Nigeria’s electricity sector risks total collapse over forex scarcity, debts

With forex scarcity biting and the dwindling fortune of the Naira at the foreign exchange market, Nigeria’s power sector is facing a herculean task meeting the electricity needs of Nigerians as most of the equipment needed for their smooth operation are imported.

As at the time of compiling this report, the exchange rate between the naira and the United States dollar is N440/$1 on the official market and N735/$1 on the black market.

According to investigation, operators in the power sector are grappling with repaying foreign currency loans borrowed when the exchange rate was more than three times its current value with investors tethering on the edges of default as they struggle to find forex to repay loans from an investment that has been a colossal loss.

A senior staff of the Ikeja Distribution Company who craved anonymity said they are facing the daunting task of funding CAPEX hugely required to improve the state of power supply in the country mostly in dollars.

Explaining further, he said power transformers, distribution transformers, electrical conductors, meters, and most of the technological solutions which are needed to ensure a steady supply of electricity, are mostly imported.

An expert in the industry, Bayode Akomolafe, said with the low liquidity of FX in Nigeria’s open market and the high exchange rate in the parallel market, the cost of electricity production increases.

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“The additional expense adds to the strain already caused by the lack of cost-reflective tariffs. The Naira’s volatility puts investors’ returns at risk rather than encouraging them to invest in Nigeria’s energy industry or the country as a whole,” he said.

According to Akomolafe, parts for equipment reliability are typically sourced from original equipment manufacturers (OEMs) who sell in foreign currency or at the most index to the black market exchange rate.

“For investors, investments in the electricity value chain are risky under these conditions due to the sub-optimal utilization of the assets and uncertainty in cash flow for the service provided,” he added.

Also bearing his mind on the crisis in the sector, Chief Executive Officer of REEnergy Africa, Ezeocha Amudo, said for players in Nigeria’s renewable energy sub-sector, most of the off-grid components are imported and as forex rates increase, operators will need to adjust to the increased costs.

Amudo said the forex crisis could pose a challenge to the increased adoption of renewable energy technologies as the burden encountered by rising costs of imported technologies reduce the purchasing power of Nigerians at the end of the day.

The forex situation has limited the entry of new private participants in the industry. For most generating companies (GenCos), whose operation and maintenance (O&M) is dependent on imports, the forex crisis adds to the strain on their already precarious cash flow and poor bottom line.

“They are paying more in Naira due to the high exchange rate to secure support services and products, while income in Naira remains unchanged. The operation and maintenance cost of an energy facility, generating companies (GenCos) for example, consists of; services (labour), gas (fuel) prices, and overheads,” Akomolafe adds.

In his own submission, an electrical engineer, Chukwuemeka Eze, believes the status quo could remain as the end of year approaches.

“Due to a lack of modern infrastructure, Nigeria still depends a lot on imports of processed natural gas, and equipment needed in the electricity sector. If the forex rate is unstable, it affects even the end consumers. That should be a source of concern for everyone that has the power and authority to do something. Nigerians are already dealing with a lot.”

“The focus of policymakers is currently not on governance but on winning the upcoming general elections in February 2023. Experience from previous elections.