Copenhagen Consensus Center
Home Menu

Nigeria Perspective: Energy

Background

Nigeria has a rapidly growing economy, fuelled by oil revenues, and is the most populous country in Africa. It was ranked number 39 globally in terms of GDP in 2012; the economy is expected to grow 20-fold by 2050, with Nigeria then reaching 13th place. However, over 68% of Nigerians live on less than $1.25 a day, compared with a sub-Saharan African average of 40%, so poverty and inequality remain big issues.

Economic growth is hampered by a huge deficit in electricity supplies, despite the country being rich in oil and gas reserves and having tremendous renewable energy potential. The large but under-performing manufacturing sector suffers from regular power outages and load shedding, and small- and medium-sized businesses spend on average 40% of their running costs on self-generation of power. The government has undertaken significant power sector reform and is promoting renewable energy in efforts to improve the situation.

One key potential post-2015 energy target for the country is the removal of energy subsidies, which in 2012 exceeded the national budget for education, health, power and transport. Reform would free up public funds for investment in healthcare, education and energy infrastructure.

Despite being Africa’s largest oil producer, Nigeria relies heavily on imported fuels, largely from the European Union. Refineries operate far below capacity because of operational failures, poor maintenance, sabotage and theft and only supply about a quarter of domestic demand even in relatively good years. Subsidies aim to alleviate poverty and maintain price stability, but are a big drain on the economy.

In 2012, the government tried to reform the subsidies for transport fuels, which cost $8 billion a year, benefitted mainly oil-importing companies and created opportunities for fraud. Embezzlement and mismanagement was reckoned to cause revenue losses of $1.1 billion a year. However, public disorder and strikes led to reintroduction of partial subsidies, so further reform will not necessarily be easy.

Removal of subsidies would eliminate economic inefficiencies estimated to cost at least $10 billion. This includes embezzlement and about $4 billion in subsidised oil products smuggled out of the country and sold at a profit. Total removal of subsidies would boost economic growth by 0.18%, but household incomes would decline. However, removal of half the subsidies and appropriate social transfers to protect the poor would increase rural incomes in the range 2.3-7.6%. Spending one Naira on social protection would pay back over two Naira in the form of subsidy avoided plus increased household incomes. The subsidy avoided could be used to meet two other targets.

The first target is improving access to electricity. Currently, only 45% of Nigerians have access to electricity and the country has one of the lowest rates of electricity generation per capita in the world. In 2012, the Presidential Task Force on Power estimated electricity demand as 12,800MW, with the country only being able to produce 3,400MW. Most businesses use expensive back-up generators and most households use wood, charcoal or animal dung for cooking and heating.

The International Energy Agency estimated that the annual value of the estimated 150,000 barrels of oil lost to theft each day – more than $5 billion – would be enough to provide all Nigerians with electricity by 2030. But to provide electricity to 93% of the population by 2040 would cost only $1.6 billion each year and the benefits in terms of household lighting alone would be huge. Overall, benefits of electrification would be worth nearly 30 Naira for each one spent.

The second target is improved access to modern cooking fuels. 115 million Nigerians – 68% of the population – use solid fuels (mainly firewood) burned on inefficient indoor stoves. The indoor air pollution kills 69,000 people each year (4.3 million worldwide) and contributes to millions of days lost to ill-health. Providing improved cooking stoves would save lives and illness, as well as saving time and fuel. On average, a Naira spent on this would give benefits worth over 35 Naira.

For these targets to be met, it is important that the government is able to deal effectively with both corruption and political unrest.