to bring in an additional $4 of private-sector investment .

PRGs can also bring wider benefits to a country . They often help to develop a country’s debt markets as local banks become accustomed to making long-term loans . PRGs will also benefit the Government as they will not count as a liability on the FGN’s balance sheet .

Raising the right amounts and right type of finance is the biggest challenge in the Nigerian power sector . If Nigeria is to meet its 40,000MW target it will need massive amounts of both national and international investment . So far the country has made impressive progress . “Nigeria is open for business”, says Ms . Onagoruwa . “If investors and business leaders are prepared to commit for the long-term they can be assured that the return on their investments will be worth their while .”

“Nigeria is open for business”,says Ms Bolanle Onagoruwa, Director General, Bureau of Public Enterprises

“If investors and business leaders are prepared to commit for the long-term they can be assured that the return on their investments will be worth their while.”


Doing business in NigeriaDoing business in Nigeria


Nigeria Power 33

Take crime . In the past few years the instability of the Niger Delta region and the kidnappings and sabotage committed by local groups has attracted worldwide attention . For now a peace treaty has brought calm to the country but some investors fear that it is only a matter of time before disenchanted community groups strike again .

However, power investors with operations in Nigeria present a more optimistic picture .

Andrew Fawthrop, Managing Director of Chevron Nigeria believes that working with local groups is important . “We have been operating continuously in the Niger Delta for about 50 years now . We have persistently been working with the communities, and we will continue to work with them . Although, sometimes there are some issues or interruptions that affect our operations, but we continuously work everyday to keep our workforce safe, and most of them come from those communities . Maintaining the good relations with the state leaders, the federal leaders and the traditional leaders is what allows us to keep working in the Niger Delta .”

Tunde Karim, CEO of Shoreline Energy International is adamant that the security situation will not stop the development of Nigerian power: “You have to take precautions but if people can build power plants in Afghanistan they can build them here .”

Another common fear of international investors is bureaucracy in Nigeria . There is no doubt that, to an extent, these fears are justified . The country scores 137th out of 183 countries in the World Bank’s ‘doing business index’ and it takes 31 days to start a new business .

“There is no doubt that bureaucracy can be an issue”, says Trevor Burrell, Acting General Manager of Premier Logistics and Solutions . “One of the best ways around the problem is to partner with a local firm that has experience working with the government .”

Encouragingly it seems the Government has recognised that bureaucracy can be a problem . It has created several inter-ministerial power committees that work to streamline power procedures that involve several different government departments . In setting up one such committee last year Minister of State for Power, Arc Nuhu Somo Wya, emphasised that civil servants should not be hampered by bureaucratic procedures . He told civil servants: “This is a very serious assignment and we will expect you to handle it equally so even if you have to be released from your various department/ministry in order to face the task squarely .”

The PTFP also stresses the need for governmental cross-disciplinary co-ordination for power projects . “There are many institutions that play a role in the delivery of power in Nigeria . Some of these

enterprises are outside the formal boundaries of the Nigerian electricity supply industry but their activities significantly impact the sector . It is imperative that these agencies understand the role they play and streamline their cross-sectoral interfaces to ensure efficient power delivery . For instance, the Central Bank of Nigeria and the Nigerian Customs and Ports Authorities, though not formally in the power sector, play a key role in the delivery of power sector equipment and spares .”

While much infrastructure development is organised by national agencies like the ICRC and national strategies like the Gas Masterplan, policies of state governments can also be an important factor . David Adesegun Aderibigbe, director of i3M Power Systems, a consultancy and project developer, believes that picking the right state can make a success of a project . “We recently acquired a generation licence in Ogun State . The state is very investment friendly and has done everything possible to help . They fast-tracked the licence and gave us quick access to the land .”

One of the key issues for power investors is transport, whether it is for fuel, equipment or construction material . Edwin Devakumar, Executive Director of off-grid power producer Dangote Industries Ltd, is often left with goods “stuck at the port… The transport system is erratic and there can be serious delays .” Dangote solved their problem by creating their own logistics division .

As head of the ICRC – the organisation charged with improving Nigeria’s infrastructure - Engr . Mansur Ahmed is only too aware of the problem and its consequences . “Addressing the infrastructure deficit is a major thrust of the present administration as it is possibly the main stumbling block of the Nigerian economy . We have been growing at a rate of 6-7% for the last six years but with the appropriate infrastructure we could grow at a rate of 10% or more .”

The infrastructure deficit also has a ‘knock on effect’ on power investments . Diamond Bank has helped to finance several of Nigeria’s new IPP deals and Edmund Duroha Anya, Head of its Specialised Industries Division, has seen firsthand how poor infrastructure affects the industry . “The lack of viable infrastructure often increases costs for power projects . Several IPPs have had to build their own gas pipelines because the existing gas infrastructure was inadequate .”

Yet the difficulties some IPPs face with infrastructure has created opportunities for indigenous engineering firms . Indev Group is a Nigerian engineering company that originally focussed on the manufacturing sector . However, Indev has recently capitalised on the recent spate of power projects to provide EPC services to IPPs . “Our involvement in the power business is two-fold”, explains group CEO Chike Madueke . “Traditionally we provided

Doing business in NigeriaDoing business in Nigeria

Like most ‘frontier’ or ‘emerging’ markets Nigeria does present both more risk and more reward for investors . Some key areas, like road transport, remain a key challenge but in many cases the risks are exaggerated and far outweighed by the potential rewards .


Nigeria Power34

custom solutions for manufacturing companies that couldn’t rely on the grid . Now we have extended our business and used our engineering know how to help companies with surplus gas use it for power generation . It is a lucrative and growing market .”

Furthermore, while infrastructure, security and bureaucracy do pose significant challenges they should not be exaggerated . If investors want an example of a successful privatisation that included national and international participants they need look no further than the Nigerian telecoms sector .

Privatisation paved the way for Nigeria’s ‘telecom revolution’ . In the five years following privatisation the number of phone lines increased from 400,000 to 22 million . The sector attracted approximately $15 billion of new investments and some 100,000 direct and five million indirect new jobs were created . For a while Nigeria had the fastest growing teledensity in the world .

The same organisation that organised that privatisation – the BPE – is in charge of privatising the power industry . Its Director General Bolanle Onagoruwa is confident that the agency can repeat its “most striking” success . “We drafted the policies and relevant laws in collaboration with international advisors and multilateral bodies such as the World Bank . The National Policy on Telecommunications was produced by the BPE and approved by the NCP/ Federal Executive Council in 2000 which formed the basis for the liberalization of the telecommunications sector and the strengthening of the sector-regulator - the Nigerian Communications Commissions (NCC) . The regulator was later voted ‘The Best Regulator in Africa’ – and we are very proud of that .”

The telecoms privatisation should help to calm investors’ nerves but the reform of the power sector could prove a longer and more complicated process . The sums required for investment are also much higher . Even Ms . Onagoruwa admits that it is “possibly the largest challenge we have taken on” .

i3M Power Systems’s Mr . Aderibigbe feels that “the two industries are very different” . He notes that “the electricity tariff could be a troublesome issue . The Government will have to pick the level very carefully .”

Another development that should reassure investors is the spate of Public Private Partnerships (PPPs) in recent years . As the name suggests PPPs use a combination government and company funds or assets to finance works . The ICRC introduced the model to Nigeria in 2005 and it has spawned a number of infrastructure projects .

Lagos has pioneered the use of PPPs to finance key works such as the expansion of the Lagos-Ibadan Expressway and the Murtala Muhammed Airport Two . Both projects have the Build-Operate-Transfer model . Private companies have a set period of operation, e .g . 30 years, which allows them to make a return on their investment before handing ownership of the development to the State .

Nigeria’s business environment and infrastructure will provide some challenges to investors . Yet the massive potential of the Nigerian power sector makes finding a solution to these difficulties worthwhile . Many people in Federal government, state government, indigenous companies and national agencies can offer solutions for international investors . The key is to pick the right local partner to develop your power business in Nigeria . As Engr . Mansur Ahmed says: “Set aside all the bad news you have heard about Nigeria and watch out for the good news that is going to come for the next ten years . Nigeria is open for business and anyone who is interested in a competitive market, a thriving market should come here .”


ConclusionNigerian power going forward

Lagos’ rapid growth is hampered by inadequate power supply


Nigeria Power36

One factor is the political consensus . All of the political parties

agree that Nigeria’s power system needs to be improved .

Previously, factions representing the interests of the lucrative oil-

based generators lobby managed to delay the passage of crucial

laws such as ESPR . However, the clamour for improved power

makes it increasingly difficult for any Nigerian politician to overtly

oppose improvements to the network .

This is because it is an issue from the boardroom to the side-

streets . All Nigerians, either directly or indirectly suffer from the

current situation . It makes Nigerian industry uncompetitive and

thereby adds to unemployment . It also adds to household costs

and prevents the spread of technological progress such as the

internet . On a domestic level it hits the poorest hardest as the

extra costs they pay for alternative power form a larger share of

their total income . Yet Nigeria’s swelling class of entrepreneurs

are increasingly frustrated with the lack of power . It only takes a

quick flick through Nigeria’s very independent, free press to see

that almost every week columnists ask searching questions about

power policy .

Subsequently it is little surprise that President Jonathan has made

electricity his keynote issue . President Jonathan has promised to

“fix the ailing power sector” and knows he will stand or fall on his

results . That matters because it means investors can expect strong

Government support for the sector . President Jonathan surprised

many when he set up a social media account to become Nigeria’s

first “Facebook President” . Tellingly one of his recent Facebook

entries was about power: “We are making progress in the power

sector and last Tuesday we hit 4,000MW, the first time in 10 years

we’ve reached that level . But it’s still not sufficient .”

The Government has also used more traditional means to promote

Nigeria’s reform . High-ranking members of Government, business

delegations and ambassadors have been representing Nigeria at a

string of international energy conferences . Nigeria’s power sector

also forms a central part of the Government’s trade negotiations

with other countries .

Government support is very important for investors . It means

that when challenges arise, say with infrastructure or security, the

state is more likely to help to resolve them . Yet for a successful

investment, in any sector, there needs to be an established legal

and commercial framework that lays out the rules governing

investments in the sector .

Between 1999 and 2005 the legal framework of a privatised

Nigerian power sector was gradually established . Many investors

grew frustrated with the slow passage of the EPSR through the

National Assembly but the Act now forms the legal basis of the

current privatisation programme .

The next step was to establish a commercial framework . That too

has taken time, and is not fully complete . However, progress has

been made . Several incentives for IPPs have now been established,

for example a five-year tax holiday for generation investments .

The Gas Masterplan has also started to improve the fuel-to-

power sector . The Strategic Aggregator has been established and

signed agreements with private-sector oil companies . Moreover,

a new price has been agreed for supplying gas-to-power, which

will gradually bring levels closer to the international rate . The

higher gas prices are evidence that Nigeria is prepared to reward

investors and a sign that the power sector is about to deliver .

Of course there have been delays along the way . Arguably the most

important player in this commercial framework is the Nigerian

Electricity Regulatory Commission (NERC) . It was created in 2005

but acted slowly in its formative years . Recognising a “leadership

vacuum” the Government recently appointed a new Chairman, Dr .

Sam Amadi . NERC has the most important task in the industry;

it will set the level of the Multi-Year Tariff Order (MYTO) . It is

early days but Dr . Amadi’s opening address set a confident tone:

“We will accomplish the mandate of stable, reliable and affordable

electricity… We have put (our) credibility on the line and we are

not ready to lose it .”

Crucially Dr . Amadi appears to realise that the image of the

regulator is an important factor in attracting investment . “The

ConclusionNigerian power going forward

President Goodluck Jonathan’s reforms have already attracted attention from international investors keen to participate in the

privatisation . In the short time since the Presidential Retreat for Power Sector Investors in October 2010 several key reforms have already

been implemented . So why does privatisation look set to succeed?

“Nigeria has an imperative to boost its power production. Its large population and fast-growing industries demand it”, Arc . Nuhu Wya, FNIA,

Honourable Minisiter of State for Power


Nigeria Power 37

work is high-profile, tariffs are around the corner and companies

are to be sold . So, the image of NERC as a credible, smart and

focused regulator is going to be critical .”

Power companies shouldn’t expect it all their own way . Dr . Amadi

has vowed to revoke generation licenses if the holder does not

fulfil their requirements . Ultimately this is good both for Nigeria

and other investors as it will ensure the best opportunities go to

deserving IPPs .

One of the best ways to judge the success or failure of the

commercial framework so far is to look at projects on the ground .

Of the 12 IPPs given licenses, six are still in the construction stage

while six are operating . That power plants were successfully built

while the commercial framework was still being formed is an

encouraging sign for future investors .

“We have already started producing power at our Abuja plant and

expect our Aba plant to go online soon”, says Agatha Nnaji of

Geometric Power . “In that time we have seen a big change in the

investment environment . Things are definitely improving .”

That message is shared by off-grid producer Dangote . “We are one

of the biggest gas consumers in Nigeria and we are pleased by the

progress of the Masterplan . It is slowly picking up momentum and

making new projects more feasible .”

The fact that producers like Dangote and Geometric are prepared

to invest heavily in power production demonstrates that the

commercial framework has come along way in the last five years .

Hopefully with a reenergised NERC the framework will improve

further .

The success of the privatisation program is even recognised by

international institutions . Erik Fernstrom, Senior Energy Specialist

at the World Bank recently praised the Government’s work at a

London investment forum .

“It is literally only about six months and it is already creating

an impressive momentum both in the privatisation and reform

of PHCN .” Fernstom added that the reforms were “bringing in

investors to build power plants and regulating the market” . He

also praised the progress of the Gas Masterplan: “The World Bank

is very positive to the government’s efforts in this regard . We think

they are serious, viable and we are very happy to support them in

any way we can .”

The positive assessment of a respected, independent organisation

like the World Bank is another sign to investors that this time

change really is coming to the power sector .

There is no doubt that the environment for investors in the

Nigerian power sector is improving . Indeed, it is already leading to

fresh power projects . The Government has shown unprecedented

commitment to reform: “Nigeria has an imperative to boost its

power production . Its large population and fast-growing industries

demand it”, says the Honorable Minister of State for Power, Arc .

Nuhu Wya . As for the 40,000MW target – it is very ambitious and

a lot of concerted investment and work will be needed if Nigeria

is to achieve it . Some opposition politicians have said that Nigeria

will not be able to meet it . Yet to quote the famous Nigerian

author Ben Okri: “politics is the art of the possible; creativity is the

art of the impossible” . If the Government, the national agencies

and the private-sector can find creative, effective solutions to the

challenges facing the sector then there is no reason why Nigeria

can not turn the power on .


Nigeria Power38

Glossary

Acknowledgements

BOI Bank of Industry

BPE Bureau of Public Enterprises

CBN Central Bank of Nigeria

EPC Engineering, Procurement and Construction

FGN Federal Government of Nigeria

GSAA Gas Supply Aggregation Agreement

HEPP Hydro Electric Power Plant

ICRC Infrastructure Concession Regulatory Commission

IOC Independent Oil Company

IPP Independent Power Producer

LPFO Liquid Petroleum Fuel Oil

MYTO Multi-Year Tariff Order

NBET Nigerian Bulk Energy Trader

NCC Nigerian Coal Corporation

NCC Nigerian Communications Commissions

NCP National Council on Privatisation

NELMCO Nigerian Electricity Liability Management Company

NERC Nigerian Electricity Regulatory Commission

NIPP National Integrated Power Project

PHCN Power Holding Company of Nigeria

PPA Power Purchase Agreement

PPP Public Private Partnerships

PRG Partial Risk Guarantee

PTFP Presidential Taskforce on Power

SO System Operator

TCN Transmission Company of Nigeria

TUOS Transmission Use of System

CBC would like to thank the following institutions for the time and efforts dedicated to helping us to produce the report:

The Presidential Taskforce on Power, the Federal Ministry of Power, the Bureau of Public Enterprises, the Infrastructure Concession Regulatory Commission, the Nigerian Electricity Regulatory Commission and the Power Holding Company of Nigeria .

Access Bank, Azura Power, Buildwell, Chevron, Diamond Bank, Ezuma Energy, General ElectricGeometric Power, GT Bank, GUMCO, Heirs Holding, Hudson Power, Ibafo Power, ICS Power, Indev Group, Mabon Energy, Negris Group, Notore Group, Premier Logistics, Shell Petroleum Development Company of Nigeria, Shoreline Power, Supertek, Total and UBA

With a special thank you to Chinedu Ebo Esq . for his guidance and assistance to the CBC delegation during their research trip to Nigeria .


Commonwealth Business Council | 18 Pall Mall | London | SW1Y 5LU | UKEmail: [email protected] Web: www.cbcglobal.org


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