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Nigeria's power reforms: a work in progress.

Summary: Abuja is serious about reviving the power sector, but will investors be convinced by what's on offer? Ian Lewis investigates.

R egulatory and fiscal chang- es, along with the success of Nigeria's first independent power project (IPP) of the new era of privatisations could provide the kickstart

that the power sector badly needs. But much remains to be done if the country is to boost generating capacity to match soaring demand.

Nigeria's power plants and producers were only producing just over 5 GW of power by the end of 2017 -- less than half of full capacity, due to a combina- tion of faulty equipment and poor infra- structure. That's just a small percentage of latent demand, which could well mer- it a lot more than 50 GW of capacity over coming years. South Africa, which has a population around a third the size of Nigeria's, already has power genera- tion capacity of over 40 GW.

Much of Nigeria's current output comes from gas-fired plants and gas is likely to continue to play a central role in the Nigerian power mix, as a comple- ment to renewables, as and when that sector takes off in Nigeria. Gas is the obvious power feedstock for the country to exploit, given it has reserves estimat- ed at around 190 trillion cubic feet and produces less than 2 trillion cubic feet annually, with much of that going to the Nigeria liquefied natural gas (LNG) ex- port facility.

Despite the country's long-running power shortages, gas tended to be re- garded by the industry as a somewhat unwelcome by-product of more lucra- tive oil production through most of the Nigerian hydrocarbons industry's histo- ry. Much of the gas that was produced was flared if it couldn't be channelled into LNG exports. The push is on now to make both upstream and downstream gas worthy of greater investment.

In mid-2017, the government ap- proved a new National Gas Policy, a 100- page document which set out ambitions to make the gas sector more transparent, remove conflicts of interest between the various participants in the supply chain and make the gas market work better.

Public-private divide

Under the policy, a distinct legal divi- sion between public and private sector involvement in the gas sector is to be established; and a legal separation be- tween ownership of gas infrastructure and gas-trading entities will be estab- lished. Plans were drawn up to split the Nigeria Gas Company into separate transport and gas-marketing companies. Upstream projects that focus on gas, even where no oil is present, are to be encouraged.

The focus is to be on project-based developments, and gas demand is to be generated across all sectors from power to petrochemicals to transport. Fiscal terms for the gas sector will be different from those for oil, as will terms for up- stream and midstream activities. Greater incentives to enter midstream projects are in the pipeline.

There is, of course, a difference be- tween an aspirational policy and put- ting it into force and this isn't the first time a Nigerian government has tried to kickstart the domestic gas sector with a chunky policy document.

A Gas Master Plan produced in 2008 by the government of President Umaru Yar'Adua called for $20bn of investment in downstream gas, and a further $10bn in upstream, as well as setting targets to ramp up gas-fired generating capacity. However, it did little to incentivise in- vestment over following years. That was deterred by worries over unattractive fi- nancial terms, the opacity of regulation, corruption, and instability in the oil and gas producing regions of the Niger Delta that led to regular supply interruptions.

PIGB breakthrough

Now, however, there appears to be a real determination to solve Nigeria's power crisis -- and perhaps more importantly, a determination to get to grips with the regulatory and investment framework for the entire energy sector, which looks likely to produce imminent legislative change.

This stems from the successful pas- sage of the country's overhauled Petro- leum Industry Governance Bill (PIGB) through both houses of the Nigerian parliament, a process completed earlier this year ahead of signing by President Muhammadu Buhari.

This was something of a triumph, as several iterations of legislation affecting both upstream and downstream devel- opment have failed to make it past law- makers, since it was first mooted a dec- ade or so ago. That left the energy sector starved of funding, as investors adopted a wait-and-see approach regarding their involvement in the country.

The breakthrough was achieved, in part, by splitting bulky legislation cov- ering many and varied aspects of the energy industry into relatively bite-sized chunks, reducing the scope for endless revisions by lawmakers.

The PIGB deals mainly with organ- isational restructuring, redefining the role of the Nigerian National Petrole- um Corporation (NNPC) and introduc- ing new bodies to handle upstream bid rounds, award exploration licences and make recommendations to the oil minis- ter on upstream licenses.

The passage of the PIGB will provide reassurance that the country is serious about improving the investment climate. However, it may well be another bill, yet to be passed, that will have most impact on the trajectory of the domestic gas sec- tor, which still struggles to attract all the private sector funding it needs.

Investors look to fiscal bill

The petroleum industry fiscal bill, the petroleum host community bill and the petroleum industry administration bill are all still under debate, but it is the fiscal bill that holds the key for investors in the domestic gas sector, according to industry leaders.

Without a new fiscal framework, in- vestors can't make an informed decision on potential returns on their investment. As Dada Thomas, president of the Nige- ria Gas Association and managing direc- tor of Frontier Oil, said in a recent Nige- rian media interview, if the fiscal terms are right, investors will be more tolerant of other uncertainties.

He lamented the slow gestation of the fiscal bill, but said that it needed more work to make terms more attractive to investors.

Gas producers and power project de- velopers alike complain that overall costs within the domestic energy sector have risen sharply -- in part due to devalua- tion of the Nigerian naira over the last two years -- and hampered its growth. Large-scale gas consumers pay around the same rate in dollars to producers for their gas that they paid in 2015.

But that represents a rise of more than 75% in terms of naira -- the cur- rency in which they earn most of their revenues.

The gas producers, for their part, have to borrow money to finance their busi- nesses in dollars, which, they say, means their revenues in naira had to rise to ena- ble them to survive. They also complain that they are paid for their gas at a lower naira rate to the dollar than the market exchange rate at which they repay their dollar loans. Thomas says that state of affairs effectively costs producers 18% of their income on domestic gas sales, even if the two rates are closer now than they were two years ago.

The pain has been partly offset by re- forms to domestic gas prices introduced under President Goodluck Jonathan and continued by the present Nigerian administration. The heavily subsidised price used to be just a few cents, before being raised to a minimum price of $2.50/1,000 cubic feet.

IPP up and running

If investors can be persuaded to put money into increased gas production and the infrastructure to get it to the do- mestic market, it will be a major spur for the IPP sector. Potential backers for IPPs have been deterred as much by the lack of assured gas feedstock supply as by the logistics of building the plants.

The dividends reaped by cooperation between gas producers and power plants were evident in the successful launch of the 450 MW Azura-Edo IPP, an open cycle gas turbine-powered facility on a greenfield site in Edo state. This is the country's first IPP to be project financed in the country's new age of privatisa- tions.

A $300m investment by Nigeria's Seplat in gas processing facilities and a long-term gas supply agreement with the company paved the way for the project to get off the ground in 2014. By Decem- ber 2017, the first gas turbine was con- nected to the grid -- a remarkably speedy development by regional standards.

The financing package for the IPP itself amounted to around $900m, of which $190m was equity with the re- mainder comprising debt provided by a group of Nigerian and international finance houses.

Amaya Capital, the founder and lead sponsor of the project, and its partner American Capital Energy and Infra- structure attracted equity investors that include funds managed by African In- frastructure Investment Managers, Al- dwych Azura Ltd and the ARM-Harith Infrastructure Fund.

Risk guarantees

But underpinning the project -- and pro- viding a potential blueprint to help other similar developments come to fruition -- was strong government and multilateral support.

Azura-Edo IPP was the first Nigeri- an power project to gain support via the World Bank's Partial Risk Guarantee -- devised to facilitate big-ticket projects in emerging markets -- and was also cov- ered by political risk insurance for equi- ty and commercial debt from the World Bank Group's Multilateral Investment Guarantee Agency (MIGA).

The Nigerian government also put in place a put and call option agreement (PCOA), complementing the power purchase agreement between the Azu- ra-Edo IPP and the government's Nige- rian Bulk Electricity Trading (NBET).

Such privately financed projects, sup- ported by guarantees from internation- al development agencies and attractive government-backed offtake deals, offer an alluring way forward in a country such as Nigeria, where power demand is high, but perceptions of operational and political risk are also elevated.

But incentivising IPP development is still proving less than straightforward. The Azura-Edo plant is supposed to be the first phase of a project envisaged to generate 1.5 GW on its site near Benin City, but progress in developing further projects elsewhere has been slow.

Hazy outlook for renewables

Efforts to galvanise solar energy IPP de- velopments have had limited success.

In 2016, Nigeria signed power pur- chase agreements with 14 solar IPPs, which would have added a total of some 1.13 GW to grid capacity. The benefits of solar, as clean energy that can be in- stalled in months rather than the much longer timeframe for fossil fuel plants, are obvious. But many of these planned solar projects have struggled to attract sufficient investment to make headway.

The Ministry of Power says it is reluc- tant to pursue projects without renegoti- ation of terms as it regards the tariffs that were agreed with NBET, the main buyer, as too high, given the falling cost of solar panels and production over recent years.

The Minister of Power, Babatunde Fashola, has said the government won't provide the partial risk guarantees and PCOAs demanded by some of the IPP developers without a cut in tariffs.

Government officials note that those agreed originally were around 11.5 cents/kilowatt-hour (kWh), while agree- ments made elsewhere in Africa were typically at least 4 cents/kWh cheaper than that.

For their part, developers of mid-to- large scale renewable energy projects are reluctant to proceed without the guar- antees, given continued concerns over the creditworthiness of power offtakers, echoing similar long-running concerns in the conventional power sector.

Not all big power projects are reliant on private sector investment. The gov- ernment said in early 2018 that a 3 GW hydropower plant, costing some $6bn, planned for eastern Mambila region would start construction later this year. It is to be built by Chinese companies and 85% financed by loans from China's Export-Import Bank, if terms can be agreed.

However, IPPs are the model expect- ed to provide the backbone of new Nige- rian power generation in coming years. The challenge for both the conventional and renewable power arenas will be to find the middle ground, where both the government and investors are comforta- ble with the level of support -- that might be a matter of developing trust between the two sides, as much as anything else. l

IPPs are the model expected to provide the backbone of new Nigerian power generation in coming years.

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Publication:African Business (Al Bawaba (Middle East) Ltd.)
Geographic Code:6NIGR
Date:Jul 4, 2018
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