Identifier
Created
Classification
Origin
07ABUJA1607
2007-07-26 14:11:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Abuja
Cable title:  

NIGERIA: DOMESTIC ENERGY SECTOR IN TRANSITION

Tags:  ENRG ECON EINV EAID NI 
pdf how-to read a cable
VZCZCXRO3247
PP RUEHMA RUEHPA
DE RUEHUJA #1607/01 2071411
ZNR UUUUU ZZH
P 261411Z JUL 07
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 0410
INFO RUEHOS/AMCONSUL LAGOS PRIORITY 7498
RUEHWR/AMEMBASSY WARSAW 0478
RUEHNM/AMEMBASSY NIAMEY 0126
RUEHCO/AMEMBASSY COTONOU 0205
RUEHCD/AMCONSUL CIUDAD JUAREZ 0473
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
UNCLAS SECTION 01 OF 03 ABUJA 001607 

SIPDIS

SENSITIVE
SIPDIS

DEPARTMENT PASS TO USTR (AGAMA)
DEPT OF TREASURY FOR DPETERS
DEPT OF COMMERCE FOR 3317/ITA/OA/KBURRESS
DEPT OF ENERGY FOR CAROLINE GAY

E.O. 12598: N/A
TAGS: ENRG ECON EINV EAID NI
SUBJECT: NIGERIA: DOMESTIC ENERGY SECTOR IN TRANSITION

REF: A. ABUJA 1582

B. ABUJA 1575

C. LAGOS 494

D. ABUJA 1376

ABUJA 00001607 001.2 OF 003


UNCLAS SECTION 01 OF 03 ABUJA 001607

SIPDIS

SENSITIVE
SIPDIS

DEPARTMENT PASS TO USTR (AGAMA)
DEPT OF TREASURY FOR DPETERS
DEPT OF COMMERCE FOR 3317/ITA/OA/KBURRESS
DEPT OF ENERGY FOR CAROLINE GAY

E.O. 12598: N/A
TAGS: ENRG ECON EINV EAID NI
SUBJECT: NIGERIA: DOMESTIC ENERGY SECTOR IN TRANSITION

REF: A. ABUJA 1582

B. ABUJA 1575

C. LAGOS 494

D. ABUJA 1376

ABUJA 00001607 001.2 OF 003



1. (U) SUMMARY: Nigeria's power sector was in transition and the
World Bank was integrally involved in this process, according to
World Bank (WB) Energy Specialist Waqar Haider. He identified three
aspects to the transition: unbundling the Nigerian Electric Power
Authority (NEPA); regulatory functions moving from the Federal
Government (GON) to the independent Nigerian Electricity Regulatory
Commission (NERC); and private investment in the domestic energy
sector. The GON had "thrown a party but no one had come" to invest
in the domestic energy sector. END SUMMARY.


2. (U) US Department of Energy (DOE) International Affairs
Specialist Carolyn Gay met with World Bank Senior Energy Specialist
Waqar Haider to discuss developments in Nigeria's domestic energy
sector on July 16.

--------------
Unbundling in Progress But Problematic
--------------


3. (U) In 2005, the GON deregulated the Nigerian Electric Power
Authority (NEPA),unbundling it into six private generation
companies, eleven distribution companies all to be privatized, and
one transmission monopoly to be state-owned but privately operated.
The assets were put under the direction of the newly-created Power
Holding Company of Nigeria (PHCN) to manage the transition process,
leaving NEPA defunct. The unbundling process was partially
complete, but Haider was skeptical whether the successor companies
were prepared to operate as independent entities. The unbundling
had been done according to geography to accommodate Nigeria's six
geopolitical zones, and left successor companies with weak finances
and huge systems that yielded scant revenue. Moreover, the
GON-imposed electricity tariff structure left a huge gap between
revenues and costs, leading to deferred investment in power
infrastructure and subsequently to system degradation. This created
a chicken-egg problem with respect to profits and investment.



4. (U) Haider complimented the GON's bold steps to deregulate the
power sector to attract private investment, but the process would
not be complete as long as successor companies relied heavily on
government subsidies for their financial viability. For these
companies to remain solvent they would need government subsidies for
the medium-term, however, there must be a trajectory to reduce
subsidies over time, by moving to a cost-based electricity tariff.
Haider estimated the budgetary burden might be more than $1 billion
per year depending on the time horizon over which companies
amortized investment projects.

--------------
Regulation Tied To Gas Pricing
--------------


5. (U) In 2005, the GON formed the Nigerian Electricity Regulatory
Commission (NERC) to regulate power sector participation and
competition, electricity pricing, operating and consumer standards,
and power sector reform. Haider reported that NERC already had
developed many rules and regulations including its Multi-Year Tariff
Order (MYTO) framework, but one of NERC's key missions would be to
depoliticize domestic power pricing to allow necessary electricity
tariff increases. This would be a time consuming process requiring
widespread public acceptance, towards which little had been done.
To make tariff increases politically palatable, he advocated
parallel tracks: increasing supplies through "better housekeeping" -
spreading electricity load shedding more equally across the country,
and allowing consumers to see the value of a future electricity
tariff increase.


6. (U) Nigeria needed a comprehensive approach to the energy sector
that precluded pricing different energy sources in isolation, given
subsidized domestic gas consumption and reliance on importing
refined product. Nigeria's gas supplies were inadequate to meet
domestic power generation requirements and Nigeria could be forced
to either cut power generation, which would hurt industrial
production, or switch to more costly liquid fuels.

ABUJA 00001607 002.2 OF 003




7. (U) The Nigerian electricity market was severely lopsided.
High-cost diesel generators ($ 0.23-0.27 per kilowatt hour) are a
primary electricity source for many customers because of Nigeria's
unreliable and under priced grid-supplied power. As of July, 4,000
megawatts (MW) of Nigeria's 7,000 MW nameplate electricity
generation was theoretically operational and only 2,500 to 2,700 MW
was consistently available. The GON planned to increase power
generation capacity to 10,000 MW by 2008, but adequate gas supplies
remained an issue to meeting this target.


8. (SBU) Niger Delta security and below-market domestic gas pricing
were two factors impeding the development of adequate and reliable
gas supplies for power generation, as was the case with the Egbin
power plant when vandals sabotaged the Escravos-Lagos Gas Pipeline
in February 2006. While international oil companies (IOCs) were
accustomed to working in difficult areas, they would be loath to
honor commitments to develop Nigeria's gas resources without a gas
pricing framework that provided adequate returns on gas
infrastructure investment.

--------------
Where are the Private Investors?
--------------


9. (SBU) Nigeria encouraged private sector investment in
Independent Power Plants (IPPs),but potential investors' concerns
over receiving payment for privately generated electricity had held
up investments in new plants and generation capacity. Payment
concerns also had led private investors to demand GON revenue
securitization to assuage their lenders. IPPs had made
securitization proposals, but the GON had not yet decided on how to
insure private investors against Nigerian government default. Gas
policy issues held up the GON's divestment of government-owned power
plants. The South Korean firm that purchased the Egbin power plant
based its bid on a financial model predicated on NERC doubling the
power tariff and the firm paid only 10 percent of its bid up-front.
With the private sector shy to invest in Nigeria's power sector, the
Nigerian government was left to pick up the investment gap. In
2005, the GON committed $9.7 billion from Nigeria's excess crude
fund for the National Integrated Power Project (NIPP),creating
government-owned power generation and distribution assets it would
then privatize to recoup their development costs. However, the NIPP
has been racked with delays.

--------------
Refineries Lack Economies of Scale
--------------


10. (SBU) Nigeria's refineries were not performing largely because
of vandalized feedstock pipelines and labor strikes. Haider
attributed Nigeria's refining problems to public ignorance over
market fuel pricing. Nigeria's refineries were small and could not
compete on cost with large-scale refineries but served a strategic
purpose for energy security and economized on transport costs to the
far north. While Haider decried Nigeria's $1.5 to $1.8 billion
annual federal fuel subsidy, he acknowledged the GON's inevitable
role in subsidizing its intrinsically uneconomic refineries. While
Nigeria's current refining picture was bleak, Haider believed that
it could support a world-scale refinery given its ample crude
supplies and become a key supplier of refined product for all of
Africa.

--------------
WB Role
--------------


11. (SBU) The WB was integrally involved in advising the GON on
various aspects of its energy sector. The WB was a transactions
adviser on Nigeria's privatization activities, under the
Privatization Support Project (PSP) with Nigeria's Bureau for Public
Enterprises (BPE) for the sale of government-owned energy assets
including the Egbin power plant. However, the GON did not keep the
WB fully informed in the divesture process. The WB was helping
Nigeria develop domestic power infrastructure and offered technical
and managerial assistance. The Transmission Development Project
(TDP) invested in grid network reinforcements, a National Load and
Demand study, and extended the Supervisory Control and Data

ABUJA 00001607 003.2 OF 003


Acquisition (SCADA) infrastructure to power plant dispatch stations
to ensure optimal electricity transmission to market. The WB
sponsored the National Energy Development Project (NEDP),which
supported power sector reform and privatization. NEDP invested in
expanding Nigeria's transmission and distribution network by
building substations, small-scale high voltage transformers,
high-voltage power lines, and metering capacity, thereby increasing
the reliability of electricity supply by decreasing electricity load
shedding. NEDP provided technical assistance for public-private
partnerships in the power sector. The WB was sponsoring renewable
energy pilots in three Nigerian states involving biodiesel, solar
energy, and micro-hydropower to boost rural electrification.

--------------
WB Assessment
--------------


12. (SBU) Haider was critical of Nigeria's "catastrophic investment
picture" and believed this would continue until the GON put its
house in order. The GON did not have the capacity to efficiently
develop energy assets on its own, and its primary duty was to set
policies. Nigeria needed to attract foreign companies with the
technical, managerial, and financial muscle to develop the domestic
energy sector. Haider advocated loosening the policy framework and
offering a generous fiscal regime to balance Nigeria's high cost of
doing business.


13. (SBU) Haider was hopeful, however, that the WB would have
fruitful discussions with the GON later this year regarding
Nigeria's domestic energy policy and believed a coherent energy
pricing framework would have a positive impact on the power sector.
The GON had shown interest in meeting with stakeholders and this
could be a way for Nigeria to break the impasse with private
investors over power sector development. The WB would like to
partner with international development agencies and foreign
governments, including USAID to build local Nigerian capacity
through technical assistance, and pilot and demonstration programs.
Carolyn Gay expressed DOE's interest in supporting energy
development projects in Nigeria and agreed to discuss with DOE
officials the possibility of partnering with the WB on upcoming
projects.

GRIBBIN