Nigeria’s Energy Future

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Energy makes the world go round. Energy is a basic need. Yet many people do not have access to it. Looking at energy consumption per capita, the inequality between the have’s and the have-not’s across the globe becomes more glaring: the map above shows the world from an energy access perspective: the more energy people access, the larger the size of the country.  Access to energy for all is a necessary pre-condition for sustainable development: there is a direct relationship between access to energy and a country's score on the Human Development Index.

Globalization has led to greater interdependence of peoples and countries: we live in a 'flat' and transparent world. There is almost instantaneous knowing; we are all connected all the time; we live a highly mobile life. The result is increasing volatility.

Business and political power isn't what it used to be. The hold on leadership is tenuous at best, public trust has been eroded across the board. We see new disruptive business models and new political coalitions emerging.

Somewhat contradicting this trend is the growing inequality and concentration of power as the incomes of global elites are rising. Elites have successfully externalized social costs for their private gain. For example, during the 2008 financial crisis that continues until today, banks were rescued at tax payers’ expense. Government and power may no longer be aligned as was the case historically, but global players, such as the G7 or the International Monetary Fund, continue to shape national policy and are thus affecting people’s lives without the people having any say in their decision making.

Creator: Oxfam International February 2012. All rights reserved.

Overstepping global boundaries

Humanity has hit several planetary boundaries, and urgently has to come to terms with the reality of climate change, biodiversity loss and fresh water scarcity in combination with an ever increasing global population. The illustration shows the ‘doughnut’ of the safe space for humanity to survive on this planet without destroying it. To achieve this, human interference must be limited on nine crucial counts, such as climate change, nitrogen & phosphorus cycles, biodiversity etc. If these planetary boundaries are exceeded, the planet can no longer accommodate human life as we know it. There simply would not be enough clean air and freshwater or other natural resource for humans to exist.

Research shows that we have already crossed four of the nine boundaries: climate change, loss of biosphere integrity, land-system change and altered biogeochemical cycles (phosphorus and nitrogen). Two of these, climate change and biosphere integrity, are what scientists call "core boundaries". Significantly altering "core boundaries" would "drive the Earth System into a new state[i]". The carefully balanced ecosystem of people and nature is becoming unstable with unknown but possibly dangerous consequences. At the same time, we have not even catered for the basic needs of humankind as millions of people on this planet have no access to safe drinking water, have no shelter, a job or access to health care.

The challenge for all countries is to find the middle ground, where people’s needs are met and the planet’s boundaries are not violated.

Creator: F. Pharand-Deschênes /Globaïa. All rights reserved.

Energy access for all is a pre-condition for the realisation of Nigeria's development potential. Providing energy access does not necessarily push us over the planetary boundary. Just 11% of the world's population produce 50% of global emissions. That's the real problem. The International Energy Agency (IEA) estimates that providing access to the 19% of the world population currently without electricity would raise emissions by just 0.7%.

Nigerians need reliable, affordable, safe, clean energy, not just any energy at all costs. And this is where Nigeria can place itself squarely inside that ‘safe space for Nigerian humanity’: by providing clean energy from renewable sources the country can provide thousands of Megawatt to its citizens without increasing the harmful effects of CO2 emissions.

Which way Nigeria?

Today, growing complexity and a high degree of uncertainty define Nigeria. The following list is a snapshot of Nigeria's challenges prepared by a group of young Nigerian decision makers from all sectors. They ranked it from high to low:

  1. climate change and its impacts
  2. extremism and the pursuance of ethnic interests
  3. rising inequality and persistent poverty in the midst of rising wealth
  4. social unrest and insecurity
  5. food insecurity
  6. corruption and governance through political clientèles
  7. weak regional integration
  8. lack of energy access and shift in global energy needs
  9. poor education
  10. population trends, such as the growing body of young Nigerians.

Energy access lies at the heart of the strategies needed to meet and mitigate these challenges. Energy access for all is a precondition for the realisation of Nigeria's development potential. However, the majority of Nigerian households do not have any access to electricity at all.

Nigeria’s future energy must:

  • serve the 60% who are off-grid and pay dearly for energy especially in the rural areas. This so-called bottom of the pyramid pays more money for energy than their compatriots who are connected to the grid.
  • serve the 40% who cannot rely on the grid (this is the urban electorate that scares politicians most).

Currently, Nigeria’s poor people pay proportionately more for their energy, not only because they need to foot the bill for expensive generators, but also because they buy kerosene, fire wood and fuel in small quantities, which hikes the price if calculated over a longer period of time.

Nigeria’s energy options

What energy resource options are available to Nigeria? This author has identified the pros and cons of the various sources in the well illustrated report Renewables on the Rise, a study for the Heinrich Boell Foundation’s Nigeria and West Africa Office.

Mike Liebreich, Chief Executive of Bloomberg New Energy Finance shows that the future of energy is renewable. Liebreich argues that 50% of new capacity investments are directed at renewables with a greater level of efficiency. Renewables drive new business models that move profits from extraction and generation to services.

Creator: Mike Liebreich, Bloomberg New Energy Finance (2015).. All rights reserved.

Everything points to an energy future that relies less on the grid and favours off-grid solutions. Given that Nigeria’s grid covers a maximum 40% of the country, this should make politicians and private sector operators rethink their current singular focus on gas and coal. Nigeria should watch this development as profits are starting to move away from extraction into the service areas of installation (at household and community level), maintenance and distribution. As Liebreich shows in the following map, the move to include clean energies in a country’s energy mix is well advanced. According to Liebreich, this is ‘the race to the future’:

Creator: Mike Liebreich, Bloomberg New Energy Finance (2015).. All rights reserved.

Clean solutions

Nigerians need reliable, affordable, safe, clean energy, not just any energy at any cost. These are the key words that politicians, development agencies and, increasingly, savvy business operators are using. It is just that in using these words, they do not always mean what they say…

Affordable energy?

Today, households pay a high poverty penalty. A poor rural household in Nigeria spends about N65 – N200 on energy per day. How much does one Kilowatt from a diesel-generator cost? How much productive time is lost in Nigeria every day because of black-outs? Whenever the argument is made that solar systems have a higher initial (upfront investment) cost, all these factors are mostly ignored. Where the cost of solar is compared only with the kilowatt hour price of grid electricity, the poverty factor is left out of the equation, thus leaving a distorted picture of the true and affordable price of renewables. For comparison sake, in wealthy Germany today one Kilowatt costs a retail customer less than € 0.25. German wholesale electricity prices are the lowest in decades as a result of stranded assets and a rapid rise of renewables (now 30%, rising to 50% by 2025). Note that industry has been exempted from paying the renewables surcharge that pays for the feed-in tariff for renewable producers.

Clean energy?

Let us remember that only those energies that do not pollute the air we breathe, the water we drink and the soil we cultivate can truly be called clean. Every energy source has its own environmental footprint. Lignite and coal, diesel and oil are the dirtiest fuels for power generation. They emit large amounts of CO2 and methane, use and pollute water, destroy ecosystems, landscapes and not to mention the social impacts of mining.

Industry is spending millions on Public Relations to make people believe today's coal is clean and that, like in the 19th and 20th century, industrialization cannot happen without it. Today, coal is gradually becoming a resource of the past. There are alternatives to coal in industrial processes, with the exception of steel making. Carbon capture and sequestration (CSS) technologies have proven to be expensive and not a single commercial power plant operating is operating with CCS. As a result of strict regulation, technology has been introduced that somewhat reduces toxic emissions from coal-fired power plants. This, however, does nothing to prevent global warming or the devastating impacts of coal mining. The waste from burning coal is full of heavy metals, like arsenic. Power plants still emit mercury and soot which kill people. We all know the images from cities covered in smog, from Beijing to Cairo. Like 'healthy cigarettes', 'clean coal' is an oxymoron.

The other energy technology some falsely claim is 'clean' is nuclear power. Doing so ignores the risks associated with needing to store radio-active nuclear waste for tens of thousands of years. As Fukushima and Chernobyl have shown, the fall-out from a nuclear accident is enormous, as harmful radiation will affect the health of generations for decades after the accident.

Reliable energy?

Even those people connected to the grid would hardly describe the grid as being reliable. A different approach to the grid is required that combines management and technological improvements to stabilize the grid with renewable energy solutions that can close the gaps. Energy resilience can be enhanced by connecting many smaller units of electricity generation. This requires a shift in investment towards smart mini-grids and energy solutions for individual households. This is especially relevant for those areas that the power lines currently pass by.

Large hydro-power dams that provide up to 30% of Nigeria's power, long viewed as the most reliable sources of electricity, are suffering from inadequate maintenance. With climate change their reliability is further undermined, as drought and other extreme weather events affect their installations.

Safe energy?

Nuclear vulnerability and waste legacy are legendary, but frankly nuclear has no future primarily because it is not economical. There is the obvious con of emissions which disintegrates air quality as previously mentioned but what about displacement of communities by mining, oil exploration, or large hydro dams?

The Nigerian reality is not one where people have access to reliable, affordable, safe and clean energy. The Nigerian people and government (as elsewhere in the world) seem addicted to oil and gas. An urgent intervention is evidently required. In my view, the only answer to Nigeria's challenges is to economically diversify as soon as possible and to leapfrog in to a clean energy future. Renewables are in vast supply and the renewable industry is changing the business of providing energy services.

No single energy size fits all

The electricity market operates at different scales and the most appropriate solutions differ significantly depending on the scale. The pros of a massive ramp up of renewables on- and off-grid are clear:

  • Solar PV and wind power are increasingly affordable. Their low cost can help drive grid penetration.
  • At scale, renewables are cost competitive. Grid parity has been reached for wind and PV solar, i.e. the cost per Kwh over the lifetime of a project are now lower when compared to fossil fueled power.
  • Renewables can lead to reductions in the wholesale price of electricity, if regulation grants it priority grid access.
  • Renewables technology is fast to deploy: One-two years for a solar plant, three-five years for a wind park, 20 years or more for a nuclear plant.

The rapid deployment of renewables needs to be managed properly:

  • There are in the short-term higher up-fronts costs that need to be borne by the investor, a community or the prosumer (a consumer who also produces electricity that is fed into the grid, see below). These can often be recouped within 2-3 years.
  • There is a risk of dumping of sub-standard technologies, like second-hand PV panels.
  • When renewables provide a lot of power, grid managers need to deal with the variable output. The experience in Europe is that while variable, the output is reliable and 90% predictable.
  • Grid integration costs need to be accounted for. Again, we see elsewhere in the world that these are manageable.
  • Finally, in the case of large-scale solar, absorption of farmland which might lead to conflicts over land tenure. There is also a perception among some people of landscape blight.

Grid-connected projects

First some good news. The arrival of the era of photo-voltaic solar power does not mean the future of the grid is bleak. Grid-defection in Europe and the USA has so far been low, due to the right mix of regulations and incentives. In Europe, households tend to produce renewable energy, take 30-50% for their own use and sell the excess to the grid. At the same time, they are consumers when there batteries are low. These so called producer-consumers, aka prosumers, are a powerful new constituency.

With plentiful renewable energy coming into the grid, combined with unbundling and privatisation, earnings in the electricity sector have moved up the value chain. Exploration and production are marginal earners, grid operation is neutral and most profits are being made in energy services. This has attracted many start-ups to the (renewable) energy services market. New services are being provided by incumbent operators as well as new companies (e.g. from telecoms, banking and electronics). We observe a trend towards selling new services in bundles (solar energy, mobile phone, home automation and internet). If designed well an energy services market promotes energy efficiency and demand-side management, thus reducing demand growth and pressure on the grid.

The lure of this fast-growing market has, unfortunately, also led to increased risk taking. In India, for example, some unscrupulous operators entered loss-making bids at power production auctions in an attempt to corner the market, with no intention of ever delivering power to the people.

Mini-grids and hybrid-grids

Policy-makers and businesses have thus far focused most attention on the grid; they continue to do so at their peril. Significant growth will come from areas not currently served by the grid. Whether businesses and consumers choose off-grid or mini-grid solutions depends on whether the additional costs and risks of scaling up are managed. Building on work by Accenture and the Rockefeller Foundation, we see five critical dimensions for business success in decentralized renewable mini-grids in Nigeria over the coming 5 years:

1. Policy

Political commitment and a suitable regulatory environment (balancing centralized and decentralized objectives) are needed. What support for renewables is available? Is there a clear regulatory framework, (e.g. do agencies have overlapping jurisdictions)? Is there a grid access monopoly or preference? Is it possible to set commercially viable tariffs and variable tariffs for rural and urban contexts?

2. Viable energy service companies and business models

Reduce barriers to entry through project development and load ramp-up support, provide access to financing.

3. Anchor

Identify potential anchor load tenants, e.g. telecom tower operators looking for portfolio optimization, business associations, etc.

4. Social

Available skills (human capacity) and consumer demand, social acceptance.

5. Financial

Availability of financial support, impact of political / regulatory risk and uncertainty.

Off-grid and appliance-based approaches

Immediate success can be achieved at the local scale, serving what economists call the bottom of the pyramid: the millions of people without access to credit, with no formal employment, and insecure tenure. We should not forget their energy needs. They spend a lot of their disposable income to serve this basic need. Today, energy services in the form of leasing and pay-as-you-go power are the most attractive options for poorer households. For that reason we want to look more closely at the business models underpinning it.

Alternatives to firewood cooking and kerosene lighting are an important part of Nigeria’s energy future. Improved technologies such as clean stoves, biogas lights, mobile phone services combined with LED lights and phone charging can easily be adopted by those who have very small disposable incomes. These technologies can be scaled up and customers rapidly move to larger units (from basic lighting and phone charging to productive use for SMEs at lower cost per Wh).

The economic fundamentals are solid. Solar is competitive compared to diesel generators in environments where solar radiation is over 4 Kwh/m2/day, as is the case in Nigeria. Biogas and small in-stream hydro generators are slightly more expensive.

See Pay-As-You-Go Solar policy brief for more details on the business model that would enable millions of households and SMEs to get access to clean energy.

Business models

Contrary to the general trend in the energy business towards unbundling, most Energy Service Companies (ESCOs) are integrated, looking to generate, distribute and sell renewable power as a means of managing risk.

Profit margins in emerging markets, with high real interest rates and low Kwh tariffs, are slim. This low rate of return on investment in turn affects scalability. The recent changes in the electricity services markets are upending many established companies. We observe that established generating utilities or grid companies are fighting back or competing with new service offerings. From a customer perspective, it is still difficult to obtain 24-hour reliability from a mini-grid, although battery and hydro storage (in combination with wind) are solid options.

Even if solar is price competitive there is a role for government and donors. They can, for example, set up debt funds to serve isolated communities, create insurance schemes, conduct long-term currency swaps, support the establishment of institutional investor platforms or funds, as well as put in place smart regulation (such as consumer protection and standardization) or provide business ramp-up support.

If the critical dimensions discussed are adequately addressed, there is no reason for Nigeria to continue to suffer massive economic losses from a lack of reliable power. Providing clean energy access to all Nigerians is possible.

Job creation & climate resilience

So what about climate change? Nigeria at the same time as being a major contributor to climate pollution is already suffering the impacts and struggling to adapt. If global warming is to be limited in this century to a 2°C rise compared to pre-industrial levels, fossil fuel use will need to be severely limited. This raises the question of how much oil, gas and coal can still be safely exploited and where. Globally, a third of oil reserves, half of gas reserves and over 80% of current coal reserves should remain unused in order not to overstep planetary boundaries. In other words, science says: Keep it in the ground! For Nigeria this means we now enter the era of “unburnable oil and gas”[ii].

Energy access for all is not about carbon, rather the other way around. Reducing carbon emissions is the co-benefit of the approach outlined. First come jobs, productive investment, inclusive development, clean air, an economy fit for the 21st century. As in any structural change process, it is important to understand who are the losers and prepare to mitigate or overcome their challenges. It is important to know there are a business case and a moral case. They appear to overlap, but they are not the same. 

Finally, to deliver energy access to all, good governance and ownership by the people (women and men) matter a lot.

 

[i] Rockström, J. et al. Nature 461, 472–475 (2009) and Steffen et al. “Planetary Boundaries: Guiding Human development on a changing planet” in Science (16 January 2015).

[ii] The geographical distribution of fossil fuels unused when limiting global warming to 2°C by Christophe McGlade & Paul Ekins in Nature 517, 187–190 (08 January 2015) doi:10.1038/nature14016

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Comments

This is quite a great

This is quite a great publication. The need to have this message communicated to Nigerian is quite imperative if the Nation is to be prepared for transiting into implementing the agenda of Sustainable Development Goals.(SDGs)

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