NIGERIA: ELECTRICITY GENERATION UPDATE

UNCLAS SECTION 01 OF 02 ABUJA 001376

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E.O. 12598: N/A
TAGS: ENRG ECON EINV NI
SUBJECT: NIGERIA: ELECTRICITY GENERATION UPDATE


ABUJA 00001376 001.2 OF 002



1. Summary. Nigerian Electricity Regulatory Agency (NERC) was
established in 2005 to regulate electricity generation, as a first
step in unbundling, privatizing and attracting new investment in the
power sector. Chronic electricity shortages have hindered social
and economic growth in Nigeria. The GON continues to approve new
projects, but recently acknowledged that the December 2007 target
date of 10,000 Megawatts (MW) of production would not be reached.
Many projects are in the Niger Delta region, which is plagued by
violence. Further most projects will use natural gas as fuel yet
supplies are neither physically nor contractually secured. The
sequencing of generation, transmission and distribution upgrades may
slow power entering the grid. End Summary.
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STATE OF THE INDUSTRY
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2. At a forum in Abuja, NERC Chairman Dr. Ransome Owan and other
energy officials discussed the state of power generation in Nigeria.
Since its creation, NERC has granted generation licenses to twenty
independent power producers to generate a total of 8,237.50 MW of
electricity by the year 2010. These are in addition to the seven
on-going GON projects that were slated to bring the national
capacity to 10,000 MW by December 2007. On June 19, NERC granted
four new licenses for Independent Power Projects (IPPs). The four
licenses are Shell Petroleum Development Company to generate 642 MW
from Afam in Rivers State; Ibafo Power Station Limited to generate
200 MW from Ibafo in Ogun State; Western Technologies and Energy
Services to generate 50 MW and 1000 MW at Buena Vista Estate at
Lekki in Lagos State and Maya Ajegunle in Ogun State respectively;
and Hudson Power Limited to generate 50 MW at Wara in Ogun State.


3. Joseph Makoju, the Special Adviser to the President on Electric
Power, reported that the December 2007 target date was no longer
feasible because of local communal clashes in the Niger Delta where
many projects are located. Makoju put the new expected completion
date at June 2008. He said that power generation had improved to
3,200 MW in April 2007, but recent press items reported that
generation had dropped back below 2,000 MW in June. The two power
plants of combined capacity of 670 MW in Ondo and Ogun states
commissioned in May 2007, were not yet operational because power
evacuation and grid line projects are not completed, but would be by
the end of 2007, according to Makoju.
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NERC PRIMER
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4. The NERC was set up as the electric power sector regulator under
Nigeria's Electric Power Sector Reforms (EPSR) Act of May 2005. The
NERC is empowered to make regulations on arbitrations, licensing,
customer matters, market monitoring, and fines and penalties. NERC
has the exclusive responsibility to license companies to generate,
transmit and distribute electricity. It is responsible for
establishing the regulatory framework within which power companies
operate. Dr. Owan reported that to promote competition and private
sector participation, the NERC seeks to allow for prudent cost
recovery and reasonable margins, using a model Power Purchase
Agreement (PPA) review process that addresses cost recovery, profit
and risk sharing. The NERC has launched a nationwide customer
awareness campaign to enlighten electricity consumers and
stakeholders on NERC activities and their rights and obligations in
a market-driven power sector. NERC also is presenting the framework
it is devising to encourage private investment in power generation
and distribution.
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INVESTMENT OPPORTUNITIES IN THE POWER SECTOR
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5. Dr. Owan promoted Nigeria's electricity sector as holding great
potential following deregulation. He underscored that Nigeria's
power sector reforms sought to create reliable and efficient
electricity at affordable prices in a business friendly environment
with a cost-effective tariff and cost recovery. The NERC's cardinal
mission was to attract private sector investment in the power
industry by creating fair and stable regulations for all players,
sanctity of contracts, full protection of investments, and 100%
profit repatriation. He estimated that Nigeria's power sector had
unmet demand in excess of 20,000 MW, and urged investors to take
advantage. The NERC was holding workshops and seminars on safety
and health standards. The NERC had received funding from the United
States Government on safety standards.
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ABUJA 00001376 002.2 OF 002


OTHER ISSUES
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6. Electricity generation continues to be a thorny issue in Nigeria
as chronic power shortages hinder social and economic development.
The NERC's role is to create a sound regulatory regime that promotes
private sector entry and competition in the sector. Many pieces of
the puzzle also need to be put in place, however. Many new plants
are located in the Niger Delta, close to fuel supplies, but are
threatened by security and safety issues. Secondly plans to build a
network to supply natural gas to many of the new power plants and
locations are lagging behind. Most plants have not secured natural
gas supply contracts, and the absence of effective regulation in the
natural gas sector is a further hindrance to gas-based power
projects. Beyond the Delta, Nigeria lacks an adequate national grid
to transmit power generated from even two of the recently
commissioned plants in Ondo and Ogun states, demonstrating problems
with the sequencing of generation, transmission and distribution
projects and upgrades. Finally the privatization process has been
repeatedly stopped and started and subject to mammoth political
interference, leaving many existing elements of the existing
infrastructure in legal limbo. If the GON is serious, focused
attention needs to be brought to bear, and coordinated action needs
to be taken, on the many issues hindering progress in the power
sector, despite literally billions of dollars in government
investment.

CAMPBELL