Privatising Nigeria’s power sector

Ben Garside's picture
Blog by
27 January 2012

After a week of protests, the Nigerian government has partly backed down on proposed fuel subsidies while achieving a partial increase in fuel prices. With the privatisation of the power sector set to start in earnest this year, how will the power reforms, which also require substantial increases in electricity prices or a hefty subsidy, play out?

The fumes of Lagos are fuelled by cheap petrol. Nigerians are more addicted than most – not only to their cars, but also to the millions of fuel-guzzling privately-owned generators powering homes and businesses. About two-thirds of all electricity produced in Nigeria is created by ‘backyard’ generators — at a cost to families and businesses of (US) $13 billion a year. They are used because the electricity grid is broken; electricity generation capacity is woefully below demand.

The lack of affordable and accessible electricity is one of the biggest and most expensive thorns in the side of all Nigerians. Importantly, it also prevents the economy from growing. Privatisation of the power sector promises to reduce the country’s expensive generator addiction by providing more reliable grid power. But, to make commercial sense and create enough money to restore and maintain the electricity grid will require at least a doubling of electricity prices. Given the recent protests on the fuel subsidies, will Nigerians accept to pay more for their electricity? 

It’s likely that many won’t notice the increase in electricity prices in their household expenses as many houses aren’t connected and grid-power is currently only for a few hours a day. Sixty per cent of the Nigerian population has no access to the electricity grid – with 90% of those unconnected Nigerians living in rural communities. As a result, many rural households are forced to use diesel and petrol-driven generators – an expensive, unreliable and noisy alternative to meet their energy needs. Cheap generators from China mean even the poor can often afford to buy and run small generators.

This explains why anger at the removal of fuel subsidies cut across all classes of society, despite the fact that fuel subsidies disproportionally benefit the rich and middle classes who have higher consumption rates. Subsidising energy will have the same disproportionate effect on the poor as the fuel subsidy.

With the announced increase in fuel prices, generator running costs will become even higher and alternatives even more attractive – but there is little knowledge, or confidence that these alternatives will come to fruition. Given that there is little evidence that the current $25 billion annual federal budget ends up building roads, schools, or hospitals, it’s understandable that the poor are mistrustful. The angry message advocated by the likes of Enough is Enough  during the fuel subsidy protests is that without good governance there is no guarantee that the $8 billion saved from the subsidy cuts would benefit the country as a whole.

 

Filling the gap

Despite the public’s cynicism, the government has promised to spend money on improving the “production” side of the energy industry to promote economic growth. Fixing and enhancing the quality of the oil refinery infrastructure, whose current output is a mere 39.2% of current capacity, would move Nigeria close to being a net exporter of refined fuels. The power sector reforms and privatisation plans are meant to deliver the renovation and rebuilding of the electricity grid.  Of course this will take time.

In light of the fuel protests, an increase in electricity prices this year - required as part of making grid operation sustainable and commercially viable - will likely be met by more demonstrations from the Unions demanding a universal subsidy. One way to ensure consumption subsidies don’t yet again favour big users is to have tiered rates where basic use is charged at a lower price. To make this work transparently would also mean universal metering to get rid of “estimated” bills which are widely considered as unfair and corrupt.

 

Quick wins the government could adopt

Filling the electricity supply/demand gap will take many years to address. There is a strong need to renovate the grid and build many more power stations. In the mean time, there are a number of quick wins that the government could adopt to soften the political blow.

Scheduled outages, like those in South Africa, are better than random blackouts — particularly when trying to run a business. Better planning and enforcement of this would be beneficial. Those on the grid may also benefit from inverters to charge batteries rather than using expensive generators when the grid is down. But this requires large-scale up-front investment and reliable equipment and vendors, which are sorely lacking in Nigeria. And, despite hotels being some of the most commercially-attractive customers to power companies, heavy electricity users like hotels and industry should not be allowed to hog power in peak demand periods.

A lot of electricity is wasted, which causes peak demand to be way higher than it needs to be. Educational programmes could encourage people to:

  • Use energy-efficient lighting, and power-efficient fridges and freezers,
  • switch off big consumption devices like water heaters and air conditioners when not being used – and replacing them with more energy-efficient alternatives,
  • replace air conditioners with new housing design and fitting new technological designs onto older systems to keep houses cooler naturally, and   
  • use solar options for water heaters.

The power sector reforms do little to address the needs of rural people. To date, rural electrification programmes for those villages unlikely to be connected to the grid have focussed on using renewable energy sources or diesel-based mini-grids. But these technologies have often failed due to poor equipment, corruption, mis-use, and a lack of maintenance.

What is needed is a big push to develop reliable products and markets structures to benefit poorer Nigerians. This includes designing products that take their needs (and their expectations of cheap goods set by the surfeit of cheap generators) into account. Examples include using hybrid networks, installing smart wiring in houses to run solar-powered lights and fans separately from high-ticket items like freezers, and using inverter/battery systems.  

The government could fund educational programmes to show users the benefits of adopting the new technologies, with local examples of them working. Equally, there is a need on the supply side to ensure heavy import duties and other obstacles are removed, and that distribution and maintenance agents receive the training and start-up capital that they need.

However the biggest obstacle to creating a vibrant market isn’t technical. The generator mafia is strong and has corrupt links to government. It has no incentive to support the electricity grid reforms which spell a potential loss of business, at least in urban areas. The power sector regulator needs to be strong and accountable to civil society to ensure pro-poor reforms can be put in place. It is civil society’s job to demand this.

All of this is a tall order for 2012. But there are signs that the power regulator is beginning to engage with civil society - as demonstrated by a recent round-table event on power sector reforms co-ordinated by the SUNGAS project. Equally, the Ministry of Environment is backing some initiatives, such as a project to support renewable energy entrepreneurs, that need wider scrutiny and support.

With some focused effort, many of the activities outlined above could be kicked off by the government prior to the planned electricity price hikes, which might make their acceptance by wary Nigerians more likely.

 

 

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