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Siemens Agreement: Game Changer or Same Old Story?

Power & Energy	1646 VIEWS
Power & Energy
1646 VIEWS

Monday, July 22, 2019 12:29PM / CSL Research / Header Image Credit: Asorock

Yesterday, news filtered into the local media that Nigeria and power giant Siemens have signed a power sector deal which would lead to the production of 25,000MW of electricity in Nigeria by 2025. At the meeting between the presidency and the management of Siemens, the president set a goal of achieving 7,000MW and 11,000MW of reliable power supply by 2021 and 2023. This agreement is said to be an outcome of Angela Merkel’s visit to Nigeria in 2018 which led to the submission of the Nigerian Electrification Roadmap last year. Furthermore, the agreement includes fixing Nigeria’s archaic transmission grid and distribution infrastructure.

We laud this agreement as a major step towards resuscitating a fast deteriorating power and energy sector. The focus of the project across the power value chain is particularly a major positive given Nigeria currently has a power generating capacity of about 13,000MW but has never reached 50% utilisation capacity with peak power generation of 5,222MW. Added to this, an archaic transmission system which has recorded countless collapses this year results in significant transmission losses.

That said, we have concerns around Siemens’ position in the power value chain given the huge investment it is committing to make. The Transmission Company of Nigeria (TCN) is currently 100% owned by the government while the Gencos and Discos are privately controlled. While, we see a possibility of Siemens getting a stake in TCN, we struggle to see how that will work for the discos and gencos given that Siemen’s huge invesments may mean ceding control to them. Also, government’s desire to maintain a stranglehold on the power sector in bid to regulate electricity tariffs remains a key risk.

In addition, we note that the key challenges for transmission and distribution segments of the power value chain includes archaic transmission grids and inadequate metering both of which have hampered realizing value for power generated. Solving the metering conundrum would require investments in meters for each consumer unit. We note that Siemen’s ability to recoup its investments may require not only an increase in tariffs but also a change in the method of calculating tariff to include a surcharge.

Considering Nigeria’s perennial romance with failed power projects however, we have decided not to get too optimistic so soon. Projects such as the National Independent Power Projects (NIPPs), Privatisation of value chain segments etc. have failed woefully over the years gulping trillions of Naira. This appalling history justifies pessismism about this new project. However, significant foreign participation this time around may be the game changer.