Interview : Ladi Sanni
In what ways are captive power plants more attractive for developers in Nigeria?
LADi SANNI: Focusing on the captive power model enables developers to avoid most of the challenges associated with the national grid’s power value chain. This particularly applies to transmission challenges, as well as aggregate, technical and commercial losses. Since power purchase agreements (PPAs) under a captive model are secure, there are very few collection issues. PPA’s are backed by bank guarantees including binding standing-order payments from the off-taker’s bank. The model ensures that there is an anchor off-taker, which provides a commercial business case for the project. Once this is secured it is easy for the producer to further de-risk a project by adding new commercial and industrial consumers to the network.
In your opinion, what financing challenges do power developers in Nigeria face?
SANNI: The country’s macroeconomic environment poses a challenge for its power sector. There is inadequate funding for the industry and the infrastructure in general. This is because Nigeria’s financial markets are not developed enough to finance large-scale projects. Bank credit facilities in the country are typically short tenured to around four years, with high interest rates in the region of 23-25% per annum. Power asset financing requires medium to long tenured credit facilities to match the useful life of the asset, which is typically between 15-20 years. Reasonably priced, project friendly interest rates are almost non existent for infrastructure projects in Nigeria.
In addition, because of the high yields on Treasury bills, particularly during 2017, investors were not encouraged to finance infrastructure projects, and instead opted for the risk free investment options offered by government securities. Consequently, Nigerian infrastructure developers relied on foreign markets to secure the needed capital to fund their projects, with the attendant exposure to foreign exchange fluctuation risks. The effect of this is that projects have been rendered commercially unattractive, as loan repayments are viewed as high risk by lenders. Furthermore, the country’s overall climate of political and policy uncertainty, especially over the sanctity of contracts, has contributed towards making infrastructure financing challenging.
How can the government ensure a more adequate and reliable gas supply to power plants?
SANNI: The government needs to focus more on the development of gas supply infrastructure. Investment in this area requires long-term considerations, and therefore it is important for the government to incentivise private developers to make the sector more attractive to investors. When developers are sure that gas produced can get to the major demand centres for power generation around the country, there will be more investment in gas production since domestic power demand is high. The government is the biggest shareholder in joint-venture oil and gas projects, and therefore is in a better position to ensure that oil multinationals allocate a percentage of their production to domestic gas development and supply.
Meanwhile, the fiscal policy for the gas exploration and development business must also be aligned to encourage investment in this area, especially as Nigeria is competing with other countries for this kind of investment. If the fiscal framework for gas production is attractive for upstream companies, it will definitely have an impact on the delivery price of gas to end consumers. I am of the opinion that if we can focus on these areas as a country, there would be a marked improvement in local gas supply available for power generation. While the government’s efforts over the past decade to make gas available for the domestic market has delivered noticeable results, there still remains a significant amount to be achieved.
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