Wednesday, September 26, 2018 / 08:47 AM / FDC Research
Nigeria’s installed electricity capacity is 12,522MW, well below the current demand of 98,000MW. The actual output is about 3,800MW, resulting in a demand shortfall of 94,500MW throughout the country.3 As a result of this wide gap between demand and output, only 45% of Nigeria’s population has access to electricity.
This power deficit has also weighed negatively on business operations in the country. Users must seek alternative energy means, primarily through buying gas and diesel-powered generators. These alternatives are relatively expensive, and most businesses that use them incur high production costs.
Besides curtailing domestic business activities, the poor capacity of electricity in Nigeria deters foreign direct investment inflows into the country, as investors are typically weary of high electricity costs and shortages. Nigeria’s total electricity mix is largely dominated by non-renewable energy despite a vast potential in renewable sources.
The exploration and adoption of these through private investments, offer a probable solution to the power challenges in the country. Attracting private sector investment into this area demands business-friendly measures such as lower interest and tax rates.
Electricity generation in Nigeria
Electricity generation for Nigeria’s grid is largely dominated by two sources - non-renewable thermal (natural gas and coal) and renewable water or hydro. Coal and natural gas make up the largest portion of energy production in Nigeria, while energy generated from hydro is well below potential.
Nigeria depends on non-renewable energy despite its vast potential in renewable sources such as solar, wind, biomass and hydro. The total potential of these renewables is estimated at over 68,000MW, which is more than five times the current power output.
The exploration of these potentials and the production of renewable energy on a large scale would significantly increase Nigeria’s electricity grid and ease power shortages in the country. Electricity created from renewable sources is cleaner, more efficient and more easily replenished.
Spurring investment in renewables
Nigerian governments have made efforts towards renewable forms of electricity in the country. For instance, in 2006, the Ministry of Environment implemented the Renewable Energy Master Plan (REMP), which was a strategy that aimed to increase the contribution of renewable energy to Nigeria’s total energy production by 2025.
The plan was produced with the support of the United Nations Development Programme (UNDP). In 2015, the current administration drafted the Nigerian Renewable Energy and Energy Efficiency Policy (NREEEP), which focused on harnessing alternative energies such as hydro, solar, wind and biomass.
This policy indicated that hydropower is the most important renewable energy source to be developed to harness the country’s full potential. Despite these plans, there has been no significant addition of renewables to the national grid. Total power output remains between 3,500MW-3,800MW, with nonrenewable sources accounting for 80%-85%.
The government’s inability to achieve its objective is largely due to a weak commitment to the proposed plans. In line with the power sector privatization objectives, the government could consider luring private investors into the renewable energy space.
Private investors, as complementary agents in a mixed economy, could overcome the government’s flaws and achieve more significant results if the federal government shows more of a commitment. A Chinese firm, Shenzhen Kang Ming Sheng Technology Industry Incorporation, has already pledged to invest in Nigeria’s renewable energy and with business-friendly reforms, Nigeria is likely to see more of this.
Two key reforms that would be foundational to incentivizing the private sector in investing in renewable energy are cheaper financing and lower taxes. Lending rates in Nigeria (currently at an average of 17.5%) are too high for investors who require capital to start up businesses such as in renewable energy.
Countries such as China, the US and India, which are leading the renewable energy revolution, offer substantially lower rates. The average commercial bank lending rate in India, for example, is about 9.45% pa. In the US and China the rates are at an average of 4.3% pa. The Nigerian government has made concessions for other sectors, enabling cheaper financing to agriculture and manufacturing in order to encourage their growth.15 While the monetary policy rate is unlikely to reduce lending rates in the near term, the government might consider offering similar lower rates to power sector investors, particularly for those who are investing in renewable energy.
In the US, lower rates for financing are complemented by tax concessions. Nigeria’s corporate tax rate of 30% is one of the highest in the world.16 Bearing in mind that a new firm investing in the renewable energy sector might find it difficult to recover its initial capital outlay at the beginning of operations. A staggered tax rate could provide incentive for such investment.
The Nigerian government needs to make investment into renewable energy more attractive to private investors in line with its privatization objective. Increased power supply from renewable sources will ease the country’s power challenges. An increased power output would also be favorable for the growth of other businesses and the viability of the country’s environment to other foreign direct investors. However, the negligence of the country’s renewable energy potential suggests that power output will remain below optimal, and this sub optimality will remain a significant constraint to economic activities in the country unless clear action is taken.