SOLVING THE ENERGY CHALLENGE IN NIGERIA BY MALCOM FABIYI, PhD

The top item on President Yaradua’s seven point agenda is the revitalization of the power sector. In fact the power and energy sector has been agenda number one on the list of Nigerian governments for as long as I can remember. Yet the failures have been colossal. Obasanjo, I recall, dispatched heavy hitters like Bola Ige, Lionel Imoke and Segun Agagu to the sector, all with little effect. The more the efforts are that have been made in the power sector, the more troubled things seem to become. The more money is spent on the sector, the more epileptic and unreliable the performance of the sector appears to be.

Somewhere between $5 – 16 billion has been spent on power in the last ten years. In 1999, the peak power output in Nigeria was about 3,000 MW. Ten years, and about $10 billion later, Nigeria’s peak power output is about 3,400 MW. Large scale power generation and transmission costs $1,000/kW (or $1 million/MW). This implies that the average $10 billion supposedly spent so far on power should have gotten Nigeria an additional 10,000 MW. Since we have improved effective capacity by just 400 MW in that entire period, it implies that we have spent about $25 million per MW of additional capacity, when the costs should have been about $1 million per MW. The question really should be asked: what exactly were these monies spent on?

The importance of Power to the Economy

The role of power in national development is so fundamental that it is futile to talk about development without simultaneously considering the energy requirements that will facilitate that development. Power fires the engine room of the economy.

In order to understand the nexus of power and economic growth I decided to research what the relationship between the availability of power and the output (or Gross Domestic Product, GDP) of various economies were. I selected for that analysis a collection of countries that included advanced economies like the USA, Japan and Australia; Transition economies like Malaysia, Indonesia, and Libya; Upper developing countries like India, China, Egypt, and Morocco; and finally developing economies like Nigeria, Ethiopia, and Ghana.

My findings surprised me. Although it is intuitive that there should be a strong correlation between economic growth and the availability of power, I was amazed at how strong the correlation was when I started to work the numbers. A plot of GDP against the available power (in kWh) in these various countries gives an impressive straight line plot – suggesting that there was a path of causality that went from power to economic growth. The analysis suggested that on average these nations (including Nigeria) are able to generate economic output of about $3 per installed kWh.

The monies spent so far on the power sector ought to have provided not just 10,000 MW of additional power, but also concomitant benefits to economic output that should have delivered a 6 six-fold increase of GDP from the current levels of about $160 billion to about $1 trillion dollars based on the observation that about $3 of output is generated per kWh of power available. $1 trillion of GDP would correspond to a GDP per capita of about $6,500 – similar to that of a middle level transitional economy like Malaysia ($6,200). We must therefore not count our losses not just in terms of the monies embezzled and wasted on the power sector, but also in terms of the opportunities lost.

The analysis also indicated that Nigeria lags its peers in terms of both its installed and available power base on per capita basis. Nigeria’s current power needs are about 25,000 MW. Currently, there is only 6,000 MW of installed capacity in place and of this, only about 3,400 MW is operational. Nigeria’s current power availability translates to about 200 kWh per capita. In comparison, Egypt and South Africa have an installed base of about 550 and 4,800 kWh per capita respectively. To enter into the league of the top 20 economies – a much publicized goal of the PDP government – Nigeria must be able to meet the average power capacity of 10,000 kWh per capita of these top economies.

The government’s current plans

While there is still some confusion regarding what Nigeria’s power sector strategy is, the list below summarizes the various targets that have been bandied around by the government and its agencies as the power generation goals that they have in sight.

6,000 MW German Power Pact: This is expected to inject 6,000 MW into the national power grid by 2013. This agreement was entered into by the Federal Government and a team of German firms.
6,500 MW Oil Producers Power Production: The Oil Producers Trade Section of the Lagos Chamber of Commerce and Industry has announced that plans were on going to inject 6,500MW into the grid before 2010.
4,500 MW IPP Power Contribution: IPPs are expected to contribute about 4,500 MW by 2010.

Strategies for Tackling the Problems in the Power Sector

There are two enduring challenges that need to be addressed if the power sector is to advance. These are the problems of sabotage and insufficient generation and transmission assets. It will be naive to imagine that there are no subterranean forces that are conspiring to keep the power sector comatose. Why would anyone want to keep such a critical sector as energy comatose? The answer is simple. It would be for the same reasons that numerous Nigerian regimes have conspired to stultify local refining capacity so that they could make money from importing petroleum imports; it would be for the same reason that Nigerian tax officials accepted $2 million bribes from Halliburton while allowing the firm to repatriate tens of millions of dollars that should have been paid to the Nigerian government; it would be for the same reason that one man – James Ibori reportedly embezzled $85 million that ought to have been spent on the citizens of Delta State.

Earlier in the year, the then Minister of State for Power, Mrs. Balaraba Ibrahim announced that in the ten (10) days between February 17 and 27th unknown vandals “cut down with a saw”, two (2) 330 kVA towers supplying power to Oyo, Ogun, Ondo, Osun, Ekiti and Lagos states. The threat of sabotage is therefore not a merely theoretical one. It is real.

Motivations for Sabotage:

What groups of people would have an interest in sabotaging the power infrastructure in Nigeria? We can conceive of four (4) distinct groups who might have sufficient motivation to sabotage the power sector for their own ends. These groups are generator distributors, oil marketers, power sector contractors and the governmental (political) players who award power sector contracts and finally disgruntled workers in the power sector.

Diesel Marketers ($10 billion per year incentive for sabotage): Nigerians use about 4,500 million liters of diesel per annum on private power generation. At a fully loaded cost (including subsidies) of about N250/liter, this implies that marketers pull in revenues of about $9.3 billion per annum or N 1.1 trillion. If the power sector becomes stable, diesel marketers will suddenly find their revenues lower by some $9.3 billion annually.

Generator Distributors ($64 million per year incentive for sabotage): Given the fact that the efficiency of power generation from diesel is about 2.5 kWh/liter of diesel, it can be estimated that there is an installed generator base of 11 billion kWh per annum which translates to an output of 1,300 MW. Assuming single residence generators cost about $250/kVA on average, it implies that the installed generator base is worth about $320 million. With generators needing replacement every five years or so, annual generator sales of at least $64 million or N7.6 billion is estimated in Nigeria.

Governmental Corruption ($1 billion per year incentive for sabotage): Power is the biggest racket in Nigeria. The recent power probe by the House of Representatives and the unending drama and theatrics that it engendered provide a glimpse of the issues that the nation faces in this sector. Despite all the controversies about how much was spent or not spent, there is widespread agreement that somewhere between $5-16 billion have been spent in the last 6 years alone. Yet, the nation has nothing to show for it. On average about $1 billion is spent on the power sector annually. All these monies are handled by a tight clique of contractors, politicians and their civil servant collaborators.

Disgruntled Civil Servants in the Power Sector: Workers in the power sector have long kicked against attempts at deregulating and privatizing the sector. The Nigerian Tribune of June 8th 2008 (http://www.tribune.com.ng/08072008/edit.html ) reported that PHCN workers had vowed to sabotage government’s efforts in the power sector. It is not clear to me what the exact benefits are that the PHCN would get if the power sector completely collapsed, hence the idea that they are primarily responsible for the problems in the sector is suspect.

There is therefore a plethora of players who would have some interest in sabotaging the power situation in Nigeria, ranging from the marketers who make over $9 billion a year in diesel sales to politicians, civil servants and contractors in the power arena who have access to over $1 billion a year in spending on the power sector. Then of course there are also generator distributors whose annual sales of about $60 million dollars will be impacted. Finally, there are the workers in the power sector who feel short changed by government’s programs in the sector.

Charting A Way Forward

(1) Decentralized Power Solutions

Decentralized power generation might be the solution to Nigeria’s chronic power problem. Rather than engaging in grand, nation-wide scale efforts that have led us nowhere in the last 3 decades, it might be time to consider targeting more localized solutions. The advantages of localized or decentralized power solutions are many. Firstly, the deployment of the necessary equipment and tools are more readily achieved. The systems are smaller and more manageable. Secondly, the problem of transmission is more readily solved. With the current centralized power approach, sabotaging a transmission tower effectively cripples the entire network for all the users both downstream and upstream of where the sabotage occurred. As we earlier saw, the sabotage of two 330 kVA transmission towers was sufficient to knock 6 states off the grid for days. This would never happen with a decentralized system. Problems are localized, and more importantly, because transmission assets are in population areas, sabotage and vandalism is curtailed.

(2) Financing Power Sector Reform

Public Private Partnerships are a good way to go in financing investments in the energy sector. The government does not need to spend a dime in the financing of the decentralized power alternative proposed. There are numerous manufacturers and operators of power generation and transmission plants (such as GE, ABB, etc) who would, given the right investment environment, readily enter into Build-Operate-Transfer (BOT) arrangements where they (the manufacturers) would commit their own funds to manufacture the systems, build and install the supporting infrastructure all at their own cost, provided they are allowed to operate the system for a period (that usually ranges from 10 to 20 years).

At the end of the concession period, the ownership of the equipment reverts to the government. The concessionaires make their money back by charging consumers to who they supply power. All that is required for the government to do in such an environment is to enact the necessary laws and statutes that will guarantee that fee collection is assured, and that the necessary eminent domain access rights to ensure that the process of putting the necessary generation and transmission infrastructure in place is provided. When the companies that own and operate these assets are the ones responsible for putting the infrastructure in place, it is certain that projects will be delivered in a cost effective and timely manner. Local and state governments need not wait for the federal government to implement these solutions.

(3) Addressing the problem of sabotage

A commission, similar to the EFCC in the scope of its powers and reach needs to be established to specifically investigate cases of sabotage, proactively identify saboteurs in the power sector, review all transactions and activities in the sector, monitor contracts and agreements, charge violators to court, prosecute their cases, and seek just restitution from all violators. Just restitution should not be limited to only the actual amounts embezzled or the market value of the damaged or sabotaged items. It should also include the opportunity cost of all the productive effort that was lost because of the unavailability of power resulting from the assets that were sabotaged or not acquired. Just recompense should also cover criminal and civil charges including murder for any known cases where people lost their lives because power outages that resulted from sabotage either caused them to fail to get life saving procedures at hospitals or caused asphyxiation resulting from carbon monoxide inhalation from generator exhausts. These latter victims would probably not have had to use a generating set if power was available.

Prologue

Prior to the deregulation of the telecommunications sector and the entry of cellular phone operators into Nigeria in 2001, the telecommunications model in Nigeria was that of a centralized, wire line service. That model delivered only 300,000 subscribers in 40 years. The new telecommunications model in Nigeria is a decentralized one. With such a model, assets can be deployed strategically, reliability is improved and service quality is enhanced. There are many parallels between that model and what I am proposing for the power sector. Bringing sanity to the power sector is a straightforward issue. It is absurd that such a readily addressable task has been made to acquire mammoth scale levels of complexity.

Malcolm E. Fabiyi, PhD can be reached at mef22@yahoo.com. He is based in Chicago, IL, USA