THE IMPACT OF POWER GENERATION ON ECONOMIC GROWTH Economics Project To…

ABSTRACT

The study examined the impact of power generation on economic growth in Nigeria between 1980 and 2016. Economic growth was proxy as real GDP while power generation was surrogated as electricity generated from hydroelectric, oil, natural gas and coal. In addition, power consumption per capita was utilized as control variables. The econometric techniques of Augmented-Dickey Fuller unit root test, Johansen Cointegration test and Error Correction Model were employed.

The study concluded that power generation did not significantly contributed to economic growth in Nigeria between 1980 and 2016. The non-significance of power generation on economic growth in Nigeria is not unconnected to the fact that the generation sub-sector of the Nigerian power industry is beset with certain constraints that has prevented the optimal generation of power.

The study concluded that; Issues pertaining to electricity production and economic development should be given adequate attention especially in the budget schemes and because of this, substantial amount should be allocated to the power sector in order to resolve its challenges and keep the sector in good shape; Government is beckoned to sincerely implement the recommendations of the Power Sector Reform Committee and Oil and Gas Reform Committee; Adequate attention should be placed on appropriate funding of the power sector, security of gas supply, maintenance of existing power supply infrastructures, harmonization of activities among various stakeholders in the power sector and expansion of transmission and distribution networks; Corrupt practices in the power sector must be checked. Any official found to have dissipated public funds meant for given project should be brought to book; Government should allow greater participation of foreign and domestic investors in the power sector. This is because investment introduces new technology and expertise.

CHAPTER ONE

INTRODUCTION

1.1     Background to the Study

      Since the dawn of time, man as an individual and in groups have gone in search of power. Power to change things and power to make things happen. Power, is referred to in this paper as electricity or electric power. Power is essential to the economic growth and development of nations. Its uses are directly correlated with healthy economic growthKaseke & Hosking, (2013). Nigeria is one of the most populous countries in the world especially in Africa, however, about 40% of the country is not connected to the national power grid, and for the 60% that are connected, the power supply is marred by regular and prolonged outages as well as low voltages which does more harm than good Aliyu, Ramila, & Saleh, (2013).

Aliyu, Ramila, & Saleh, (2013) Claimed that these outages which are as a result of poor power generation and supply, act as a crippling influence on the industrial sector. When power fails ,work and productivity come to a grinding halt, labour hours are lost and seeing as labour is perishable, which means that any labour power withheld is lost and can never be got back thus a loss of power  reduces productivity and efficiency in the industrial sector.

      Although Nigeria is rich in human and material resources, its economic and political developments have been plagued with crises since its independence in 1960. Indices of the failure of the Nigerian State are today evident in the pervasive cases of hunger, inflation, budget deficits, debt overhang, street begging, prostitution, frauds, high crime rates in major cities, collapse of manufacturing industries, corruption in public service, stagnation in entrepreneurial development and epileptic power supply Fadeyi & Adisa, (2012).

      Nigeria’s energy sector is unarguably in crisis due to lack of development resulting from poor handling and mismanagement of the energy sector, in addition ,external factors such as vandalism have impacted negatively on the sector. Nigerians who live close to oil and natural gas reserves often vandalize oil pipes and steal oil as they feel it is their right to share in the oil coming from their region since the government in their opinions are not showing them the benefits of being from the region. In Nigeria the lack of adequate power and a shortfall in power supply leads to over use of generators for the production of power/electricity. It has been estimated that power generation capacity in Nigeria is above 7000MW by the current administration of President Buhari through Vice president Osibanjo at the 23rd Nigerian Economic Summit. 

     Nigeria’s power sector operated for several decades as a state monopoly then called National Electric Power Authority (NEPA) until 2005. NEPA controlled electricity transmission, generation and distribution facilities with all the problems associated with public monopoly. This over centralization made it impossible for electricity supply to keep up with the growth in population and economic activities. In 2005, government’s efforts to revitalize the power sector took the form of privatization. They intended to privatize NEPA using the name PHCN (Power holding company of Nigeria). They intended to transfer the assets and liabilities of NEPA to PHCN. Nigeria has the biggest gap in the world between electricity demand and supply, providing its population of over 190 million with less than 4000 megawatts of electricity.

    In contrast, South Africa with a population of over 55 million people generates more than 40,000 megawatts while Brazil, a developing economy like Nigeria, generates over 100,000 megawatts for its 201 million citizensFG, (2013). Indeed, the gap in the power sector has far reaching implications for improving the business climate, sustaining economic growth and the social wellbeing of Nigerians. About 45 percent of the population has access to electricity, with only about 30 percent of their demand for power being met.

The power sector is plagued by recurrent outages to the extent that some 90 percent of industrial customers and a significant number of residential and other non-residential customers provide their own power at a huge cost to themselves and to the Nigerian economy.

    The Association of power generation companies (APGC) claims to have an installed capacity of 12,000 megawatts, with an available capacity of 8,000 megawatts but only 4,500 megawatts is able to be transmitted by the grid of which about 1,500 megawatts is available to generate electricity.

At 125 kWh per capita, electricity consumption in Nigeria is one of the lowest in the world AFDB, (2009) .Nigeria currently uses four different types of energy sources to generate power, these include Hydro, Natural gas, Oil and Coal Aliyu, Ramila, & Saleh, (2013). The power sector is however heavily dependent on the use of petroleum as the method of producing electricity which has slowed down the emergence of alternative forms of energyAliyu, Ramila, & Saleh, (2013) such as wind energy and solar energy, further cementing Nigeria’s place as a mono economy. Three out of four of Nigeria’s energy production resources are linked with greenhouse gas emissions showing that the country is not growing with the times and needs the utmost radicalization of the power sector.

   Nigeria is endowed with abundant energy resources but suffers from a never ending energy crisis which has proved difficult to solve. The co-existence of vast wealth in natural resources and extreme personal poverty referred to as the “resource curse” or ‘Dutch disease’ Auty, (1993) is the Nigerian burden. The size of the economy marked by the Gross National Income per capita is put at $1,190 and ranked 162 out of 213 countries in the world development index in 2009 The World Bank, (2011). On economic growth, the GDP per capita of Nigeria expanded by 132% between independence in 1960 and 1969, and rose to a peak growth of 283% between 1970 and 1979. The severity of this led to the restructuring of the economy in 1986. In the period 1988-1997 which constitutes the period of structural economic adjustment and liberalization, the GDP responded to economic adjustment policies and grew at a positive rate of 4%. In 2006, the real GDP growth rate was 7%. The economy when measured by the real GDP, grew by 7.87% in 2010.National Bureau of Statistics, (2017).

      The power consumption ( KW) in USA, Japan, South Africa, China, India and Nigeria were 3,913, 934, 212, 5,523, 973, and 24 respectively, these roughly correlate with the GDP per capita of the countries in 2014The World Factbook, (2014). Nigeria’s energy resources, particularly oil, are exported to other countries while its economy suffers from severe shortfalls of the very same product. This is evidenced by the limited and most times erratic supply of electricity and shortage of most petroleum products.

      The examination of literature shows that majority of the studies carried out  to observe the relationship between power generation and economic growth focus on either testing the role of energy in stimulating economic growth or examining the direction of causality between these two variables. Although the positive role of energy infrastructure on economic growth has become well known, there are some reservations about the results from these studies methodologically. Some authors have used panel data approach and multivariate models. It should be noted that most of these studies produced varied results and there is no agreement on the existence and direction of causality between energy consumption and economic growth. This project is aimed at determining the relationship between power generation and economic growth using electricity output and gross domestic product as proxies. With a view to also finding out if different sources of energy have varying impact on economic growth.

1.2     Statement of Research Problem

     In the 21st Century power/electricity is the one thing that cannot be lived without. In any area or region where there is a shortage of electricity, the economic activities in that area shutdown and in cases where they do not, they become more expensive, increasing the cost of production and thus the overall price of goods and services. The issue of power supply is one that is keenly watched by observers nationally and internationally, and has been continuously used politically as a means to obtain votes with political candidates always promising stable power supply. For industrialists the issue of power supply is one which has been watched with great interest as it would determine their willingness to invest in the country. As a result, the power generation issue is now one of the more sensitive issues in Nigeria especially since the power industry has experienced lots of changes between 1980 and 2017. This research study therefore aims to highlight the relationship if any between power generation and economic growth and thus solve the problem of retarded growth in the Nigerian economy through a more stable and reliable generation of power.

1.3Research Questions

        The research questions which this paper will aim to answer are as follows.

1.     Does power generation affect economic growth?

2.     What is the amount of power generated in the country?

3.     What are the problems facing power generation in Nigeria?

4.     What possible steps can be taken to boost the power supply of the country so as to boost the country’s economy?

1.4     Objective of Study

The broad objective of this project is to find ways of stimulating economic growth in Nigeria and to see if power generation is one of such ways.

           The following are the specific objectives for carrying out this research project

1. to determine if power generation affects economic growth.
2. to determine the amount of power generated in the country.
3. to determine the problems facing power generation in the county.
4. to ascertain the necessary steps to be taken to improve power generation.

1.5    Hypothesis

H0: There is no significant relationship between power generation and economic growth in Nigeria between 1980 and 2016.

H1: There is a significant relationship between power generation and economy growth in Nigeria between 1980 and 2016.

1.6      Sources of Data

   Data was collected from various sources. The data collected was secondary data collected from textbook, Journals, various issues of the National Bureau of Statistics, the central intelligence agency as well as from the world fact book.

1.7     Scope of the Study

          This research work covers a limited area which is on the impact of power generation and supply on the economic growth of Nigeria using GDP as a proxy for economic growth. The research will be carried out empirically with data ranging from 1980-2016.

1.8     Limitations of the Study

Time Constraint: This research was done in addition to other academic work thus cutting down the amount of time available to be dedicated to the research work.

Data availability: Some data were difficult to obtain due to both inefficient record keeping and varying data figures from different sources.

Financial Constraint: Limited funds prevented me from visiting the government parastatals involved in collating required data.

1.9       Definition of Terms

Economic growth: Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. It can be measured in nominal or real terms, the latter of which is adjusted for inflation. Traditionally, aggregate economic growth is measured in terms of gross national product (GNP) or gross domestic product (GDP).

GDP:The gross domestic product (GDP) is one of the primary indicators used to check the health of a country’s economy. It represents the total dollar value of all goods and services produced over a specific time period.

Power/ Electricity: is a form of energy that comes in positive and negative forms, that occur naturally (as in lightning), or is produced (as in a generator). It is associated with the presence and flow of electric charges.

Mono-economy: A mono economy is one which relies mainly on one commodity to bring in most of its revenue from exportation.

Mega Watts of Power (MW)

This simply refers to the amount of power a nation generates for her citizens which can be used for several productive tasks.

National income per Capita: This can be defined as a the measure of the amount of money earned per person in a certain country