Velusami: Vibrant Power Sector Required for Industrialisation

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Arun Velusami is a Partner in the Energy Group of international law firm, Hogan Lovells, which is based in London. He has been working in Nigeria’s energy sector for over 15 years. In this interview with Hamid Ayodeji, he speaks about ways to develop Nigeria’s power sector. Excerpts:

Considering the recent emergence of renewable energy in countries like China and the US, do you think Nigeria should also invest heavily in renewable energy?
Yes. I think the key factor with the power sector in any country is to have a portfolio of different types of technology. If you look at countries like India and China, they have thermal power plants that burn either coal or gas. They also have hydropower plants, solar projects, and wind projects that create a blend of conventional and renewable energy. Nigeria has significant hydrocarbon resources and number of gas-fired power plants, but we must not forget the significant amount of power-generating capacity that also is derived fromhydropower in the North at the Shiroro and Kainji plants. In terms of renewable energy, there is definitely the scope for more investment. I think the advantage of the renewable energy projects, particularly solar projects,is that as long as the grid is in place, they’re not reliant on supply chain of fuel. For example, if there is an interruption of gas to a gas power plant the gas power plant cannot operate. The sun, on the other hand, is obviously always shining during the daytime so you can have smaller scale power plants in more isolated rural areas, and with thesesmaller scale power plants you can have more operating generating centres around the country.The other advantage is that renewable energy projects can vary in scale, which means they can be cheaper and quicker to construct and bring online. So I definitely think there is a place for renewable energy projects in Nigeria, as part of a balanced energy portfolio.

So how much impact do you think support from foreign investors and financial institutions will have on the growth and sustainability of the energy industry?
Foreign investors and banks definitely have a key role to play. For a start, the cost of foreign debt is much lower than the cost of Nigerian debt so that in itself brings an economic advantage. In addition, having access to foreign investors greatly increases the pool of capital available for investment into the sector. Foreign investors do not come into the exclusion of domestic investors. Very frequently, you see foreign investors partnering with Nigerian companies to develop project. The importance of the Nigerian companies in these projectscannot be underestimated, because they understand how the system works. I think attracting foreign capital will help revitalise the energy sector in Nigeria, and if the sector is revitalised then that will lead to more opportunities.

What consequences do you think the country will face if renewable energy is not maximised?
Principally, Nigeriawill lose a competitive advantage. We must remember that many of Nigeria’s neighbouring countries are also looking at renewable energy, and that international investors and lenders have a choice as to who they invest in and/or lend money to.If Nigeria does not maximise the opportunities provided by renewable energy, those flows of capital will simply be invested somewhere else. So I think there’s obviously significant economic benefit to Nigeria to attracting the foreign capital that is focusing on renewable energy and will allow the sector to be significantly strengthened.Right now, we are at the very start of a process where this renewable technology can be used throughout Nigeria and I think Nigeria should take the opportunity to attract this capital.

What steps would you take towards establishing a more stable energy sector in this country?
I believe there are a number of steps to be taken. If one is investing in this country to generate power, they need to know that the price of the power is going to cover the costs of generation, so cost-reflective tariffs need to be implemented. The investor needs to know that the tariff is at a sufficient level to cover their costs and that the tariff is going to be paid on time. There’s also a lot of support being offered by the international development finance institution (DFI) community. The World Bank in particular has proposed certain structural reforms for the power sector. I also think Nigeria needs to make a decision as to how much of that support the country wants to utilise and how it can best implement some of the reforms that have been proposed.

Do you think there is an economic impact that will arise as a result of having more refineries and how will private-public relationships help foster this?
Clearly, if you have more indigenous refining capacity within Nigeria then that means that you have to import less diesel and fewer fuel oil products. Right now, all of those products are purchased in foreign currency, so all of that foreign currency is leaving the country and the country is not directly benefiting other than the fact that it’s getting the fuel. If Nigeria can produce and refine fuel and fuel products domestically, all of that money should theoretically stay within the country and be used to further invest and develop infrastructure and capacity within that sector.

There is a clear benefit to retaining that investment domestically rather than have all of that foreign currency leaving Nigeria. It also contributes to a trade deficit if you are a net importer of these products. Given the extent of the natural resources and the hydrocarbon assets that Nigeria has, if refining capacity is sufficiently developed over the next decade, then Nigeria could even find itself being a net exporter of these products.

So what do you think is the best way to increase refineries and the capacity of these refineries and how they function, considering we have a couple of them and they’re not working?
How do we incentivise the construction of new refineries? Well, it needs to make business sense for foreign investors and there needs to be support from the government. In relation to the production and construction of these refineries, we need to see increased support from the international investment and lending community to finance these refineries. This is because refineries are notcheap to develop. Depending on their scale, they can be some of the most expensive pieces of energy infrastructure that you can have. Therefore, attracting those foreign capital inflows while also having domestic support with apolitical agenda to promote the construction of these refineries is the combination Nigeria requires.

How do you think Nigeria can maximise foreign investment and job creation for the power sector?
It comes back to the earlier question regarding the stability of the energy sector. If the energy sector is stable, you will attract foreign investment, it’s as simple as that. Investorsmust know that their investment in the power sector is going to be profitable. Another key component is that the costs of producing power need to be covered by the revenues that are generated from selling the power. If this can be achieved, I think that will attract the foreign investment that is required.

What does Nigeria’s energy mix look like and what energy sources should the country be considering to ensure stable energy supply?
As I mentioned previously, a country should ideally have a portfolio of different technologies. So you have gas plants, you have hydro plants and I think we need to see some utility-scale solar plants. Nigeria also has coal resources, so you should consider whether you could use advanced cleanercoal technology to generate electricity. If you look at both India and China, a significant proportion of their power is currently generated by coal-fired power plants, so it’s a question of making use of the other. Nigeria has had success in using its oil and gas resources and it is a question of using some of the other resources that the country possesses. You have sunshine and coal and there could be potential for further hydropower. Basically, it is seeing what else you have within the country that could be used to create a more balanced technology mix for power generation.

So typically coal should be the focus over solar?
Coal should be considered alongside solar, not over solar. I’m not saying one is exclusive to the other. For example, coal can provide baseload power, whereas solar is obviously limited to when the sun shines, although you can extend it using battery storage technology. That is why having a portfolio of different technologies is key so that they can work together.

The other vital aspect is to ensure that the grid is capable of taking all of this power and distributing it. We tend to focus solely on generation but we should not underestimate the importance of distribution and also transmission. In Nigeria, there has been some investment in transmission and the distribution sector has been privatised. There is a debate as to how successful that privatisation has been in attracting new investment into the distribution sector and how much has physically been spent on rehabilitating and enhancing the distribution grids.

I think one of the other key points is if you have a stable power sector, it allows you to push forward with industrialisation and you can have more heavy industry. Also, we need to remember the needs of Nigeria’s mining companies, as they are very energy and power-intensive. Stable power supply allows you to develop other sectors of the economy.