How Nigeria’s power sector will shape out in 2018

by | January 16, 2018 12:34 am

Significant policy decisions taken last year including N701billion payment assurance to Generation Companies (GenCos), declaration of eligible customer, enactment of the Power Sector Recovery Programme (PSRP) and increased transmission investments helped Nigeria achieve a peak on-grid capacity of over 7,000MW.

However, this year will present a fresh set of challenges as some of these policies enter gestation period in 2018. Analysts say progressive policies and sustaining reforms already started can attract new investments especially in offgrid power generation.

“In as much as the projected development within the power sector cannot yet be determined with absolute certainty, emerging trends already indicate an unbiased projection of a productive, busy and industrious year for the sector,” said Ayodele Oni, partner at Bloomfield law firm.

Oni further said, “These trends are considered very valuable factors which will contribute to efficiency and reliability in the sector and ranges from federal government policies, investment decisions and increased private participation especially in power generation due to new regulations such as embedded power regulations amongst others.”

Critical for Nigeria going forward are actions to begin implementation of key power projects including N9.8 billion for the Mambilla hydro power project, and the N12 billion counterpart funding for earmarked transmission lines and substations and faithfully implement the Power plan.

Three weeks ago, the 450MW Azura Edo-IPP came online seven months ahead of schedule and according to budget, the first of its kind in Nigeria’s chequered power generation history. Power generation could reach a peak of 6,000MW within months but this comes with the problem of capacity to pay.

Azura IPP is backed by a Partial Risk Guarantee (PRG) from the World Bank and in the event of default, could raise the nation’s sovereign debt portfolio and hurt credit ratings.

“The current liquidity crisis in the power sector is likely to be heightened in 2018, not least because the front runner IPP will become operational in the course of the year, and NBET’s limited receipts from the distribution companies would have to be shared with even more generation companies,” Woleme Esan, partner at Olaniwun  Ajaiye.

Esan further said, “In my view, the solution to the liquidity crisis is binary – it is either tariffs are made to be cost-reflective, or the Federal Government steps in to make good the losses. Either of these options would have to be actively considered this year for the sector to attract the much needed investments.”

Oni agrees 2018 could indeed witnessed increased investment as, “reports show that Nigeria is planning to amend investment rules to channel more of the country’s US$26b of pension funds into corporate bonds, to ensure long-term funding of power and infrastructure projects.

“In 2017, Viathan Group, a private company, issued a $32 million infrastructure bond to fund power assets. This was the first of its kind in Nigeria and more companies are likely to seek creative means of raising funds beyond typical deposit money bank financing,” said Oni.

Analysts say other notable projects that will likely impact the sector include the Dangote group’s 12,000 megawatts of electricity generation plan and the plan of Phanes Group, an international solar energy developer, investment and asset manager based in Dubai, to develop three 100 megawatts (Mw) grid-connected solar plants in Nigeria this year.

Operators in the renewable energy space would seek to ramp up new investments taking advantage of the mini grid regulation which makes obtaining a permit optional for a mini-grid operator that distributes up to 1MW and allows investors to charge market reflective tariff.

The Rural Electrification Agency (REA) grant of at least $300,000 to operators has generated keen interest among operators and successfully winners will begin new projects to improve power in rural areas within the year.

In April last year, the Federal Ministry of Power, Works and Housing signed an agreement with two firms, Afrinegia Nigeria Limited and CT Cosmos Nigeria Limited to provide cover against a premature termination of the power purchase agreement it signed with 14 solar power companies in July 2016 to provide $2.5bn capital towards a yield of 1200MW. Optimism is high that these projects would take off in 2018.

Other critical areas that will determine how 2018 shapes out is the resolution of meter policy for residential customers. NERC has proposed a meter regulation by whereby electricity customers can repay a self-financed meter acquisition over the course of five years through energy credits and DisCos mandated to source 40 percent of their meter requirement from local licensed providers.

Much of these would depend on what happens in the tariff. “I believe the government fully implement the revised customer tariff plan even if at the end of the day, the government is not going to fully pass it on to the customer, it will go a long way into bringing in liquidity to the market because the banks and some foreign investors will now see that Nigeria is ready to open up the sector for further investments,” said Chuks Nwani, energy lawyer.

There are still bumps on the way. The N701billion as Power Assurance Guarantee for gas suppliers would soon run out and if DisCos continue to pay less than 30 percent of the market invoice and do not improve collections by cutting ATC&C losses, the sector would remain in crises.