ICA Report: "LIGHT INSIDE: THE EXPERIENCE OF INDEPENDENT POWER PRODUCERS IN NIGERIA"
18 July 2012
This report examines the current electricity environment in Nigeria, with a focus on Independent Power Producers (IPPs) - past, present and future.
Change and hope abound. Nigerian President Goodluck Jonathan has made overhauling the electric power industry the top priority of his administration. Although nearly every single Sub-Saharan African country faces some form of electric power woes, Nigeria’s challenge is distinct, given the sheer size, as well as the repeated attempts at power sector reform. This report examines the current electricity environment in Nigeria, with a focus on Independent Power Producers (IPPs) - past, present and future.* How have the IPPs come into the power mix and what impact have they had to date? What new IPPs are in the pipeline? What is the interface between current and future IPPs and the reform agenda? Finally, how may the Nigerian IPP experience to date come to represent a lesson-learned, for Nigeria, and for other countries, facing similar electricity challenges?
As of 2012, three large-scale IPPs produce approximately 25 percent of Nigeria’s electric power, with the balance provided by the Power Holding Company of Nigeria (PHCN) and State governments, viz. about 1000 MW (IPPs) and 3000 MW (non-IPP), respectively. The introduction of IPPs has been gradual (dating to 1999), but according to the ‘Road Map’, the private power component will more than double in less than 5 years, including via the country’s sale of its generating assets. Given the significant imminent change, a clear understanding of past experience with IPPs is paramount.
To date, all three IPPs have helped to advance the reform process, directly and indirectly. First they have been among the most visible elements of reform, other than the Nigerian Electricity Regulatory Commission (NERC), over the past 13 years. In this regard, the IPPs provide an important example to potential investors of private power at work in the country. Serious transaction experience has been gained, especially by stakeholders in government, with regard to the overal risk allocation in IPPs. With this has come a greater understanding with intepreting contracts, notably the PPA and fuel agreements. Furthermore, the existing IPPs have helped to reinforce the need for cost-reflective tariffs, together with the urgency to reform the gas supply network. In addition, the importance of international competitive bidding and/or more transparent bidding and contracting procedures has been highlighted.
In the present overhaul of the entire Nigerian Electricity Supply Industry, several important factors are noteworthy in terms of IPP development. While not being replicated, space has been afforded to the three ‘legacy IPPs’; that is, contracts with AES Barge, Okpai and Afam VI will be upheld, unchanged, with the main change that the PPA will be administered by the Bulk Electricity Trader (BET), rather than the now defunct Power Holding Company of Nigeria (PHCN). A transitional entity, the BET is intended to be the present nexus between generation companies (Gencos), IPPs and distribution companies (Discos), as Gencos and IPPs will sell to the Bulk Trader, which will then resell power to Discos through vesting contracts. Despite this institutional change, for the legacy IPPs, by far the greatest difference will be the new entrants in power supply and their anticipated trading arrangements.
Those new entrants are multi-fold and are expected to include the divested Gencos, a slate of National Integrated Power Projects (NIPP), additional capacity from captive plants and new IPPs. The recent past points to a level of skepticism, as no new IPPs have materialized since 2008, when Afam VI came online, despite reforms taking center stage. There are, however, voices of optimism. Citigroup Global Markets projects that “Nigeria, India and Vietnam are expected to experience the highest real per capita GDP growth rates until 2050.” They characterize Nigeria among 11 developing countries noted for their young populations and present poverty, with overwhelming growth prospects, across all sectors. According to the Bulk Electricity Trader, responsible for power purchases for the mid-term, the evolving market conditions will be attractive to new IPPs, provided the multi-year tariff order strikes the right balance, and sends the right signal to investors while simultaneously looking out for consumers. Other key stakeholders nod their heads in agreement: IPPs will present themselves as the existing reform environment settles.
Nigeria is unique, according to some experts, in the African context, due to the strong willingness to pay, together with the abysmal present power situation which hinders public and private sectors in virtually every activity. Bottom line, there is real, latent demand. In addition, there are indications that between 2013 and 2015, up to 1000 MW of additional capacity may be provided by between three to six different IPPs, with a “snowball effect” after 2015. That said, to meet the 2020 goal of 40 000 MW, new investment will need to multiply exponentially, and Nigeria will need to address the real impediments to doing business.
Certain strategies are being adopted to enhance the investment environment, including a critical Partial Risk Guarantee (PRG) being extended to the Bulk Trader, which counters the default risk of the Discos, thus reducing risks for potential new Gencos. Although the planning process has been interrupted by different political administrations and the involvement of different government agencies, the present approach with strong executive oversight may help bring about more coherency. Also in the works is an overhaul of the gas sector, which should move the country towards more dependable fuel supply for its power projects, something that has been a severe hindrance, particularly for the first IPP, AES Barge, over the past decade. In sum, there is a way forward, and the voices of optimism, together with the requisite planning and prudent procurement strategies will hopefully lead to continuous light inside and out for Nigeria. Meanwhile, with the most extensive power sector reforms undertaken by any African country to date, Nigeria has the potential to offer countless lessons and case studies for other countries. The possibilities are endless.
*For the purpose of this report, IPPs are defined as power projects set up as special purpose project companies with a significant proportion of private equity and/or debt, and long-term power purchase agreements (PPAs) with the national utility or other large customers. The research scope is limited to grid-connected projects, which have reached financial close and are under construction, operational, complete or concluded. Short-term, grid connected, rentals are largely excluded from the analysis, due to the variation in contracting methods. Also excluded are the estimated 4000-8000 MW in off-grid generators, which make up a substantial part of Nigeria’s power supply, as referenced above.
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