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Nigeria Power Series - Part 1:
Independent Power Projects in
Briefing Note: November 2016
The Dentons Nigeria Power Series comprises briefing notes on the Nigerian power sector. In this first
instalment, we will consider some recent trends in the Nigerian power sector and provide an overview
of some key considerations for developing bankable independent power projects (IPPs) in Nigeria.
2. Recent trends, opportunities and challenges
The deficiencies of Nigeria's power generation sector are widely acknowledged.1 It is hoped that the
current drive by the federal government of Nigeria (the Nigerian Government) to increase Nigeria's
power generation capacity will have a significant impact on its economic and sociopolitical
development. Whilst the Nigerian Government has taken some significant steps to liberalise, increase
liquidity and attract investment into the power sector (such as implementing the power privatisation
programme,2 direct funding3 and entry into the Power Africa memorandum of understanding with the
Government of the United States of America4), there is still a huge amount of work to be done by the
Nigerian Government, the domestic private sector and international partners to develop Nigeria's
In addition to developing renewable energy projects (particularly solar and hydro) and captive power
projects to diversify Nigeria's power generation mix, the development of greenfield gas-fired power
generation projects by private developers, commonly referred to as IPPs, will significantly increase
Nigeria's power generation capacity. However, developers of IPPs (IPP Developers) face a raft of
challenges in developing successful IPPs. These challenges include:
(a) the high cost and extensive timeline involved in achieving an acceptable allocation of risks
and rewards among stakeholders;
(b) the difficulty in raising commercial debt funding for project development activities, particularly
following the recent tightening of credit to emerging market borrowers;
(c) obtaining uninterrupted access to feedstock gas for power generation and achieving a
bankable offtake arrangement with Nigerian Bulk Electricity Trading Plc;
(d) low regulated domestic electricity prices which do not reflect the costs of power generation;
(e) navigating a labyrinth of political, legal and regulatory frameworks in order to successfully
develop and operate IPPs.
1 In 2015, power supply in Nigeria averaged 3.1 GW for approximately 180 million people, which is estimated to be only a third
of Nigeria’s minimum demand. PWC report titled: "Powering Nigeria for the Future".
2 The power privatisation programme comprised: (a) the unbundling of the National Electric Power Authority, the vertically
integrated state-owned entity, into: (i) six generation companies; (ii) 11 distribution companies; and (iii) a transmission
company; (b) the sale by the Nigerian Government (through the Bureau of Public Enterprise) of its majority interests in the
power generation and distribution companies to private sector participants, primarily comprised of Nigerian investors and their
international technical partners; and (c) the Nigerian Government subcontracting the management of the national grid
operator, the Transmission Company of Nigeria, to Manitoba Hydro International (together, the Power Privatisation
3 For example, the CBN's disbursement of the Nigerian Electricity Market Stabilisation Facility.
4 Power Africa has played a key role in increasing access to liquidity and credit enhancement products from US Government
agencies (such as OPIC and USAID) and increasing the levels of technical capacity in the domestic power sector.
3. Developing bankable power projects: avoiding the common pitfalls
The commercial banks and development financial institutions that finance IPPs (the Lenders) will
typically expect IPP Developers to have completed a number of project development milestones prior
to the debt financing phase of the IPP, which include:
a. Relationships between project development partners
Developing an IPP in Nigeria, as in many emerging markets, is time-consuming,5 capital-intensive and
sensitive to in-country political, economic, social and regulatory risks. Consequently, IPPs are usually
undertaken by a number of co-venturing developers who agree to pool resources (including funding,
assets, know-how and expertise) and share the risks and rewards associated with the development
and operation of the IPP.
The development partners will usually enter into commercial agreements (e.g., a joint development
agreement, a shareholders agreement and/or a development and cooperation agreement) in order to
formalise their relationship and document their respective rights and obligations during the
development and/or operation phases of the IPP.
b. Engagement with stakeholders
IPP Developers' engagement with a project's other key stakeholders – the local community, regulators
and any adjoining landowners (together, the Stakeholders) – is crucial for disseminating projectrelated
information, identifying and addressing concerns and obtaining Stakeholders' support for the
IPP. Engagement with Stakeholders may help to address legal and other challenges to the IPP which
might otherwise arise at a later stage. Development of a well-considered action plan early in the
project development phase – one which identifies the Stakeholders and their representatives and
which sets out formal procedures for engaging with these Stakeholders – can be an effective tool for
engaging with Stakeholders.
c. Land procurement and perfecting proprietary rights
IPP Developers will need to ensure that the company incorporated to own the project assets and
enter into project documents on their behalf (the Project Company) has obtained a proprietary
interest in the project site land, which is typically evidenced through a certificate of ownership.
Alternatively, the Project Company may obtain a long-term lease of the project site land under a lease
agreement with satisfactory terms, particularly robust termination provisions. Lenders will typically
expect the Project Company to (a) exercise its proprietary rights to the project site land free of
adverse rights and (b) create security over its proprietary rights to the project site land in favour of the
d. Satisfying social and environmental requirements
The majority of international financial institutions have adopted the Equator Principles, a risk
management framework for determining, assessing and managing environmental and social risk of
projects, which is based on the International Finance Corporation's standards on social and
As a precondition to obtaining project financing for an IPP, the Project Company will be required to
satisfy the Lenders of social and environmental requirements. These requirements typically include:
5 It is reported that the lead time on the Azura-Edo IPP, the first fully-privately-financed greenfield IPP in Nigeria, was six years
from the start of the project to financial close – Azura Report titled: "High Voltage – A Development Guide to the 459MW
(a) completion of feasibility studies to ascertain the impact of the project on the community and
(b) the Lenders' technical consultants' approval of the remedial action plans, which may include
compensation, resettlement and decommissioning arrangements.
e. Obtaining regulatory permits
The IPP Developers and/or the Project Company will be required to obtain certain permits,
authorisations, approvals and/or waivers from the relevant Nigerian regulators in order to validly
construct and/or operate the IPP (together, Permits). The scope of applicable Permits for an IPP is
wide ranging and will typically include Permits relating to the following activities: construction of the
power plant, power generation, environmental, health and safety procedures, equipment importation,
obtaining insurance, reinsurance and foreign exchange.
Experience has demonstrated the need for an IPP Developer/Project Company to:
(a) engage its transactional advisers to conduct extensive due diligence on the IPP in order to
ascertain the exact scope of requisite Permits;
(b) develop an action plan with stipulated procedure, timelines and allocation of responsibility for
obtaining the Permits;
(c) anticipate that the Lenders will insist that all relevant Permits are obtained as conditions
precedent to drawdown of their loans;
(d) consider the additional risks associated with obtaining the Permits, such as (i) delays to the
transaction timetable where there is no deadline by which processing of a Permit must be
completed and (ii) increased transaction costs resulting from the payment of applicable fees
for obtaining or extending a Permit;
(e) make conservative assumptions on the requirements, process and timeline for obtaining the
Permits when developing the transaction timetable;
(f) engage with the relevant regulatory authorities at an early stage in the project development
(g) pre-agree the process, scope and consequence of extensions to any applicable "longstop
dates" for the completion of the transaction due to delays in obtaining the Permits; or
(h) mitigate the risks related to cancellation of Permits, arbitrary delays in granting or extending
Permits through obtaining political risk insurance and/or by including such events within the
scope of "political force majeure" provisions in the project and finance documents.
f. Sourcing funding
During the Power Privatisation Programme, Nigerian banks provided more than 80 per. cent. of the
acquisition debt provided to the purchasers of power generation and distribution assets. These
acquisition facilities, some of which are currently underperforming and require restructuring, have
resulted in liquidity constraints in the domestic debt market. The Central Bank of Nigeria's (CBN) has
imposed restrictions on Nigerian banks' level of exposure to industry sector by reference to a
percentage of their loan portfolio.
This CBN regulation and the recent unavailability of foreign exchange in the Nigerian financial market
(linked in part to low global oil prices and Nigeria's recent monetary policies in response to reduced oil
export revenue) have further exacerbated illiquidity in the Nigerian debt market. Consequently, IPP
Developers will need to source funding for IPPs from both the domestic debt market and international
Lenders – not only commercial banks, but also export credit agencies and development finance
Funding from international Lenders will typically be structured on a limited-recourse or non-recourse
basis and, therefore, involve a rigorous bankability assessment and risk allocation process, a
summary of which will be set out in Part 2 of this briefing note.
4. Conclusion – where there's political will, there's a way
To achieve the Nigerian Government's targeted increase in electricity wheeling capacity, there is a
general consensus that the Nigerian Government will need to take a number of additional wideranging
steps to incentivise the development of a pipeline of bankable IPPs on a sustained basis,
(a) ensuring fiscal stability, cost reflectivity and transparency of the electricity pricing structure
that supports a level of economic returns to IPP Developers without compromising
affordability of power supply to final consumers;
(b) facilitating a reliable supply of gas from upstream and midstream activities and facilitating
investment in power transmission and distribution infrastructure to avoid a scenario where
generated power becomes a stranded asset;
(c) improving liquidity and continued provision of credit enhancement of NBET to preserve the
bankability of PPAs;
(d) providing regulatory and fiscal support to distribution companies in their deployment of
technology and funding of capital expenditure programmes required to develop a robust
system of metering, billing and revenue collection;
(e) implementing investment-friendly market reforms in order to attract private investment; and
(f) reducing system inefficiencies across the power value chain whilst reducing bureaucracy
within the relevant governmental agencies.
This briefing note is provided for information purposes only and does not constitute legal advice. For
further information on the content of this briefing note or legal advice, please contact Dominic
Spacie, Danielle Beggs or Omosuyi Fred-Omojole.
You might also be interested in the second instalment of the Dentons Nigeria Power Series briefing
notes (titled: "Unlocking Financing for Developing Independent Power Projects in Nigeria"),
which will be launched in December 2016.
Dominic is a partner in the Banking and Finance practice at Dentons. He has
considerable experience in advising lenders, sponsors, investors and the public
sector on all aspects of project financing, on both project-related documentation
and the finance documents (debt and capital market solutions).
Danielle is a partner in the Firm's Energy and Infrastructure practice. She has
experience of working for a number of international oil and gas and electricity
industry clients, governments and regulators.
Danielle has advised on major projects in the oil and gas (both in the upstream
and downstream sectors) and electricity industries, both domestic and
international, and has extensive experience of both foreign and domestic
regulatory and licensing regimes.
Omosuyi (Suyi) is an associate in the Energy, Infrastructure and Banking and
Finance practice at Dentons. He has a broad practice which covers project
development, project finance, export finance, structured trade and commodity
Suyi regularly writes and speak on a wide range of emerging market transactional
issues. He was recognised as one of "40 leading lawyers under 40" at the ESQ
Nigeria Legal Awards 2016 for his transactional experience and contribution to
Nigeria-focused thought leadership.