1. Nigeria has struggled with adequate electricity supply for over a century despite reforms to privatize the electricity sector. The sector remains challenged by lack of sufficient generation capacity and distribution issues. 2. Current available generation capacity is only 4,996MW, enough for 40% of the population. Estimates suggest 12,490MW to 15,000MW of capacity is needed to provide electricity for all 170 million Nigerians. 3. Reforms have led to increased investment and 82 generation licenses totaling 26,437MW of potential capacity. However, distribution companies remain insolvent, hindering purchases from generators. Expanding and strengthening the electricity sector remains a work in progress.

1. 1
Nigeria, the most populated African country, with huge prospects for exemplary
economic development, has yet to successfully defeat the number one enemy of
economic progress: lack of adequate electricity supply. This case study analyzes
the structure of the electricity sector in Nigeria and its challenges, and
recommends probable solutions to these problems.
“The emergence of the electricity industry in Nigeria can be traced to the late
1890s, a decade after electricity was introduced in England.” (U. I Okoro, 2007)
Nigeria has had electricity for over a century, although its rate of development
has remained appallingly slow. “The Nigerian Electricity Supply Company
(NESCO), the first utility company in Nigeria, was established in 1929” (KPMG,
2013) “ In 1950, the then colonial government of Nigeria passed the Electricity
Corporation of Nigeria (ECN) Ordinance No. 15 of 1950. ECN emerged as a
statutory public corporation and took over the assets of NECSO and other power
generation projects of the government, as established by the Ordinance.” (Oni,
2013) To address the worsening state of electricity supply, the National Electric
Power Policy, 2001 was enacted, which paved the way for the reform agenda
that led to the establishment of the Electricity Power Sector Reform Act (EPSRA),
2005. “EPSRA provided the legal background for the privatization of the
Nigerian electricity industry. It also served as the framework for the
development of a competitive electricity market, the establishment of a
dedicated regulatory body and the establishment of the rural electrification
agency.” ((PHCN), n.d.) In 2013, the privatization of the power sector, according
to the provisions of EPSRA, was completed “and PHCN was split into 6
generation and 11 distribution firms, all sold separately, for about $2.5 billion in
total.” (Brock, 2013)

2. 2
4,996MW
83%
1060MW
17%
Availabe Capacity
Gas (Thermal)
Hydropower
The Nigerian Electricity Supply Industry (NESI) is comprised of Generation,
Transmission and Distribution. “As stated on the portal of the National
Integrated Power Project, since the execution of the reform scheme and the
subsequent transfer of asset ownership to private investors, the number of
generating plants connected to the grid has increased to 23, with a net installed
capacity of 10,396 MW and available output at approximately 58.3% of installed
capacity. “ (Project, n.d.)
The Transmission Company of Nigeria (TCN), through a 3-year management
contract with Manitoba Hydro International (a Canadian based company),
handles the transmission business, which is a natural monopoly in Nigeria. NESI
is regulated by the Nigerian Electricity Regulatory Commission (NERC), which
operates under the purview of EPSRA, 2005. The roles of NERC include tariff
management (price), market entry and participation management (licensing)
and consumer protection.
Fig. 1a – Fuel Mix (Installed Capacity) – Source: Gilbert Igwe
Fig. 1b – Fuel Mix (Available Capacity) – Source: Gilbert Igwe
8,457MW
81%
1,938.4
MW
19%
Installed Capacity
Gas(Thermal)
Hydropower

3. 3
“Data from both local and international sources estimate that 60% of Nigerians
do not have access to electricity.” (Verolme, 2015) (Alike, 2014) If the current
available capacity of 4,996MW serves only 40% of the Nigerian populace, it is,
therefore, reasonable to conservatively hypothesize that, Nigeria requires
approximately between 12,490MW to 15,000MW of available capacity for her
170 million inhabitants1. Drawing conclusions from Brattle Group’s study (al,
2014), the average cost of installing new generating infrastructure is $1 million
per megawatt. Drawing an inference from this study, therefore, Nigeria requires
approximately between $7.5 billion and $10 billion to match generating capacity
with demand.
Fig 2. – Capacity & Demand (Gilbert Igwe)
There has been an upward trend of investors’ confidence and interest in the
NESI, as a result of the electricity market reforms implemented by the Nigerian
government. A quick review of NERC’s licensing portal substantiates the
effectiveness of the reform. A total of 82 licenses for electricity generation have
been issued for both off-grid and on-grid generation. The aggregate capacity of
1 {Available Capacity/Current Coverage (0.4) – Available Capacity = Additional Capacity Needed.} {Then I
rounded up to the nearest tenth thousand by 33.4%} This is without consideration for industrial demand
and population growth.
GDP $521.8 billion
Capital Abuja
Currency Naira
Population 170M
Rural Population 95.8M
Access to Electricity 40%
Available Capacity for 40% 4,996MW
Estimated Further Capacity Req. ~ 7494MW – 10,000MW
Cost/MW (CCGT) $1 M
Total Licenses Issued

4. 4
licenses (only On-grid & Embedded2) issued until now is 26,437MW. (Nigerian
Electricity Regulatory Commission, n.d.)
Fig 3 below is a list of proposed and ongoing upstream (generation) projects.
MW Name Operator Location Expected
Completion
Technology
495 Okija
Phase 1
Century
Power
Generation
Ltd
Okija,
Anambra
State
September
2015
Open Gas
Cycle
Turbine
+225 Phase 2 “ “ NA Conversion
to CCGT
750 Phase “ “ 2018 CCGT
450 Azura-
Edo IPP
Azura
Power
Benin City
Edo State
2017 OCGT
150 Akute Hudson
Power Ltd
Akute-
Esorun
Ogun
State
2015 OCGT
100 Jos Wind
Farm
JBS Wind
Power
Plateau
State
2018 Wind Power
40 Dadin
Kowa
Hydro
Mabon Ltd Gombe
State
2016 Hydro
(Embedded)2
Fig 3 – Proposed & Ongoing Upstream Projects – Gilbert Igwe.
The NESI comprises of institutional and private players. The various institutional
players are saddled with the responsibilities of policy formulation, licensing,
power purchase and resale, transmission monopoly, sectorial development and
regulation. The private players are licensed to generate, or distribute electricity
to industrial and private consumers.
Federal Ministry of Power: Managed by a minister appointed by the president,
the federal ministry of power initiates and formulates sectorial policies and
developmental programmes. (Federal Ministry of Power, n.d.)
Nigerian Electricity Regulatory Commission (NERC): Consequent to the
Electric Power Sector Reform Act of 2005, the NERC was established as an
independent institution to regulate the economic and technical operations of all
participants in the supply chain of the Nigerian Electricity Supply Industry. The
2 Embedded plants supply directly to distribution companies in their area of operation, rather than the
national grid. They may be referred toas Network-Specific-Plants.

5. 5
NERC is responsible to operators3 for licenses, for formulating operating codes
and standards, establishing customer rights and obligations, and for setting cost
reflective tariffs. (Nigerian Electricity Regulatory Commission, n.d.)
:
NBET, a wholly owned federal government company, licensed by NERC, acts as a
go-between electricity generator and distribution companies. A two-way
contract model, Power Purchase Agreements (PPAs) and Vesting Contracts
(VCs), is adopted by NBET to incentivize upstream (generators) and down
stream operations (distributors). The PPA, a contract for bulk electricity supply
to NBET, is executed with qualified generators after satisfying NBET’s licensing
requirements. On the other hand, distribution companies purchase electricity
from NBET through Vesting Contracts4.
Some of the requirements for a “PPA” are:
a. “Verification of site (land) documents in the form of title deed, notarized sale
agreement or deed of assignment.
b. Environmental impact assessment subject to the statutory standards of the
Federal Ministry of Environment.
c. Comprehensive plan for the evacuation/transportation of generation. This is to
ensure that no capacity is stranded.
d. A standing agreement with a fuel supplier: coal or gas. “ (Nigerian Bulk
Electricity Trading Plc, 2015)
NBET seeks to promote liquidity and to motivate generators, because most of the
DISCOS are insolvent and may not be able to directly purchase electricity from
the generators, due to huge collection losses and electricity theft. “It is baffling
that a government who should be promoting investments and encouraging
investors, owes DISCOS a whooping sum of $155m!” (Simon Echewofun Sunday,
2015)
Instituted on the 31st of
October 2005, the NERC regulates the Nigerian electricity industry according to
the provisions of the Electric Power Sector Reform Act 2005. It issues licenses to
prospective players who are qualified to engage in the electricity sector, sets a
cost-reflective tariff for the industry using a “building blocks” approach, and
ensures that all sectorial participants conform to the statutory rules and
operating guidelines for the electricity sector. (Nigerian Electricity Regulatory
Commission, n.d.) (Nigerian Electricity Regulatory Commission, 2012)
3 Operators here refer to electricity generators, the Transmission Company and distribution companies.
4 The electricity purchased from generators through PPA is resold to distribution companies according to
their network demands. The Vesting Contracts are usually for 20 years.

6. 6
Source: NERC (Cost Components of Tariff)
The NERC issues licenses and permits for electricity
generation, transmission and distribution. To generate electricity above 1MW for
personal use, a permit is required. (Nigerian Electricity Regulatory Commission,
n.d.) NERC has detailed guidelines for applying for a permit on its website. On
the other hand, a license is required to generate electricity for sale irrespective of
capacity. (NERC, n.d.)
The gas industry plays a major role in the Nigerian electricity
sector. It is equitable to recognize the gas supply industry as one of the
“backbones” of the NESI.
: NERC issues both off-grid and on-grid licenses to generators. Off-
grid generators supply electricity to industrial consumers through a private
distribution network. The on-grid generators either supply to the grid or directly
to the distribution company within its supply reach (Embedded Generation). The
generation market in Nigeria is based on a competitive market model where new
entrants are encouraged to participate in the market, through investor-friendly
policies and incentives.
: The Transmission Company of Nigeria, a government owned
enterprise, is the only company licensed by NERC to engage in the business of
electricity transmission. It coordinates the transmission business of the NESI as a
natural monopoly. It was set up to operate the system and engage in electricity
trade. (Transmission Company of Nigeria, n.d.)
: There are 11 distribution companies (DISCOS) licensed by NERC
to retail electricity to consumers in Nigeria. The distribution arm of the NESI is
organized as an oligopolistic market. New entrants are not allowed to enter into
32.5 31.0 30.6 30.7 32.0
0
5
10
15
20
25
30
35
40
2015 2016 2017 2018 2019
(NGN/kWh-nominal)
Export Sales (Avg
Costs)
Uncollected Sales
Non-Tech Losses
Distribution
Losses
Transmission
Losses
Distribution Tariff
OVERALL INDUSTRY TARIFF

7. 7
the market. This, I believe, limits the scope for competitiveness and effectiveness,
as most of these DISCOs are not liquid enough to finance the development and
improvement of distribution infrastructure.
: The optimum tariff discovery mechanism is based on the
“Building-Blocks” approach, which considers cost on historical basis and
develops price on performance projections. That is, cost is calculated on the basis
of the last performance cycle/period, and price is fixed on the premise that
performance would improve. Though it doesn’t seem like this model would
completely appreciate the cost implication(s) of effectively running the system, it
does, however, seem like an appropriate platform to motivate industry players
to improve their efficiency levels so as to make gains from the difference
between projected performance (price) and actual performance.
The DISCOS, in recent times, have continued to clamor for a collection-losses-
and-cost-reflective tariff and for NERC to punish the hugely indebted
government consumers. The NERC, as the industry regulator, should empower
the DISCOS, whose investments are at stake, to disconnect non-complying
consumers whether government, industry or private. The issue of transferring
collection losses to consumers is unethical. Instead, NERC should collaborate
with discos to design solutions for minimizing collection losses and electricity
theft.
: The EPSRA 2005 was enacted to promote a speedy transition of the
electricity sector to the era of improved power supply. However, 10 years after
enactment and implementation, 60% of Nigerians do not have access to
electricity, epileptic power supply persists, prospective investors have shown
little or no commitment to utilizing issued licenses, and industry players
continuously lament about poor access to finance, losses to theft, unpaid debts
and asset vandalization. Does it, therefore, mean that the industry liberalization
was a failure? Emphatically no! However, development is a continuous process,
and the tenets of ‘the EPSRA’ should continuously evolve to accommodate the
changing dynamics of the electricity industry.

8. 8
: I would recommend that the government of Nigeria
considers proper information dissemination imperative. Nigerians should be
properly informed about the cost of generating electricity per megawatts, per
technology, and the cost of every component, and equipment, required to
provide electricity to every Nigerian household. This information would help the
Nigerian populace understand and appreciate the relationship between cost and
the need for price (tariff) increment.
Source: Gilbert Igwe - Information Management Cycle
: The transmission
network is the foundation of the electricity supply system. A well functioning
transmission grid gives investors the impression of investment-security. Reports
from different sources estimate that upgrading the Nigerian grid infrastructure
would require approximately 30-50 billion dollars. To this effect, I suggest that
TCN should be completely corporatized to enable it raise finance from the capital
market (local and international). This would provide the much-needed finance
for infrastructural development and effective system management.
Source: Gilbert Igwe

9. 9
: The DISCOs
have been unable to meet the meter supply obligations. The reason for this is not
far fetched; there is a serious liquidity problem because of huge collection losses
and electricity theft. If electricity consumption is not properly metered, how,
then, can the consumers be held liable for the corresponding receivables? To
meet the target of metering every household, I am suggesting that meter supply
should be structured as a separate component of the NESI. It should be designed
in a way that encourages competitive pricing from suppliers. The cost per meter
may be spread over a period of years, as a specific percentage of electricity bill
per annum. The meters must be designed to transmit supply and consumption
data of each meter account to a dedicated auditing system in real-time, or
periodically.
DISCOS
METER
SUPPLIERS
HIGHER METER
PENETRATION
&
WELL
DOCUMENTED
CONSUMPTION
Source: Gilbert Igwe – Independent Meter Supply Industry

10. 10
:
In addition to detaching meter supply from the DISCOs, I am also suggesting that
a monitoring industry should be established to design and manage algorithms
and systems that can audit, and detect discrepancies between, consumption and
supply of electricity, and receivables, per meter account, in real-time or
periodically. Any discrepancies discovered would be immediately flagged, and
the affected account would be shutoff remotely or visited for a physical audit.
Source: Gilbert Igwe - Monitoring Consumers
: If my recommendations on metering and auditing are adopted,
there would a drastic reduction in the rate of electricity theft. In addition to the
suggestions, NERC should develop and implement stringent punishments for
electricity theft and infrastructure vandalism. If an offender were subjected to a
15-year jail term for electricity theft, subsequent offenders would be
discouraged from a similar crime.
: The
government of Nigeria should, in collaboration with international development
organizations and financial institutions, develop a financial product to empower
rural entrepreneurs to set up small scale power supply enterprises. Such fund
should provide local entrepreneurs with the necessary training and finance to
establish Biomass Plants, Battery -Based Solar Power Systems, Micro-hydro
schemes, etc.
The ‘Building Block’ approach of cost assessment,
though it incentivizes cost reduction, may not be very cost-reflective because it
draws cost assumptions from historical data. Therefore, I would suggest
designing a truly cost reflective tariff based upon the premises of historical and
current cost analysis.
CONSUMERS
2. MONITORING COMPANY
RECORDS SUPPLY PER
METER ACCOUNT
(CONSUMER)
1. DISCO SUPPLIES TO
CONSUMERS
5. DISCO DISCONNECTS
FLAGGED CONSUMER
VISITS METER FOR PHYSICAL
EXAMINATION
3. DISCO SENDS MONTHLY
BILL TO CONSUMER
4. MONITORING COMPANY
AUDITS METER READING
(MONTHLY BILL) AGAINST
RECORDED SUPPLY
EXPECTED READING =
SUPPLY - ENERGY LOSS
**FLAGS ANY ACCOUNT
WITH DISCREPANCIES

11. 11
: Until now, NERC has more than
20,000MW on-grid licensees, and majority of them are either inactive or not
doing enough to come on-stream, which contravenes the terms and conditions
agreed upon with the regulatory body. NERC recently threatened to revoke the
licenses of these defaulters, who have remained assiduously inactive. (Ochayi,
2015) To avoid a reoccurrence of such, I am recommending that NERC should
establish a 2-phase licensing regime. The first phase (Prospecting) should
empower prospectors to seek capital, complete site and environmental
assessment, and other preparatory procedures. It should be valid for a maximum
of 3 years with a one-time 6-month extension grace. The second phase
(Operation) should be for facility development and operation. The issuance of
the “Operation License” should be subject to the satisfactory compliance with the
terms and conditions of the “Prospecting” license.
It is seen that though electricity has existed in Nigeria for over a century, it
neither evolved nor developed like in other places, because of poor maintenance
and systematic ineptitude. However, the current efforts to cleanse the system of
retrogression are plausible, and must remain consistent to achieve significant
results. The measures currently in place should continuously evolve;
accommodate changes and improvements when, and where, necessary. I am
optimistic that if things are done properly, Nigeria has the potential to serve as a
success model for other developing economies to emulate. To this regard, and
upon my optimism, drawing inferences from the magical, but well orchestrated,
transformation of China from a developing economy to an economic
powerhouse, I term Nigeria a potential Mini-China of Africa.
Phase 1
Prospecting License:
Site and Environmental
Appraisal
Investment feasibility
study
Securing financial
commitments
Arrangement with OEM
Primary commitment
with fuel supplier
Primary Commitment
with TCN
Primary Commitment
with NBET
Duration: 3 years
Evaluate
Satisfactory completion of
Phase 1
or
a 6-Month grace period.
Phase 2
Operating License:
Development of Site
Installation of
infrastructure
Commissioning
Operation
Caveat: Fulfill all steps
within 2 years
Extension: 1 year
Exception:Nuclear
plant

12. 12
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13. 13
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