Understanding the Nigerian Electricity Supply Industry: Repositioning the Sector for Sustainability

On 29 May 2024, the Bola Tinubu administration will mark its first anniversary since it came to power. Since the inauguration of President Tinubu in May 2023, and the famous ‘subsidy is gone’ remark; the country has grappled with high energy prices and an epileptic power supply – none of these problems are particularly unique to this administration but have been exacerbated by the ill-advised ‘shock economic therapy’ pursued by the Government.

Since the beginning of the year, the electricity supply to consumers seems to have hit a new low, particularly with the frequent collapse of the National Grid, which supplies electricity to many Nigerians, albeit infrequently. In the last month, the Minister of Power, Mr Bayo Adelabu, announced an almost 300% increment of the tariffs for the category of customers marked as ‘Band A’. These are supposedly highly energy-consuming customers and hence should pay more for the power they consume. Despite the several negative consequences of the removal of petroleum subsidies on the economy, the Minister has advocated for the further removal of electricity subsidies.

What is this electricity subsidy and how did it come about? It is instructive that many Nigerians are unaware of the existence of electricity subsidies, particularly, as the electricity supply in the country has been inconsistent for a long time. In simple terms, the electricity subsidy is the unpaid difference sum/amount between the actual cost of power generated and supplied, and the price paid by the consumer for electricity consumed. The Government has consistently maintained that the cost of power generation far exceeds the amount paid by the end-user; hence, the Government is responsible for the payment of the difference in the form of subsidy, after financial settlement, through Nigerian Bulk Electricity Trading Plc (NBET), who guarantees the offtake of the bulk electricity generated and supplied to the consumers through the distribution companies. Hence, the government is seeking to raise the price of electricity tariff, to reduce the burden paid for electricity supplied, to reflect better and to equalise the cost of power generation and transmission.

While it is undoubted that the production and transmission cost of electricity far exceeds the price paid by the Nigerian end-user; however, the simple economic imbalance, is not the sole reason for the prevailing unsustainable subsidies. Other factors which have led to unsustainable electricity subsidies include lack of proper infrastructural investment in the power sector by successive governments; unstable macro-economic business environment; unstable exchange rate regime; poverty; lack of effective regulation; private sector inefficiency in management of the privatised generation and distribution companies; as well as the inefficient structure of the Nigerian electricity supply industry.

To understand the electricity supply industry and its failings, we must critically examine the entire supply value chain from generation to consumption. It is only then that we can begin to reposition the sector for sustainability. We will briefly examine the chain Nigerian Electricity Supply Industry, explain how it works, identify the problems and challenges, and propose lasting solutions.

The Nigerian Electricity Supply-Side Industry Value Chain

The electricity supply side comprises the Generation; Transmission and Distribution stages (including consumption). The Nigerian Bulk Electricity Trading PLC (NBET) and the regulator – the Nigerian Electricity Regulatory Commission (NERC) also operate within this chain.

Generation

The power generation phase is the first in the chain of electricity supply. This is the production of electricity through the conversion of one form of energy into electricity using industrial power generators. Various energy sources may be converted into electricity; this includes water (Hydro), Wind, Natural Gas, Coal, Nuclear, and Solar lights. While the complexity of the science of electricity generation is not the crux of this piece, it is however important to understand the economics of power generation and how it underscores why the challenges power sector persist.

Importantly, power generation on a large scale i.e., over 100 MW, is an expensive endeavour as it involves the purchase of power generators, building power plants, etc. Hence, national governments are traditionally suited to undertake such monumental power projects, using the collective resources of the State obtained through taxes. The Nigerian Government since 2005, through the National Integrated Power Project (NIPP), increased the generating capacity with 10 new generation plants to a combined capacity of 5,455 MW, in 2019. This is however underwhelming considering that the projected demand requirement for the country far exceeds this installed capacity manifold. Nigeria has a mix of independent, government-owned, private & government jointly-owned post-privatized generating companies unbundled from the PHCN.

Nigeria presently generates 80 per cent of its electricity from Methane (Natural) Gas, 15 per cent through Hydro Dams, and 5% from other sources. The thermal generation is located in the country’s south, generally near the gas. The hydro generation is located further north at Jebba, Kainji and Shiroro. The over-reliance on Natural Gas and lack of diversification of power generation sources, despite the abundance of alternative sources, has severely limited the capacity of the country to produce consistently cheap electricity for the citizens.

While Nigeria is blessed with abundant proven gas resources of over 206.53 trillion cubic feet (tcf); the country presently lacks adequate infrastructure to reliably extract, convert, process, transport, and utilise ‘Gas’ as an energy source for power generation.

In 2023, the Managing Director of the Nigerian National Petroleum Company Limited (NNPC Ltd) stated that Nigeria could transport 6.9 billion Standard Cubic Feet (BCF) of gas to support power generation. Despite this development, the gas transportation capacity remains insufficient to support the installed capacity of approximately 10,000 MW of the gas power plants, to provide the desired 24-hour power supply.

A quick calculation reveals that approximately 34,121,416 ft³ of Natural Gas is required to produce 10,000 MWH of electricity. Hence, 818,913,984ft³ is needed to generate 24 hours of electricity at the same 10,000; and 24,567,419,520ft³ for 30 days. It follows that to generate 10,000 MWH of electricity for 12 months for 24 hours a day, using gas-powered power plants, Nigeria must have adequate infrastructure to consistently extract, produce, process, transport, store, and utilise about 294,809,034,240ft³ of Natural Gas annually. It is important to note that 10,000 MW, does not meet the electricity demand requirement of the nation, and the extent of capital investment required to supply this capacity is extensive. This may not be feasible considering the dire economic situation of government revenue. Put differently, the extent of infrastructure commitments, required to achieve this level of electricity generation using Natural Gas is expensive considering the cost of the fuel, but capital intensive to build (gas extraction plants, gas processing plants, gas transport pipelines, gas networks, gas storage tanks, power generation plants etc).

The lack of infrastructure investment in a mix of power generation by the successive government administrations, and incoherent power policy direction, has severely impeded our ability to generate sufficient and cheap power to meet the electricity demand. Also, the inadvertent overreliance on a relatively expensive mode of producing power – Natural Gas; as opposed to a combination of other cheaper sources such as Coal, Hydro, and Nuclear (relatively assessed over a long period), has contributed to the failures of the electricity supply in Nigeria.  It should be noted that where the cost of producing electricity is expensive, ultimately the cost to the final producer (tariff) will be unaffordable; hence, it is important that there is a healthy mix of cheaper options to ensure affordable energy.

We propose that Nigeria must immediately diversify its power generation sources to incorporate long-term comparatively cheaper sources such as Hydro and Nuclear power to generate electricity; while Natural Gas-powered plants be used to complement these other generation sources to supply electricity during demand peaks.

Transmission

The electricity transmission stage is the wheeling (transportation) of electricity through power transmission lines and substations to the distribution stations for onward sale to the consumers. The Transmission Company of Nigeria (TCN) is primarily responsible for evacuating the generated power/electricity across the Grid. The TCN is also responsible for Systems Operations and Market Operations across the entire 36 states.

There have been calls for the unbundling of the TCN into independent Systems Operators and Market Operators, as the responsibility of the TCN has greatly burdened it, as it is unable to perform optimally. The Electricity Act 2023 finally creates an Independent Systems Operator, which the TCN is required to incorporate and transfer its System Operation responsibilities. The Systems Operator is responsible for dispatching the generated power, handling system outages, forecasting electricity demand and load, and conducting systems tests among other responsibilities under the Act.

As with power generation, there must be adequate power transmission capacity to evacuate the electricity generated from the power generation plants to the distribution stage. Where the transmission element, is unable to transmit the high voltage electricity generated from the power plants, the electricity generated is wasted, thereby leading to inadequate power supply. As of 2022, Nigeria reported wasted electricity of almost 8%. In 2023, the Federal Government announced that the Nigerian Transmission capacity stands at 8500 megawatts and is capable of transmitting voltage levels of 330 Kva and 132Kva. However, this is yet to translate to increased wheeling in reality, as TCN continues to evacuate about daily peaks of 4500 MW. It should be stated that some of the failures of transmission are an underwhelming distribution receiving capacity, but this does not absolve that the TCN has also under-invested in transmission infrastructure such as substations and transmission lines across the country. A review of the transmission chart from the TCN website, reveals the dearth of lines into major areas of the country, with a single line 330 KVa transmission line serving states like Taraba, and a single 132 Kva substation serving Sokoto and Zamfara. This is manifestly insufficient to meet the electricity requirements and demands of such states or propel industrial activity in these States.

Another major failure of the TCN is the lack of an Operating Reserve to address supply contingencies thereby leading to the rolling and popular blackouts experienced. The Operating Reserve is the generating capacity available to the System Operator within a short interval of time to meet demand in case of a disruption to the supply from the traditional plants. The utility of the reserve is to ensure the constant wheeling of electricity on the transmission lines, to prevent a total collapse of the System, such as at any point in time, there is electricity being evacuated and distributed pending onboarding of additional generation capacity. The absence of any such Reserve has led to the frequent Grid collapse and rolling blackouts experienced today.

Distribution

The distribution stage of electricity supply of electricity to our homes is perhaps the most notorious stage of the electricity supply industry. Upon unbundling of the Power Sector, 11 Distribution Companies (DISCOs) were licensed to distribute power to consumers. The distribution capacity of the DISCos, at present, is less than 5000MW and regularly operates at about 4000MW.

A fascinating element of electricity supply is that electricity production to consumption is instantaneous and highly interconnected. Put differently, when the power is generated by a power plant run by the GENCOs, the high electricity volts are immediately sent to the Grid operated by TCN, which immediately evacuates the same to the DISCOs stations, who immediately send the same to the consumer. All within seconds! The consumer immediately utilizes the power as it is immediately generated, transmitted and distributed! Hence, for consistent electricity supply, the MW capacity of power generation, transmission and distribution must be synchronized. Where the generating installed capacity is approximately 10,000 MW, and transmission is 8500 MW, the distribution capacity is currently hovering at about 4000 MW.

Nigeria currently has a wasted or idle capacity, of at least 5000 MW, which can theoretically be generated but not transmitted or distributed, as the necessary infrastructure to transmit and distribute same is not adequate or unavailable. In addition to the idle capacity, the failure of adequate distribution, leads to higher consumer pricing for the electricity supplied, as the generating plant, operating at less than installed capacity must also meet with capital and operating cost of generating electricity, whether or not, they produce to the maximum capacity.  The brunt of the inefficiency is ultimately borne by the consumer whether by poor supply or higher prices to cover the costs. The electricity market is unique, as the entire supply chain is dependent on the consumption and payment by the consumer. The entire electricity supply value chain is interconnected, and a failure of any part of the chain dooms the power sector to fail.

The Electricity Act 2023

The Nigerian Electricity Act 2023 is a welcome development. The Act repeals the Electric Power Sector Reform Act 2005 (EPSRA) and makes major strides in decentralizing the electricity supply markets.

While the EPSRA sought to unbundle PHCN by creating the DISCOs, GENCOs, and TCN, the 2023 Electricity Act has liberalized the electricity supply industry and encouraged State government participation in the power sector, as well as increased private sector investment in the industry. Some of the key features of the EA 2023 are the creation of independent state electricity markets and the creation of mini-Grids which allow for less reliance on a single National Grid, which has been prone to collapse. It should be stated that the National Grid system used across the world, is a cost-effective mode of supplying electricity, however, it has been severely mismanaged in Nigeria. Mini-grids may be set up by States, leveraging on the existing power infrastructure in such states to improve electricity supply. States can also issue licenses to private investors to operate mini-grids and power plants within their territory.

Section 67 of the EA 2023 also provides for the unbundling of the TCN by creating an Independent Systems Operator for managing the market and systems operations.

So which way forward?

The promulgation of the Electricity Act 2023, is a step in the right direction for the electricity industry, but its success, requires dedicated and skilled implementation by the participants. A major challenge that we have faced in governance and administration is the right execution of policy. However, we cannot implement the Act in a vacuum, of the present macroeconomic realities which is hostile to investment and business that the Act seeks to promote.

This administration must make the country attractive to investment. The economic conditions must be right. That means the Foreign Exchange market must be stable and the government must allow and encourage free flow of capital in and out of the country. The importance of stable FX exchange cannot be overemphasised, as the power generation equipment, technical expertise, and Natural Gas fuel are priced in USD. Hence, the government must work to ascertain a stable FX regime. In addition, there must be security of lives and property to promote capital-intensive investment, especially in the northern part of the country where there are extreme electricity deficits. Also, a government that does not respect property cannot attract investment whether from its citizens or foreigners.

There is a need to urgently invest in the power distribution infrastructure of electricity supply to ensure that the electricity can be adequately delivered to the consumers and to match the transmission and generation capacity in the short term. A short-term option/fix would be to upgrade distribution capacity to at least 10,000 to match generation and transmission. It is counterproductive to continue to build more generation plants where the distribution network cannot hold the electricity supplied. The government should declare an emergency in the power distribution sector, and intervene to provide power distribution infrastructure, which can then be leased back to the distribution companies to manage and repay the sums expended. While 10,000 MW is not sufficient to meet the entire electricity demands of the country, it is a welcome start, which would utilize the full capacity of the generation plants. We cannot continue to operate generation plants at 50% capacity because of little infrastructure to distribute the power. Without this, we may not be able to break even in pricing.

In conclusion, in addition to the macroeconomic measures to promote investment and state of emergency in the distribution sector; there must be cooperation at the local levels to ensure that consumers of electricity, who are connected to the Grid, are properly identified and billed accordingly using meters. There must be a largescale mass metering of the population. While the DISCos inherited legacy infrastructural metering issues from the PHCN, not much has been done to massively meter the entire populace since then. Local authorities and law enforcement should encourage collaboration with the NERC, to enforce the criminal provisions of the Electricity Act to ensure that no person continues to steal electricity from the wires; or vandalise existing infrastructure.