The scramble for investment opportunities

There is a scramble for investment opportunities which will lead to improving the poor state of Nigeria’s power supply as evidenced by frequent power blackouts. Unreliable supply will soon be a thing of the past as the government’s new policies begin to bear fruit

The importance of adequate electricity through improving Nigeria’s power supply  cannot be overemphasized as many studies have proven time and again that increased electricity consumption per capita stimulates economic growth as well as social development in any community. Improving Nigeria’s power supply is no exception. A simple observation shows that adequate electricity can improve lives tremendously by providing light, refrigeration for food and medicines while increasing gainful economic activity.

It is not uncommon in Africa to see a small sleepy town transformed into a bustling center when it gets connected to the grid because with it comes the establishment of sawmills, posho mills right down to a simple barber shop and even small rudimentary movie theaters airing world cup matches or the latest soaps. Studies show that the minimum per capita consumption required to stimulate meaningful economic and social growth is 500kwh, in Nigeria it is currently at a paltry 115kwh.

Nigeria recently became the largest economy in Africa after rebasing its GDP to the year 2010 and the country can now boast of being the 29th largest economy in the world and the largest in Africa surpassing even South Africa. By comparison however South Africa still remains well ahead in the power sector when you consider that it produces 40,000mw for a population of 50 million compared to Nigeria’s 4,000mw for a population of 170 million.

The cost of not having power is colossal and it is estimated that presently the lack of adequate power supply continues to sap away a staggering US$130billion that would otherwise have added to its GDP.

Nigeria currently has 23 power plants connected to the grid with a total installed capacity of 10,000 mw of which  6000mw is available capacity. The nature of the countries supply is principally thermal based though there are 3 major hydropower plants accounting for about 2000mw of installed capacity and 1000mw of available capacity. These facilities are woefully inadequate.

The need to improve Nigeria’s power supply has therefore become a critical factor in the country’s next growth chapter and President Jonathan is well aware of this. The government’s ambitious plans to increase availability of power started when President Jonathan unveiled the Power Sector Roadmap. Under the plan, the government was to gradually deregulate the power sector and attract private sector investment amounting to US$3.5 billion annually in a bid to move power generation from 3,500mw to 40,000mw by the year 2020.

Though interim generation targets for 2011 and 2012 were not met, the current Minister Professor Chinedu Nebo has been credited with continuing the momentum and tangible gains are being realized.

Reforms

One of the key reform steps in the roadmap was the intention to deliberately attract private investment participation in injecting US$3.5billion required annually to realise the goal of 40,000 mw generation capacity and this has been initiated by the unbundling and privatization of the national power utility known as the Power Holding Company of Nigeria (PHCN) an acronym which for some stood unflatteringly for ‘please have candle nearby’ .

Late last year the President handed over share certificates and licenses to the purchasers of electricity generation and distribution companies that were the aftermath of the unbundling of PHCN into 18 companies – 11 distribution companies, 6 generation companies and 1 transmission company. The government has only retained ownership of the transmission company but has none-the-less engaged a private Canadian company to manage it.

The process was described by many as one of the most ambitious and successful privatisations of the power sector in Africa with the process earning the government US$3 billion according to some estimates.

In March of this year the federal government sold the 10 power plants built under the National Integrated Power Project (NIPP) for US$5.8 billion. The National Integrated Power Project (NIPP) was conceived in 2004 as a major fast-track initiative to add significant new generation capacity to Nigeria’s electricity supply industry. The government is to use the money to develop additional power plants.

Eight of these power plants were initially designed as open-cycle gas turbine (OCGT) power plants while the remaining two were designed as combined-cycle gas turbine (CCGT) power plants. Seven of the OCGT plants have the capacity to be expanded to combined cycle gas turbine (CCGT) configuration.

Only Geregu and Omotosho power plants had been commissioned by the time they came under the block though the rest were said to be over 90% complete. It is expected that the power plants will add another 5000mw of power to the national grid once they are completed by their new owners.

Incentives

In a bid to attract further private investment in the sector the federal government has set-up a raft of incentives to attract foreign direct investment into the power sector.

For instance in order to stimulate the local production of electrical equipment, manufacturers of transformers, meters, control panels, switchgears, cables and other electrical related equipment are enjoying tax holidays of 5 to 7 years for investors who invest in these areas.

Power plants using gas are assessed under the companies income tax act at a reduced rate of 30% while in addition the government is allowing 100% foreign ownership of electricity plants which was previously the preserve of the government.

Investors thrive on predictability and the government has implemented a transparent and predictable tariff adjustment mechanism that covers cost of production and provides adequate returns on investment at all times.

The opportunities that lie in investing in the power sector have even attracted the attention of GE the American multinational with interests in power supply. Last year the Chief Executive Officer of GE, Mr Jeff Immelt pledged to invest US$1billion in Nigeria’s power sector and this year committed to make available a fund worth US$350million to finance mini power supply facilities that would generate between 1MW to 20MW as a faster solution to Nigeria’s power crisis.

Challenges

The set targets of reaching at least 18 hours of power supply a day for the Nigerian population has been bedeviled by one setback after another blamed on various aspects such as rain, grid capacity, vandalism and sabotage.

Recently the Minister of Power Chinedu Nebo was reported as saying that power supply had dropped to about 3,200MW in March from 4,000MW due to vandalism at 5 different gas pipelines that supply gas to power plants. To put the problem of vandalism into perspective consider that the country could generate more than 10,000mw but this has been heavily curtailed by a drop of over 4000mw.

This statistic was given by The Petroleum and Natural Gas Senior Staff Association of Nigeria Publicity Secretary, Mr. Seyi Gambo recently when he spoke to reporters. Some suspect outright sabotage orchestrated by those who have the most to loose if the power sector reforms are successful.

Transmission capacity also needs to keep up the pace of generation. Minister Nebo particularly stressed the need to develop the sector’s transmission capacity and expand the wheeling strength, so that all power generated can be effectively transmitted. The minister also said there were huge challenges in transmission “because we need to be sure that we have more wheeling capacity than generation, so we need to beef up our generation capacity and transmission capacity.”

The investment opportunities are broad in Nigeria from investing in power supply plants, manufacture and supply of electrical equipment such as transformers and even training. With sustained focus there is no doubt that consistent gains will be made and the most recent target set by the Minister for Power of 6000mw of power by December is the latest target that everyone will be keenly watching. If successful it will mark a break with the past.

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