Reschuffling Nigeria’s Energy Mix: the Coal Power Alternative
Nigeria is a country of contrasts – varied and amusing at the same time. When in 2008 Candidate Obama campaigned on the theme of energy independence, there was a loud and frightening silence while the campaign lasted and thereafter. In fact, Nigeria went to sleep even though America has traditionally been Nigeria’s biggest buyer of crude. No deliberate policy was thought through on how to deal with the expected drop in sale of our crude to the USA. The numbers were to later prove staggering and with that, the toll on the economy.
According to Citigroup’s global commodities research unit, the United States of America (USA) oil and gas production was evolving so rapidly—and demand was dropping so quickly—that in just five years the U.S. could no longer need to buy oil from any source but Canada. Canada, Saudi Arabia, Mexico, Venezuela, and Nigeria had consistently been five of America’s largest crude oil suppliers, although their rankings vary year on year. Predictably and expectedly, U.S. purchases of crude oil in 2011 increased from Canada and Saudi Arabia and declined from Mexico, Venezuela, and Nigeria, according to final trade data from EIA’s (Energy Information Administration) February 2012 Company Level Imports report. So from being the biggest importer of oil, the US was going to be, in a matter of years, a net exporter.
A similar scenario has continued to dog the power sector. And the silence this time is louder still! Routinely, Nigeria’s power assets, especially pipelines hauling gas to gas turbines, are vandalised compounding the already pathetic electricity situation in the country. Of course Nigeria depends largely on gas as fuel for her electricity. The facts speak for themselves. Currently, Nigeria has a power generation mix made up of roughly 70% gas and 30% hydro creating an overdependence on gas as a source of power. A combination of serial pipeline vandalism, inadequate gas infrastructure and more installed generation capacity than can be adequately supported by available feed gas makes a stronger case for diversification of the energy mix away from, and/or in addition to, gas.
Using Coal as fuel for power plants going forward, provides a triple-A advantage (Affordability, Abundance and Assortment)viz; it is a cheaper source of electricity overall; its abundance locally effectively mitigates the fuel supply risk factor that has dogged gas as a source of fuel for power plants in the country and it meets the diversification criteria.
World-wide coal power generation statistics comparison provide an even more compelling case for Nigeria to diversify her energy mix. For instance, according to the World Coal Institute Report for 2009, Germany generates 42% of its electricity from coal. Coal is the single largest source of electricity for the United States at about 50%. According to the Report, India generated 147’000MW of electricity as at Report date and 69% of that was from coal. Greece and China respectively generated 52% and 80% of their electricity from coal while South Africa at 93% and Poland at 92% are the undisputed leaders of countries generating power from coal.
As of today, there is not a single coal-fired power plant in operation in Nigeria. The old Oji River Power Station which used to run on coal has been dismantled now. This is despite the fact that the Federal Government of Nigeria has committed to diversifying her energy mix with a 30% target contribution from coal. Need we over flog the imperative to change the narrative by introducing coal into Nigeria’s energy mix?
I know environmentalists will talk of carbon emission, ozone layer depletion and cleanliness of the energy source. But using the Circulating Fluidized Bed (CFB) Technology which is a clean coal technology that meets the World Bank Sulfur Oxides (SOx) and Nitrogen Oxides (NOx) emission standards with significantly reduced pollution will take care of that.
Some little glimmer of hope though! As of 4th March 2016, Black Rhino, the African arm of America’s Blackstone Energy Partners and Dangote Group of Companies, announced a decision to jointly invest up to $10 billion in energy infrastructure projects in Kano State and in East and South West of Nigeria.
The projects are with particular emphasis on renewable energy, power transmission and building of pipelines including a 1000MW Coal-Fired Power Plant (CFPP)and 100MW solar energy project in Kano State. According to BusinessDay of 6th March 2016, MuhammaduSanusi II, emir of Kano, who is the chairman of Black Rhino Group, disclosed that his Group, Black Rhino, and Dangote Industries would each contribute $5 billion for the construction of a coal power plant and a solar energy project in Kano, as well as gas pipeline project from AkwaIbom to the South West, where Dangote Industries are concentrated. We hope this initiative will extend to the huge coal deposits in Owukpa in Benue State and Itobe in Kogi State.
Also in April 2016 during an interview granted by the Hon Minister of Power, Works and Housing, BabatundeFashola, SAN, he made so many interesting comments that gave hope and direction to the issuesaround the power sector.
Two points stood out for me – the need to define a clear Energy Mix Policy for Nigeria and encouragement of local Nigerian investors who hitherto were reluctant to invest in our local economy. Rethinking or re-imagining Nigeria’s energy mix has obvious advantages. Apart from locating similar fuel sources within the same belt for ease of power evacu- ation as espoused by the Minister, there are others. Coal, for instance, does not need the laying of hundreds of kilometers of pipelines and so is less susceptible to incessant vandalism plus coal is not found around the Niger Delta where militancy has become the new normal, to name just a few.
On the support to local investors, the FGN must do more than pay lip service because the challenges are myriad. For instance, the prescription of a 30% equity and 70% debt contribution for green field power projects by both the Nigerian Electricity Regulatory Commission(NERC)and Power and Aviation Intervention Fund (PAIF) as funding structure is stiff. For instance, for a 1200MW Coal Fired Power Plant (CFPP), that I am aware of, being executed by a local investor and estimated to cost US$3.2b broken into two tranches of 600MW each i.e. US1.6b per tranche, the local investor is expected to provide equity of US$480m (i.e. 30%) and then borrow US$1.12b(i.e. 70%). By all standards, US$480m is huge for any Nigerian business. This is compounded by the fact that Nigerian banks do not have long term funds to finance the highly capital intensive power projects. Government can do a number of things to provide needed intervention: seriously consider reducing the equity requirement to 10% or lower; provide support by way of quasi-equity of about 20% through a PPP-type arrangement which the power company can buy back at a future date; consider alternative funding sources like channeling about half or more of the estimated Pension Fund assets of over N5.2trillion as of December 2015 i.e. over N2.5trillion to the power sector; allocate a dedicated crude production quota to be applied solely for power project similar to the dedicated local refining allocation of 445’000bb/d.
In addition, the Nigeria Bulk Electricity Trader, NBET, was created with a view to enhancing investor confidence. But with no financial track record, nobalance sheet and no tangible assets compared to its planned liability, it raises a huge concern for banks who might want to consider a fixed or floating charge on the assets for purposes of extending credit. One way Government can empower NBET is to extend a Sovereign Guarantee to NBET covering its Power Purchase Agreements (PPAs) for green field projects on a short to medium term basis (3-5years) from the operational date of the plants. The World Bank Partial Risk Guarantee is another window that needs to be activated to support the sector. These measures will enable the Bulk Trader access requisite credit locally and internationally to carry out its role.
The power sector in Nigeria is on life support and requires emergency response. So no amount of attention dedicated to it will be misplaced as it is foundational to driving our economic growth. The Power Minister is ‘making the right noises’ and hopefully, as the action man that he is known to be, we expect he will translate these ‘right noises’ to verifiable results to help jump-start the economy.
-Ashiekaa, PMP, a Chartered Accountant, Lawyer and member of the Chartered Institute of Taxation is the President/CEO of World Energy Consult currently consulting for Governments and National Oil Companies