Is Nigeria a fragile country? It is Africa's largest economy – bigger than South Africa and Egypt – with a population of 222 million, 37 billion barrels of oil reserves (Nigeria is Africa's No. 1 oil producer), mining reserves and an area of 924,000 square kilometres. With a variety of climates (from the humid southern tropical coast, suitable for cocoa and palm oil, to the Sahelian savannah in the north and the central highlands where food and cereal crops are more readily grown), the country is an economic powerhouse with a massive domestic market, a broad industrial base, a business culture and quality management.

KNOWN IMBALANCES AND CONSENSUAL SOLUTIONS

The fragile nature of present-day Nigeria is attributable to the accumulation of overlapping and mutually-reinforcing problems to which the country is exposed. Insecurity, poverty, energy deficiency, corruption, a lack of infrastructure, a shortage of foreign currency and the related problems of a depreciating currency are challenges that seem impossible to resolve independently of one another.

And yet, there is general agreement among economists concerning the solutions. The increase in Nigerian energy production thanks to improved security and massive but highly profitable investment upstream (oil and gas production), midstream (densification of the pipeline network), and downstream (modernisation of refineries), would reduce the balance of payments deficit, stabilise the currency, reduce energy prices, create jobs, boost the competitiveness of industry and, in so doing, boost national wealth and reduce poverty.

However, these interconnections can also work in the opposite direction. Because the security situation in the Niger Delta region is not improving, investment in onshore oil fields is being reduced, as evidenced by the recent decisions by Shell and TotalEnergies to divest some of their interests in onshore and shallow water oil fields. Nigeria has not reached the oil production quota allocated by OPEC (an average of 1.3 million barrels a day in 20231, increased to 1.5 million in November 2023). The country is struggling to get its natural gas to major centres of consumption. The gas is flared at a loss at oil production sites, while also releasing greenhouse gases. By failing to maintain and modernise the refineries operated by the national oil company NNPC, whose production has fallen from one year to the next, imports of refined oil are increasing and weighing on the country’s balance of payments in dollars. The Nigerian currency, the naira, was devalued twice between June 2023 (-44%) and January 2024 (-39%) and it continued to lose value in February 2024. The private sector is directly impacted by this situation. The cost of a litre of diesel in Nigeria rose from 790 to 1,227 naira per litre between August 2022 and February 2024.

A HIGHLY NEGATIVE IMPACT ON AN UNSTABLE AND EXPENSIVE ELECTRICITY SUPPLY

The situation in Nigeria's electricity sector is symptomatic of the fragile nature of the economy. The 42 gigawatts of installed capacity generated by 22 million generators need to be compared with the 5.4 gigawatts supplied by the electricity grid. Private individuals, businesses and public authorities have to take the place of failing electricity distribution companies (DISCOs) by acquiring their own generators, which run for an average of 4 to 8 hours a day due to power cuts. The cost of this electricity, based on imported diesel and paid for in dollars, is more than 20 cents per kilowatt-hour. This cost fluctuates with the price of a barrel of oil, but crucially, it increases in local currency in proportion to the depreciation of the naira, a major headache for companies focused on the domestic market and for private individuals whose income is not dollarised.

How are Nigerian businesses coping in this environment? It's a daily challenge, as we learned from senior executives of Valentine Chicken in the agri-food sector, JMG in the capital goods assembly sector and Baze University in Abuja. Most of the equipment needed to produce electricity, particularly solar panels, is imported and paid for in dollars. Payment for these purchases is contingent on the availability of dollars from commercial banks, which try to secure allocations from the Central Bank of Nigeria (CBN). In June 2023, this critical situation led to the removal of the Head of the CBN, a devaluation of the currency and a floating exchange rate regime.

THE PRIVATE SECTOR ORGANISES ITS OWN ELECTRICITY SUPPLY

Nigerian companies can sign a power purchase agreement (PPA) with independent power producers (IPPs) specialising in photovoltaic solar power for commercial and industrial businesses (solar C&I). The constant fall in the dollar cost of photovoltaic panels and their installation is resulting in a cheaper alternative to the electricity grid and diesel generators, provided a commitment is made for 10 to 15 years at fixed prices indexed either to the dollar or to inflation. Nigerian regulations authorise these purchase contracts for businesses' own needs and they allow third parties to build and operate these private power plants.

However, a company's energy policy in Nigeria depends on a number of assessment criteria: anticipating grid prices set by the regulator, the number of hours of power cuts per day, the price of a litre of diesel in dollars and local currency, rates charged by IPPs for PPAs (which vary according to solar irradiance), availability of the space required to install a photovoltaic power plant, the creditworthiness of the company and financing costs.

These factors, which influence decision-making, change very quickly and frequently - for example, changes in the dollar/naira exchange rate automatically increase the cost in local currency of a PPA billed in dollars. If an economic agent compares the rates charged by an independent producer with those of the electricity grid, this comparison becomes unfavourable for a PPA the day after a currency devaluation, especially as the Regulator tends to defer passing on primary energy supply costs in grid electricity rates. Similarly, the price of diesel consumed in generators is a function of the applicable taxes or subsidies, and economic agents necessarily bet on changes in public tax or subsidy policies. All of this affects and delays economic decisions in favour of renewable energies.

Another determining factor in private sector energy strategy is expectations regarding electricity sector reform. In Nigeria, electricity distribution is entrusted to DISCOs, whose economic health varies from state to state. The reform of the electricity sector, ratified in June 2023 by the Tinubu government, plans to leave responsibility for the electricity sector to the states themselves. Uncertainty over the new regulations that will come into force in each state of the Nigerian Federation is encouraging certain players, rightly or wrongly, to opt for the status quo.

Private sector lack of visibility over the grid’s capacity to meet its requirements and the future cost of this energy is symptomatic of a fragile country like Nigeria – a characteristic encountered in most sub-Saharan Africa countries. The choices made in this uncertain environment will determine the margins of businesses over the coming years and affect their competitiveness. Introducing solar photovoltaics into the economic equation is a good thing because costs are lower than grid rates and generator costs in most circumstances, however, this is insufficient to trigger investment decisions and commitments given the uncertainty created by exchange rate fluctuations, regulatory action and national energy policy choices. To respond to this uncertainty as effectively as possible, financing institutions are reducing financing timeframes as much as they can and adapting their offers to private sector solar projects