How can Nigeria secure its energy future?

We live in unprecedented times. The intrigues of very recent global events snowballed from navigating a pandemic to unravelling tumultuous economic uncertainties. These unprecedented events preempted world governments to rethink energy policies by steering such policies to a precarious point — seeking a pragmatic balance between meeting consumption needs and safeguarding energy sustainability.

On a grand scale, the global energy crisis reveals the primacy of good energy infrastructures. The logic here being that commissioning modern, complex infrastructures, and expanding the capacity of existing ones would complement energy supply to expanding economies and hedge against unforeseen market shocks.

Now, to describe Nigeria’s energy crisis as ‘unprecedented’ requires a nuanced, antithetical approach. Granted, Nigeria’s energy crisis is unprecedented because, just like other energy-rich countries, its oil revenue plummeted owing to fluctuating demand for crude, competing investments in renewables, the rise of alternative fuel sources e.g., U.S. shale, combined effects of health restrictions and geopolitical tensions which stalled cross-continental exports. However, a parallel argument foils the preceding point by presenting a stronger view: Nigeria’s crisis is anything but ‘unprecedented’. It was a long time coming. This is premised on decades-long hesitancy to modernize the oil sector, targeted sabotage of strategic assets, public mismanagement, and most significantly, neglect of energy infrastructures.

The signs of a future crisis had, arguably, always been there — The handwriting on the wall.

To understand how Nigeria got to this point, we need to explain the cause-and-effect relationship between poor infrastructure and a resulting outcome of having an under-served market. Empirical reviews of the energy sector suggest that overhauling existing systems is the element needed to unlock the full potential of Nigeria’s hydrocarbon deposits.

For a clearer context, we should analyze this subject from the prism of the following subsectors: crude/gas, power, and renewables.

Cause-and-Effect: Crude/Gas supply crunch.

Living in Nigeria comes with a sour reality. This reality forces one to learn, and live with, dreadful words such as 'fuel scarcity'. Discussing the fuel scarcity with almost anyone always evokes all too familiar imagery: overcrowded petrol stations bustling with poorly organized queues and petulant motorists. Everyone struggling for hours to purchase liters of petroleum products which are in short supply.

Fuel scarcity extends beyond the queues, however. It pervades the macroeconomy, for one, by gagging corporate Nigeria into budget rations and austerity measures. With the rise of diesel and petrol prices, businesses have been forced to transfer costs to consumers. A vicious cycle ensues leading to inflation, expensive travel fares, increased cost of living and meagre income for households.

Supply shortfall, or more colloquially put ‘fuel scarcity’, persists because of unutilized production capacity which refers to Nigeria’s inability to refine, store, and transport petroleum products within the national supply chain.

The bargaining chip of possessing vast hydrocarbon resources becomes insignificant given the evolution of modern energy trends. We could reference the gas market as a case in point. The domestic gas market is stunted because a significant percentage of available natural gas, rather than being refined and supplied for consumption, is exported as liquefied natural gas, re-injected to enhance oil recovery or simply flared. Inability to optimize refining capacity is a moot point, yet a persisting clog in the wheel of collective progress. Without a functioning refinery, the country may not realize the full gains of its hydrocarbon deposits.

Supply shock and the economy’s vulnerability to disruption connect to the point we made on the primacy of infrastructures. A clear example is how Nigeria is bearing the brunt of the Ukraine crisis by incurring high costs to import refined petroleum products. It is reasonable to argue that the months of ‘fuel scarcity’ could have been averted if existing refineries were at optimal operation. An insular Eurocentric energy policy, given present realities, does not spell good for Nigeria's petroleum and gas consumption.

So, can the crude sector rise above disruption?

Hardly can any sector be ‘disruption-proof’. Although, modernizing Nigeria’s oil and gas sector requires an uncompromising resolve to, first, expand energy infrastructure, and second, protect existing assets.

We should not discount the urgency of insulating critical assets from targeted sabotage. Safeguarding strategic assets, in this context, is a key concern for both gas and petroleum production in view of persistent vandalism of pipeline installations. Vandalism of oil assets curtails production, and terminal disruptions from illicit operations materially affect exports leading to revenue losses.

Increasing coastal security in Nigeria; deploying intelligent pipeline monitoring systems, among others have been suggested as viable means to crack down on sabotage and illicit disturbance of oil operations. It would take political will to achieve these safeguards because of the deep seated socio-political implications. Regardless, stakeholders should engage with host communities to ensure they collaborate in protecting assets sited within the communities.

A reductive surmise here is quite simple: produce more, refine more, supply more.

Let there be Light: Power & Electricity.

The power sector is beleaguered with legacy problems as far as infrastructure is concerned. The 2013 privatization exercise, being part of a wider reform strategy, should have expanded generation and distribution capacity, increased electricity access and upgraded transmission. But so far, the strategy has achieved ambivalent outcomes. For instance, Distribution Companies acquired and had to use existing facilities from the government-owned company. These facilities are not of optimum standards, neither can they serve Nigerians at full capacity. This means that even post-privatization distribution companies must retrofit, and upgrade, inherited infrastructures to absorb, and distribute, transmitted power at full capacity.

Distribution companies presently cannot absorb the circa 7000 megawatts of power which the Transmission Company of Nigeria wheels out to them thanks to the infrastructure deficit. A weak infrastructure system forces a glitch in the distribution flow process by causing load power rejection. This, in turn, puts unneeded pressure on the spinning reserve. The spinning reserve is the technology that provides short-interval electricity during frequency drops. Constant pressure on the reserve forces an eventual collapse of the National Grid which explains intermittent electricity outages, and which equally worsens aggregate technical and commercial losses of companies.

Again, the domestic electricity market has had its share of vandalization with far reaching consequences. For example, vandalism on transmission facilities disrupts the electricity supply process. Moreover, given that power generation facilities require significant gas feed injection, disruption of gas supply invariably affects power generation.

A deficient electricity supply comes with significant economic losses for consumers, especially corporate entities who spend quantifiable resources on fuel and diesel. It is also of little comfort that diesel and petrol are scarce, worsening Nigeria’s business climate.

The Nigerian power sector sorely needs investment fed into the infrastructure chain to restore industry reputation. It is estimated that the country requires as much as $100 billion in investment over the next 20 years to boost supply capacity. Existing companies must expand power transmission network and capacity. Distribution companies must equally improve the reliability of supply to consumers which comes from rehabilitation and upgrading transmission lines and substations.

The power sector relies heavily on electrical components, which makes the electrical equipment market strategic and a point of focus for stakeholders. Unfortunately, electrical components are largely imported with manufacturing capacity being insufficient to meet local demand. Components such as electrical wires, power generating machines, inverters, transformers, conductors, meters, switch gears, capacitors, distribution boards, and voltage regulators are useful to the value chain when they are manufactured, or imported, with high standards to phase out outdated components across the country.

It is useful to note that bankability and viability of this sector has been a long-standing concern for investors in terms of expanding revenue traction from electricity users. But continuing with an opaque payment/metering system may not attract more investments because of the potential collection losses to companies. This, again, is a legacy problem endemic to the previously government-owned company. Collection and revenue problems might be alleviated under a transparent pricing and collection regime. Notably, the Meter Asset Provider Regulations and the National Mass Metering Programme seek to achieve this objective.

An efficient approach is to restore confidence and bankability by financing meter deployment, closing metering gaps, removing estimated billing, and digitizing revenue collection from customers directly to the companies — customers should pay for actual power consumed.

The third factor: Renewables?

Renewables constitutes a fundamental makeup of the energy sector. Considering the significant deposit of renewable sources in many parts of Nigeria, the crucial issue now lies in finding the right financial strategies to invest in the technology to generate and transmit renewable energy outputs to consumers.

The renewables prospect is certainly gaining momentum in view of widespread market awareness, technology innovations, and the National Feed-In Tariff Programs which encourage renewable-sourced power to be generated and integrated into the National Grid. Conversations around renewables show that Nigeria is repositioning its strategy on energy access. Access to energy and productive use of energy are, in this sense, two necessary components. This is why renewable electrification must extend beyond simply providing energy to ensuring that individuals and communities can utilize energy productively spurring economic development.

The renewable market should be constituted into a cohesive sector similar to what the power/electricity market experienced. There needs to be a structured market for renewable technology and products in addition to the clusters of community-based projects and downstream sale of products. Establishing this structured market could solve the commercial problem of feeding a huge amount of renewable-sourced power into the broad energy infrastructure — benefitting many unserved areas. Presently, Nigerian legislators are working on Bills that would constitute a renewable market and new regulatory entities.

In addition to tax exemptions and fiscal incentives for renewables products, import tariffs should be a concern for the government. Given the push to ensure a breakthrough in Nigeria’s renewable systems, high import tariffs for renewable products appear counterproductive in building a suitbale infrastructure model. This explains the reason renewable components are quite expensive for consumers today. The current tariff system must be reviewed downwards to encourage investments into renewable components while an innovative approach to domestic manufacturing capacity is explored.

Looking at a bright future?

Ostensibly, one of the missing components to Nigeria’s energy progress is infrastructure security. Thankfully, as we have seen, the country's hydorcarbon resources remains a core competitive advantage, solving one aspect of the equation. However, more needs to be done, hence our conversation on building, and reinforcing, the components of infrastructure across the gas, power, and renewables value chain.

To avert future crises, and to secure the future of energy, stakeholders must revisit the basics of cross-sectoral reforms — Improving energy access, which comes from a self-sufficient domestic supply chain. In the face of energy transition, foreign exchange fluctuations, and market instability, spending on overhauling existing infrastructure might be challenging, and uncomfortable. However, this is a durable solution for everyone involved.