Power Play

The drive for energy deals in Africa is widely recognised, says Peech Oggero, power & energy associate director (Europe, Middle East, India & Africa), Aecom

It is widely recognised that electricity supports economic growth and development; there is continued need for electricity in Africa, yet lack of funding and an unfavourable investment environment, combined with political instability, are delaying the development of the sector.

The continent is home to many of the world’s fastest growing economies (Ivory Coast, Tanzania, Senegal), and one billion people, but two-thirds of people have no regular access to electricity. The opportunity for investors is therefore significant. Sizeable funding from US and EU institutions (USAID, IFC, European Commission) and others is granted or lent to African countries to develop their required energy and infrastructure sectors.

Further funds are needed, as public funds remain insufficient to meet the required power generation. To meet this funding gap, several countries have started to unbundle their power systems and have introduced private participation and competition through engaging in independent power projects (IPPs).

From our past experience of engaging with IPP stakeholders, we have learned to treat each individual country separately to understand the unique opportunities it offers. For example, our long-term engagement in Nigeria has given us in-depth insight into how the IPPs have developed over the years and ideas on what the way forward might be.

With a population of 186 million, the largest in Africa, Nigeria has only 13,400MW of installed power generation capacity, of which only 8,000MW is available. By comparison, the UK with a population of 66 million, has electricity demand equating to 40GW which is met with an installed capacity of 78GW. In Nigeria less than 4,000MW was dispatched on average over the last two years due to constraints in gas supply, electricity transmission and distribution. As a result, the lack of constant electricity supply has driven industries to pursue off-grid alternatives.

Nevertheless, Nigeria has several potentials for power transactions, with about 52 active power generation transactions, based on USAID estimates.

In Nigeria, the first IPP was developed in 1999: the project was marred by dispute and arbitration creating further delay in power sector reform.

Notwithstanding this, Nigeria has an ambitious Power Sector Recovery Programme (PSRP) to expand power sector infrastructure as a priority, with objectives to: (a) restore the sector's financial viability; (b) improve power supply reliability to meet growing demand; (c) strengthen the sector's institutional framework and increase transparency; (d) implement clear policies that promote and encourage investor confidence in the sector.

These objectives can be realised with decisiveness and prompt action by federal government tackling key issues. In brief, these include:

• Gas constraints

Currently the gas industry is considered overregulated in Nigeria. A deregulated and more appropriate legislation could encourage new investment in gas development and allow market forces to determine prices and cost for producers or consumers and also support in securing gas supply contracts. Fuel smuggling and pipeline vandalism will also need to be tackled.

• Transmission and distribution constraints

The system is operating well below international reliability and security standards, primarily as a result of inadequate maintenance of outdated equipment and the lack of a comprehensive and modern system to have real-time data and manage real-time operation and control to keep in balance the power system.

Currently, limited funding and inefficient operation is a core barrier faced by the government. One of the possible solutions is entry into PPPs, with the right approach this could help to expand the T&D network and improve efficiency overall.

• Cost-reflective tariffs

Tariffs are problematic in Nigeria: they do not generally meet the actual cost incurred and are incoherent from one project to another. For the sector to be financially viable, the end-user tariffs must be cost-reflective and meet the actual cost incurred by investing in such a project. There is a plan to fund the required Electricity Market Support until tariffs attain cost recovery levels but this has not quite materialised on the latest IPP and currently only applies to the Distribution Company (DisCo).

• Favourable investment climate

The government could take several actions that could improve investment climate, such as commitment for payment of sovereign guarantee, improve sector transparency, clear communication, clear policy framework, and consistent and fair regulatory oversight.

On the investor side, investors could focus on tackling the key dead end issues such as sourcing of fuel supply, understanding the requirements for electrical transmission upgrade, investment to improve it, and network connection, since engaging with Nigerian stakeholders takes time to get to resolution. These issues should be negotiated and firm agreements in place early in the project development process.

Since the government is now looking at a favourable tariff structure, among other measures, it is recommended to utilise the cost effective best available technique to increase efficiency, which will then help to reduce the tariff.

Nigeria aside, there are more countries in Sub-Saharan Africa to watch out for on such transactions, such as Tanzania, Kenya and Ghana.