After more than a decade of reforms and continuous repositioning of Nigeria’s electricity sector to attract private investments, the outlook remains positive and bullish but not much traction has been gained. While it appears that investors are seeking footholds in the sector, efforts must be intensified by stakeholders to accelerate and accommodate these new potential investments.
As Nigeria strides forward to consolidate its pride of place as Africa’s economic powerhouse, configuring its power supply architecture for optimum performance remains critical to realizing the lofty goal of an economic resurgence.
Nigeria’s electricity sector presents a significant untapped investment potential, given the country’s vast energy needs and the current supply deficit. While estimating the precise investment potential is challenging due to various factors, several reports and analyses provide insights into the magnitude of opportunities available.
Power generation investment potential According to the Nigerian Electricity Regulatory Commission (NERC), the country requires an estimated investment of $3.5 billion yearly over the next 20 years to achieve its desired power generation capacity. This translates to a potential investment of $70 billion in the generation segment alone.
The International Energy Agency (IEA) estimates that Nigeria needs to invest approximately $10 billion in its transmission and distribution networks to improve the reliability and efficiency of the electricity supply chain. Nigeria’s renewable energy potential, particularly in solar and hydropower, remains largely untapped.
The Rural Electrification Agency (REA) estimates that the country’s solar potential alone is around 25,000 megawatts (MW), requiring an investment of $23 billion to harness this potential fully.
The Nigerian Electrification Project (NEP), supported by the World Bank, also aims to attract $350 million in investments for off-grid and mini-grid solutions, targeting the electrification of underserved communities and remote areas. However, while the allure of renewable energy solutions is undeniable, the existing infrastructure needs more immediate attention, and optimizing it offers a pragmatic and potentially more immediate pathway to improving the overall efficiency and reliability of the electricity sector.
According to the African Development Bank (AfDB), Nigeria’s overall power sector requires an estimated investment of $100 billion over the next decade to address the current supply deficit and meet the country’s growing energy demands, while these estimates may vary based on different assumptions, scenarios, and timelines.
However, even with conservative estimates, the untapped investment potential in Nigeria’s electricity sector remains substantial, ranging from tens to hundreds of billions of dollars across various segments of the value chain.
For serious and ready investors looking to tap into the Nigerian electricity sector, there are several “low-hanging fruits” or relatively low-risk, high-potential opportunities that can be explored. Beyond the core generation, transmission, and distribution activities, several ancillary services also offer investment opportunities.
With the persistent power supply challenges faced by industries and commercial establishments, there is a significant demand for embedded generation solutions.
Investors can establish captive power plants or independent power projects (IPPs) specifically designed to cater to the energy needs of industrial clusters, estates, or large commercial complexes. This approach mitigates transmission and distribution risks while providing a dedicated and reliable power supply to customers.
The recently commissioned Geometric Power Plant in Aba, Abia State, serves as a compelling case study on how effective investment in power generation and distribution can buoy manufacturing and industrial hubs across Nigeria.
Aba, once the thriving commercial hub of south-eastern Nigeria, had suffered from a prolonged power crisis that crippled its once-vibrant industrial sector. However, the recent commissioning of the $142 million Geometric Power Plant, a 141MW integrated power project, has ushered in a new era of hope and economic revival for the city.
The Geometric Power Plant, a collaborative effort between the Abia State Government and private investors, has provided a reliable and cost-effective power supply to the Aba industrial cluster. This has had a profound impact on the region’s manufacturing sector, addressing one of the critical bottlenecks that had stifled its growth for decades.
The Nigerian Electricity Regulatory Commission (NERC) has also introduced a distribution franchising model that allows private investors to operate and manage specific distribution areas within the existing Distribution Companies (DisCos) networks.
This model presents an opportunity for investors to focus on improving service delivery, reducing losses, and enhancing revenue collection in targeted areas, potentially leading to better returns on investment. Promoting energy efficiency and demand-side management can help reduce the strain on Nigeria’s electricity supply chain.
Investors can partner with utilities or technology providers to implement energy efficiency programs, deploy energy-efficient technologies, or offer demand response services to industrial and commercial customers. These projects can generate revenue streams while contributing to the overall sustainability of the electricity sector.
Integrating smart grid technologies, such as advanced metering infrastructure (AMI), grid automation, and outage management systems, can significantly improve the efficiency and reliability of the electricity supply chain.
Investors can partner with utilities or technology providers to deploy these solutions, leveraging the growing demand for modernization and digitalization in the sector. In remote areas or underserved communities where grid extension is challenging, investors can explore the development of mini-grid systems or off-grid solutions powered by renewable energy sources.
These projects provide access to electricity and contribute to rural electrification and economic development. To capitalize on these investment opportunities, investors must carefully assess the regulatory environment, market dynamics, and risk factors associated with each value chain.
Partnering with experienced local firms, engaging with relevant stakeholders, and leveraging available government incentives and development finance can further enhance the viability and success of investments in Nigeria’s electricity sector.
In 2013, the Nigerian government embarked on a comprehensive privatization program, unbundling the state-owned Power Holding Company of Nigeria (PHCN) and selling majority stakes in generation and distribution companies to private investors. This move aimed to introduce competition, improve efficiency, and attract much-needed capital into the sector.
However, key attention has to be paid to the plethora of challenges and opportunities that continue to define this critical sector, such as revamping an underwhelmed infrastructure and retooling power-generating and delivery vehicles with 21st-century technology and management efficiency.
On the government’s side, removing bureaucratic bottlenecks and stabilizing the Naira to safeguard investments, need to be prioritized to boost investor confidence. The Nigerian Bulk Electricity Trading Plc (NBET) continues to play a critical role in the Nigerian electricity sector ecosystem, and its functions directly benefit investors in several ways.
As an off-taker and bulk purchaser, the NBET acts as the off-taker and bulk purchaser of electricity from generation companies (GenCos) in Nigeria. It enters into Power Purchase Agreements (PPAs) with GenCos and buys their generated electricity in bulk, which it then resells to distribution companies (DisCos) through vesting contracts.
Another primary role of NBET is to provide creditworthiness and payment assurance to GenCos and independent power producers (IPPs). NBET’s strong financial backing, guarantees, and government support help mitigate the risk of non-payment or default, which is crucial for attracting investments in power generation projects.
NBET also facilitates the negotiation and execution of Power Purchase Agreements (PPAs) between GenCos/IPPs and DisCos. These long-term PPAs provide revenue certainty and predictability for investors, enabling them to secure financing and ensure the viability of their power generation projects.
NBET also helps mitigate risks associated with the electricity market by acting as a buffer between GenCos and DisCos. It manages the payment and settlement processes, reducing the exposure of GenCos to the credit risk of individual DisCos and ensuring timely payments for electricity supplied.
By consolidating and managing the bulk purchase and resale of electricity, NBET helps stabilize the Nigerian electricity market. This stability and predictability create a more attractive environment for investors, as it reduces market volatility and uncertainty.
Overall, NBET’s role as a central counterparty in the Nigerian electricity market helps mitigate risks, provide payment assurances, facilitate project financing, and promote investments in energy generation projects. Its functions directly address some of the key challenges and concerns faced by investors in the sector, making it an essential component of the ecosystem.
Indeed, the federal government has established a robust Public-Private Partnership (PPP) framework to facilitate private sector participation in the development of power infrastructure.
This includes the establishment of the Infrastructure Concession Regulatory Commission (ICRC) and the National Integrated Infrastructure Master Plan (NIIMP).
The Nigerian Electricity Regulatory Commission (NERC) has also implemented various reforms to improve the regulatory framework and attract investments. These include the introduction of cost-reflective tariffs, the development of a Transmission Expansion Plan, and the establishment of guidelines for independent power projects (IPPs) and embedded generation.
Despite being a major oil and gas producer, Nigeria’s electricity supply has consistently lagged behind demand, with a current installed capacity of 12,522MW but an available capacity of just 3,876MW as of Q3 2022.
This supply deficit, coupled with ageing infrastructure and inefficiencies in the transmission and distribution networks, has resulted in frequent power outages and a reliance on expensive off-grid solutions.
The current state of Nigeria’s electricity sector presents a complex challenge, but within this challenge lies a transformative opportunity. While inadequate and unreliable power supply hinders the nation’s progress, it also unveils a compelling investment frontier brimming with untapped potential. The statistics speak volumes.
The Manufacturers Association of Nigeria (MAN) reports that the nation’s industrial capacity stands at a mere 50%, far below its true potential. This underutilization stems primarily from the unreliable power supply, forcing many industries to rely on expensive and inefficient self-generation methods.
MAN further estimates that the manufacturing sector alone requires 10,000 MW to operate at full capacity, a demand that will only grow with intensifying industrialization efforts. However, these challenges are not insurmountable.
They paint a clear picture: Nigeria craves a robust and efficient electricity sector. This hunger for reliable power presents a lucrative opportunity for strategic investors seeking long-term returns and positive societal impact.
As Africa’s largest economy and most populous nation, Nigeria’s energy needs are vast and growing, creating a conducive environment for investors who are not only driven by profit but also passionate about supporting the nation’s sustainable and equitable development.