Sustainable Power Supply and Economic Growth in Nigeria_ Empirical Evidience

7/28/2019 Sustainable Power Supply and Economic Growth in Nigeria_ Empirical Evidience

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SUSTAINABLE POWER SUPPLY AND ECONOMIC GROWTH IN NIGERIA: Empirical Evidence

Researcher: Nwafee Francis Ikechukwu Supervisor: Dr Ugbor I. Kalu

SUSTAINBLE POWERSUPPLY AND ECONOMIC

GROWTH IN NIGERIA:

Empirical Evidence

2011

FRANCIS IKECHUKWU NWAFEE


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Researcher: Nwafee Francis Ikechukwu Supervisor: Dr. Ugbor I. Kalu Page ii

TITLE PAGE

SUSTAINABLE POWER SUPPLY AND ECONOMIC

GROWTH IN NIGERIA: Empirical Evidence

BY

NWAFEE, FRANCIS IKECHUKWU

2007/149525

(Being a research project submitted to the Department of Economics,

University of Nigeria, Nsukka, in partial fulfillment of the requirements for

the award of a Bachelor of Science (B.Sc) Degree in Economics)

JULY, 2011.


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Researcher: Nwafee Francis Ikechukwu Supervisor: Dr. Ugbor I. Kalu Page iii

SUSTAINABLE POWER SUPPLY AND ECONOMIC

GROWTH IN NIGERIA: Empirical Evidence


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Researcher: Nwafee Francis Ikechukwu Supervisor: Dr. Ugbor I. Kalu Page iv

DEDICATIONDEDICATIONDEDICATIONDEDICATION

This work is dedicated to God Almighty for His faithfulness,

grace and mercy in my life; and to the memory of my late sister, Mrs.

Onuegbuna Elizabeth Chianumba (Igboago College).


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Researcher: Nwafee Francis Ikechukwu Supervisor: Dr. Ugbor I. Kalu Page v

ACKNOWLEDGEMENTACKNOWLEDGEMENTACKNOWLEDGEMENTACKNOWLEDGEMENT

With deep sense of honor and gratitude, I humbly appreciate theMighty God on whose mercy I rely for help, and who makes way in the

wilderness of my life.

I am indebted to my family, especially to my dear mother, Mrs.

Caroline Okwuchukwu Igboanugo and my brother, Mr. Anthony Okafor

Igboanugo for their relentless support throughout the period of my stay in the

university.

Also, invaluable support and contributions of the following people tothis work cannot be thrown overboard. They include Dr. Ugbor I. Kalu, a

dedicated simple man and my project supervisor, Prof. N. I. Ikpeze, a lively

personality and excellent teacher, Rev. Fr. (Dr.) H. E. Ichoku, Dr. (Mrs.) G.

Aneke, Prof. F. E. Onah, Dr. Moses Oduh, Mr. Emma Nwosu, Dr. E O.

Onyukwu, Mr. Ezebuilo Ukwueze, Mr. Jude Chukwu and other lecturers in

the Department of Economics.

The following people are not left out in the vote of thanks; Mr. & Mrs.

Emmanuel O. Maduagwuna (Ichie Eze di Ora Mma), Mr. Bernard Chidebe,

Mr. Michael Ugwu (Ichie Ochiliozua), Ebeke Sixtus, Ozoemena Chinenye,

Ebeke Beatrice, Ugwuoke Oliver, Kpadobi Nmachi Nwamaka, Aghadinauno

Chinedu, Ejimofor Raphael, Ofodile Joseph, Okechukwu Nweke, Emmanuel

Eboatu, Igboanugo Felicia, Mr. & Mrs. Tony Ozoffor, Mrs. Catherine Emoh,

and Mr. & Mrs. Anekwe Onuorah. We appreciate you all.


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APPROVAL PAGEAPPROVAL PAGEAPPROVAL PAGEAPPROVAL PAGE

This is to certify that this project has been red and approved asmeeting the requirements of the Department of Economics, University

of Nigeria, Nsukka, for the award of B.Sc Degree in Economics.

_____________________________ __________________Dr. Ugbor I. Kalu Date(Project Supervisor)

_____________________________ __________________Prof. C. C. Agu Date

(Head, Department of Economics)

_____________________________ __________________Prof. E. O. Ezeani Date

(Dean, Faculty of the Social Sciences)

_____________________________ __________________

External Examiner Date


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Researcher: Nwafee Francis Ikechukwu Supervisor: Dr. Ugbor I. KaluPage vii

TABLE OF CONTENTTABLE OF CONTENTTABLE OF CONTENTTABLE OF CONTENT

Title page ii

Dedication iv

Acknowledgement v

Approval page vi

Table of Content vii

Abstract x

CHAPTER ONECHAPTER ONECHAPTER ONECHAPTER ONE

IntroductionIntroductionIntroductionIntroduction 1

1.1.0: Background of the Study 1

1.2.0: Statement of the Problem 2

1.3.0: Objectives of the Study 4

1.4.0: Statement of Hypotheses 5

1.5.0: Significance of the Study 6

1.6.0: Scope of the Study 7

1.7.0: Definition of Basic Terms 8

CHAPTER TWOCHAPTER TWOCHAPTER TWOCHAPTER TWO

Literature ReviewLiterature ReviewLiterature ReviewLiterature Review 101010102.1.0: Conceptual Framework 10


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2.2.0: Theoretical Framework 11

2.2.1: Structure of the Nigerian Electricity Industry 12

2.2.2: Perspectives on Nigerias Electricity Crisis 142.2.3: Reforms in the Power Sector 18

2.2.4: Power Supply and Nigerias Vision 20:2020 24

2.3.0: Empirical Framework 28

2.4.0: Limitations of Previous Studies 35

CHAPTER THREECHAPTER THREECHAPTER THREECHAPTER THREE

Research MethodologyResearch MethodologyResearch MethodologyResearch Methodology 33339999

3.1.0: Introduction 39

3.2.0: Method of Estimation 39

3.3.0: Model Specification 40

3.3.1: Functional Specification of the Model 40

3.3.2: Mathematical Specification of the Model 40

3.3.3: Econometric Specification of the Model 41

3.4.0: Evaluation of Result 41

3.4.1: Economic Criterion 42

3.4.2: Statistical Criterion 44

3.4.3: Econometric Criterion 44

3.5.0: Source of Data 47

CHAPTER FOURCHAPTER FOURCHAPTER FOURCHAPTER FOUR


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Discussion of Research FindingsDiscussion of Research FindingsDiscussion of Research FindingsDiscussion of Research Findings 44448888

4.1.0: Presentation of Result 48

4.2.0: Evaluation of Regression Result 494.2.1: Economic Criterion 49

4.2.2: Statistical Criterion 51

4.2.3: Econometric Criterion 54

4.3.0: Evaluation of Research Hypotheses 60

4.4.0: Limitations of the Study 61

CHAPTER FIVECHAPTER FIVECHAPTER FIVECHAPTER FIVE

Summary, Policy Recommendation and ConclusionSummary, Policy Recommendation and ConclusionSummary, Policy Recommendation and ConclusionSummary, Policy Recommendation and Conclusion 63636363

5.1.0: Summary 63

5.2.0: Policy Recommendation 64

5.3.0: Conclusion 66

ReferencesReferencesReferencesReferences

AppendixAppendixAppendixAppendix


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ABSTRACTABSTRACTABSTRACTABSTRACT

This study investigated the challenges posed by inadequate and

unreliable power (electricity) supply to economic growth and development

in Nigeria.

To guide the study, Ordinary Least Square (OLS) method of regression

analysis was adopted using the Eviews 3.1 econometrics software.

A time series data sourced form the National Bureau of Statistics (NBS),

Central Bank of Nigeria (CBN), and Power Holding Company of Nigeria(PHCN), which covers between 1973 and 2009, was used for the analysis.

The result revealed that electricity supply is positively related to, but with

an infinitesimal or insignificant effect on economic growth in Nigeria;

whereas there is high or significant demand for electricity in the country.

Based on the findings of the study, it recommended that immediate step

should be taken by the government to privatize and liberalize the poor

public sector managed electricity industry in order to encouragecompetition and efficiency.

It also recommended that a complete overhaul on existing facilities and

new investment in capacity expansion be pursued in the areas of power

generation, transmission, and distribution in order to attract high profile

private investors who will be able to inject new blood into the industry;

and that a regulatory agency be established to oversee the activities in the

sector and forestall possible exploitation of consumers by profit drivenactions of such private players.


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CHAPTER ONECHAPTER ONECHAPTER ONECHAPTER ONE

INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTION

1.1.0:1.1.0:1.1.0:1.1.0: BABABABACKGROUND OF THE STUDYCKGROUND OF THE STUDYCKGROUND OF THE STUDYCKGROUND OF THE STUDY

Technological breakthrough in both basic and applied science,

mostly between 19th and 20th century has created a new world order

where over 80% of mans activity and comfort now require direct or

indirect use of electricity.

According to Energy Commission of Nigeria (2003), electricity can

be seen as a form of energy which enjoys considerable and diverse

application because of its flexibility, ease of transmission and

distribution.

Electricity has assume dominant role in every economy among

which include: the engine that powers production of goods and services;

it facilitates use of technological devices; increases opportunity for

investment in different lines of business; enhance agricultural

development among others. Its availability reduces cost, increases

output and makes production process easier and faster.

The above roles have made electricity to be widely used among

households, firms, government, agencies and organizations. Electricity

is mainly used for lightening, cooking, powering of factory machines

and other devices which are used for production and social welfare


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services. Thus its usefulness has earned it a vital position among

infrastructural needs of every society.

Despite the above value and benefits of electricity, Nigeria doesnot have access to the supply of qualitative, reliable, and adequate

electricity even after 100 years of experience. Her power stations

remained in crisis situation, battling with inefficiencies in generation,

transmission, distribution and sales of electricity, even when the

country is in the midst of enormous primary energy potentials.

Poor quality and inadequate electricity supply has affected

Nigerias economic performance in no small measure.

Its effect on the economy will help us to appreciate the uniqueness,

usefulness, and irreplaceable status of electricity among other

infrastructures. Most importantly, poor quality electricity has retarded

agricultural growth and development. It has undermined

competitiveness in industrial sector and influence performance in other

sectors of the economy as a result of its multi linkages.

To remedy this effect the Federal Government was brought in

contact with serious reforms to enhance adequacy, sustenance,

efficiency and profitability in the power sector.

1.2.01.2.01.2.01.2.0:::: STATEMENT OF THE PROBLEMSTATEMENT OF THE PROBLEMSTATEMENT OF THE PROBLEMSTATEMENT OF THE PROBLEM

It is unarguable that power supply crisis in Nigeria significantlyundermines the effort to achieve sustained economic growth,


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competitiveness in regional and global markets, employment

generation, and poverty alleviation. Iwayemi (2008) contends that the

prolonged dismal electricity industry performance has been the mostintractable infrastructural problem and policy challenge that the

nation has lived with in the past 50 years of independence.

It is not only worrisome that about 90% of Nigerians cannot boast

of 16 hours of electricity supply per day (Okonkwo, 2010), rather it is

most challenging that the nation has experienced mass exodus and

closure of manufacturing firms because of the electricity failure that

has plague the nation over the years. Hence remaining firms are forced

to produce under very high cost of alternative power supply, which

often translate into high cost of consumer and industrial goods, excess

inflation and unemployment.

In general, cardinal challenges of inadequate power supply in

Nigeria include insufficient power generation, high generation losses,

low transmission voltage and transmission losses, distribution losses

underutilization of installed capacity resulting from shortage of gas

supply and hydraulicity phenomenon, that is, seasonal water

fluctuations in the hydro power stations and as well overstress of

actual generated electricity, which leads to frequent breakdown in the

electricity grid.

It also included underutilization of primary energy potentials; poorinvestment and maintenance regime, widespread corruption in form of


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embezzlement of injected project fund and misallocation of resources.

High indebtedness to PHCN, vandalism of PHCNs property, electricity

theft, and inconsistency in planning, poor technical and institutionalframework and poor human capital development are also among the

challenges in the sector.

In view of the above stated problems, we shall seek answer to the

following research questions:

i. Does unreliable and inadequate electricity supply affect

economic growth in Nigeria?

ii. Does electricity consumption influence economic growth in

Nigeria?

iii. Is the domestic investment level sufficient for economic

growth in Nigeria?

The answer to above questions shall guide our recommendations as

regards the nature and scope of reforms required in the power sector.

1.3.0:1.3.0:1.3.0:1.3.0: OBJECTIVES OF THE STUDYOBJECTIVES OF THE STUDYOBJECTIVES OF THE STUDYOBJECTIVES OF THE STUDY

The over-riding focus of this research undertaking is to carefully

analyze the importance of sustainable electricity supply for economic

growth, using empirical evidence from Nigeria as our reference point.

We shall also exert more energy on the nature and magnitude of major

challenges facing Nigeria power sector in the supply of adequate and


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sustainable electricity. We shall also proffer an optimum and most

economic solution to the existing problems.

However, in adhering to the quantitative nature of studies of thiskind, the objectives of this enquire shall be explicitly define in terms of

the areas the scope of the study will cover. They shall include;

1 To examine the effect of unreliable and inadequate electricity

supply on economic growth in Nigeria.

2 To ascertain the influence of electricity consumption on economic

growth.

3 To investigate the influence of domestic investment on economic

growth in Nigeria.

1.4.0:1.4.0:1.4.0:1.4.0: STATEMENT OF HYPOTHESISSTATEMENT OF HYPOTHESISSTATEMENT OF HYPOTHESISSTATEMENT OF HYPOTHESIS

In attempt to properly accomplish the above stated objectives,

this study shall be firmly guided by these hypotheses.

But we shall for ease of analysis partition our testable hypothesis into

three cases.

HHHH0000:::: Total electricity supply is insignificant for economic growth in

Nigeria.

HHHH0000:::: Total electricity consumption does not contribute to economic

growth in Nigeria.

HHHH0000:::: Domestic investment level does not influence economic growth inNigeria.


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1.5.0:1.5.0:1.5.0:1.5.0: SIGNIFICANCE OF THE STUDYSIGNIFICANCE OF THE STUDYSIGNIFICANCE OF THE STUDYSIGNIFICANCE OF THE STUDY

Economically speaking, the rate at which electricity crisis hasconstrained the enormous potentials within Nigeria cannot be easily

quantified. The overwhelming need for uninterrupted and sustainable

electricity supply for both economic and social use, and as well, for

maintenance of comfortable living shall make this research

undertaking of great importance to various levels of government in

Nigeria and as well the entire populace.

In more specific terms, this study shall be of particular

importance to the following class of people

i. Policy makers and energy experts:Policy makers and energy experts:Policy makers and energy experts:Policy makers and energy experts:From the findings of this studythey would be presented with the right policy inputs to revive the

sector.

ii. Government and Investors:Government and Investors:Government and Investors:Government and Investors:Outcome of this research shall includeunveiling root causes of the crisis in the sector. Thus, the available

information shall in no small way assist both players in taking

right steps require to escape the crisis and provide insight for

better future performance.

iii.Business firms, Institutions and Households:Business firms, Institutions and Households:Business firms, Institutions and Households:Business firms, Institutions and Households: These entities shallalso benefit from this study. It will offer them useful insights on

how to minimize energy cost while maximizing outputs and utility.


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iv.FutureFutureFutureFuture Researchers:Researchers:Researchers:Researchers: They would be served a veritable footing toembark on other areas, which they felt are not covered in this

study.

1.6.0:1.6.0:1.6.0:1.6.0: SCOPE OF THE STUDYSCOPE OF THE STUDYSCOPE OF THE STUDYSCOPE OF THE STUDY

This research work shall place more emphasis on nature and

magnitude of the effect of unreliable and inadequate electricity supply

as it relates economic growth in Nigeria. This implies that the study

shall dwell more on the supply side than on the demand side of

electricity. Above this step, we shall review the reforms in the sector

and as well assess the level of performance of such reforms. The study

shall also enquire into possible causes of poor quality electricity supply,

underutilization of primary energy potentials in electricity generation,

and the effect of state monopoly in the sector.

Although the study shall highlight the origin of electricity

industry in Nigeria, we shall focus on the activities of National Electric

Power Authority (NEPA) and its successor, the Power Holding

Company of Nigeria (PHCN) between 1973 and 2009.

Our efforts shall revolve around the strengths and weaknesses of the

above name utility companies in the supply of electricity in Nigeria.


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1.7.0:1.7.0:1.7.0:1.7.0: DEFINITION OF BASIC TERMSDEFINITION OF BASIC TERMSDEFINITION OF BASIC TERMSDEFINITION OF BASIC TERMS

a) Sustainable Power Supply:a) Sustainable Power Supply:a) Sustainable Power Supply:a) Sustainable Power Supply: Sustainability is a recent concept that

originated at the 1980 world conservation strategy of the InternationalUnion for the Conservation of Nature and National Resources (IUCN),

where it was argue that sustainability is a strategic concept involving

the lasting utilization of national resources, the preservation of genetic

diversity and the maintenance of ecosystem (Smith, 1993).

However, sustainable power (electricity) supply can be defined as

that which meets the need of the present without compromising the

ability of future generations to meet their needs. It has to do with

power supply that will be maintained or support itself in the future

without giving rise to factors that will prevent or undermine its

performance.

b) Economic growth:b) Economic growth:b) Economic growth:b) Economic growth: This has to do with increase in economic or

profit-driven legal activities leading to increased income, provision of

more work, generation of more income, and increased material well-

being. Economic growth include those factors that bring about wealth

creation at the individual, community, and national levels; allowing

people to raise their standards of living; and potentially strengthen

such individuals, communities or nations.

c) Empirical Evidence:c) Empirical Evidence:c) Empirical Evidence:c) Empirical Evidence: By empirical evidence we mean proven or

confirmed testimonies, facts or indications about what took place in thepast, and which can be verified. Empirical evidence in this context


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involves using of traceable facts in analyzing performance of the

electricity sector in Nigeria while sourcing for optimum solution to the

problems and challenges of the sector at the same time.


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CHAPTER TWOCHAPTER TWOCHAPTER TWOCHAPTER TWO

LITERATURE REVIEWLITERATURE REVIEWLITERATURE REVIEWLITERATURE REVIEW

2.1.0:2.1.0:2.1.0:2.1.0: CONCEPTUAL FRAMEWORKCONCEPTUAL FRAMEWORKCONCEPTUAL FRAMEWORKCONCEPTUAL FRAMEWORK

By its nature and ease of conversion, electricity stands to be

recognized as the highest alternative used resources. This was made

possible by trend of technological innovation, where most products are

develop to use electricity in one form or another.

Indeed power sector has become very strategic given the prominent role

of electricity in powering economic growth in every economy.

Although electricity has become indispensable for a meaningful

economic and non-economic welfare, its supply remain infinitesimally

low and of poor quality in Nigeria.

The power sectors inability to generate electricity need of the nation

has degenerated into what is known aspower supply crisis.

Apart from underutilization of installed capacity, the crisis was marked

by poor infrastructural maintenance, low investment in new projects,

and inadequate supply of energy need (especially gas) of the sector.

Effect of the crisis can also be measured in terms of non

competitiveness in the industrial sector, non mechanization of the

agricultural sector and non expansion of Small and Medium Scale

Enterprises (SMEs). The experience of constant power failure in theface of increasing demand for electricity has been identified as the


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cause of high suppressed demand for national grid electricity in the

country. Firms and households instead depend more on self-generated

electricity, which was estimated at about 100% or above of the nationalgrid electricity.

Consequently, high cost of locally made goods, limited investment

opportunity, rising unemployment and environmental pollution become

the other of the day.

But the pertinent question is what can the government do to save the

power sector from total collapse? For some, it is privatization of

electricity market, while for others, funding and investment should be

increased while state monopoly structure in the sector be retain. These

views dominated the argument for the solution to power failure in

Nigeria.

2222.2.0:.2.0:.2.0:.2.0: THEORETICAL FRAMEWORKTHEORETICAL FRAMEWORKTHEORETICAL FRAMEWORKTHEORETICAL FRAMEWORK

Though Nigeria is highly endowed in natural, human, and energy

potentials; her electricity market remains highly underdeveloped. Thus

one of the biggest challenges facing her economic growth and welfare is

unavailability of adequate and sustainable electricity supply. The

countrys poor record of national savings and capital accumulation has

been responsible for low investment in the sector.

According to Todaro and Smith (2009), every economy must savea certain proportion of its national income, if only to replace worn-out


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or impaired capital goods. They argue that new investments

representing net additions to the capital stock are necessary if we

assume that some direct economic link between the total size of capitalstock and total GDP exist.

Thus narrowing down this argument to the context of Nigeria

power sector where under-investment, technical and institutional

inefficiencies is the tradition; one will see why the sector records poor

performance.

The principal logic behind Harrod-Domar Economic Growth Theory

found in Todaro and Smith above is that the rate of growth of GDP is

said to be jointly determine by the net national savings ratio and the

national output ratio.

Having stated that constant electricity supply is positively related to

economic activities, which in turn increases the GDP; it also follows

that underinvestment in the power sector can seriously undermine

economic growth.

2.2.1:2.2.1:2.2.1:2.2.1: Structure of the Nigerian Electricity Market.Structure of the Nigerian Electricity Market.Structure of the Nigerian Electricity Market.Structure of the Nigerian Electricity Market.

Electricity market in Nigeria was developed in late 19th century.

In Sambo (2008); Babatunde and Shuaibu (2009); Isola (2010); Falosey

(2011), attempt at electricity generation in Nigeria started in 1896

when electricity was first produced in Lagos, fifteen years after itsintroduction in England.


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This electricity was trusted to the care of Public Works

Department (PWD) until 1929 when Nigeria Electricity Supply

Company (NESCO) was establish immediately after the construction ofKurra hydroelectric power station near Jos.

In 1951 a central body known as Electricity Corporation of

Nigeria was established by the Legislature Council. This follows

construction of the first 132kV line in 1962, which link Ijora power

station and Ibadan power station. After this, the Niger Dams Authority

(NDA) was established in 1962, and mandated to develop hydropower

potentials of the country.

But the government however in 1972 merged the two authorities

namely, ECN and NDA to form the National Electric Power Authority

(NEPA). NEPA was made a state monopoly in the power sector and was

also charged with development and maintenance of an efficient co-

ordinate and economical system of electricity supply for all parts of the

country.

This structure remains until March 2005 when the Electric Power

Sector Reform bill was passed into law. The EPSRA 2005 unbundled

NEPA into 18 companies in preparation for its privatization. It equally

created a holding company known as Power Holding Company of

Nigeria (PHCN) to oversee generation, transmission, distribution, sales

of electricity and general management of the utility company (NEPA)until the newly created companies are privatized.


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In defense of state monopoly in Nigeria power sector,

Koutsoyiannis (1998) and Varian (2006) contend that state monopoly is

the most suitable market structure for an establishment of highlycapital intensive nature (especially in production of essential goods).

According to their argument, a state monopoly will ensure more

protection of the masses against private sector exploitation and

guarantee adequate provision of such commodity, even in the presence

ofa zero economic profit.

This theory supported government domination in Nigeria power sector

given the importance of electricity in economic life of the nation.

However, in Subair and Oke (2008), the justification for state

monopoly in the sector was disqualified on the ground of inherent

inefficiencies associated with monopoly market. They maintain that

poor performance and crisis in the power sector was embedded in the

weaknesses of a monopolist which include misallocation of resources.

2.2.2:2.2.2:2.2.2:2.2.2: Perspectives on Nigerias Electricity CrisisPerspectives on Nigerias Electricity CrisisPerspectives on Nigerias Electricity CrisisPerspectives on Nigerias Electricity Crisis

Poor performance of the electricity sector has been a recurrent

decimal in Nigeria. Various studies show that required electricity

supply for a meaningful economic growth is still lacking in he country,

even though she has one of the highest energy potentials in the world

as contain in table 2.1


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Table 2.1: Energy Resources in NigeriaTable 2.1: Energy Resources in NigeriaTable 2.1: Energy Resources in NigeriaTable 2.1: Energy Resources in Nigeria

Energy TypeEnergy TypeEnergy TypeEnergy Type Reserves EstimatesReserves EstimatesReserves EstimatesReserves Estimates

Crude OilCrude OilCrude OilCrude Oil 36 billion barrels

Natural gasNatural gasNatural gasNatural gas 185 trillion cubic feet

CoalCoalCoalCoal 2.75 billion metric tones

HydroHydroHydroHydro 14, 750 MW

Solar radiationSolar radiationSolar radiationSolar radiation 3.5-7.0 kwh/m2-day

Wind energyWind energyWind energyWind energy 2.0-4.0 m/s

BiomassBiomassBiomassBiomass 144 million tons/year

Wave and tidal energyWave and tidal energyWave and tidal energyWave and tidal energy 150,000 TJ (c16.6x106 toe/yr

Source:Akin Iwayemi (2008)

In its assessment of the power sectors performance, the

Presidential Task Force on Power (PTFP) maintains that Nigeria

records biggest gap between electricity supply and demand. After the

evidence which shows that out of 8,000MW installed capacity only

3,800MW was generated electricity for more than 150 millionpopulations. The Task Force however contends that for the nation to

pull out of its electricity gap she must have to engage in meaningful

investment in power generation, transmission and distribution (Salau,

2011).

Further emphasis was laid on inability of the federal Government

dominant role in procurement, construction, operation and


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maintenance in the sector to provide the nation with adequate

electricity supply.

In National Economic Empowerment and Development Strategy(NEEDS, 2004), an independent private sector model was projected as

a better alternative to state monopoly in Nigeria power sector.

The publication criticized the state monopoly on the ground of

inefficiency as follows;

No new power stations were built between 1990 and 1999

No major overhaul of plants was carried out between 1990 and

1999

Only 19 out of 79 generating units were in operation in 1999.

Actual daily generation fell to less than 2000MW in 1999

No transmission lines have been built since 1987.

Federal Government funding to the sector decreased continually

between 1980 and 2000.

Similarly in his view, Okonkwo (2010) conceptualized the crisis from

perspective of inadequate supply of gas to the thermal power plants.

He insisted that constant harassment of oil workers by the Niger Delta

militants and high rate of gas flaring by the oil companies are

responsible for acute shortage of gas supply to the power stations in

Nigeria.


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Okonkwo also included the effect of global warming which causes low

water levels and undermine generation of electricity at hydropower

stations especially in dry season.Another model of consideration that explains the performance in

Nigeria power sector is the concept of technological constraints on

firms, using the Cobb-Douglas production functionstated as;

Y = AKL----------------- 1

Where Y is the output level, A is the parameter measuring level of

technology, k is the capital input, L is labour input and , are

parameters that measure rate of combination of factor inputs (K and L)

respectively. According to Varian (2006), only certain combinations of

inputs are feasible ways to produce a given amount of output; and the

firm must limit it to technologically feasible production plans.

This implies that the level of output (Y) is influenced by technological

coefficient (A) given certain level of capital (k) and labour (L).

But empirical evidence reveals that both obsolete technology and

inadequacy of modern technical skill is paramount in the sector. Thus,

leading to low utilization of installed capacity of the power plants

[estimated at about 26.7% in 2009 by CBN (2010)] and low energy mix

in electricity generation.

Ayodele (2001) shows that only 36% of primary energy resources are

being utilize in electricity generation in Nigeria. He stressed that out ofcoal and lignite, natural gas, crude oil, solar, hydro, nuclear, wood fuel,


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geothermal, tide, biogas and biomass; only four sources (coal, crude oil,

natural gas and hydro) are currently being utilized.

Institutional weakness is yet another factor in the electricitycrisis.

Adoghe (2010) define this weakness to include poor tariff regime, poor

planning and coordination, low managerial skill and governance

failure, and lack of innovative spirit which is inherent in the state-

owned power sector.

Lastly, corruption in the polity was pointed out among factors

responsible for under-performance in the sector.

It has been argued by Okonkwo (2010) that high profile inducement in

appointment of key personnel in the sector is responsible for the gross

mismanagement and embezzlement of funds allocated to the sector

over the years. This argument arose from the insignificant effect of the

injected US$ 13.5 billion in the sector by Obasanjos government

between 2000 and 2007. The fund was estimated to be sufficient to

assist the sector in generation about 10,000MW of electricity by 2007,

but it ended up generating only about 4,000 MW.

2.2.3:2.2.3:2.2.3:2.2.3: Reforms in the Power Sector.Reforms in the Power Sector.Reforms in the Power Sector.Reforms in the Power Sector.

Most countries in Africa, Latin America, Asia and European

Union have embarked on extensive power sector reforms. In all thesecountries electricity supply is now no longer the statuary monopoly of


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the state-owned public utilities, Independent Power Producers (IPPs)

have already made their powerful appearance.

Power Ministries have been converted into corporations, andliberalization has gathered momentum across the US, Ireland, Sweden,

Norway, and New Zealand, except in France where the Electrcite de

France (EDF) retain state monopoly with optimal performance

(Vijayamohanan, 2008).

Further more, Bacon (1995) opine that power sector reform

should reflect developmental stage of the country in question. That is,

whether the reform should embrace privatization and liberalization, or

whether it should entrench state monopoly by making it more

economical and efficient should be determined by whether the country

is a developed or developing country.

He cited example of large countries like China and small countries like

Bolivia which have adopted power sector reform models according to

their own needs and circumstances.

In Nigeria in particular, NEPA has remain a state owned public

utility from its establishment in 1972 until 2005 when the Electric

Power Sector Reform Act was introduced. Although the company was

once commercialized which supported upward review of tariffs in 1988

following the implementation of 1986 structural Adjustment

Programme, the sector remain unable to meet electricity demand of thenation.


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Hence the Federal Government of Nigeria in her current reform

agenda according to Faloseyi (2011) estimated an investment worth of

N1.5 trillion over few years to ensure adequate and reliable electricitysupply from the sector.

Available literature has revealed two principal reasons that made

power sector reform a necessary condition in the provision of

sustainable electricity supply in Nigeria, and they include:

a) The poor performance of the state-owned utility company in

terms of high cost, inadequate expansion of access to electricity

services for the population and/or unreliable supply.

b) The inability of the sector to finance the needed expenditure on

new investment.

This reform was set to meet the following goals and objectives as it was

contain in the National Electric Power Policy (NEPP) as follows:

(i) Improve the efficiency and affordability of the power

supply.

(ii) Encourage private sector participation and competition.

(iii) Attract investment.

(iii) Establish an independent regulatory agency to ensure level

playing field for all market participants.

(iv) Provide an enabling environment for long term

development of the sector.(v) To ensure minimum adverse environmental impact and


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(vi) To ensure a leadership role for Nigeria in the development

of the proposed West African Power Pool (WAPP).

In an effort to achieve the above objectives, the EPSRA 2005 adoptedwholesome competitive model as opposed to the single buyer model or

retail competition.

In this arrangement, distribution companies should buy power directly

from the generators; and the transmission company will remain a pure

electricity transport and dispatch company.

In Isola (2010), it was stressed that the adopted competitive model in

the sectors operation was linked to the provision of the Act which

unbundled NEPA into 18 different companies. The company will be

made up of 6 Generators, 11 Distributors and 1 Transmission

Company.

According to the Electricity Power Sector Reform Act (2005), the

reform will be carried out in three phases as follows;

Phase 1: A 100% state-owned PHCN was created and vested with the

assets and liabilities of the defunct NEPA. This company co-exists with

the IPPs of which NEPA has signed power purchase agreement.

The National Electricity Regulatory Commission (NERC) was also

created in this stage as an independent and self-funding sector

regulator.

Ikeonu (2006) listed the statutory obligation of the commission asfollows:


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Ensure orderly development of a competitive power market

Ensure efficient safe and adequate production of electricity.

Promote competitive and private sector participation. Protect consumers and the public interest.

Evolve standard and codes that measure with international best

practice.

Evolve stable and equitable rates thereby ensuring reasonable

profit.

License and regulate persons engaged in electricity business.

Settle disputes amongst industry participants.

Ensure expansion of access to rural and urban dwellers.

Establish and administer the power consumer Assistance Fund

for subsidizing under-privileged consumers.

Again successor companies are also incorporated in this phase for

the purpose of assuming the assets and liabilities of the PHCN. They

are empowered to carry out functions relating to generation

transmission, trading, distribution and bulk supply as well as resale of

electricity.

To ensure a smooth transition to a private sector led market, the

Federal Government will initially hold the shares in the successor

companies until they would be gradually privatized.


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A special purpose entity would also be created for the purpose of

procuring electricity from successor generators and distributors as well

as the IPPs.Phase 2 (Medium term): Privatization of the successor generation

and distribution companies would have been completed while the

successor transmission/dispatch company would be left under

government control. This phase shall be characterized by competition

among generators; by energy trading between generators and

distributors, primarily on the basis of bilateral contracts.

Phase 3 (Long-term): This involves the establishment of a wholly

competitive market characterized by economic pricing of electricity that

would allow for recovering of full cost of supplied electricity.

Another key provision under the reform was the creation of Rural

Electrification Agency (REA) and Rural Electrification Fund. Ojukwu

(2008) upheld the view that REA and its supporting fund were

established to increase access to rural area; and to make available

reliable electricity to at least 75% of Nigerians by 2020. He equally

summarized the essence of the reform as effort to provide effective and

efficient power supply that is affordable but at the same time cost

reflective.

But for Vijayamohanan (2008), a developing country like Nigeria

should not embrace total privatization and liberalization of its powersector for two main reasons:


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First, there is high tendency of running into the abuse of private

monopoly due to the inherent strong profit motive of the private

sectors.He argue that since electricity cannot be readily stored, but must be

supplied continually in adjustment with varying demand, it is

technically required that power sector is to be a vertically integrated

natural monopoly capable of supplying electrical energy as

economically as possible, and with a high degree of quality and

reliability.

Second, leaving such an important public utility to the vagaries

of profit-controlled market forces will exclude the under-privileged

populace from benefits of electricity. Thus it will lead to unbalanced

economic growth, inequality and perpetuate poverty in the system.

2.2.4:2.2.4:2.2.4:2.2.4: Power Supply and Nigerias Vision 20:2020Power Supply and Nigerias Vision 20:2020Power Supply and Nigerias Vision 20:2020Power Supply and Nigerias Vision 20:2020

Vision 20:2020 is all about Nigerias dream of becoming one of the 20

largest economics in the world by the year 2020.

This dream was anchored on the nations long-term development plan

which was designed to stimulate rate of economic growth and

development through increase in utilization of her resource

endowment.

Argument from different authors seems to converge at aparticular point. Predominantly, there is a view that Nigeria is less


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likely to actualize the nine-years-away dream, given her critical

infrastructural deficit which cannot stimulate required consistent high

economic growth rate.While analyzing poor electricity supply as a major constrain to

economic performance in Nigeria some analysts for instance Iwayemi

(1991); Adegoke (1991); Ayodele (1992) and (1998) explain neglect of

the power sector in 1990s as the period of serious electricity crisis; a

crucial or decisive moment; an undesirable turning point; a time of

difficulty and distress; a state of confusion when things no longer

happen in the normal or usual manner.

But the question is whether the power sector, given the level of

resources at its disposal can supply about extra 45,000MW of electricity

within the next 9 years to meet electricity need of the nation by 2020.

To answer the above question, we shall borrow from economic

theory of the Neoclassical Counterrevolution, using Market

Fundamentalismapproach as it is contain in Todaro and Smith (2009).

In a developing country like Nigeria, the theory favoured supply-

side macroeconomic policies. It called for free markets and the

dismantling of public ownership, static planning and government

regulation of economic activities. The central argument of the

neoclassical counterrevolution is that underdevelopment results from

poor resource allocation due to incorrect pricing policies and too muchstate intervention by overly active developing nation governments.


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Hence the neolibrals contend that by permitting competitive free

markets to flourish, privatizing state-owned enterprises, promoting free

trade and export expansion, welcoming investors from developedcountries and eliminating the plethora of government regulation and

price distortions in factor, product and financial markets; both

economic efficiency and economic growth will be stimulated.

Thus predominant state monopoly in NEPA/PHCN; excessive

government regulation with respect to conduct; under-investment; and

static planning strategy accounts for poor resource allocation, which

yield poor quantitative and qualitative performance in the sector.

Again, since the actualization of vision 20:2020 is intricately

interwoven with the provision of sustainable electricity supply, it thus

suggest that a good number of internal and external factors should be

considered while making reforms that will bring sustainability in the

sector.

In his definition ofquality kilowattsor sustainable electricity provision,

Wilde-Ramsing (2009) insist that it involves that which generate,

transmit, distribute and supply electricity in a manner that contributes

to poverty reduction and satisfaction of basic needs without damaging

the natural environment or compromising the future generations

ability to meet their own need.

The strategic role of electricity calls for critical consideration of social,environmental and economic issues surrounding the economy while


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Source: SINTEF Ener Research and ProSus

planning for sustainability. This will ensure peaceful coexistence

among the product (electricity), users and the environment.

A look at figure 2.1 below will help us appreciate the factors thatshould go in while planning for a sustainable electricity supply.

Fig 2.1: Sustainable electricity modelFig 2.1: Sustainable electricity modelFig 2.1: Sustainable electricity modelFig 2.1: Sustainable electricity modelCritical issues for sustainable electricity provision

Environmental issuesSocial issues Economic Issues

Displacement

Indigenous rights

Affordability

Public health and

safety

Labour Issues

Communitylife style

impact

Consumer

rights

Access to

electricity

Gender

equality

Naturalresource

depletion

Renewable

source of energy

for electricity

Bio-diversity

Climate change

and Green

House Gas

emission

Waste and

pollution

Ecosystem

impact

Local economic

development

Reliability of

supply

Economic

efficiency

Research and

Development

Competition

Corruption

Due diligence

Demand-side

initiative

The sustainable development balance: Cross-cutting issues

Production chain

responsibility

Poverty reduction

and meeting basic

needs

Respect for human

rights

Transparency and provision of

information

Precautionary principles and evaluation of risks and

alternatives Stakeholder engagement and public participation indecision making


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Attempt to analyze Nigeria power sector in the context of above

diagram suggest that poor performance in the power sector was

resulted from inability of the planners to inculcate issues likecommunity lifestyle, affordability, public safety, renewable energy

source, waste and pollution, competition among others in the

development of her power sector.

While a wider approach is being taken in planning for a

sustainable reform, the government is expected to accelerate its effort

in introducing full-time private sector leadership in the sector so as to

keep the visions hope alive.

2.3.0:2.3.0:2.3.0:2.3.0: EMPIRICAL FRAMEWORKEMPIRICAL FRAMEWORKEMPIRICAL FRAMEWORKEMPIRICAL FRAMEWORK

From our theoretical argument above, we have been able to

establish that;

a) State monopoly power of NEPA and PHCN was the source of

inefficient resource allocation and mismanagement in the sector.

b) Demand and supply gap in the sector was primarily caused by

underinvestment which emanated from poor national savings

culture.

c) Dismantling of public ownership in favour of freer market

structure will revive and boost performance in the sector.

Some researchers examined the problem of power failure using quite anumber of approaches such as self-assessment, economic welfare


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analysis, market structure approach, production function and

cointegration test approach. Their application in both developed and

developing economics show their strengths and weaknesses alike.On its assessment of impact of inadequate power supply on

economic growth, the Central Bank of Nigeria (2000) concisely

enumerated the following problems of Nigerian power sector as follows;

(i) Lack of preventive and routine maintenance of NEPAS

facilities which results in huge energy losses.

(ii) Frequent major breakdowns, arising from the use of outdated

and heavily over loaded equipment.

(iii) Lack of coordination between town planning authorities and

NEPA, resulting in poor overall power system planning and

over-loading of NEPA equipment.

(iv) Inadequate generation due to operational/technical problems

arising from machine breakdown, low gas pressure and low

water levels.

(v) Poor funding of the organization.

(vi) Inadequate budgetary provision and undue delay in release of

funds to NEPA.

(vii) NEPAs inefficient billing and collection system.

(viii) High indebtedness to NEPA by both public and private

consumers who are reluctant to pay for electricity consumedas and when due.


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(ix) Vandalization and pilferation of NEPAs equipment.

The fact that Nigeria has poor national savings record, which

often undermines investment ability, helps to explain the existenceof above mention problems in her power sector.

For instance the CBN (2009) gave national savings as percentage of

GDP in Nigeria for 1984, 2001, 2003, and 2005 as 10.8%, 1.8%, 1.4%

and 0.5% respectively.

It shows a continuous decline in the nations Marginal Prosperity to

Save(MPS) over the listed years.

Apart from relatively low installed generation capacity of about

8,469.5 MW which was expected to satisfy electricity needs of 150

million people in 2009, average utilization capacity remain 26.7%

(CBN, 2010). This implies average supply of 2257.6 MW of

electricity as against estimated demand of about 14,066 MW for the

year.

Though actual demand for the national grid electricity stood at

2060.71 MW, about 12,005.29 MW represented suppressed demand

which is likely to be provided through self-powered generators.

Thus, this revealed the dichotomy between electricity supply and its

demand in the country.

Table 2.2 below will present us with facts on installed generation

capacity of the power plants, total generated electricity, actualelectricity consumed percentage losses from generated electricity,


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ownership position of power plants, and consumption categories

between 1999 and 2009.

Table 2.2: Power Sector Performance (1999Table 2.2: Power Sector Performance (1999Table 2.2: Power Sector Performance (1999Table 2.2: Power Sector Performance (1999----2009)2009)2009)2009)Year Total install

generation

capacity

(MW)

Total

generated

electricity

(MW)

Actual

electricity

consumption

(million of

kwh)

% loss of

generated

electricity

% of production

NEPA IPPs

% of consumption category

1999 5.876 1,596.2 867.1 45.7 99.5 0.5 51.5 26.8 21.7

2000 5.981.6 1,531.2 811.5 47.0 99.5 0.5 51.4 26.4 22.2

2001 6251.6 1,801 889.4 50.6 99.5 0.5 52 26.2 21.8

2002 6.180 2,145.5 1,2841 40.1 99.5 0.5 59.6 27.5 12.9

2003 6.130 2,018.3 1,286.7 36.3 99.5 0.5 59.6 27.5 12.9

2004 6.130 2,762.3 1,917.8 30.6 99.5 0.5 51.4 26.4 22.2

2005 6.777.6 2,687.1 1,973.1 26.8 99.5 0.5 51.4 26.4 22.2

2006 6.999.5 2,636.4 2,389.2 9.1 85.3 14.7 51.3 26.6 22.1

2007 8,233.5 2,623.3 2,245.5 14.4 85.3 14.7 51.3 26.7 22.0

2008 8,233.5 2,403.2 2.108 12.9 85.3 14.7 55.3 26.7 20.0

2009 8,469.5 2,257.6 2,060.7 8.8 87.2 12.8 56.3 26.7 18.0

Sources:CBN: Annual Report and Statement of Account several years.NBS: National Statistic Fact Sheet, 2000.NEPA: National Electric Power Authority, 2000.

Although electricity generation losses has reduced significantly from

what it used to be before the inception of the Fourth Republic, the case

of underutilization of installed capacity remained a critical challenge in

Residential

Commercial/

Industries


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the sector. Empirical investigations show that the power sector was at

the brink of total collapse before the intervention of the Obasanjos

government. Barros, Ibiwoye and Managi (2011) recorded that previouseffort of past governments to restore life in the sector yielded little or

no result.

Even though the government introduced a reform which will

ensure possible shift in paradigm as regards effective performance in

the sector, it still lives below its words with respect to policy

implementation. A practical illustration of this weakness was found in

several unfulfilled promise of constant power supply to the nation.

It once promised increasing operable power generation to 6,000 MW by

the end of 2009, which will further be increase to 10,000 MW by the

end of 2011 (African Development Bank Group, 2009) . Yet operable

power generation is below 6,000 MW as at April 2011.

As a matter of fact, the real cost of constant electricity failure in

Nigeria cannot be easily estimated. For instance in 2010 annual budget

estimate, the sum of N3,829,539,696 was projected for expenditure on

purchase of generators, maintenance and fueling in federal parastatals

alone.

Recently, the acting Director General of the Bureau of Public

Enterprises (BPE), Ms Bolanle Onagoruwa reveal that the bureau has

not received the go-ahead order from Federal Government to commence


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privatization of the 18 companies created from NEPA by EPSRA 2005

(see Daily Punch, Tuesday, 15 March 2010).

If we should go by the reference growth scenario in tables 2.3 and 2.4below, it will be easily established ceteris Paribus that current

propensity of governments effort in the power sector reform can meet

the nations electricity need only in the long-run.

Table 2.3: Electricity Demand Projections per Scenario MWTable 2.3: Electricity Demand Projections per Scenario MWTable 2.3: Electricity Demand Projections per Scenario MWTable 2.3: Electricity Demand Projections per Scenario MW

ScenarioScenarioScenarioScenario 2005200520052005 2010201020102010 2015201520152015 2020202020202020 2025202520252025 2030203020302030

Reference (7%)Reference (7%)Reference (7%)Reference (7%) 5,746 15,730 28,360 50,820 77,450 119,200

High GrowthHigh GrowthHigh GrowthHigh Growth(10%)(10%)(10%)(10%)

5,746 15,920 30,210 58,180 107,220 192,000

Optimistic IOptimistic IOptimistic IOptimistic I(11.5%)(11.5%)(11.5%)(11.5%)

5,746 16,000 31,240 70,760 137.370 250,000

Optimistic IIOptimistic IIOptimistic IIOptimistic II(13%)(13%)(13%)(13%)

5,746 33,250 64,200 107,600 172,900 297,000

Source:A. S. Sambo, 2008

Table 2.4: Electricity Supply Projections per ScenarioTable 2.4: Electricity Supply Projections per ScenarioTable 2.4: Electricity Supply Projections per ScenarioTable 2.4: Electricity Supply Projections per Scenario MWMWMWMW

ScenarioScenarioScenarioScenario 2005200520052005 2010201020102010 2015201520152015 2020202020202020 2025202520252025 2030203020302030

Reference (7%)Reference (7%)Reference (7%)Reference (7%) 6,440 15,668 28,356 50,817 77,450 136,879

High GrowthHigh GrowthHigh GrowthHigh Growth(10%)(10%)(10%)(10%)

6,440 15,861 30,531 54,275 107,217 192,079

Optimistic IOptimistic IOptimistic IOptimistic I(11.5%)(11.5%)(11.5%)(11.5%)

6,440 15,998 31,235 71,964 177,371 276,229

Source:A. S. Sambo, 2008


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Investment in the sectors expansion and operation has gathered

accelerated momentum from 2010, which continue till date.

2.4.0:2.4.0:2.4.0:2.4.0: LIMITATIONS OF PREVIOUS STUDIESLIMITATIONS OF PREVIOUS STUDIESLIMITATIONS OF PREVIOUS STUDIESLIMITATIONS OF PREVIOUS STUDIES

Well articulated and commendable as previous studies and

research efforts are, it must be noted that they are not without some

shortfalls and limitations.

In his analysis on improving and sustaining power supply in Nigeria,

Ayodele (2001) suggested diversification of primary energy sources

without any mention on the environmental implication and economic

profitability of those energy sources.

Though it is desirable to diversify energy sources for the supply of

adequate electricity in Nigeria, it is also reasonable to consider the

development of those sources in which the nation has economic

advantage and which also has less environmental effect.

For example, the radioactive rays from a nuclear accident should be

well considered before developing nuclear energy in a low technical

efficient human-resource-nation like Nigeria.

On a similar note, the abundant coal resources in the country can

effectively and efficiently be utilized when energy experts have

compared and contrasted the effect of high carbon emission from coal

burning plants with a relatively low emission from natural gas plantsin which the nation also has in more abundance.


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While doing this, both economic and technical cost of available primary

energy source should be considered since the ultimate goal of the power

sector is to ensure sustainability and economy in its supply ofelectricity.

Another case is that of Sambo (2008). He did not acknowledge the

already existing large market for electricity in Nigeria.

Nigeria is the current largest market for consumer goods in Africa; it

also follows that Nigeria is a well suitable market for electricity supply.

Even though that table 2.2 indicated low industrial consumption of

electricity, it does not imply absence or low industrial demand for

electricity. Most industries switched over to full time self-generated

electricity due to the constant power failure in the country, thus actual

demand for national grid electricity supply decreased.

Again the nations population and the abundance of raw material needs

of various industries also qualify the nation for a fertile market in both

industrial and residential supply of electricity.

It only needs a reliable economic supply-side of electricity to

acknowledge the local market potentials.

Similarly, Iwayemi (2008) measured electricity consumption by

actual demand for national grid electricity without any reference to the

huge suppressed demand, which is being supplied through self-

generated electricity.


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To substantiate the existence of high suppressed demand for electricity,

Adeola (2009) noted that a total of 750 companies closed their shops in

2006 alone due to power failure problems. He equally observedNigerias top position among world importers of generator sets since

2002.

It is obvious that low consumption of national grid electricity was

supplemented with high consumption of self-generated electricity. Thus

to capture real demand for electricity in the country, one should include

the 50% -100% estimated annual supply of electricity from self-

generators.

Finally in his contribution, Vijayamohanan (2008) failed to

consider high inefficiency rate of public corporations as the reason for

dominant privatization policy in most economic reforms of developing

nations. Even in the presence of essential commodity production like

electricity as he argues, public corporations in these nations have failed

to stimulate efficiency in production process.

This is because of the double role played by government of developing

nations which include the role of an active economic agent (participant)

and that of an economic regulator at the same time. Among public

corporations failure in developing nations include the examples in

Nigeria such as NITELs failure to provide functional telephone

services until the private sectors intervention; NNPCS failure to meet


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local demand for refined petroleum and gas products even after 42

years of establishing a local refinery.

The example of NEPAs and PHCNs inability to supply reliableelectricity will also not be excluded from the failure list of public

corporations in the country.


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CHAPTER THREECHAPTER THREECHAPTER THREECHAPTER THREE

RESEARCH MEHODOLOGYRESEARCH MEHODOLOGYRESEARCH MEHODOLOGYRESEARCH MEHODOLOGY

3.1.0:3.1.0:3.1.0:3.1.0: INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTION

This research employs a linear equation technique of

econometrics simulation for its analysis.

The merits of this technique according to koutsoyannis (1998) included

its theoretical plausibility, explanatory ability, accuracy of the

parameters, simplicity and forecasting ability.

Thus Economic theory makes statement or hypothesis that is

mostly quantitative in nature and as a result it is the choice of the

researcher to make judgment on the hypothesis based on appropriate

models and method of inference. Such economic technique enables us to

obtain the estimate parameters to interpret the result based on the

study.

3.2.0:3.2.0:3.2.0:3.2.0: METHOD OF ESTMATIONMETHOD OF ESTMATIONMETHOD OF ESTMATIONMETHOD OF ESTMATION

The Ordinary Least Square method (OLS) shall be used in this

study for two reasons. First, the OLS is an essential component of most

other techniques as is fairly simple to compute when compared all

other economic techniques. Second, the parameters estimated by OLS

have some optimal properties. This means that they posses the BLUE


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(Best Linear Unbiased and Efficient estimator) quality (Gujarat; and

Porter, 2009)

3.3.0:3.3.0:3.3.0:3.3.0: MODEL SPECIMODEL SPECIMODEL SPECIMODEL SPECIFICATIONFICATIONFICATIONFICATION

Economic theory always allows suggesting a model for analysis.

The parameters of these models are estimated based on the available

data and the adequacy of the fitted model carefully checked by the

following dependent and independent variables below.

a) Real Gross Domestic Product (RGDP)

b) Total Electricity Supply (TES)

c) Total Electricity Consumption (TEC)

d) Total Labour Force (TLF)

e) Gross Domestic Investment (GDI)

f) Money Supply (M2)

3.3.1:3.3.1:3.3.1:3.3.1: Functional Specification of the ModelFunctional Specification of the ModelFunctional Specification of the ModelFunctional Specification of the Model

RGDP =f(TES. TEC, TLF, GDI, M2) ________3.1

3.3.2:3.3.2:3.3.2:3.3.2: Mathematical SpecificationMathematical SpecificationMathematical SpecificationMathematical Specification ofofofof thethethethe ModelModelModelModel

RGDPt = + 1TESt + 2TECt +3LOG(TLFt) + 4GDIt-1 + 5M2t-1

_______3.2

In order to capture both the explained and unexplainedrelationship between the dependent and independent variables above


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the stochastic error term(t) is introduced which gave the econometric

model below.

3.3.3:3.3.3:3.3.3:3.3.3: Econometric SpecificationEconometric SpecificationEconometric SpecificationEconometric Specification ofofofof thethethethe ModelModelModelModel

RGDPt= + 1TESt+ 2TECt+ 3LOG(TLFt) + 4GDIt-1 + 5M2t-1 + t

________3.3

Where:

RGDP = Real gross domestic product (which measures economic

growth)

TES = Total electricity supply

TEC = Total Electricity consumption

LOG(TLF) = Natural log of total labour force (It measures percentage

change in the labour force).

GDI = Gross domestic investment

M2 = Money supply

= error term

t = time trend

= intercept

1, 2, 3, 4, 5, = parameters

3.4.0:3.4.0:3.4.0:3.4.0: EVALUATION OF RESULTEVALUATION OF RESULTEVALUATION OF RESULTEVALUATION OF RESULT

The result obtain from this study shall be evaluated based on thefollowing criteria.


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3.4.1:3.4.1:3.4.1:3.4.1: Economic Criterion (AEconomic Criterion (AEconomic Criterion (AEconomic Criterion (A priori Expectation)priori Expectation)priori Expectation)priori Expectation)

This criterion is concerned with determining the consistency of

our parameter estimates with the signs and magnitude defined by theReal Gross Domestic Product.

a) Real Gross Domestic product:Real Gross Domestic product:Real Gross Domestic product:Real Gross Domestic product: This is the dependent variable

used to measure economic growth in this study.

Its size and sign depends on the findings from the model of the

study. Thus, it is considered to be stochastic.

b) Total Electricity Supply:Total Electricity Supply:Total Electricity Supply:Total Electricity Supply: This is expected to have a positive

relationship with RGDP. This is because the more the quantity

and quality of electricity supply, the more the productive activity

will increase in the economy.

c) Total Electricity Consumption:Total Electricity Consumption:Total Electricity Consumption:Total Electricity Consumption: Electricity consumption is a

function of income and price which still determine the size of

RGDP. The more a countrys RGDP grows, the more electricity

consumption is expected to grow. Thus, it is expected that both

TEC and RGDP should be positively related.

d) Total Labour Force:Total Labour Force:Total Labour Force:Total Labour Force: Total labour force is expected to be

positively related to RGDP since every economy requires a

meaningful size of labour force to effectively utilize its resources.


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The greater the size of the labour force, the more the chances of

economic growth.

e) Gross DomGross DomGross DomGross Domestic Investment:estic Investment:estic Investment:estic Investment: A countrys RGDP is expected to

increase as it increases its investment ratio over time, which

implies a positive relationship between the two.

f) Money Supply:Money Supply:Money Supply:Money Supply: An increase in money supply is expected to

increase the nations output (RGDP) through the transmission

mechanism of interest rate, which will increase investment.

Thus, the relationship between depend and independent

variables are summarize in table 3.1 below.

Table 3.1Table 3.1Table 3.1Table 3.1

VariableVariableVariableVariable AAAA priori Expectationpriori Expectationpriori Expectationpriori Expectation

TESTESTESTEStttt 1 > 0

TECTECTECTECtttt 2 > 0

Log (TLFLog (TLFLog (TLFLog (TLFtttt)))) 3 > 0

GDIGDIGDIGDItttt----1111 4 > 0

M2M2M2M2tttt----1111 5 > 0


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3.4.2:3.4.2:3.4.2:3.4.2: Statistical Criterion (First Order Test)Statistical Criterion (First Order Test)Statistical Criterion (First Order Test)Statistical Criterion (First Order Test)

This include test defined by statistical theory which are used in

determining the reliability of the parameter estimates.According to Keller (2005), they confirm the reliability or statistical

relevance of parameter estimates.

i)i)i)i) RRRR2222 Test:Test:Test:Test: This is known as coefficient for determination which isuse to measure the goodness of fit of the model.

ii)ii)ii)ii) TTTT test:test:test:test: This will be used to test the significance of theindividual parameter estimate of the regression model.

iii)iii)iii)iii) FFFF test:test:test:test: It will be used to test the overall significance of allthe parameters of the regression model

3.4.3:3.4.3:3.4.3:3.4.3: Econometric Criterion (Second OrderEconometric Criterion (Second OrderEconometric Criterion (Second OrderEconometric Criterion (Second Order Test)Test)Test)Test)

This criterion ensures the stability of the parameter estimates, as

to justify their use in policy formulation.

a)a)a)a) Normality Test:Normality Test:Normality Test:Normality Test:This is used to check whether the error term isnormally distributed. That is, to check if the residuals, a proxy

for stochastic error term follows normal distribution or not

symbolically i.e., t~ N(0, 2

)


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The Jarque Bera (JB) test of normality would be adopted for

this test.

b)b)b)b) Multicollinearity Test:Multicollinearity Test:Multicollinearity Test:Multicollinearity Test:This test the level of linear relationship orthe collinearity among the explanatory variables used in this

model. The essence of this is to see if there is high collinearity

among the variables or not so as to know the level of accuracy of

our estimated parameters.

The correlation matrix table would explain this test.

c)c)c)c) Specification Error Test:Specification Error Test:Specification Error Test:Specification Error Test:This test whether there is specificationbias or error in the model used in this regression analysis.

The interest is to check whether the model is correctly specified.

That is whether important explanation variables are omitted or

unnecessary ones are included, or wrong functional form of

relationship between the dependent and explanatory variables

exist.

The Ramseys RESET test will be used for this study.

d)d)d)d) Test fTest fTest fTest for Autocorrelation:or Autocorrelation:or Autocorrelation:or Autocorrelation:The importance of this is to see whetherthe errors corresponding to different observations are serially

correlated or not. Autocorrelation refers to a correlation in the


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error between members of a series of observations ordered in

time (as in time series) or in space (as in cross sectional) data.

The uncorrelated series are desirable.Symbolically E(ij) = 0.

NsweyWest HAC will be used to correct errors for

autocorrelation if it exist.

e)e)e)e) Test for Heteroscedasticity:Test for Heteroscedasticity:Test for Heteroscedasticity:Test for Heteroscedasticity: This is used to test whether thevariance of the error term of each observation is constant over

time or not.

It is expected that the error term have equal spread (i.e. they are

homoscedastic).

Symbolically, E(2) =2 ,i=(1,2,n).

The Whites General Heteroscedasticity (with no cross term) test

will be adopted for this test.

f)f)f)f) Stationarity (Unit Root) test:Stationarity (Unit Root) test:Stationarity (Unit Root) test:Stationarity (Unit Root) test: Stationarity test makes sure thatall the variables employed are mean reverting, that is, they have

a constant mean, variances and covariance over time (Gujarati

and Porter, 2009). The essence is to help avoid spurious

regression.

The Augmented Dickey Fuller Test (ADF) would be used for the

analysis since it adjusts for serial correlation.

The general form is given as: yt =1+2+yt-1+ iyt -1+t


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g)g)g)g) CointegCointegCointegCointegration test:ration test:ration test:ration test:This is used to know if two variables have along term relationship between them or not.

It means that despite being individually non stationary, a linearcombination of two or more time series variables can be

stationary. To ascertain this we use Augmented Dickey-Fuller

Test (ADF).

h)h)h)h) Error correction Mechanism (ECM) test:Error correction Mechanism (ECM) test:Error correction Mechanism (ECM) test:Error correction Mechanism (ECM) test:Apart from the existenceof a long-term equilibrium between two variables, there may be a

short-term disequilibrium in the relationship between such

variables. This mechanism will use the error term to correct the

short-term relationship (disequilibrium) there by equilibrating

the long-term and short-term relationship.

3.5.0:3.5.0:3.5.0:3.5.0: SOURCE OF DATASOURCE OF DATASOURCE OF DATASOURCE OF DATA

The data used in this research work are secondary data sourced

from various recognized institutions such as the National Bureau of

statistics National Statistic Fact Sheet, 2000 and 2009;Central Bank

of Nigerias Annual Report and Statement of Account, various series

and Statistical Bulletin 2002 and 2009; Power Holding Company of

NigeriasAnnual Report, several series.

The period used covered 37 years, from 1873 to 2009.


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CHAPTER FOURCHAPTER FOURCHAPTER FOURCHAPTER FOUR

DISCUSSION OF RESEARCH FINDINGSDISCUSSION OF RESEARCH FINDINGSDISCUSSION OF RESEARCH FINDINGSDISCUSSION OF RESEARCH FINDINGS

4.1.0:4.1.0:4.1.0:4.1.0: PRESNTATION OF RESULTSPRESNTATION OF RESULTSPRESNTATION OF RESULTSPRESNTATION OF RESULTS

This chapter is devoted for the presentation and analysis of the

estimate from the regression carried out for the purpose of this study.

Economic, statistical and Econometric test were conducted based on the

estimated parameters presented below in table 4.1 which is also in line

with the model in section 3.3.3.

Table 4.1: Regression outputTable 4.1: Regression outputTable 4.1: Regression outputTable 4.1: Regression output

VariablesVariablesVariablesVariables CoefficientCoefficientCoefficientCoefficient Std. ErrorStd. ErrorStd. ErrorStd. Error TTTT---- statisticstatisticstatisticstatistic

CCCC -446995.1 161482.9 -2.768065

TESTESTESTES 39.83032 23.45791 1.697949

Sustainable Power Supply and Economic Growth in Nigeria_ Empirical Evidience

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