Impact of the Global Energy Transition on the Nigerian Economy

Change is said to be the one thing that remains constant. The Greek philosopher, Heraclitus of Ephesus, said – “the only constant in life is change.” It’s inevitable.

The world keeps evolving and science and technology are considered to be the major facilitators of evolution in the world. Science and technology have succeeded in making human daily activities easier and faster.

Not only has it brought ease to human endeavours, it has also contributed to helping humans live healthier and reside in a healthier and more conducive environment.

Energy is one of the basic amenities required for ease in our everyday affairs as most of our activities are linked to it, e.g, transportation, power supply, manufacturing processes amongst many others.

Energy plays a vital role in the economic growth, it’s an important factor in all sector’s of a country’s economy. It supports the provision basic needs in areas of communication(Radio, Emails, television) Transportation, Essential Health services etc. and also fuels and provides ease of productive activities in aspect of agriculture, commerce and manufacturing processes.

Fossil fuels—such as coal, oil, and natural gas—has been dubbed the main source of energy in the world and has been powering many economies for years. They account for about 80% of the world’s energy. However, studies on fossil fuels have been shown to have very dangerous effects and stand as a threat to the climate and humanity. Fossil fuels pollute the environment and are considered to be the major contributor to global warming.

In lieu of the threat of global warming, the world has begun moving towards green energy which is deemed more friendly to the ecosystem. Green energy is energy derived from natural sources, such as sunlight, wind, water, biomass, which do not cause harm to our environment.

Green energy is also of huge benefit to the environment because it is renewable as against fossil fuels that are not renewable. This implies that green energy doesn’t run out and are inexhaustible as opposed to fossil fuels that can’t be reused. Green energy is thus, a means to prevent the current global warming and the effect it has on the world.

Technology has facilitated this transition and made it easier on the world. Thus, we have electric-powered vehicles that don’t run on fuels, such as Tesla, Hyundai Ioniq electric, and many others.

Also, rather than depending on fossil based power supply, solar panels are now in vogue. Statista Research Department in a February 2022 publication stated that as of 2020, the solar energy capacity in Nigeria amounted to about 28 megawatts, which shows that it is on the rise.

At the 2015 COP 21 (conference of parties) in Paris, parties to the UNFCCC reached a consensus to combat climate change and to take positive gigantic steps towards achieving this, thereby preventing global warming.

The central aim of the Paris Agreement is to strengthen the global response to the threat of climate change by limiting the of global warming to below 2 degrees Celsius and fostering efforts to limit the increase to 1.5 degrees.

In 2017, Nigeria ratified the Paris agreement and at the COP26, reaffirmed its commitment to the same agreement and adopted climate change policies with a target to go carbon-neutral by 2050 or 2060. Thus, nations have agreed to transition from fossil fuels as a means to combatting global warming.

The effect the global energy transition has on economies are diverse. The transition has its pros and cons. For countries whose major source of revenue is fossil fuels, the transition will not be favourable at the onset, as it will take a huge toll on such economies.

Nigeria falls under this ambit because the oil sector is the major source of revenue and mainstay of its economy. Since the discovery of crude oil in Oloibiri, Niger Delta in year 1956, oil has been the economic foundation of the country.

Nigeria, a part of the nationally determined contributor to the COP21 2015 Paris Agreement, committed to cutting its carbon emissions unconditionally by 20% or conditionally by 45% with international support by 2030. Nigeria further committed to include clean cooking as part of its contribution in 2021.

Nigeria’s participation in the Paris Agreement is not the nation’s first attempt at effecting climate change. Policies such as The Vision 20:2020 that identified climate change and global warming as a threat to the nation’s sustainable development, attests to this.

The global energy transition as expected, is a change from the fossil fuel norm and is here to stay and in light of this will lead to changes in the power sector as well as the economic sector of the country.

The transition will have diverse impact on several economies around the globe, of which Nigeria will not be an exception.

Effect of Global Energy Transition on the Nigerian Economy – In the Short Run

The global energy transition was agreed upon with the view to reduce, drastically, the production and use of fossil fuels. This will have a negative effect on Nigeria whose economy depend dominantly on fossil fuels, as Nigeria is known to be one of the largest oil exporters in Africa.

It is no gainsaying that the oil sector is the rock upon which the Nigerian economy is founded. This oil shock of 2016 that threw the GDP into -1.60% attests to this fact. Although the oil sector amounts to only 7.2% of the country’s GDP, fossil fuels account for about 60% of the government revenue and 90% of foreign exchange earnings. This makes Nigeria very volatile, because a reduction in the government revenue could affect the smooth-running the country.

The transition will also induce a great fall in the country’s foreign exchange earnings because oil revenue accounts for 90% of it. this could thus, destabilize fluctuations in the exchange rate and weaken the national currency.

As it is, statistics have shown that the unpredictable global crude oil prices and similar factors have caused a decrease in the demand for crude oil thereby diminishing oil transactions and the revenue and profit derived from it compared to what obtained prior to the Paris Agreement.

Furthermore, a drastic unprecedented or poorly planned switch from fossil fuel-based economy could be damaging to the economy as the foundation needed to effect the transition is rushed and not strong.

This implies that there is a possibility that the Nigerian economy enters into an irretrievable slump as a result of the transition, if adequate steps, management and policies are not kept in place and fervently implemented.

According to the International Labour Organisation, the Nigeria Oil Sector currently employs about 65,000 direct staff and 250,000 indirect staff. Thus, energy transition is bound to render a large number of the employees unemployed.

Furthermore, production activities are also bound to suffer from the decrease in production of fossil fuels.

Effect of Global Energy Transition on the Nigerian Economy – In the Long Run

The global energy transition is said to pose gargantuan benefits in the long run when fully attained and assimilated into the economy.

In September 2019, The International Renewable Energy Agency (IRENA) report titled, ‘Transforming the Energy System – And Holding the Line on the Rise of Global Temperatures’ argues that the cost of “climate- proofing” the global energy mix is lower than the cost of inaction, “even without factoring in the payoffs of mitigating climate change and achieving long-term sustainability.”

This implies that the benefit the transition offers is greater compared to the danger and threat fossil fuels pose to the world.

1. Increase in Gross Domestic Product

The study estimates that the transition could create about 2.5% increase in Gross Domestic Product (GDP) gains by 2050 including increase by millions in job opportunities.

The International Renewable Energy Agency (IRENA) published a report in collaboration with the African Development Bank (AFDB) titled “Renewable Energy Market Analysis: Africa and its Regions”.

The report estimated that the African economy has the potential to grow by 6.4% in 2050 when an effective energy transition policy and management framework is integrated and implemented.

2. Increase in Job Opportunities

As a matter of fact, the International Renewable Energy Agency’s “Renewable Energy and Jobs – Annual Review 2021” stated that its most recent report estimates that in year 2020 about 12 million people were employed in the sector, directly and indirectly, with Solar PV leading the field and accounting for about 4 million jobs. The wind energy sector on the other hand, employs about 1.25 million people. This indicates growth in the sector because the first edition estimated 7.3 million in 2012.

3. Human Welfare

The State of Global Air, 2020 Report estimated that air pollution contributed to about 6.7 million deaths in 2019. Fossil fuels, processing and production, is a major contributing factor to air pollution.

Fossil fuels possesses a lot of harmful combustion products and are one of the major contributors to global warming thereby standing as a huge threat to humanity. Thus, the energy transition will bring about the use of environment friendly energy. It will also ensure lower carbon emissions.

4. Reliable Energy Source and Efficiency

Research has shown that we will run out of fossil fuels in the long run as it is not inexhaustible. This shows that failure to transition has the potential to throw the economy into jeopardy.

As a matter of fact it has been said that fossil fuels are no longer enough to meet the power/energy meets of Nigeria. Energy transition will prevent this havoc as it is more reliable, renewable and is derived from constant natural sources such as the sun, wind and the likes. This will further produce constant power supply in Nigeria where bad power supply is known to be a cankerworm that has eaten deep into the Nigerian fabric for years.

5. Economic Stability

Consistent dependence on fossil fuels will cause it to wield so much power such that it will be the scale upon which the Nigerian economy will be weighed. The oil shock of 2016 which had a negative impact on the Nigerian economy is an example of the power it can harness.

Energy transition will protect the Nigerian economy from being at the whims of such controlling factor. It will also promote economic stability and reduce economic susceptibility to fluctuations in energy prices. It will further diversify energy supply and reduce dependence on imported fuels.

6. Innovations

Energy transition will foster innovation in the country and lead to the rise of startups and small medium enterprises. The integration of renewable energy and new technologies will help advance this motion, not to talk of the job opportunities such innovations could create.

Recommendations

A country that transits to green energy is sure to gain specific benefits in various spheres. These include, environmental and economic benefits as earlier stated. The following recommendations will be sure to secure this transition and make it effective and beneficial.

1. Investment

It is advised that the Nigerian government follows the global trend of investing more in renewable energy than before as this has been proven to yield more profit for economies that have done same.

The “Clean Energy Investing: Global Comparison of Investment Returns” report estimated that listed renewable power portfolios outperformed listed fossil fuel portfolios in all markets and renewable energy companies’ cost of capital remain lesser than that of fossil fuel companies.

The Nigeria Sovereign Investment Authority is said to be investing an initial sum of 10 billion naira in the off-grid renewable space. Entities like Britain and the Agence Francaise de Developpement (AFD) have funded renewable energy projects in the country to the sum of $13.6 million and $70 million respectively in 2021.

2. Diversification of the Economy

To prevent a staggering damage to the Nigerian economy due to its exit from an oil-based economy, measures should be taken to diversify the nation’s income and revenue such as investing in non-oil sectors.

3. Establishment and Implementation of Effective Policies and Monitoring Bodies

It is imperative that laws be made to foster the energy transition and make it easier. the Nigerian government has established various programmes, initiatives, policies such as the National Renewable Energy and Energy Efficiency Policy and the Renewable Energy Master Plan.

However, it is not enough to just establish these agencies, they should be effective, policies should also be strictly implemented. Furthermore, an effective legal framework will encourage and attract investment.

4. Public Enlightenment

The general public should be educated about the benefits of renewable energy and the threat fossil fuels pose to the climate. They should also be enlightened on ways to actively help the energy transition cause and reduce global warming.

5. Promotion of Innovation

Government should encourage innovation and urge citizens to do same by investment, competitions and awards.

For example, All On, a green energy hub launched its 2022 edition of the yearly Nigeria Off-Grid Energy Challenge in collaboration with the United States African Development Foundation (USADF). This challenge is stated to identify and help scale innovative off-grid solutions to power up several areas in Nigeria.

6. Stable Political Economy

Investors would rather invest in an economy that is stable politically because a country that is not stable politically shall be at the whims and caprices of every political change that occurs thereby leading to a fluctuating economy.

Conclusion

Nigeria should not sit idly while other nations are jumping on this hot profiting trend of renewable energy that is profitable to our health and economy.

The oil sector failed the Nigerian economy in year 2021 while the non-oil sector contributed to 92.76% of the country’s GDP. As it is, reduction in price of crude oil and illegal oil activities such as bunkering already renders the economy vulnerable.

Failure to take advantage of the energy transition in diversifying the Nigerian economy and shifting from an oil sponsored economy to non-oil will be sure to cause a fatal earthquake to the economy.

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See also: The Impact of Intellectual Property Law in the Economic Development of Nigeria