Nigerian Power Capacity Growth to Remain Below Ambitious Targets

Sourced from Fitch Solutions

• We are maintaining our more bearish growth forecasts for Nigeria’s power capacity despite the deal being signed with Siemens to upgrade the overall power sector.

• While we expect that the first two phases of the project have a higher chance of success given its multi-faceted approach to addressing many issues in the sector, we expect that the plan to increase power capacity by to 25GW by 2025 is too ambitious.

• High security risks, widespread corruption and the failure of previous attempts by international firms to improve the sector’s overall capacity leaves us cautious in our forecasts.

We at Fitch Solutions view the deal signed between the Nigerian government and Siemens to improve the country’s power sector and its efficiency as having a higher likelihood of success than previous efforts undertaken by the government and other firms. This is due to the multifaceted approach planned by Siemens, which will address the various factors inhibiting growth in the sector. 85% of the project’s funding is also backed by international financing through a consortium of banks, which the German government guarantees through credit insurance firm, Euler Hermes. However, as we highlighted last year after the deal was announced, the project still faces many risks which leaves us cautious in revising our forecasts upwards for Nigeria.

The overall project, called the Presidential Power Initiative (PPI), is planned for three phases. We highlight the details of the overall project in the table above. The first two phases will focus largely on improving the overall transmission and distribution (T&D) sector in order to better handle the existing power generating capacity. We forecast Nigeria’s total power capacity for 2020 will be at a level of just over 15 GW, however the power sector only operates on approximately 4.5 GW. This is due to both breakdowns at power plants as well as an inefficient grid network that is not able to reliably transmit the full available capacity.

The plan is therefore to increase reliable operating capacity to 7 GW by 2021, then to 11 GW between 2021 and 2023 through an improvement of the existing networks and upgrades at existing power plants. The third phase will entail increasing overall power capacity to 25 GW between 2023 and 2025.

We expect that the first two phases have a higher chance of being implemented successfully as it addresses many of the core issues in the sector in a sustainable manner. This is because of its approach in ensuring a more stable electricity grid and increasing capacity by upgrading existing infrastructure (indicated in the chart above), which will reduce losses. In fact, the Nigerian government estimates that the PPI could save it up to USD1bn in losses every year. At the same time, Siemens will aim to improve overall metering to improve collection rates. Insufficient revenue collections has led to distribution companies operating at a deficit and not being able to undertake the necessary maintenance nor pay for electricity supplied.

However, we are more bearish on the prospects of the ambitious third phase of increasing the country’s total power capacity to 25GW between 2023 and 2025. Given multiple delays and false starts to planned projects, we expect the plan to add at least 10GW of capacity in five years in Nigeria will be too ambitious. As can be seen from the chart above, we forecast Nigeria’s total power capacity to be below 20GW over our 10-year forecast period. We also expect that T&D losses, while forecast to decrease, will remain above 15% of total output. At the same time, we also highlight a limited clarity on new projects that would increase the country’s capacity to the level required. Siemens, in its white paper for Nigeria, stated that independent power producers (IPPs) would be responsible for constructing most of the new capacity.

Given the issues plaguing the country’s power sector currently, the success of the first two phases of the PPI will therefore be key in ensuring sufficient interest from IPPs to meet that gap, especially in the relatively short timeframe. We also highlight Nigeria’s relative underperformance in our Project Risk Index, with the country ranking below the global average on all three main pillars and only above the SSA average in terms of operation. This indicates the high risks faced by projects in Nigeria and the likelihood of it not progressing as planned.

We also expect that the PPI will be met by several key obstacles that will need to be addressed in order for the initiative to be successful. These factors include widespread corruption and vested interests in many sectors which would seek to maintain the status quo. Security risks also remain a concern, with militant groups such as the Niger Delta Avengers posing a risk to gas feedstock. Similarly, Boko Haram has also carried out attacks on electricity infrastructure before, causing a major blackout in the city of Maiduguri as a result.

The failures of previous initiatives also indicates a high risk to the PPI. The first one being Canadian firm, Manitoba Hydro International being contracted to in 2012 to provide training, management process and knowledge transfer to support the work of the Transmission Company of Nigeria (TCN). The government eventually terminated the contract without official comment. In addition, a 2013 commitment by US firm General Electric to invest USD1bn in Nigeria’s power sector in order to triple output has been quietly dropped in recent years with limited headway having been made.

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 (‘FSG’). FSG is an affiliate of Fitch Ratings Inc. (‘Fitch Ratings’). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. The original article can be accessed by clicking here