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Nigerian power sector and the drift to renewable energy 10 Jan 2018

The original timeline for appraising the performance of the Nigerian power sector after the privatization of the state generation and distribution assets in 2013 falls due this year. However, it is not unlikely that any fundamental assessment of the sector could be pushed to sometime later. The past administration that privatized the sector was voted out of office less than two years after the privatization. But the underperformance of the exercise cannot be advertised by the current administration because it would mean it has failed in one of the key areas it promised effective intervention.
    
Timeline re-scaling may also be useful in building the reputations of the investors who acquired the privatised assets five years ago. It would offer an opportunity for the power generation companies (gencos) and the distribution companies (discos) to realign their operations for much improved service delivery.

But whether or not the official evaluation of the power sector Performance Agreements holds in 2018, the market appears to have started its own appraisal. This can be seen in the growing market for alternative energy supply. The growth in the alternative energy market is now fast cutting through customer segments that were hitherto reticent or considered insignificant.

To better appreciate this fact, Nigeria's solar power market grew above N20 billion in 2016 and it is attracting residential customers in an unprecedented scale.

Power Privatization Comes to Reckoning

Ordinarily, the performance benchmarks for the power sector, post-privatization, are not far-fetched. For example, the Aggregate Technical, Commercial and Collection (ATCC) Losses targets were willingly agreed to by the investors. Also, the privatization objectives have not changed as far as we know. The objectives include enhanced power sector management, improved operational efficiency and funding, and improved power generation.

There may be different opinions on the progress made in the sector, depending on where each observer stands. But the reality in the power market today is most objectively stated by the epileptic supply to customers' homes and business premises.

Pressure on Government to Claim Success

But one must not be so naïve as to not reckon with possible politicization of the appraisal. As the campaigns ahead of the 2019 general elections go into full swing later in the year, the administration of President Muhammadu Buhari would be under pressure to claim some achievements for political leverage. In this regard, improvement in power generation would be touted.

However, the practical yardstick for improved power is improved supply to customers, not just the generated megawatts. Actual power supply to customers' premises should supersede statistics that only cite megawatt capacities or power generation at the plants. Indeed, other important yardsticks for measuring success include discharge of regulatory and oversight duties, enforcement of contracts, level of business confidence, consumer protection and public safety, and sustainability of growth.

Drifting to Alternative Energy

There has been a significant shift in the last couple of years from public supply as a primary source to alternative sources. Before now, alternative energy, as a primary source, was more common in critical commercial applications. But the grim outcome of the power sector privatization has spurred many domestic customers to seek alternative power sources. Public supply is now considered a secondary source. Some do not even consider public supply as an option at all.

Whereas the discos are protesting the intervention of the power ministry and the Nigerian Electricity Regulatory Commission (NERC) in declaring Eligible Customers regulation – which the discos believe undercuts their revenue potentials –  they should also work at curtailing the gradual loss of several small-scale customers who are shifting from public supply to self-help power systems. This class of customers could be lost for a long time since they might not find it easy returning to the grid even if public supply gets better in the future.

And with the mini-grid framework introduced by NERC, this trend would spread to entire communities as long as Renewable Energy (RE) investors are confident that the fundamentals and dynamics support investment recovery.

Solar power is currently the most prominent non-fossil option in Nigeria's alternative energy mix. This is not surprising given the considerable crash in the costs of photo-voltaic panels compared to several years before. Another major cost-crash factor is the intense competition in the sub-sector and the proliferation of service providers compared to years back when it was an exclusive preserve of a handful of experts. But one cost factor in solar power and RE in general that is yet to really change is the need for energy storage (batteries). The cost is quite substantial among the components of a renewable energy system.

RE opportunities are not without risks, especially for the final customers. The risks can be significant depending on what aspects are under review. Such risks could range from product risk, solution risk, safety risk to cost risk, among others. Sometimes, the risks are correlated. For example, product risk can escalate to safety and/or cost risks. Same goes for solution risk, which can impact overall cost.

The risks are better appreciated in the context of a budding RE sub-sector and a poorly regulated environment. Every Tom, Dick and Harry is an expert, installer or solution provider, whether or not they are qualified by training or experience. Although solar power is limited to low-voltage DC for the most part, the fact remains that it is electricity and, for most applications, there is ultimately an AC portion of the system around which due care must be taken for both user and system safety. Little or no regulation/enforcement in the space means that much, if not all, of the risks is borne by the customer.

Also, a major risk worth considering is cost. Going by the maturity level of the RE market in Nigeria, not many vendors are equipped to comprehensively analyze each application and optimize a design to meet the complex requirements. Although RE costs are crashing, the initial investment is still relatively upscale. Even for customers that can afford it, they will be happy to escape avoidable costs and get the best value from whatever spent.

It is, therefore, important to properly appraise each application with optimized design and proper components selection. For example, there are different requirements for a telecom base station, a school, a hospital, an office, or a home. Different considerations come to play in designing what works so that customers get their money's worth and not just a vendor's promise.

Proper evaluation should reveal upfront the life cycle costs, a significant part of which goes to the battery and can represent upwards of 50% of the solar power CAPEX, depending on the application. Batteries can be due for replacement in as little as two years or less depending on the application, design, components choice, and environment, and based on the most available technology. With such a stark reality, it is important to gain full appreciation of available energy options, cost outlays, including CAPEX, OPEX, total Life Cycle, and non-financial considerations to ensure that investments in RE are secure and value-directed.

Wole Abayomi is the Head of Strategy, Vanetti Advisory Limited, and also E.D. Business Strategy, Powerex Limited. He can be reached at oluwole@vanettiadvisory.com