Economic Update

30 Nov, 2016

Three years after the start of Nigeria’s power privatisation programme, the government is looking to burnish the attractiveness of the sector by providing a range of new incentives and guarantees.

Extending partial risk guarantees

In November the World Bank and state-owned Niger Delta Power Holding Company (NDPHC) signed a partial risk guarantee (PRG) agreement for integrated gas company Seven Energy to supply 3.7m cu metres of gas to the $500m Calabar gas plant in Calabar City, as part of a number of deals expected to add 500 MW to the national grid.

PRG programmes are being used by President Muhammadu Buhari’s administration as a way to incentivise independent power producers (IPPs) and attract fresh capital into Nigeria’s power sector, which has long been hampered by a significant shortfall in production. PRGs provide guarantees – in this case, backed by the World Bank – that protect investors against a default by power companies.

For example, in the event that the Calabar Generation Company, which is owned by NDPHC, is unable to make payments, the agreement guarantees that JP Morgan under the World Bank will pay and be reimbursed over a one-year period, according to press reports.

The Calabar agreement is not the only PRG currently in effect. Under the World Bank’s Power Sector Guarantees Project for Nigeria, approved in May 2014, the bank has offered $670m of PRG financing, with approximately $237m of the funding used for the 459-MW, $900m Azura-Edo PRG package, the first commercial IPP to produce electricity for Nigeria’s grid.

The Azuro-Edo gas-fired power plant is being financed by 20 private equity funds and international banks and is being built by a joint venture of Siemens and local company Julius Berger. The plant, located near Benin City, is expected to be operational by 2018.

Infrastructure challenges

The need for the guarantees is clear. As of early November, Nigeria’s power industry was generating approximately 4 GW, less than half of its 12 GW installed capacity, according to data from the Transmission Company of Nigeria, with daily power cuts estimated to cost the country at least 2% of GDP annually.

Power shortages are in part a result of limited upstream supply, with militant groups attacking gas pipelines in the Niger Delta earlier this year and decreasing available feedstock. According to international press reports, the drop in gas supply – which serves as Nigeria’s primary feedstock – reduced the country’s output to as low as 1 GW in May.

Towards renewables

At the same time, Nigeria is moving to encourage investment in renewables with a new FIT regulation – approved last November and entered into force in February – requiring distribution companies to source 50% of electricity from renewable sources by 2020 to help reach the government goal of 2 GW of clean energy by the same year.

The Nigerian Electricity Regulation Commission is responsible for maintaining the tariff regime, with fees set at $177 per MWh for solar power, $125.47 for wind, $154.71 for biomass and $154.72 for small hydro this year. The commission will make incremental increases in coming years, using 2016 as the base.

The design of the tariffs are set to attract smaller facilities with a capacity of 1-30 MW, while those with greater capacity will have to meet additional requirements.

By 2020 the government is targeting sourcing 10% of renewable energy outside of large-scale hydropower, with Nigeria’s three hydroelectric dams currently contributing 20% of the country’s power supply.

The solar industry also presents a viable option, particularly in the northern regions of the country, where solar radiation levels are as high as 2210 KWh per square metre annually in Sokoto.

To augment the solar segment’s development, in July officials signed 14 power purchase agreements with utility-sized solar power developers totalling over 1.1 GW of power.

Greenwish Partners, a Paris-based renewables company, plans to construct two solar plants in Nigeria with a combined capacity of 100 MW for an estimated $150m under an agreement signed in October.

More recently, in November Phanes, a Dubai-based renewables firm, signed a contract to build three plants to bring a total of 300 MW of solar capacity to the grid over the next two years.

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