A Review of the Nigerian Energy Industry

Money as the root of Nigeria’s power sector evils

15 September 2015, Lagos – The current problems bedevilling the Nigerian Power Sector are all tied to money. The public uproar surrounding tariff increase, which has been taken before the Nigerian Court, (this topic is off my discussion radar, since our law firm represents one of the parties in Court on the issue on tariff determination) is all about money. The Distribution Companies’ “Disco” legalizing of their Association to give them a voice, is mostly about money. The gas supply crises, transmission losses, low supply from generating companies – are all about money, money, money.  So how did the financial squeeze on the sector begin and what has been done and is being done about it?

Mobile money, NigeriaHistory of Financial Squeeze

The Bureau of Public Enterprises (BPE) effected the acquisition of the power assets owned by the Federal Government of Nigeria’s (“FGN”) Power Holding Company of Nigeria (PHCN) through an open bidding process. The FGN power assets were priced in United States Dollars and the preferred bidders who were Nigerian companies had to obtain dollar financing to pay their bid prices. Primarily, Nigerian banks did these financing. The preferred bidders thus became owners of various Generating Companies “Gencos” and Discos with performance parameters they were obligated to meet towards improving their services. The privatized Gencos and Discos took over companies with existing liabilities towards gas suppliers and other entities. The FGN agreed for these liabilities to be transferred to a government formed vehicle called the Nigerian Existing Liabilities Management Company (NELMCO)

The privatised Gencos and Discos have dollar liabilities to banks for the acquisition and need more financing to invest in the power assets for optimal performance. Their one sure source of income was the tariff earned from power supply, which they claim is not cost reflective. Hence, the financial squeeze on the sector commenced.

Government’s Aid to Ease Financial Pressure

In order to ease the sector’s financial squeeze, the FGN set up the Nigerian Electricity Market Stabilisation Facility to pay accrued debts owed to various service providers including the Nigerian Gas Company, oil and gas Joint venture partners by the NELMCO and the new Gencos and Discos. These were debts that had accrued prior to the privatsation and during the period before the Nigerian Electricity Supply Industry, were declared fit for market forces to somewhat determine price of supply. The mechanism for disbursement of the N213, 417, 034.34 Billion was for the CBN to purchase debenture notes issued by a selected refinancer of the debts. The CBN in June 2015 made a second payment under this facility to the beneficiaries.

The CBN also set up the Power Aviation Investment Fund “PAIF” which is a N300 Billion fund aimed at financing projects or refinancing loans of eligible Discos and Gencos through a participating bank. The loan pursuant to the PAIF is meant to be long term at single digit interest rates.

The Nigerian Electricity Regulatory Commission “NERC” has also directed the Discos to consult with their consumers towards determining a cost reflective tariff to be approved by the NERC.

Has the Government’s Aid Helped?

The question is “with all these financial aid given to the NESI, are there improvements in the NESI towards hedging closer to the ultimate goal of improving power supply?” The response from the power supply chain participants will probably still be negative. The gas suppliers, for example, will say that the benchmark price of gas at US$2.50/mcf is still not encouraging for investments in the gas production and supply. Investment in gas production is capital intensive which is why most oil producers find it cheaper to flare associated gas than re-inject. It is more beneficial for the gas suppliers to enter private gas supply arrangements than to meet their required domestic obligations to the power sector.

Only a few of the Discos could access the PAIF, meaning a number of the Discos are illiquid with huge liabilities, so they will say a lot more needs to be done to ease the financial squeeze. Some of the privatized Gencos could also not access the PAIF and are in the same boat as the Discos.

Further, the default by the Discos on their payment obligations stemming from defaults by big ticket consumers (amongst other reasons) has triggered systemic risk in the sector since the Gencos, who rely on the Discos for revenue, have equally defaulted on their payment obligations to gas suppliers amongst other sector participants. The current freeze on further lending to the power sector has contributed to the participants’ financial problems. Greenfield Gencos also require funding, which foreign investors and financial institutions are more interested in providing. These foreign investors however require more payment guarantees on tariffs to ensure debt servicing and timely exiting for equity investors.

Although electricity consumers will admit that supply of power has improved, they still demand for more to be done.

So What Else Can Be Done?

The FGN should encourage investments in captive power plants of 1MW or less which will reduce: (a) the sums needed for power project, (b) the construction period for power plants, and (c) the time within which power from these small plants will be available for supply. The CBN has tightened access to foreign exchange in Nigeria in order to ease the pressure on Naira created by a high demand for the Dollar. The CBN should include transactions in the power sector on its lists of transactions for which foreign exchange can be bought directly from the CBN. This will enable Gencos and Discos access to foreign exchange to meet their dollars denominated exposures. The FGN also needs to be clear on its policy as regards the power sector. The uncertainty surrounding the plans of the new FGN is contributing to the stagnation in investments in the power sector. The FGN also needs to concretize the support it will give to the Nigerian Bulk Electricity Trading Company Plc. (“NBET”) towards guaranteeing the NBET’s payment obligations under bulk power purchase agreements.

The potential in Nigeria’s power sector is huge and there is still interest internationally in investing in various parts of the power supply chain. The FGN needs to urgently collaborate with the sector’s participants to ensure power supply is increased. I am certain that addressing the problem of the abysmally low power supply in the country is one of the ways to wealth creation. This will however require collective effort from all relevant parties.

  • Tonbofa Eva Ashimi, This Day
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