Nigeria: Power Sector Privatisation In Nigeria: Opportunities And Challenges

Last Updated: 6 January 2015
Article by Misi Oni

In the recently concluded Africa Summit in Washington, President Obama announced a US$14 billion commitment for investment in Africa by US companies.

This comes only a year after he announced "Power Africa", a US government initiative to add over 30,000 MW of more efficient electricity generation capacity in six focus African countries, including Nigeria. During the Summit, the World Bank also announced a commitment of US$5 billion of support for "Power Africa". This is timely. Power has been at the top of Nigeria's agenda for a while, as it attempts to "switch the lights on" to create a more investor-friendly environment and increase internal productivity and growth.

This article looks at recent and planned developments in the Nigerian power industry, and the challenges and opportunities in the country in this vital sector.

Nigeria's population of over 160 million is the largest in Africa. Its GDP growth rate is approximately 7 per cent and it has the highest levels of foreign direct investment in Africa—US$20 billion over the last three years. Therefore, it came as no surprise when during a recent GDP rebasing, Nigeria replaced South Africa as the largest economy in Africa.

The government of Nigeria has high aspirations for the country to be among the world's top 20 economies by 2020 and in this regard, it has set up an Economic Transformation Agenda. This includes an ambitious target to generate 40,000 MW of electricity by that year, an enormous challenge, considering current power generation is only 4,000 MW.

One step towards this target was made with the decision to privatise the power sector. Nigeria's President Goodluck Jonathan announced in 2010 that the government-owned Power Holding Company of Nigeria (PHCN), which had responsibility for the generation, transmission and distribution of electricity, would be sold to the private sector to increase efficiency and profitability.

The first phase of the privatisation was concluded in November 2013. This was a landmark US$2.5 billion transaction that saw PHCN unbundled into six generation companies (Gencos)—(four for thermal power and two for hydro)—and 11 distribution companies (Discos), and sold to new private owners.

The transaction has been regarded as landmark for many reasons, not least because it is one of the world's largest privatisations, and also because 70 per cent of the transaction was debt financed solely by local banks, a first of its kind.

Other interesting features of the transaction were that the government sold 100 per cent of its equity stake in some of the successor companies and the African Development Bank supported the process with the provision of a partial risk guarantee of up to US$180 million to guarantee the obligations of the Nigerian Bulk Electricity Trading (NBET) under its power purchase agreements with selected independent power projects.

Local debt financing available for the first phase of the privatisation was relatively expensive. It was expected at the time that this debt would be refinanced within 1˝ to two years as internal governance and restructuring processes were adopted in the successor companies. However, due to increased appetite from international banks, it now appears that such refinancing might take place as early as 2015. Whether this refinancing from international markets will be across the board remains to be seen.

The Gencos have now been in operation for about eight months, with varying degrees of success. One of the more successful Gencos, Transcorp Ughelli Power, has already increased generating capacity from 160 MW to 453 MW within the first six months of operation due to close proximity to gas pipelines. According to Transcorp CEO Deoye Fadeyibi, the company is set to reach 750 MW by the end of the year. However, not all Gencos have been as successful in increasing capacity or reducing losses. The first refinancings are likely to be for more successful Gencos.

The second phase of privatisation, which is currently underway, relates to the sale of 10 government-owned independent power projects, called National Integrated Power Projects (NIPPs). In 2004, the Nigerian government set up a special purpose vehicle to build and own these assets using private sector best practices, in order to address Nigeria's persistent power shortage. However, the output of these NIPPs fell considerably short of expectations, generating only 600 MW of power compared with the 2,500 MW that was planned.

The privatisation of the NIPPs has attracted interest from the international investor community and, unlike for the Gencos, it appears likely that international banks will participate in the financing of this phase of the privatisation process.

Existing Challenges

However, challenges still exist. Eight months on, the average Nigerian does not feel the impact of the privatisation due to a number of issues being faced by the successor companies which include:

Gas Supply

One of the main challenges currently faced by thermal Gencos is insufficient gas supply. Despite holding the ninth largest gas reserves in the world, domestic gas supply in Nigeria has always been a challenge due to poor gas infrastructure. Energy companies are reluctant to incur large investment costs unless a cost-reflective tariff is put in place.

According to the Nigerian Petroleum Minister Alison-Madueke, about 750 mmcf/d of gas is supplied to the power sector, resulting in an aggregate generating capacity of 4,000 MW—and adding up to 370 mmcf/d of gas could increase generation capacity to 5,000MW by the end of 2014.

In response to the gas supply shortfall, the government has recently approved temporary intervention measures:

i. A gas price increase from US$1.50/mcf to US$2.50/mcf and US$0.80/mcf to cover transportation costs for new capacity;

ii. A regulatory requirement for gas suppliers to commit to supply agreed gas quantities for so long as they are paid by the Gencos;

iii. Arrangements to allocate an additional 370 mmscf/d of gas to the power plants as part of the plans to increase Nigeria's generation capacity to 5,000 MW (including hydro) before the end of December 2014; and

iv. Working with the Central Bank of Nigeria to set up a special purpose vehicle structure to restructure up ₦25 billion (approximately US$156 million) of accumulated debts owed to gas suppliers.

Transmission Infrastructure Holdup

Transmission is currently a major challenge. The Transmission Company of Nigeria (TCN) remains a government entity, despite it being managed by Canadian company, Manitoba Hydro International.

TCN continues to operate obsolete transmission equipment and be held back by bureaucratic processes. In July 2014, the Nigerian Minister of Power announced plans to privatise the transmission sector into three separate business units but details of the proposed privatisation have yet to be finalised.

Efficiency and Asset Utilisation

Aggregate Technical Commercial and Collection (ATCC) losses also continue to be a significant issue for the Discos. During the bid process, successful Discos were selected based on their ATCC loss reduction plans over the next five years. However, these plans have had limited success due in part to delays in payment for electricity supplied, wastage and theft of electricity. This affects the Gencos in turn, as the losses are currently being shared by all parties.

Opportunities in the Nigerian Power Sector

Despite the various challenges highlighted above, renewed focus on the privatisation of the Nigerian power sector provides opportunities for international and local investment.

Opportunities exist for the construction of alternative independent power projects, such as coal fired power plants and renewables. The eastern part of Nigeria has rich coal reserves, and, in 2013, the government of Nigeria entered into a memorandum of understanding with a Chinese energy firm to build a US$3.7 billion coal power project which is expected to add 1200 MW of electricity to the national grid.

NBET is already able to buy power from all generation companies and sell this competitively in the open market. The regulator has provided incentives for investments in renewable energy projects including feed-in tariffs, a more relaxed licensing regime, access to land and import duty waivers. Nigeria also has geographic and climatic conditions which are particularly well suited for solar and hydropower projects.

As gas prices become more competitive, particularly in relation to transportation fees, more investors may begin to give greater consideration to investing in gas pipeline infrastructure.

There are numerous opportunities for collaborations between international investors and the successor companies from the first round of privatisation, with the latter requiring the expertise and experience of more seasoned companies.

... and Beyond

Any investor considering Nigeria ought to be interested in the progress of the country's power sector privatisation. The power sector directly impacts and drives all economic activity. The ripple effect from an efficient and productive power sector will be felt across all sectors that rely heavily on power including agriculture, manufacturing and information technology.

The actions of the government have already garnered the interest of a wide spectrum of international investors and it appears that there is the political will to successfully execute a transformation in Nigeria's power sector. International investors will benefit from a closer inspection of, and familiarity with, the opportunities presented by this exciting development in Africa's leading economy.

This article first appeared in August 2014 in African Business Insights (, the online knowledge portal of the NTU-SBF Centre for African Studies.

Originally published Winter 2014

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