Why Nigeria's power sector needs rework

Nigeria's power ministry is considering halting dollar-denominated transactions as part of a plan to address the gas supply challenge facing the sector. The move comes as the Minister of Power, Bayo Adelabu, leads a 3-day retreat with key power sector stakeholders to discuss the necessary reforms for the sector. Oti Ikomi, the CEO of Proton Energy, recently joined CNBC Africa for a discussion on the current state of the power sector and why reforms are crucial at this point. Ikomi highlighted the ongoing challenges in transmission, distribution, and generation within the sector. He emphasized the need to create liquidity and ensure the entire value chain is bankable. One of the key areas of focus is the transmission leg, specifically the Transmission Company of Nigeria (TCN). Ikomi mentioned that the Minister is considering unbundling TCN into separate units to improve efficiency. The System Operator would manage dispatching power from various sources to distribution companies, while the Market Operator or Transmission Service Provider would handle other services like maintenance and capacity planning. A major initiative in the transmission sector is the Presidential Power Initiative, aimed at improving transmission infrastructure through a partnership with Siemens. The goal is to reduce transmission losses and increase efficiency. Ikomi also addressed the issue of dollar-denominated gas transactions, which significantly impact power generation costs in Nigeria. Approximately 80% of power generation in the country relies on gas, with pricing based on international rates. The fluctuating exchange rate has led to challenges in pricing gas effectively. To address this, there is a proposal to consider pricing gas in Naira to stabilize costs and incentivize production. Additionally, the issue of electricity subsidies, amounting to $2.8 trillion, was discussed. The government currently subsidizes electricity tariffs to manage consumer costs, but a potential repricing may be necessary in the future due to currency devaluation. Ikomi suggested a targeted approach to tariff adjustments, with high-income consumers paying a more reflective tariff while low-income users continue to receive subsidies. This balancing act is essential to maintain liquidity in the power sector and attract both domestic and foreign investments. Overall, the power sector in Nigeria is at a critical juncture, requiring comprehensive reforms to address longstanding challenges and create a sustainable and bankable ecosystem for future growth.