The COVID-19 pandemic has reaffirmed the oil and gas industry's fragility to external shocks and highlighted their renewable counterparts’ resiliency, stimulating more interest in shifting investments from fossil-based energy to renewable sources. While such a shift is ideal for sustainability, balancing it with economic growth in oil-producing, developing countries remains a complex challenge to navigate.
Even though the COVID-19 pandemic has taken a heavy toll on the energy sector, it has also generated opportunities to advance renewable energy development through pandemic recovery programs. While the focus of major economies and polluters has been on decarbonizing their industrial sectors to cut greenhouse gas emissions, the discussion for governments and international organizations in developing regions such as Africa is centered on improving electricity access as part of economic recovery efforts. The inadequacy of electricity for essential health facilities and business activities during the pandemic has highlighted the necessity of reliable electricity systems. Renewable energy systems, especially off-grid and mini-grid solar photovoltaics, are touted as the most cost-effective solution to this problem. These systems are ideal for off-grid communities, and the high renewable energy potentials coupled with declining solar system costs provide an excellent opportunity for their deployment in Africa. However, advancing clean energy access only forms one part of the COVID-19 energy conundrum.
The other challenging aspect of navigating post-pandemic recovery is handling the negative impact of the pandemic on the petroleum sector. Globally, energy demand and oil prices plummeted significantly, dealing a heavy blow to oil-producing countries who rely on high oil prices to generate revenue and sustain their economies. Exports of crude oil also fell by an estimated 10 percent in 2020. Using average crude oil prices for 2020, the African Energy Commission (AFREC) estimates that net oil export value for oil-producing African countries was around $31 billion in 2020, the lowest in the past two decades. AFREC also projected that Nigeria lost about $20 billion in oil value last year.
Nigeria’s energy sector has also been struggling domestically due to the pandemic. Revenues for utilities are plummeting, renewable energy projects have either stalled or been canceled, off-grid energy companies are facing financial challenges, and progress made in advancing electricity access in the continent is unwinding. As an oil-dependent economy, Nigeria needs to bolster earnings from petroleum exports and make significant investments to advance energy access and repair the damage caused by the pandemic in their domestic energy sector.
- COVID-19, the economy, and the energy sector in Nigeria
Nigeria is currently the largest economy and the most significant oil-producing country in Africa. The oil and gas sector contributes about 10 percent and 86 percent of the country's GDP and total export revenue, respectively, making it an indispensable component of economic growth. While the country is mostly regarded as an oil-based economy, oil and gas contribute only about 10 percent of its GDP growth makes this assertion murky. The petroleum sector contributes relatively little to the economy because revenues accrued from this sector come from natural resource rents—revenue collected by allowing external clients to access the petroleum resources. Thus, Nigeria is a rentier state, and the country's inadequate capacity to refine its crude oil for domestic consumption is the main gap between the petroleum sector and economic growth.
Like many African countries, Nigeria was swift to combat the spread of the COVID-19 pandemic. These measures, including lockdowns, have minimized casualties from the pandemic: 146,928 cases with 1,761 deaths have been recorded as of February 16, 2021. The near-total shutdown of economic activities, coupled with the global fall in oil prices, has caused Nigeria to experience its biggest economic growth contraction in the past decade. The economy contracted by 6.1 percent during the second quarter of 2020 and sectoral contribution from industry and services took a negative dip (see figure 1). Already struggling to recover from a recession in 2016, the Nigerian economy's outlook amid the COVID-19 pandemic is bleak.
Figure 1: Real GDP Growth rates (a) and Sectoral Performance of Real GDP (b) of Nigeria's economy 2019 Q1-2020 Q3 (Percent). Source: National Bureau of Statistics, cited in Central Bank of Nigeria.
Despite its petroleum resources, refined crude oil constitutes the largest proportion of yearly imports in Nigeria. The decline in global oil market prices should make importing such products more cost effective. However, taking advantage of this fall in prices may prove challenging because the pandemic-driven disruption of supply chains and businesses within the country makes it difficult to stock imported oil products for a long time. As of November 2020, the economic forecast showed improvements following the easing of COVID-19 restrictions and the government's fiscal and monetary interventions. These interventions include a ₦500 billion COVID-19 fund to support the real sector and a liquidity injection of ₦3.6 trillion into the banking system. Consumer demand and firm production have increased; however, business conditions remain fragile. An increase in the pump price of petrol and electricity tariffs created more issues in the business environment, such as increased inflationary pressure, increased consumption expenditure, and reduced purchasing power of consumers.
Electricity is an indispensable driver of domestic business activities, but approximately 77 million people in Nigeria do not have access to electricity. While the pandemic is seen by scholars and international agencies (e.g., IRENA) as an opportunity for the clean energy transition, a key question for an oil-rich developing country such as Nigeria is whether renewable energy will be able to replace the number of petroleum fuels used in the industrial sector and meet the needs of the unserved population. Calls for clean energy development have not sufficiently taken this question into account. There are two possible scenarios for Nigeria to balance economic growth with a clean energy transition.
Renewables leading the way for universal access to energy
The International Energy Agency stresses that pandemic recovery in Africa must go hand in hand with expanding electricity access. Energy consumption increases economic growth, so universal electricity access is key for reviving the economy and improving post-pandemic living conditions. Renewable energy sources provide the best solution to achieve such universal access. Solar and offshore wind are currently the cheapest energy sources globally, and Nigeria has enormous solar energy potential. A recent study shows that off-grid and hybrid mini-grid solar systems could provide electricity access to over 88 million Nigerians by 2030.
Nigeria's government is already making great commitments to advance renewable energy development as part of its COVID-19 recovery efforts. The government’s solar power strategy to install 5 million new solar home systems and mini-grids by 2023 is underway. Specific funding sources have been launched by the Nigerian government and international agencies, such as USAID through its Power Africa partnership, to propel the development of renewable energies in the country. Some off-grid renewable energy companies also received a share of the $500,000 relief fund launched by All-On, a Nigerian off-grid energy investing company. The government has also ended certain fossil fuel subsidies, a move that could improve the competitiveness of renewables. Investing in renewable energy development also creates many jobs, particularly in the off-grid and decentralized energy sector. While the government’s investment in renewable energy development is expected to create about 250,000 jobs by 2023, solar energy supply chains have been disrupted by the pandemic, stalling some ongoing projects and putting many off-grid companies under financial stress. To ensure that the solar energy sector thrives, careful planning, favorable policies, and increased investments are needed to support its growth and mitigate the risk of the current uncertainty.
Increasing local oil refinery capacity
While the continued use of fossil is not desirable from a decarbonization perspective, Nigeria, as a developing, oil-producing country, cannot leapfrog from a fossil fuel-based economy to one powered completely by renewable energy sources in the direct aftermath of the COVID-19 pandemic. The infrastructure necessary for handling the intermittency of renewable energy sources needs to be developed to reliably provide energy and electricity to the small business and manufacturing activities that contribute a substantial amount to Nigeria's economy. In the short term, small businesses that rely on diesel could be targeted with small-scale solar energy systems to satisfy their business needs. Additionally, much of the imported refined petroleum is used in the industrial and transportation sectors, which consume the highest proportion of petroleum in the country and contribute to the economy. Refinement of crude oil for domestic uses would be the best way to boost the local economy, which will cut costs from foregone imported petroleum and facilitate economic growth.
For most of the developed world, the energy transition process focuses on gradually phasing out fossil-based energy sources from the energy mix. In developing regions such as Africa, governments are confronted with the challenge of achieving universal energy access and phasing out fossil fuel-based energy systems at the same time. With weak infrastructure and fragile economies, this task cannot be easily achieved. Therefore, the country must leverage its oil-dominant resource base to expand energy access while also taking mitigative efforts to avert environmental catastrophes associated with their usage and simultaneously advancing plans to phase out fossil fuel-based systems in the near future.
- Future directions: carbon lock-in must be prevented in the long-term
While boosting domestic oil refinery use is essential for local, short-term economic gains, fossil fuels are not desirable for a sustainable future. Therefore, measures must be taken to avert carbon lock-in, which is a major problem confronting many developed nations in their clean energy transition. Carbon lock-in occurs when carbon emitting systems such as fossil fuel energy systems become embedded in a society such that existing technologies, institutions, and user practices are caught in self-perpetuating inertia that prevents the introduction or development of alternative energy sources, particularly renewable energies. Huge investments have already been made in fossil fuel infrastructure and technologies, which currently supply the bulk of Nigeria's energy. It can be expected that swift shifts from such systems to renewables will result in some costs. However, like most assets, fossil fuel energy systems also have a limited life span, typically 25 to 30 years for combined cycle power plants commonly powered by natural gas. At some point, fossil fuel will have to be decommissioned. When the time comes to replace these systems, they must be replaced by renewable energy.
Crude oil provides the bulk of Nigeria's federal government revenue. Thus, it is imperative to avoid institutional lock-in through a continuous dependence on this source of revenue. Economic diversification is vital in this process. Indeed, countries such as the United Arab Emirates prove that an oil-rich country does not have to depend on its oil resources for the majority of its revenue. The Nigerian government can capitalize on resilient sectors, such as agriculture, and support them with investments and favorable policies to boost government revenue.
Nigeria must also scale up its efforts to decarbonize the transport sector, the major consumer of refined petroleum, to promote a clean energy transition. Neighboring countries such as Ghana are already stepping up efforts to encourage the use of electric cars by installing electric vehicle (EV) charging stations. The Energy Commission of Ghana launched a “Drive Electric Initiative” to boost the uptake of electric cars. In Nigeria, efforts are underway to encourage oil companies to invest in electric vehicles. Several private companies, such as Just Commercial Vehicles Limited, are already taking the initiative to introduce electric cars and charging stations in the country. More of these efforts are needed to reduce the dependence on fossil fuels in the transportation sector. However, balancing the need to expand electricity access with additional demand from EVs and whether the existing grid is robust enough to accommodate additional load from EV charging remains critical.
The Nigerian government must seize all opportunities presented by the pandemic to advance the clean energy transition and expand energy access, including developing COVID-19 recovery programs, acquiring funding from international agencies, and taking advantage of the rising competitiveness of renewable energy technology. At the same time, sustainability concerns should be balanced with the current economic reliance on the oil and gas industry for government revenue. Long-term plans must include measures for economic diversification to avoid carbon lock-in. While this discussion focused on Nigeria, the Nigerian context is not too different from many other oil-producing countries in sub-Sahara Africa. Countries such as Angola, Gabon, Ghana, Uganda, and South Sudan are all rentier states with significant socio-economic challenges. The economies of these countries have been hard-hit as well, with similar impacts on their energy sectors as outlined by AFREC. Thus, the future directions outlined for Nigeria could also be relevant in the aforementioned countries.
Mark Akrofi is a Ph.D. student in Sustainability Science at the United Nations University, Institute for the Advanced Study of Sustainability in Japan. He holds a Master’s degree in Energy Policy from the Pan African University and specializes in researching governance and policy aspects of sustainable energy transitions in Africa.