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PP RUEHMA RUEHPA
DE RUEHOS #0318/01 2240826
ZNR UUUUU ZZH
P 110826Z AUG 08
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC PRIORITY 0107
INFO RUEHZK/ECOWAS COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 9783
RUEATRS/DEPT OF TREASURY WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
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UNCLAS SECTION 01 OF 03 LAGOS 000318 
 
SENSITIVE BUT UNCLASSIFIED - HANDLE ACCORDINGLY 
SIPDIS 
 
STATE PASS USTR FOR AGAMA 
STATE PASS USAID FOR NFREEMAN, GBERTOLIN 
STATE PASS EXIM FOR JRICHTER 
STATE PASS OPIC FOR ZHAN, MSTUCKART, JEDWARDS 
STATE PASS TDA FOR LFITTS, PMARIN 
DOC FOR 3317/ITA/OA/KBURRESS 
DOC FOR 3310/USFC/OIO/ANESA/DHARRIS 
DOC FOR USPTO-PAUL SALMON 
DOJ FOR MARI-FLORE KOUAME 
TREASURY FOR RHALL, DPETERS 
 
E.O. 12958: N/A 
TAGS: ENRG EINV ECON NI
SUBJECT: NIGERIA: STAKEHOLDERS BRIEF U/S JEFFERY ON BLEAK 
POWER SECTOR OUTLOOK 
 
¶1. (SBU) Summary: Nigeria's top electric power sector 
companies told Under Secretary of State Reuben Jeffery July 
26 that the Government of Nigeria (GON) would not attain its 
ambitious goals to significantly expand electricity 
generation and distribution with its current policy mix, 
which discouraged investment in the sector.  An inconsistent 
fuel supply, the GON,s dearth of technical expertise, and a 
culture of indecisiveness and neglect added to the bleak 
near-term outlook.  On the bright side, representatives were 
guardedly optimistic about the possibility of supplying 
limited electricity via private sector "captive power 
generation" models. End Summary. 
 
Government's Power Goals Unattainable 
------------------------------------- 
 
¶2. (SBU) Under Secretary of State for Economic Affairs Reuben 
Jeffery met July 26 with representatives of Nigeria's top 
private sector power companies.  Power sector roundtable 
participants included: 
 
--James Doak, Managing Director, AES Nigeria Barge Limited 
--Robert Kremer, Risk Analyst, AES Nigeria Barge Limited 
--Adewale Audifferen, Vice President, Global Energy (former 
GE Nigeria Managing Director); and 
--Cyril Odu, Chief Financial Officer, ExxonMobil 
 
¶3.  (SBU) Company representatives agreed that the 
Presidential Commission on Accelerated Expansion for 
Electricity Infrastructure,s plan to deliver 6,000 megawatts 
(MWs) of generation capacity by 2009, and an additional 
11,000 MWs by 2011 under the National Integrated Power 
Projects (NIPP), was unrealistic and unattainable in the 
current environment.  Audifferen pointed out that while some 
equipment, including turbine units, had been imported, they 
had not been maintained.  Should the government decide to 
acquire replacement turbines, a lead time of three to four 
years would be required from the time of purchase to 
installation.  Further, current global demand is such that 
Nigeria would be competing with countries like China and 
India for a limited supply of the same equipment. 
Representatives lamented that an additional infrastructure 
problem was that Nigeria's transmission lines had not had 
regular maintenance since the 1950s.  Kremer suggested that 
if existing plants were refurbished properly, the country 
might be able to add as much as 4,000 MWs by 2012, however, 
it did not appear that the GON had the will to organize such 
a renovation. 
 
Sector Challenges Discourage Private Investment 
--------------------------------------------- -- 
 
¶4. (SBU) Representatives contended that the GON,s recently 
adopted Multi-Year Tariff Order (MYTO) regime to establish 
rates for electricity consumers would not help attract the 
level of private investment in the sector the government 
hoped for.  Even with the MYTO, tariffs were set too low, 
yet, a cost-effective tariff regime was essential to ensuring 
firms would recoup their costs and find investment 
profitable. In addition, Audifferen estimated that the cost 
borne by power generators -- responsible for all line losses 
from point of generation to distribution -- amounted to eight 
percent of their potential revenue.  Low tariffs, a virtually 
nonexistent gas supply, and revenue loss all contributed to 
discouraging private investment in the sector, he said.  Odu 
pointed out that, in addition, any tariff structure would 
need an effective, enforceable collection scheme. 
Unfortunately the Power Holding Company of Nigeria (PHCN) was 
not making its current prepaid meter system work properly. 
 
Loan, Payment Guarantees In Lieu of Positive History 
--------------------------------------------- ------- 
 
 
LAGOS 00000318  002 OF 003 
 
 
¶5. (SBU) Interlocutors agreed that in the absence of a 
"history of positive development" in the energy sector, the 
GON should offer sovereign guarantees to attract foreign 
investment to the power sector.  Current high oil prices make 
it possible for the GON to extend guarantees, they believe, 
and banks would be disposed to lend money for investment if 
the government stood behind the project.  However, Odu noted 
examples of the GON not living up to its commitments which 
undermined a healthy power and energy sector.  For example, 
he said the National Electric Power Authority (NEPA) had not 
paid its share of the cost for the 450 MWs powerplant built 
by Italy's AGIP in Delta State, Shell had had to refinance 
funding for a project because the government had not paid its 
share pursuant to a joint venture agreement, and Shell's 
Power Purchase Agreement (PPA), pursuant to which it sells 
power to the national grid, was being questioned by the 
government. 
 
Human Capital Needs Upgrading 
----------------------------- 
 
¶6. (SBU) Audifferen said the level of technical capacity in 
the sector overall was low.  Nigerian power plants are, on 
average, twenty years old and operated by technicians who 
have not had refresher training or skill upgrades in that 
entire period, he observed.  Plants do not have the resources 
for retraining staff, and developing technical capacity is 
not a priority of the government.  Doak said the dearth of 
skills in Nigeria is far more severe than elsewhere.  By 
comparison, he said, in Jordan or Kazakhstan, power units 
might be old but people are capable of repairing and 
maintaining them. 
 
Gas an Untapped Solution to Power Generation Fuel Shortage 
--------------------------------------------- ------------- 
 
¶7. (SBU) Overall, Nigeria's reliance on oil has prevented the 
development of a diverse power generation portfolio, Kremer 
observed.  Water shortages have curtailed the usefulness of 
hydroelectric plants and solar power was not an option except 
for housing.  While natural gas is available, most is 
"associated gas," a byproduct of oil production, and natural 
gas production had not been developed to fuel power 
generation, representatives explained.  Therefore, supplies 
for power producers were inadequate and no power producer had 
a gas supply agreement in place.  No agreement on the price 
of gas and no security for payment resulted in no investment. 
 
 
Real Solution Requires Competent, Innovative Leadership 
--------------------------------------------- ---------- 
 
¶8. (SBU) Representatives criticized President Yar'Adua's 
appointment of the current Minister of Power, Hajiya Fatima 
Ibrahim, as ill-advised.  Ibrahim does not have a technical 
background in the electric power industry, they said, and as 
a result, she had to rely on people entrenched in the current 
system who brought no innovative ideas to the current 
challenges.   Doak said his company, AES, had a favorable 
Power Purchase Agreement (PPA) with the GON and was willing 
to add 300-400 MWs of generation capacity.  The stumbling 
block was that negotiations with the GON had stalled.  AES 
had the units and turbines available for ramping up 
generation, and the GON seemed enthusiastic about the 
project, but the window during which the GON needed to make a 
final decision was fast closing.  Without a quick decision, 
AES would have to commit the equipment elsewhere. (Note: AES 
Barge Nigeria, the only operating IPP in Nigeria, is seeking 
arbitration in a dispute with PHCN over the terms and 
conditions of its PPA.  Payments on its existing PPA are 
perpetually in arrears.  End Note) Given the gravity of 
Nigeria's electricity problem, which hinders economic 
diversification and industrialization, and the inherently 
 
LAGOS 00000318  003 OF 003 
 
 
complex nature of the power sector, the GON urgently needs 
technically competent and innovative government leadership to 
break the stalemate and to demonstrate a commitment to 
following through on effective policies, they said. 
 
Captive Power Model as the Way Forward 
-------------------------------------- 
 
¶9. (U) As a way around the lack of electricity in the 
country, instead of relying on the government, those who can 
afford it have resorted to private sector arrangements, such 
as the captive power model, representatives noted.  Under 
this model, private operators generate and distribute power 
off the national grid and collect tariffs directly from 
consumers.  Given that only 60 percent of NEPA tariffs are 
collected at all and the cost of uncollected tariffs must be 
borne by power generators, the captive power model presents 
producers with an alternative model that may be somewhat 
successful, Audifferen contended. 
BLAIR