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Cablegate: Nigeria: Missing Long-Term Energy Plan

VZCZCXRO1936
PP RUEHMA RUEHPA
DE RUEHUJA #1582/01 2061139
ZNR UUUUU ZZH
P 251139Z JUL 07
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 0362
INFO RUEHOS/AMCONSUL LAGOS PRIORITY 7483
RUEHWR/AMEMBASSY WARSAW 0468
RUEHNM/AMEMBASSY NIAMEY 0123
RUEHCO/AMEMBASSY COTONOU 0202
RUEHCD/AMCONSUL CIUDAD JUAREZ 0468
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 ABUJA 001582

SIPDIS

SENSITIVE
SIPDIS

DEPARTMENT PASS TO USTR (AGAMA)
DEPT OF TREASURY FOR DPETERS
DEPT OF COMMERCE FOR 3317/ITA/OA/KBURRESS
DEPT OF ENERGY FOR CAROLINE GAY

E.O. 12598: N/A
TAGS: ENRG ECON EINV EAID NI
SUBJECT: NIGERIA: MISSING LONG-TERM ENERGY PLAN

REF: A. ABUJA 1575

B. LAGOS 494
C. ABUJA 1376

ABUJA 00001582 001.2 OF 003


1. (SBU) SUMMARY: Nigeria faces power problems despite abundant
oil and gas resources because it does not have a coherent long-term
energy plan, according to Dr. Joseph Makoju, Special Adviser to the
President on Electric Power. Since 2005, the GON has spent $13.7
billion on the power sector, however, due to construction delays,
vandalism, Niger Delta insecurity, political turmoil and poor
planning power production has not increased. END SUMMARY.

2. (U) U.S. Department of Energy Assistant Secretary for Policy and
International Affairs Karen Harbert on July 17 met with Dr. Joseph
Makoju, Special Adviser to the President on Electric Power. Makoju
described the recent history of Nigeria's power sector and
strategies to address Nigeria's domestic energy crisis. A/S
Harbert's discussion is supplemented with details from previous
Mission interaction with Makoju.

-------------------
Power Sector Primer
-------------------

3. (U) Despite rapid population growth and rising demand since the
1970s, the GON invested inconsistently in power infrastructure
causing a huge electricity supply deficit. When President Obasanjo
took power in 1999, seven gas-fired and hydro power plants, some
virtually obsolete, produced an average of 1,750 megawatts (MW) per
day. More than 70% of transmission capacity was over 20 years old
and not routinely maintained, leaving the power grid fragile and
overstretched. Starting in 1999 the GON embarked on a two-track
strategy of government investment to expand and rehabilitate power
infrastructure, and to deregulate the power sector to encourage
private investment. While Nigeria doubled functional power
generation capacity between 1999 and 2007, gains were achieved by
rehabilitating old plants.

4. (U) From 2002 to 2004 GON officials expected that private
investment would fund domestic power sector expansion and reduced
government investment. By 2005, lukewarm private investment in the
sector coupled with declining performance led the GON to increase
its role in restoring the power system using the excess crude fund
under the $9.7 billion National Independent Power Project (NIPP).
The NIPP included generation, transmission, distribution, and gas
supply projects across Nigeria. The plan foresees privatizing the
majority of these assets at a later date to recoup their development
costs.

----------------------------
Progress But Problems Remain
----------------------------

5. (SBU) Since 2005 the GON spent $4 billion on power
infrastructure expansion and 17 new power station projects ongoing
in locations across Nigeria - including seven in the Niger Delta -
making the NIPP the largest power project in Africa. Plans for
several Independent Power Plant (IPP) joint ventures with
international oil companies (IOCs) continue. Makoju estimated
Nigerian suppressed electricity demand was between 10,000 and 20,000
MW. Nigeria was working with the World Bank on a study to assess
Nigeria's suppressed demand, needed to expand cheaper grid-supplied
power and the gas network to industry in Lagos and Port Harcourt to
encourage privately-generator users to join the public power grid.


6. (SBU) Despite progress, NIPP implementation was delayed and no
NIPP plant had yet been commissioned. Securing adequate and
reliable gas supplies was a hurdle for capacity expansion. As of
July, Nigeria's total gas requirement for power generation was 920
million standard cubic feet per day (mmscfd) but supply was 400
mmscfd. The Niger Delta security situation had reduced gas supplies
available to power plants, affecting power generation. As of July
2007, Nigeria's power sector exhibits a high incidence of load
shedding from insufficient generation due to restricted or
interrupted gas supplies to gas-fired power plants, and heavy water
reservoir drawdown at hydropower stations from drought and
overrunning of hydro plants. Makoju cited the vandalism in February
2006 of the Escravos-Lagos Gas Pipeline (ELP), a major line for the

ABUJA 00001582 002.2 OF 003


Egbin power plant. However, as of July the local community in the
area of the rupture had granted repair crews access to the pipeline
and he expected the ELP to be operational by October. Makoju
contended attitudes in the Niger Delta had changed and attacks on
energy infrastructure would decrease, due to improvements in state
and local government accountability. He pointed to the militants'
willingness to come to the bargaining table over the last ten months
as positive steps, despite increased hostage taking.

----------------------------
Necessity for New Gas Regime
----------------------------

7. (SBU) Makoju underscored that the GON would need a gas
regulatory and pricing regime that provided incentives for
international oil companies to invest in the domestic gas
infrastructure. A/S Harbert shared similar concerns of power
generation shortfalls in the U.S. Makoju was optimistic that
efforts to form a 25-year power development plan would be successful
because it was necessary to depoliticize Nigeria's electricity
tariff.

--------------------------------------------- --
Electricity Pricing Endangers Power Development
--------------------------------------------- --

8. (SBU) Makoju indicated the Nigerian Electric Power Authority's
(NEPA) successor companies still relied on GON subsidies for
financial viability, but stressed they must achieve financial
autonomy and independence to survive in the long run. The GON
electricity tariff structure reinforced the reliance on subsidies
and put undue stress on the budget, exacerbated by Power Purchase
Agreements (PPAs) with Agip and AES Independent Power Plants (IPPs).
The IPPs paid world prices for feedstock gas, and the PPAs
obligated the GON to pay world prices for the electricity IPPs
generated. Makoju lamented the GON was hemorrhaging cash to meet
its PPA obligations, severely depleting power sector working
capital. This contributed to an $11.7 million monthly power sector
operating loss and which led to under funding supplies and
maintenance at government-owned plants. Further, the persistent
threat of GON default on PPA's led IPPs to demand securitization for
GON payments and could deter future IPP investment. If the GON
privatized its gas-fired power plants, projected total monthly PPA
obligations would reach $51 million. Privatization thus might "do
more harm than good" if the electricity tariff was not adjusted to
reflect costs. He advocated phasing out power subsidies gradually.
A/S Harbert agreed this was not sustainable and advocated moving to
a system where power development costs were passed on to the
consumer.

---------------------------
Diversifying the Energy Mix
---------------------------

9. (SBU) As part of its 25-year energy plan, the GON plans to
diversify its energy mix by exploring several potential hydropower
projects that together could add 6,000 MW of power generation
capacity. The GON was interested in coal-fired power plants,
biodiesel, wind, and solar power for off-grid generation. These
off-grid initiatives would work in conjunction with the GON's rural
electrification program, but would require government subsidies and
international aid assistance in the absence of private investment.
A/S Harbert offered the U.S. government's experience with regulating
renewable energy. The geographic peculiarities of U.S. transmission
and distribution systems meant renewable energy standards were best
left to state governments, while federal tax credits could make
renewable energies more cost competitive. Renewable power storage
and transmission problems made their widespread use difficult, but
the U.S. was researching high-voltage transmission and electricity
storage. Makoju said these solutions would be welcome in Nigeria,
as they would free up gas supplies to seek higher returns in the
export market.

-----------------------------
West African Power Pool (WAPP)
-----------------------------

10. (SBU) Parallel to his calls for Nigeria to develop a long-term
energy plan, Makoju said Nigeria should be planning power supplies

ABUJA 00001582 003.2 OF 003


for the entire West Africa region. Providing power to the WAPP had
little impact on Nigeria's domestic supply since the power needs of
the neighbors were small by comparison - 14 MW to Niger and 80 MW to
Benin and Togo daily. The WAPP served Nigeria's strategic interests
by helping it to build goodwill with its neighbors and deterring
Niger from building dams on the River Niger upstream of Nigeria.

GRIBBIN

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