RECAI: Market to watch

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RECAI 41 - Market to Watch: Nigeria


On the map. A May agreement between a private sector joint venture and the Federal Government and Delta State Government represents a milestone in Nigeria’s energy transition. The deal will see Canadian renewables developer SkyPower Ltd. and FAS Energy, a subsidiary of Saudi retail group Fawaz Alhokair, develop 3GW of utility-scale solar capacity in Nigeria over the next five years, requiring around US$5b of investment and creating around 30,000 jobs. Nigeria’s renewable energy sector is now well and truly on the map.

Underway. The deal’s importance should not overshadow the broader energy sector transformation already underway, which has paved the way for large-scale developments like this. Nigeria’s pro-reform government has initiated a 5- to 10-year Transitional Electricity Market (TEM) that will liberalize the sector and eventually establish full wholesale and retail competition.

Sell-side. A critical prerequisite of this reform was the US$2.5b unbundling of state-owned Power Holding Company of Nigeria (PHCN) in late 2013, which saw ownership of 15 successor generation and distribution companies pass to the private sector (though with two transactions to be re-run). The dismantling of this monopoly attracted local and foreign investors, with successful bidders including Siemens AG, Korea Electric Power Corp. and Forte Oil Plc. Attention has now turned to the auctioning of 80% stakes in 10 new gas-fired power plants totaling 5GW, with preferred bidders selected in March this year.

Under pressure. Despite having the world’s seventh largest natural gas reserves, Nigeria still suffers chronic power shortages. A population of over 170 million, Africa’s highest, and projected 9% annual electricity demand growth is creating demand already double Nigeria’s 4GW production capacity. Pipeline sabotage has halved this capacity again, straining supply even further.

Self-service. Low tariffs have also prevented investment in Nigeria’s transmission infrastructure, ranked globally as one of the most neglected and inefficient. This, and supply shortages, has prompted around 90% of industrial customers and many Nigerians to buy their own generators, creating the world's highest concentration of small-scale power supply and costing Nigeria an estimated US$13b annually.

A role for renewables. Nigeria’s current power sector transformation, and the challenges it faces, represent huge opportunities for a growing renewable energy sector. Surging demand and an overreliance on natural gas and hydro have created a need to increase and diversify electricity supplies, and energy market liberalization is gradually encouraging private sector investment. Significant domestic gas reserves could support hybrid renewables solutions, and weak infrastructure and relatively low electrification levels support a focus on distributed applications and microgrids.

Ambition. Nigeria first adopted its Renewable Energy Master Plan in 2006 and is now targeting 14% capacity by 2020 and 20% by 2030, including 4GW of solar by 2025. In 2012, the Nigerian Electricity Regulatory Commission published FITs for most renewable technologies, with NBET acting as offtaker, supported by a World Bank Partial Risk Guarantee. The proposed regime has not yet been fully approved and enacted, but shows the Government’s intention to introduce investment incentives.

A matter of time. Nigeria’s need, and desire, to transform its energy sector is clear, with progress showing the potential for private sector participation (acknowledging that privatization will take some time), and support for increased renewable energy investment.

Political and social unrest is a major barrier though. Foreign companies and investors are understandably apprehensive, and getting into the country can be difficult, though political risk insurance and other measures can help mitigate some of the risks. Once accessed, however, the Nigerian energy market has significant opportunities, making it not ‘if’ renewable energy developers and investors will move in, but when.

Also in this article:

  • On hold
  • All about price
  • Deals being done

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