- Title: Nigeria's diesel-dependent economy braces for clean-fuel rules
- Date: 17th September 2019
- Summary: LAGOS, NIGERIA (RECENT) (REUTERS) VARIOUS OF GENERATORS IN A BARRICADE VARIOUS OF GENERATOR ON A BALCONY ABUJA, NIGERIA (RECENT) (REUTERS) VARIOUS OF MEN POURING DIESEL INTO A GENERATOR VARIOUS OF GENERATORS LAGOS, NIGERIA (RECENT) (REUTERS) VARIOUS OF FILLING STATION WITH SIGNAGE READING 'English' FORTE OIL, DIESEL DIRECT' PRICE BOARD FUEL ATTENDANT SELLING FUEL ROAD SCENE VARIOUS OF ANALYST, TUNDE LEYE SPEAKING WITH A REUTERS JOURNALIST (SOUNDBITE) (English) ANALYST, TUNDE LEYE, SAYING: "The price increases may be sharper than most people expect especially because diesel is deregulated in Nigeria so there is no subsidy on diesel and as we've seen overtime the price of diesel has moved along with the international market so if new rules cost the price to rise in the international market, we expect that that will cascade into Nigeria as well." VARIOUS OF OIL TANKS AT CONSTRUCTION SITE VARIOUS OF TELECOMS MAST BANK BUILDING WITH GENERATORS ON DISPLAY VARIOUS OF FUMES FROM DIESEL GENERATOR (SOUNDBITE) (English) ANALYST, TUNDE LEYE, SAYING: "Many businesses may go under, businesses may struggle to survive or in the best case scenario will at least downsize and shut down some production capacity because if you can't pay for the diesel for production, you can't pass the pricing for increased cost in diesel. The next logical thing to do is to shut down some of that production capacity and produce at the quantity that the demand can carry price you are willing to sell at." VARIOUS OF REHOBOTH BAKERY SHOWING MACHINERIES VARIOUS OF BAKERS REMOVING AND STACKING BREADS VARIOUS OF MAN PUTTING BREAD IN OVEN OVEN METER OVEN VARIOUS OF BAKERY DIESEL GENERATORS VARIOUS OF COO, REHOBOTH BAKERY, ABAYOMI AWE MONITORING PRODUCTION AND PACKAGING WOMEN PACKAGING BREADS (SOUNDBITE) (English) CHIEF OPERATING OFFICER, REHOBOTH BAKERY, ABAYOMI AWE, SAYING: "If the price of diesel goes up it becomes more difficult for us to operate because consumers considering the characteristic of the market in which we operate are not ready to bear the price and so it becomes more difficult for us to think about expansion. First is survival, you know, we will survive the situation if the prices of diesel goes up? This is a question I cannot really answer." (SOUNDBITE) (English) ANALYST, TUNDE LEYE, SAYING: "The last figures released by the Nigerian bureau of statistics show that about we had 1.94% growth in a quarter, that's not good enough for a country that has almost 3% population growth. People are getting poorer every day. We need to solve things that would increase productivity and power is definitely one of the productivity drivers that we can quickly solve if we just move some livers and do the right policy movement." VARIOUS OF LAGOS GARDEN SHOWING SOLAR PANELS
- Embargoed: 1st October 2019 14:10
- Keywords: Oil Power spike Diesel hike Economy Generators
- Location: LAGOS AND ABUJA, NIGERIA
- City: LAGOS AND ABUJA, NIGERIA
- Country: Nigeria
- Topics: Commodities Markets,Economic Events
- Reuters ID: LVA002AX1RCD3
- Aspect Ratio: 16:9
- Story Text: Nigeria's frenetic commercial capital, Lagos, is plunged into darkness several times a day. Then its generators roar, and the lights flood back on.
Nigeria is one of the world's largest economies where businesses rely so heavily on diesel-powered generators.
More than 70% of its firms own or share the units, while government data shows generators provide at least 14 gigawatts of power annually, dwarfing the 4 gigawatts supplied on average by the country's electricity grid.
The machines guzzle cash and spew pollution, but they are reliable in a nation where nearly 80 million people - some 40% of the population - have no access to grid power. Now diesel costs could spike globally, and many businesses are not prepared.
Diesel prices are expected to surge as United Nations rules aimed at cleaning up international shipping come into effect on Jan. 1, with many ships expected to burn distillates instead of dirtier fuel oil.
Slowing economic growth and nascent trade wars could blunt a price spike, and as the shipping industry adapts to the rules, vessels will likely consume less diesel. But in the short term their impact could be profound.
Estimates vary widely, but observers warn that prices could surge by nearly 20%.
Higher costs for operating generators that power the machinery, computer servers and mobile phone towers that run Nigeria's economy could impair growth in gross domestic product, already limping along at 1.92% at a time inflation is at 11%.
With the population growing at 2.6% each year, people are getting poorer.
"The price increases may be sharper than most people expect especially because diesel is deregulated in Nigeria so there is no subsidy on diesel and as we've seen overtime the price of diesel has moved along with the international market so if new rules cost the price to rise in the international market, we expect that that will cascade into Nigeria as well," says Tunde Leye, a Lagos-based analyst with SBM Intelligence, adding that diesel is the second or third biggest cost for many Nigerian businesses.
Nigeria and German engineering group Siemens agreed in July to nearly triple the country's "reliable" power supply to 11,000 megawatts by 2023. But previous such plans have failed.
While many Nigerian household and small business generators are powered by price-capped gasoline, the big generators for larger firms, apartment complexes and more substantial homes can only run on diesel.
"Many businesses may go under, businesses may struggle to survive or in the best case scenario will at least downsize and shut down some production capacity because if you can't pay for the diesel for production, you can't pass the pricing for increased cost in diesel. The next logical thing to do is to shut down some of that production capacity and produce at the quantity that the demand can carry price you are willing to sell at," says Tunde.
The oil industry, the Nigerian economy's biggest driver, would not take a big hit as it does not rely on Nigerian consumers being willing to absorb extra costs it has to pass on.
As fuel producers in their own right, its firms can also recoup costs more easily.
But other heavyweight industries would feel pain. Bank branches rely on generators, with diesel often accounting for 20-30% of banks' operating expenses, according to Popoola.
Telecommunications companies need them to run their mobile phone towers across the country. Telecoms giant MTN told local media in 2015 that it spends 8 billion naira ($26 million) annually on diesel.
Even bakeries need diesel. At Rehoboth Chops & Confectioneries Ltd., a bakery in the Ogba district of Lagos, giant diesel-powered ovens bake hundreds of loaves of bread. The factory runs 24 hours a day, six-and-a-half days a week.
The lights, mixers and fans that clear the heat are powered by two large diesel generators outside. The ovens run directly on diesel, so they never cut out.
Chief operating officer Abayomi Awe said they use cheaper grid power when they can but rely on generators for around 20 hours per day. Grid power can be down for days.
"If the price of diesel goes up it becomes more difficult for us to operate because consumers considering the characteristic of the market in which we operate are not ready to bear the price and so it becomes more difficult for us to think about expansion. First is survival, you know, we will survive the situation if the prices of diesel goes up? This is a question I cannot really answer," says Abayomi Awe.
"The last figures released by the Nigerian bureau of statistics show that about we had 1.94% growth in a quarter, that's not good enough for a country that has almost 3% population growth. People are getting poorer every day. We need to solve things that would increase productivity and power is definitely one of the productivity drivers that we can quickly solve if we just move some livers and do the right policy movement," Tunde says.
Many businesses are already searching for solutions. The Lagos Chamber of Commerce wants electricity prices revised upwards so the grid can attract investment - a politically risky move domestically.
It has also lobbied the government to remove tariffs and taxes on imported solar panels, which stand at 10%.
Unity Bank and the Bank of Agriculture have already signed deals with solar firm Daystar Power, while mobile phone tower firm IHS Towers is trying to power more sites using solar panels.
Solar power provider Starsight Power Utility Ltd. said it is working with 70% of Nigerian banks, but that cheap diesel has been one of the biggest hurdles for the development of solar.
(Seun Sanni, Nneka Chile, Angela Ukomadu) - Copyright Holder: REUTERS
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