Nigerian Power Industry: Hindsight, Insight & Foresight
July 11, 2016
My last post on the Nigeria power industry was a reaction to a Vanguard article by the Minister of Power. It was an article I read while at Murtala Mohammed Airport in the midst of what turned out to be a brief power outage. It was a reactionary post and its been on my mind for a few weeks to write a more structured article about where we went wrong, why we are where we are now, and what we need to do to ensure a future of economic development borne out of the provision of a critical element of the fuel that drives the engine of growth in most developed countries; electricity.
Hindsight: “Cause and effect are not closely related in time and space”
So what happened? How did the power sector in Nigeria get so decrepit? Hindsight says we all lacked foresight and didn’t invest in power industry infrastructure development and maintenance. There were no power stations built in Nigeria throughout the 1990’s (the worst period for the industry, in my opinion), we failed at long term systems and needs planning because we were too busy just trying to survive. I grew up in Nigeria during this period and that’s when all day and week-long power outages (without explanations) began. No surprises that it coincided with a period of bad government, but that’s a story that has been told time and time again so I won’t repeat that here. I will focus on the systems failings; in my opinion, that was the period shortly after the 90’s when Electric Power Reforms started in Nigeria without recognizing the immediate need to increase generation.
There’s a systems saying, ‘the easy way out usually leads back in.’ It fully captures the mistake made in trying to solve the lack of generation issue by focusing the 2005 National Power Sector Reform Act (EPRSA) on privatizing the sector i.e. transferring the burden of making up the generation shortfall without fully transferring the benefits/money to be made from the privatization to the private sector. The Niger Delta Power Holding Company Limited (NDPHC) was formed to take best practices from the private sector without fully privatizing the sector. Here’s an analogy; imagine having a run-down home and, while holding on to the keys, you ask your new neighbor who is building his own home to help you fix your home, after which you will finally hand over the keys. Very few neighbors would actually fall for such a trick, so it was no surprise that this NDPCH arrangement did not work. The government tried to take the easy way out but we still did not have enough power to meet the needs of the people from current generation capacity or new build. That situation has continued till today…
Insight: “Today’s Problems Come from Yesterday’s Solutions”
So where are we? Citizens and consumers require 3 things from their power provider; electricity delivered safely, reliably and affordably. On all three expectations, the current power system fails Nigerians. Every citizen or business that can afford it is his/her/its own government when it comes to utility service provision, salving their needs by buying a generator, building a borehole in their compound and providing their own personal security. And for every citizen who cannot afford to be their own government? They live without electricity. According to the government ‘Today, in March 2016, we have just about 5,000 MW of power on the National Grid for about 180 million people.’ For some context (and this is a rough but apt calculation),
I worked at a power station which generated 1000 MW of electricity for approximately 400k homes, assuming every home in London uses the same amount of electricity as a home in Nigeria. Assuming there are 36M homes in Nigeria (with 5 people per household), it means we as a country are generating just 5X the amount of electricity from one power station in London for 90X the number of people!
Put another way, according to the World Bank, our per capita electric consumption is 142 kWh. What does that mean? It means we are in the league of countries like Nepal (128kWh per capita), Sudan (159kWh), Togo (148kWh) and the Democratic Republic of Congo (110kWh). These are countries with much smaller populations and smaller requirements than Nigeria. With all due respect to these countries, that is not a league we want or deserve to be in. Contrast this with the countries that have similar size populations (and less natural resources to draw on) to Nigeria, countries like Bangladesh (156M pop.) with per capita of 293 kWh and Pakistan (182M pop.) with per capita of 450 kWh. My point? We are falling extremely short of the expectations we have of ourselves and the possibilities…
There are very few things that we all do which don’t require that electricity be delivered safely, reliably and affordably. Electricity is the engine of growth in every developed country in the world. It is also the single most impactful element in personal comfort (an oft ignored element of the value electricity provides).The similarities between Nigeria and the low electricity consumption per capita countries I listed above extend from poor electricity provision to lower life expectancy and health expectations for citizens. Provision of electricity ranks very closely in importance to good governance because it is a big input into productivity growth, especially in the long run, which, in itself, is a strong driver of economic growth. If we increase the productivity of the average Nigerian (and heaven knows our productivity is at a low right now), we increase the growth of the economy. Increased productivity = greater money earned = greater money spent and improved credit flow within the economy. Let’s chalk up the last few years in the Nigerian power industry, two full economic cycles, as the lost decades. Current policies are structured to rebuild or improve old infrastructure and maintain less relevant business models. The good-governance experiment is currently ongoing in Nigeria; it’s time to begin the provision-of-electricity experiment with a clear view of the industry’s future.
Foresight: “The areas of highest leverage are often the least obvious”
If we agree with the premise that all consumers, regardless of class, deserve to have stable, affordable and secure electricity, then it’s time to embrace the change currently going on in the electricity industry globally. There is a chance to start afresh in Nigeria, as the way electricity is generated, produced, stored and marketed is changing. There is a wider array of choices for generation (solar, geothermal, wind etc), there are storage options which serve the needs of average Nigerian homes at less cost than the current diesel alternatives, and smaller companies can get into the business of producing electricity for different segments of the market. The change we have to embrace in Nigeria, with an opportunity to even leapfrog countries like the USA in adoption, is inevitable and is as a result of several global trends that are currently playing out. These trends are climate change, reducing costs of renewables like solar, the convergence of internet technology and operational technology, bringing more efficient methods of electricity consumption to consumers and businesses alike. What does this look like for the average Nigerian?
It means Kayode, a small business owner with an office in Ikeja and a family of five living in Ogudu, Lagos, can buy solar panels (his primary source of electricity) for his home/business from Powerseller Co. PowerSeller Co also provides a small diesel generator (as backup) for Kayode. Powerseller Co manages the solar panel and diesel generator and manages the interaction between Kayode and the PHCN. It means the PHCN plays the role most government agencies play; providing oversight, so Powerseller Co does not cheat Kayode. It means Kayode might pay a little more money for Power at the start of the month, but he is assured that throughout the month, his electricity will be on and keep the food in his freezer from rotting. It means even though Kayode is now spending more on electricity, his productivity has increased, and so has that of his family and employees. Since productivity growth and credit leads to economic growth, it means Kayode’s business generates more money, and the cost of electricity stays at the current percentage of his expenses, but he now gets reliable and safe electricity. It also means Kayode and his neighbors in Ogudu can band together and form a mini electricity grid of their own.
The scenario above clearly demarcates the value elements and who is providing it. The generation comes from any business which can afford to generate power from any safe source. The distribution and transmission is provided by an asset owner who only collects rent on the usage of transmission lines. The oversight is provided by government entities, who, based on a clear understanding of where value lies and where things are going, ensure that all parties play fair. The service provider, or marketer, ensures that the average consumer receives the optimal customer service because anything less means the customer can move to a competing business. This new business model solves the real problems facing the Nigeria power sector; generation and a focus on solving the problems of the past. It’s happening fast; in 2012, Vivint,a home security services provider in the US, decided to start selling solar panels to Americans in a market where the price of solar was well above current customer prices. In just two years, Vivint had put solar panels on twenty two thousand homes, generating 274MW (5.6% of total generated in Nigeria), the size of a power station! It takes 5–6 years to build a power plant, but recognizing the future of power generation, Vivint built a virtual/future power plant in 2 years. It can be done, and the time to start is now.
And by the way, taking the future virtual utility approach also solves the problem that continues to plague the Nigerian economic mindset. It places the convenience and productivity of the consumer as the priority, because that is really the point of this whole industry; to provide electricity to consumers safely, securely and affordably.
It isn’t rocket science, we just need to start taking our citizens seriously.