Friday, June 14, 2024

Powering Industrialization: A Roadmap On The Kind Of Policy Choices Nigeria Can Make To Support Industrialization

Electricity & Industrialization in Nigeria Today: Challenges with Existing Policies

For industries, grid power remains the cheapest source of electricity, but not for long. The impact of the instability of foreign exchange, huge debt profile, high operating costs, and other inefficiencies across the entire power sector value chain are impacting tariffs, which are currently suppressed. Nonetheless, wholesale generation costs here remain lower than wholesale generation costs across sub-Saharan Africa. Nigeria is also blessed with an abundance of natural gas and renewable energy sources (rivers, the Sun, etc.) – sources that will ensure that Nigeria continues to remain a low-cost power producer.

Electricity policy formulation is centralized with ONLY the Federal Government. This is against the spirit of the Nigerian Constitution which provides that the Federal Government and State Governments should be responsible for electricity. Since there are too many policymakers in the sector (Ministry of Power, Office of the Vice President, BPE, NCP, Ministry of Finance, CBN, Presidency, NERC, NEMSA, REA, etc.), policy implementation by the Federal government is disjointed and lacks coordination.

Existing policies and regulations do not recognize or prioritize the use of grid electricity to drive industrialization and more industrial activities. For instance, the EPSRA makes no provision for wholesale supply or prioritization of electricity to industries.

The Eligible Customer (EC) policy gave birth to the Eligible Customer Regulations passed in 2017. The EC policy was to provide industries and large power users with more reliable electricity that would have remained “stranded” due to low absorptive capacities of DisCos to utilize the power. However, the EC regulations have not solved the electricity problems of Industries, including those connected directly to TCN’s network. Only one eligible customer has been approved to date, despite excess stranded generation of more than 2000MW.

There is a lack of market competition in the transmission and distribution segments of the power sector value chain. DisCos are structured as electricity monopolies within their license areas covering multiple states. TCN is the sole provider of transmission services.

The regulated tariff structure encourages and actually rewards the inefficiencies of TCN, DisCos, and GenCos. Cross subsidies, capacity charges, take-or-pay obligations, fixed gas prices, high FX inputs, etc. are some of the built-in failures of a regulated tariff system.

Policy Choices to drive Industrialization in Nigeria

– Capitalize on Nigeria’s status as a low-cost electric power producer to attract and retain industries in Nigeria. The abundance of natural gas and renewable resources (water bodies and the Sun) makes this feasible.

– Designate Industrial Customers as “Must Serve” customers, e.g., mining operations, steel mills, manufacturing companies, etc. Such heavy users of electricity are the bedrock of any electricity market.

– As low-cost wholesale power producers, Hydro GenCos have a “must-run” status to ensure that the power they generate is always dispatched by the TCN. There should be a policy to dedicate some of the available capacity of Hydros to the heavy industries connected to the TCN grid (330kV or 132kV). While this might lead to revenue shortfalls by DisCos, it presents a net positive benefit to Nigeria and will spur further industrialization.

– Allow more bilateral contracts between industries and power producers BUT with less regulatory requirements. This will ensure that embedded power producers (from 100MW and below) do not need to obtain a license from the government. In Nigeria, it is presently required to have a license from NERC to generate 1MW of power or to distribute above 100KW of electricity.

– Liberalize and further decentralize the power sector to introduce more competition, especially at the distribution segment of the value chain. Under colonial Nigeria, Native Authorities and private entities built and operated power stations and distribution infrastructure. NESCO, a private entity in Jos still operates one of the best distribution networks in Nigeria and operates in parallel with Jos Electricity Distribution Company.

– State Governments should get involved in the electricity business, particularly from a policy and regulatory perspective. Section 14, Schedule 2 of the Legislative list of the Nigerian Constitution makes it the responsibility of state houses of assembly to make laws for electricity, inclusive of electricity generation, transmission, and distribution within their states. Rural electrification policies and implementation should be under the ambit of State Governments, not the Federal Government.

– Wholesale privatization of TCN is not advisable. However, policies and regulations should be developed to stimulate investments in merchant transmission lines or promote PPP arrangements between TCN and 3rd parties.

– The EPSRA is no longer fit-for-purpose. Wholesale amendment of the EPSRA to align it with the intention of the Constitution, the realities of a competitive market, and Nigeria’s unique challenges and development aspirations as enumerated above. In particular, Section 62 (1) of the EPSRA needs to be amended.

Odion Omonfoman is the CEO of New Hampshire Capital 


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