Incidentally, as a player/ consultant in the Nigerian Electricity Supply Industry (NESI), the writer has been receiving several enquiries about same from prospective foreign investors considering expending ‘risk capital’. It is the writer’s view that, there is a lot going on in the NESI. However, the success or otherwise of all of these activities will be dependent on whether or not the federal government of Nigeria will look beyond politics and do what it states it will do. Whether beyond churning out policy statements, documents and proposals supported by the World Bank and its sister/affiliate organizations, the federal government will take the necessary steps it ought to take without deterrence caused by politics.
Where the federal government does see its policies through (without paying only lipservice), this may, for the discerning investor, be one of the best times to invest in the electric power sector in Nigeria, as there will then be a clear path to progress cum profitability with investors still being able to obtain concessions and waivers which may not be available a few years from now.
Currently, the government appears to be doing a lot to ensure that the NESI ‘recovers’ from its near pariah status through its (the FGN’s) power sector recovery program (“Recovery Program”). The Recovery Program is one idea that has been resonating in the sector and is a series of actions, policies and programs aimed at re-working the shortcomings of the sector, especially arising from the privatization program. The ultimate aim of which is, the delivery of a stable, competitive and efficient NESI.
As alluded to above, the NESI had fallen into a near pariah status such that, foreign investors were no longer interested in investing because of several issues culminating in illiquidity and the near impossibility of making any reasonable returns on investment. However, investors (especially foreign ones) are now re-looking at the electric power sector with renewed interest.
The foregoing, is the case because of the vigor with which the FGN is working to achieve improvement in the sector to make same liquid and investment friendly especially because of the enormous demand which, if there is an enabling environment, can be met and profitably too. The reputation of the current minister in charge of the electric power sector is also a significant factor making prospective foreign investors consider Nigeria.
Thus, in this edition of column, we shall be reviewing some of the concerns of prospective investors in NESI and what the government is doing (or has stated it will do) to ensure that those concerns are catered to, adequately. We will also generally look at the state of the NESI and where government policy is headed. In the writer’s view, government policy direction is primarily aimed at ensuring that the concerns of current and prospective investors are addressed.
Special Forex Regime for the Electric Power Sector
There have been several challenges around availability of foreign currencies, convertibility of the Nigerian Naira and fluctuation of the Naira in the foreign exchange market. The challenges have been exacerbated by the fact that a large portion of the expenditure of electric power companies (especially for maintenance, Long Term Service arrangements, costs of consumables and parts etc.) is in foreign currency, whilst income is primarily in Nigerian Naira.
The situation has been further precarious because, despite the benchmarking of electricity tariffs (especially grid connected) against that United States Dollars and required increase in tariffs where there is a 5% change in exchange rates, there has been, for a while, no increase in tariffs corresponding with changes in exchange rates. To ameliorate the pains being suffered by electricity companies, a new policy intervention to protect power investments in the country from the volatility of her foreign exchange regime is being considered by the Central Bank of Nigeria. The government and the central bank are in consultation on this policy and the expectation is that there would be an increase in the sector’s access to foreign exchange, as well as provide some level of predictability on the rates, to enable investors plan their investments in the sector.
On a related note, the writer is also aware that there have been challenges regarding (in particular) the solar power Put Call Option Agreement (the “PCOA”). The idea of the PCOA is to give comfort to investors in connection with certain issues including early termination of power purchase agreements with the NBET. The government had sought to make termination payments in Naira or United State Dollars at its own discretion. Many of the investors looking to develop solar power projects, together with their financial backers (especially the development finance institution) have kicked at this leeway the government is providing in the PCOAs to pay in Nigerian Naira.
The writer is aware that the FGN is now taking steps to ensure that these investors have comfort that they will receive payment in United States Dollars, in the unlikely event of an early termination. The forgoing could give additional comfort to prospective investors in the sector that the government is tackling the foreign exchange challenge and the risks are not quite what they used to be.
General Plan to increase Electricity Access Across Nigeria
The aim is to increase power generation by optimizing operational capacity, encouraging small-scale renewable projects, and building more capacity. A number of discerning investors are now working hard to deliver power to certain institutions particularly with the aim of exploring the opportunity under the eligible customer regime which before now had no clear regulatory and policy path.
At the moment, the federal government is working to ensure the delivery of at least 10,000 MW (on-grid and off-grid power). There is a lot of work going on to ensure improved operational capacity by 2020 and to assure the optimization of the existing installed capacity available for generation, addressing gas availability issues, including vandalism and completing major gas infrastructure lines for power supply.
In reality, there has been the expansion of transmission capacity with the completion of Kukwaba Sub-Station last month to bring relief to Katampe in Abuja, Completion of the Ajah Sub-Station in Lagos and very recently, the completion of the repairs at Ikot Ekpene switching station to activate the full 1,300MW evacuation capacity of the Calabar to Ikot Ekpene double circuit transmission line.
The foregoing suggests that the previously much touted grid constraints are becoming a thing of the past. For the discerning investor, there are opportunities to invest in already existing power companies (after completing the requisite due diligence exercise) which may be struggling due to financial challenges and services providers which may bid to provide some of the requisite services to the sector. Further, to give more financial potency to the other activities being undertaken in the sector to ensue recovery and substantial improvement, a lot is seemingly being done (including providing huge financial support, such as the N701 billion payment assurance guarantee) to ensure that the Nigerian Bulk Electricity Trading Plc. has financial capacity to support the electricity market. Very shortly, much more plants may be seamlessly connected to the grid with reduced grid constraints.
Added to the steps being taken to support the sector and help it out of its financial difficulty is the support being given in relation to metering because without proper metering, the challenges in the sector are unlikely to reduce substantially. Thus, the federal government is providing the sum of N 39 Billion, which will be a loan to meter provider(s). Honestly, there is still some controversy about these issues and the government needs to provide clarity on its applicability and scope together with convincing industry players that this is not merely politics or an intention to frustrate an out-of-court settlement initiation of some sort.
Tariffs which had been frozen due to a court decision amongst other issues may now be increased (like the World Bank had recommended) to ensure that same are adequate to ensure returns to the efficient power utility. For this, the options are a subsidy (but the writer doubts that the current administration can afford this) or an outright increase (in all cases the utility companies should earn more revenue, per kilowatt hour). It is, however, pertinent to note that it is intended that before tariffs are increased; customer enumeration, metering, distribution infrastructure and transmission interfaces etc. are first adequately dealt with. The foregoing, is necessary, to accurately determine what the actual cost reflective tariffs and the actual Aggregate Technical, Commercial and Collection losses are. Hence, genuine opportunities exist for the discerning investor to plug into the power sector in Nigeria, at the moment.
Specific Steps to Improve Access to Electricity
Declaration of Eligible Customer
With the declaration of eligible customer status, large electric power consumers which are NERC prescribed, such as state government secretariats, large estates, industrial complexes and even generation companies can apply to NERC to build the distribution assets that electricity distribution companies cannot fund, defray the cost over time, or pay a user charge to the Disco under an arrangement approved by NERC in order to get more reliable power, at a price which is higher than public tariff of N29Kw/h but less than N80kw/h of diesel power.
The effect of the foregoing, if well managed, could be the creation of a new window of investment opportunities, in the NESI, to supply power on a willing buyer- willing seller basis at a price to be negotiated over the public electricity tariff of N29Kw/h and below automotive gas oil (diesel or diesel 2) power of at least N80Kw/h.
Mini Grid Opportunities
With the mini-grid option, which is consistent with the federal government’s much touted policy of incremental power, there are mini-grid opportunities similar to what is obtainable elsewhere in world. Mini Grids are already a feature of many parts of the world where privatization has taken place and they provide access to produce power and in Nigeria, this is especially for those who want to produce power below 1MW.
Resolution of Issues Connected with Federal Government Indebtedness
The actual aggregate owed the electricity industry by the ministries, departments and agencies of the federal government was estimated at NGN 65 billion (US$206 million) by the end of the year 2016 contributing a significant portion of the accumulated cash deficit in the sector.
However, with the verification of the debts of the ministries, departments and agencies of the federal government of Nigeria, now completed and plans to get approvals on how to pay these, there is clear movement and reasonable assurances that this indebtedness will reduce and there will be more money for investment purposes by power utilities and companies generally in the power sector and it is expected that a substantial part of such sums will be reinvested to upgrade distribution networks, in particular.
The federal government is also implementing payment mechanism for future electricity bills and with this also comes opportunities to invest in that implementation and or to provide electricity, render power supply related services to such ministries, departments and agencies of the federal government of Nigeria, with a view to providing excellent services (including power related ones) and getting appropriately compensated and timeously too.
These policy statements of the federal government and actions currently being taken appear to be attractive to would-be investors. However, it is pertinent that this government sees these through and not let politics or political considerations stand in its way of achieving the success required to substantially improve the power sector and move things forward. These prospective investors are only just making enquiries and require more tangible steps.