VZCZCXRO3247
PP RUEHMA RUEHPA
DE RUEHUJA #1607/01 2071411
ZNR UUUUU ZZH
P 261411Z JUL 07
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 0410
INFO RUEHOS/AMCONSUL LAGOS PRIORITY 7498
RUEHWR/AMEMBASSY WARSAW 0478
RUEHNM/AMEMBASSY NIAMEY 0126
RUEHCO/AMEMBASSY COTONOU 0205
RUEHCD/AMCONSUL CIUDAD JUAREZ 0473
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 03 ABUJA 001607 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT PASS TO USTR (AGAMA) 
DEPT OF TREASURY FOR DPETERS 
DEPT OF COMMERCE FOR 3317/ITA/OA/KBURRESS 
DEPT OF ENERGY FOR CAROLINE GAY 
 
E.O. 12598: N/A 
TAGS: ENRG ECON EINV EAID NI
SUBJECT: NIGERIA: DOMESTIC ENERGY SECTOR IN TRANSITION 
 
REF:  A. ABUJA 1582 
  ¶B. ABUJA 1575 
  ¶C. LAGOS 494 
  ¶D. ABUJA 1376 
 
ABUJA 00001607  001.2 OF 003 
 
 
¶1.  (U) SUMMARY: Nigeria's power sector was in transition and the 
World Bank was integrally involved in this process, according to 
World Bank (WB) Energy Specialist Waqar Haider.  He identified three 
aspects to the transition: unbundling the Nigerian Electric Power 
Authority (NEPA); regulatory functions moving from the Federal 
Government (GON) to the independent Nigerian Electricity Regulatory 
Commission (NERC); and private investment in the domestic energy 
sector.  The GON had "thrown a party but no one had come" to invest 
in the domestic energy sector.  END SUMMARY. 
 
¶2.  (U) US Department of Energy (DOE) International Affairs 
Specialist Carolyn Gay met with World Bank Senior Energy Specialist 
Waqar Haider to discuss developments in Nigeria's domestic energy 
sector on July 16. 
 
-------------------------------------- 
Unbundling in Progress But Problematic 
-------------------------------------- 
 
¶3.  (U) In 2005, the GON deregulated the Nigerian Electric Power 
Authority (NEPA), unbundling it into six private generation 
companies, eleven distribution companies all to be privatized, and 
one transmission monopoly to be state-owned but privately operated. 
The assets were put under the direction of the newly-created Power 
Holding Company of Nigeria (PHCN) to manage the transition process, 
leaving NEPA defunct.  The unbundling process was partially 
complete, but Haider was skeptical whether the successor companies 
were prepared to operate as independent entities.  The unbundling 
had been done according to geography to accommodate Nigeria's six 
geopolitical zones, and left successor companies with weak finances 
and huge systems that yielded scant revenue.  Moreover, the 
GON-imposed electricity tariff structure left a huge gap between 
revenues and costs, leading to deferred investment in power 
infrastructure and subsequently to system degradation.  This created 
a chicken-egg problem with respect to profits and investment. 
 
¶4.  (U) Haider complimented the GON's bold steps to deregulate the 
power sector to attract private investment, but the process would 
not be complete as long as successor companies relied heavily on 
government subsidies for their financial viability.  For these 
companies to remain solvent they would need government subsidies for 
the medium-term, however, there must be a trajectory to reduce 
subsidies over time, by moving to a cost-based electricity tariff. 
Haider estimated the budgetary burden might be more than $1 billion 
per year depending on the time horizon over which companies 
amortized investment projects. 
 
------------------------------ 
Regulation Tied To Gas Pricing 
------------------------------ 
 
¶5.  (U) In 2005, the GON formed the Nigerian Electricity Regulatory 
Commission (NERC) to regulate power sector participation and 
competition, electricity pricing, operating and consumer standards, 
and power sector reform.  Haider reported that NERC already had 
developed many rules and regulations including its Multi-Year Tariff 
Order (MYTO) framework, but one of NERC's key missions would be to 
depoliticize domestic power pricing to allow necessary electricity 
tariff increases.  This would be a time consuming process requiring 
widespread public acceptance, towards which little had been done. 
To make tariff increases politically palatable, he advocated 
parallel tracks: increasing supplies through "better housekeeping" - 
spreading electricity load shedding more equally across the country, 
and allowing consumers to see the value of a future electricity 
tariff increase. 
 
¶6.  (U) Nigeria needed a comprehensive approach to the energy sector 
that precluded pricing different energy sources in isolation, given 
subsidized domestic gas consumption and reliance on importing 
refined product.  Nigeria's gas supplies were inadequate to meet 
domestic power generation requirements and Nigeria could be forced 
to either cut power generation, which would hurt industrial 
production, or switch to more costly liquid fuels. 
 
ABUJA 00001607  002.2 OF 003 
 
 
 
¶7.  (U) The Nigerian electricity market was severely lopsided. 
High-cost diesel generators ($ 0.23-0.27 per kilowatt hour) are a 
primary electricity source for many customers because of Nigeria's 
unreliable and under priced grid-supplied power.  As of July, 4,000 
megawatts (MW) of Nigeria's 7,000 MW nameplate electricity 
generation was theoretically operational and only 2,500 to 2,700 MW 
was consistently available.  The GON planned to increase power 
generation capacity to 10,000 MW by 2008, but adequate gas supplies 
remained an issue to meeting this target. 
 
¶8.  (SBU) Niger Delta security and below-market domestic gas pricing 
were two factors impeding the development of adequate and reliable 
gas supplies for power generation, as was the case with the Egbin 
power plant when vandals sabotaged the Escravos-Lagos Gas Pipeline 
in February 2006.  While international oil companies (IOCs) were 
accustomed to working in difficult areas, they would be loath to 
honor commitments to develop Nigeria's gas resources without a gas 
pricing framework that provided adequate returns on gas 
infrastructure investment. 
 
-------------------------------- 
Where are the Private Investors? 
-------------------------------- 
 
¶9.  (SBU) Nigeria encouraged private sector investment in 
Independent Power Plants (IPPs), but potential investors' concerns 
over receiving payment for privately generated electricity had held 
up investments in new plants and generation capacity.  Payment 
concerns also had led private investors to demand GON revenue 
securitization to assuage their lenders.  IPPs had made 
securitization proposals, but the GON had not yet decided on how to 
insure private investors against Nigerian government default.  Gas 
policy issues held up the GON's divestment of government-owned power 
plants.  The South Korean firm that purchased the Egbin power plant 
based its bid on a financial model predicated on NERC doubling the 
power tariff and the firm paid only 10 percent of its bid up-front. 
With the private sector shy to invest in Nigeria's power sector, the 
Nigerian government was left to pick up the investment gap.  In 
2005, the GON committed $9.7 billion from Nigeria's excess crude 
fund for the National Integrated Power Project (NIPP), creating 
government-owned power generation and distribution assets it would 
then privatize to recoup their development costs.  However, the NIPP 
has been racked with delays. 
 
---------------------------------- 
Refineries Lack Economies of Scale 
---------------------------------- 
 
¶10.  (SBU) Nigeria's refineries were not performing largely because 
of vandalized feedstock pipelines and labor strikes.  Haider 
attributed Nigeria's refining problems to public ignorance over 
market fuel pricing.  Nigeria's refineries were small and could not 
compete on cost with large-scale refineries but served a strategic 
purpose for energy security and economized on transport costs to the 
far north.  While Haider decried Nigeria's $1.5 to $1.8 billion 
annual federal fuel subsidy, he acknowledged the GON's inevitable 
role in subsidizing its intrinsically uneconomic refineries.  While 
Nigeria's current refining picture was bleak, Haider believed that 
it could support a world-scale refinery given its ample crude 
supplies and become a key supplier of refined product for all of 
Africa. 
 
------- 
WB Role 
------- 
 
¶11.  (SBU) The WB was integrally involved in advising the GON on 
various aspects of its energy sector.  The WB was a transactions 
adviser on Nigeria's privatization activities, under the 
Privatization Support Project (PSP) with Nigeria's Bureau for Public 
Enterprises (BPE) for the sale of government-owned energy assets 
including the Egbin power plant.  However, the GON did not keep the 
WB fully informed in the divesture process.  The WB was helping 
Nigeria develop domestic power infrastructure and offered technical 
and managerial assistance.  The Transmission Development Project 
(TDP) invested in grid network reinforcements, a National Load and 
Demand study, and extended the Supervisory Control and Data 
 
ABUJA 00001607  003.2 OF 003 
 
 
Acquisition (SCADA) infrastructure to power plant dispatch stations 
to ensure optimal electricity transmission to market.  The WB 
sponsored the National Energy Development Project (NEDP), which 
supported power sector reform and privatization.  NEDP invested in 
expanding Nigeria's transmission and distribution network by 
building substations, small-scale high voltage transformers, 
high-voltage power lines, and metering capacity, thereby increasing 
the reliability of electricity supply by decreasing electricity load 
shedding.  NEDP provided technical assistance for public-private 
partnerships in the power sector.  The WB was sponsoring renewable 
energy pilots in three Nigerian states involving biodiesel, solar 
energy, and micro-hydropower to boost rural electrification. 
 
------------- 
WB Assessment 
------------- 
 
¶12.  (SBU) Haider was critical of Nigeria's "catastrophic investment 
picture" and believed this would continue until the GON put its 
house in order.  The GON did not have the capacity to efficiently 
develop energy assets on its own, and its primary duty was to set 
policies.  Nigeria needed to attract foreign companies with the 
technical, managerial, and financial muscle to develop the domestic 
energy sector.  Haider advocated loosening the policy framework and 
offering a generous fiscal regime to balance Nigeria's high cost of 
doing business. 
 
¶13.  (SBU) Haider was hopeful, however, that the WB would have 
fruitful discussions with the GON later this year regarding 
Nigeria's domestic energy policy and believed a coherent energy 
pricing framework would have a positive impact on the power sector. 
The GON had shown interest in meeting with stakeholders and this 
could be a way for Nigeria to break the impasse with private 
investors over power sector development.  The WB would like to 
partner with international development agencies and foreign 
governments, including USAID to build local Nigerian capacity 
through technical assistance, and pilot and demonstration programs. 
Carolyn Gay expressed DOE's interest in supporting energy 
development projects in Nigeria and agreed to discuss with DOE 
officials the possibility of partnering with the WB on upcoming 
projects. 
 
GRIBBIN