By Wale Yusuff, Business Development Manager, Wärtsilä Nigeria
Developing a culture of stability in Nigeria’s energy policymaking will be key to unlocking the massive foreign investments needed to achieve its 2060 carbon neutrality goals.
Wale Yusuff is the Managing Director of Wärtsilä in Nigeria, a global energy company with an impressive track record of delivering and operating over 1GW of power capacity for the Nigerian energy and marine sectors. In this feature, Mr. Yusuff draws on his considerable experience to explain why stability in the regulatory framework is paramount to deliver on Nigeria’s ambitious energy targets. He argues that if sound power market reforms are important for Nigeria, stability over time is what will really make the difference between success and failure.
Financing Nigeria’s power system expansion needs
Nigeria has set some of the most ambitious energy targets in Africa. The country aims to achieve carbon neutrality by 2060 whilst securing universal access to electricity for its fast-growing population. Nigeria has also established an intermediary “30-30-30” target, which aims to reach 30 GW of grid-connected capacity with at least 30% of renewable energy by 2030.
Delivering on this ambitious plan will require enormous investments, much of it will need to be attracted from abroad. In an in-depth study published in 2022, Wärtsilä estimated that over 1 terawatt of installed power capacity will need building by 2060 to achieve that goal. Financing this monumental power system expansion plan will require investments of nearly $20 Billion until 2030 and some $425 Billion until 2060 according to the most advanced models.
Attracting that level of investment is possible, but not without sound and stable policy reforms. Over the past decade, authorities have made good progress to implement a stronger legal framework to structure and liberalise the power market. Investors also welcome the latest policy reforms, such as removing fuel subsidies and unifying the exchange rate. Other important long-term policies are underway, for instance on metering and electricity theft to enhance revenue collection and ensure cost-reflective tariffs.
Much progress has been made by Nigerian authorities in the past two decades. But the situation still remains somewhat complex and unstable. On the ground, project developers and investors must push their projects through a rather uncertain regulatory environment caused by conflicting regulations, loopholes and overlapping jurisdictions.
This lack of stability and consistency is a major showstopper for international project finance, because regulatory risk has an adverse impact on the value of the projects financed. Higher investment risk will lead to an increase in the cost of capital, as investors will require a higher return on their investment to compensate for the additional risk they are taking. As a result, the cost of borrowing funds or the cost of equity capital increases, reducing the value of the project in the process. If the risk is deemed too great, projects are dropped altogether.
A much-needed culture of transparency and consultation in policymaking.
Investors in power projects make substantial investments that require planning and commitments extending over decades.
That’s why they consider the relative stability of the regulatory environment as one of the key factors when deciding to invest in a country. A predictable policy environment will greatly mitigate their risks and enable them to develop the reliable long-term planning that they need to finance power projects often worth hundreds of millions of dollars. Foreign investors need to have a certain level of assurance that the rules governing these investments will not change drastically or abruptly over time.
Inconsistent and sudden regulatory changes act as a powerful deterrent for investors. That’s where finding the right balance between stability and flexibility becomes very important. Rules must inevitably evolve and adapt to changing circumstances. But it can’t change out of nowhere. Change must be managed appropriately, first and foremost through regular open consultations with stakeholders, including industry experts, businesses, and the public. Thorough consultations will gather crucial feedback on the proposed regulation changes. This will help ensure that new regulations are comprehensive, effective, and widely accepted by all parties.
What is more, the establishment of an independent regulatory body will help insulate regulations from political interference and ensure impartial decision-making. These bodies should have the authority and expertise to develop and enforce regulations, promoting stability and consistency in the regulatory environment.
Long-term planning is key
Long-term planning is the foundation of any stable regulatory environment as it provides a clear roadmap for investors and stakeholders in the power sector. Defining a robust, detailed and data-driven power system expansion plan covering the next three decades will be essential to boost business confidence.
In particular, long-term planning ensures that the power generation sources are diversified and integrated with the transmission and distribution networks in a way that ensures stable and reliable power supply. As the power system expands and evolves, it becomes increasingly important to ensure proper integration of renewable energy plants into the grid.
Underestimating power flexibility requirements will lead to grid failures causing great harm to the public, businesses, and investors alike. That is why policy makers must make sure there will be adequate levels of flexible electricity generation in the form of balancing engine power plants to accommodate the enormous quantity of renewable energy needed to reach carbon neutrality.
Nigeria’s enormous potential is well known to foreign investors. If the country can also be known for its stability and reliability in regulatory matters, it will become the trustworthy investment destination that it needs to be. This will lead to increased capital inflows in our power system and set us on the right course to become a continental powerhouse.