Nigeria’s major power challenge is getting electricity to the consumer

Rocky Mountain Institute’s James Sherwood and Sachi Garber shared their thoughts with business a.m. BUKOLA ODUFADE on Nigeria’s prospects for growth in its electricity industry, despite the mammoth challenges it is facing; the need for the country to scale up its electricity supply using off grid solutions, like mini grids, in both rural and urban areas. Following are excerpts:

I think there is a lot of prospect. I’d come back to your question. But just for you to know where we are coming from, we’re working in countries across sub-Saharan Africa, with countries like Rwanda, Ethiopia, Uganda and here in Nigeria and broadly what we’ve seen in most of these countries is that there is a lot of room for more integrated planning approach. So we are really looking at things from the top level down rather than the project level down, and I think what we have seen in other countries like Rwanda, is that a focus on developing projects often lead to inefficiencies and oversupply and not really addressing the core issues in the electricity industry. So that is broadly where we are coming from, and we are working in Nigeria with the Rural Electrification Agency (REA); so they invited us in last year to help them with their strategy on off grid  electrification in particular, so that has really been our focus, on mini grids, and the off grid space.

I’m coming back to your initial question, just wanted to provide the context. So, we started from that perspective and over the course of last year and half working in Nigeria, we have gained a lot of perspective on what is happening in the sector.

I think some of the things we have seen have been well reported on in your paper and other places but there is definitely some supply issues; but it seems that the main issues are in the transmission and distribution and actually getting power to the people. So, well there is loads and loads in generation capacity, there is enough probably to meet demand on most days, and the real problem is how to get it to the end users. That would obviously change over time as some of those problems get corrected but that is the crux of the issue and thinking about it from the off grid perspective, it is really expensive to run distribution to communities that are not electrified yet especially if the power reliability is going to be really poor, it makes less financial sense when you factor in all those things, so the issue becomes how to get capital to invest into alternative systems like mini grids systems, and those into the communities.

You mentioned integration; I guess you are talking about integrating mini grids into the main grid?

Not necessarily, although that could happen over time.

Do you see it happening because I think it is a bit farfetched, distribution companies are territorial and are not really having this kind of conversations with mini grid players?

Yes, we have had initial conversations with a few of the distribution companies, to understand what their perspectives are, on this because as you have pointed out, this is new, and it is not something that has been done, there is no precedence for it, there is regulatory framework in place but nobody has tested it yet so we have talked with a few of the distribution companies just to know where they stand and how they are thinking about it, and there is a range of perspective and some are wary of it, they see it as something that may or may not work, and might be a distraction with unintended consequences, so they may not be the first ones to try it, but there are other distribution companies that look at it and say we are struggling to extend our systems to serve these customers and if this is a way to do that then we are eager to figure out if it would work for us.

Can you give me some names of companies that are interested?

I would say they are interested in the prospects but I can’t speak for them and say they would do projects.

They are not really expected to do projects but having the conversations with people willing to do the projects. The DisCos are territorial and might be trying to create another monopoly after NEPA, which is not possible because this was the reason for privatization?

I see some similarities with the way the conversations around distributed resources have unfolded in other countries, and I have done a lot of work in the United States prior to working in Nigeria and in U.S., there has been a multiyear conversation around distributed PV, household rooftops solar panels, how to do that and whether utilities can be owned and operated in that space, and it is similar here because you want to protect the monopoly and you give the utility the ability to do that or open it to the commercial sector, giving the benefit of competition. So I think that is something that would need to evolve but probably most private companies are going to have the desire to elbow other people out and make sure they can’t play in the space if they can.

The energy imbalance in Nigeria is growing because our population is exploding and the demand is skyrocketing but supply remains the major issue, majorly from the transmission and distribution parts but are you seeing the will to move the electricity sector from its current position because we have to really scale up quickly?

I think I have been impressed with a lot of the folks I have met, the distribution companies have capable teams in place but my impression is that if they had their finances in a better place and could raise more capital to do the investment necessary, then they would be able to install meters, and address some of their collection and losses issues and fix some of the reliability issues in the system, which is more investment in wires and poles on the ground, I think they could go a long way toward it, but it would not necessarily solve the problems but it would go a long way and this is one of conversations that needs to happen and is one of the topics that is intended to happen in the power sector recovery programme (PSRP), which I understand is now delayed but I think being able to figure out and work around for their current financial predicament which is somewhat their fault and somewhat the fault of investors for maybe not doing their due diligence of assets at the outset.

The assets are old and it is a challenging environment to work in so there are a lot of factors in to it but I think at the root cause level, it really comes down to having enough capital.

Yes I agree, but capital investment requires an enabling environment and the DisCos have to be in the right shape, for example, their collection efficiency rate is really low, below 30 percent, so how are they going to attract capital when they don’t have their house in order yet?

Yes, I think that is the question and I don’t have the answer to that but they have to put their house in order. And I dont think anybody has the answer. Maybe the recovery programme or the financial influx from the World Bank is one option and there are other options to get there, we have not really looked into this, just some observations.

Looking at rural areas, the major issue delaying electrification of rural areas is consumer demand, because economic activities would drive consumer demand and in turn electrification is supposed to drive economic activities, so which one comes first?

I think it is sort of a cycle where both of these things are reinforcing each other. What we are seeing right now is that there is already a demand even in rural areas where you see commercial shops and even larger households where they are all running their diesel generators, which means they are using electrical appliances and they are interested in power and are actually willing to pay a lot using diesel or petrol on a daily basis. I think the way we are viewing it is at starting with that sort of baseline demand where customers are used to using electricity, it would make financial sense to bring in a more stable source of electricity and you start to see once that electricity supply is available then the rest of the community is starting to buy into this, and once you have access to affordable electricity, you start to see more commercial activities picking up, more economic activities picking up, which in turn creates that cycle where people are purchasing more.

I think I agree with you because mini grids players in the rural areas have recorded amazing results in those areas, their revenue collection rates is almost at 100 percent and even their demand is always increasing so much that they keep having to expand their projects, so how can this be replicated in the urban areas since this is where most economic activities happen but the energy supply is still sporadic?

I think strictly from a regulatory point of view, embedded generation is allowed; there is a pathway to do that, creating a stable electricity supply that makes customers willing to pay and also creating new and better mechanisms for collection. I think there is an important risk to consider with that, again stepping back from the big picture and from an integrated planning perspective, having a bulk grid in the long run if it is working correctly is going to result in much lower costs for everybody, and a lot of the customers that tend to be targeted for embedded generation projects are usually the best customers for the distribution companies or grid to serve, so as you start taking those customers away and serving them somewhere else, all the distribution and grid cost gets spread over a smaller pool of customers who are maybe less able to pay and it creates this negative feedback that could have longer term negative impact on the sector.

So it is not something we have worked on in Nigeria and I don’t have answers or solutions to it but there are two ends to it, you want to serve these customers because it helps to support economic development, but you also don’t want to undercut the long term sustainability of the sector, so there is an important thing to consider there, for the distribution companies who can see that they are not providing good enough services for the people but they recognize that those are the customers they need to find a way to keep if not, their finances will just keep spiraling out of control.

Going to mini grids in Nigeria, the potentials are limitless in Nigeria. REA recently carried out a study and found out that there are over 10,000 potential mini grids sites in Nigeria, so the question is how do we speed up on this, the main thing is to scale up on mini grid, how can this be done?

The Rural Electrification Agency (REA) would love to hear you say that. I think there are two things that need to happen in parallel, one is continuing to grow this initial solution. It is still, sort of, in the experimental stage for 0-10,000 sites. It is still very early in the learning curve and continuing to grow the experience, one of the things that should unlock is cost reductions, so whereas mini grids today range in cost from N140-N300/ per kilowatt hour, so there is a huge opportunity for those costs to fall and if you can get mini grid cost down to N80/ per kilowatt hour which we think is really reasonable in the next few years, then that really changes the economics, to roll them out on a much larger basis. So out of the 10,000 communities, maybe a thousand of them have a lot of economic activities right now, and there are some portion that have little bit economic activities and some portion have less. So as you move out of the less wealthy communities, a lower mini grid tariff will need to be worked out, so someone might be able to pay N80/per kilowatt hour but might not be able to pay N160/kilowatt per hour, so I think that is one thing that needs to happen on that learning curve.