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Analysis: The Warped Nigerian Electricity Supply Industry (Part 1)

The Nigerian Electricity Supply Industry (NESI) is a knot of interests tied pretty solidly by the Federal Government, which continues to see electricity supply as a tool for mopping up votes every four years. The harder government tried to reform the sector, the tighter the knots get. Sometimes, a public official could even add a layer of personal interest to the firmness of the bond. Electricity is a product like airtime - it cannot be touched or held. Still, it must be produced. Telecommunications firms use equipment like cables and masts to enable conversation through waves. Electricity is produced from anything that has high energy levels.

In Nigeria, 85% of electricity generated is from gas - that is what the Advisory Power Team, which is housed in the Vice-President’s office says. The other 15% is generated from water. Power producers have to pay for the supply of any raw material they intend to produce electricity from; the same way you need to buy baking ingredients before you can bake a cake or make snacks.

But power producers are hindered from selling their electricity, their product -  to wholesaler or off-taker of their choice because the Electricity Power Supply Reform Act (EPSRA) says they should sell to only the National Bulk Electricity Trading Company. This company keeps an invoice of how much power is pumped from the plants of the electricity producers and sent to the distribution companies through the transmission grid. The distribution companies are supposed to collect revenues from the consumers and pay the power generation companies through NBET.


But Data from NBET revealed that the Discos remitted only 33.29% of their revenues as at February of 2017. The Minister of Power, Tunde Fashola released a policy directive in May that allowed people who consume a minimum of two megawatts a month to buy electricity from either the generation, transmission or distribution arm of the electricity value chain based on a licensing agreement.

According to Mr. Sunday Oduntan-  the voice of the distribution companies - there is a liquidity crisis in the market caused by one trillion-naira shortfall.  “The liquidity crisis means that there is an excess of one trillion-naira shortfall in the industry. If I am buying a product for N68 and I am allowed to sell it for only N31.50 and nobody is taking care of the difference between N31 and N68, then, nothing will happen.”

The problem is, not only are the Discos failing in collection of payment for the electricity they distribute to consumers, the tariff they are allowed to sell by the regulatory commission is N37 which lower than the cost at which they receive the product.

 We could say there is a double coincidence of deficit to the power generators and their raw material producers- the National Gas Processing Transportation Company (NGPTC)- an NNPC subsidiary. The number of people in Nigeria and the projected population growth of the country by 2050 as well as the numerous other natural resources the nation is blessed with are the attractions that keep bringing investors to the country. That is why the World Bank probably further dipped its already ‘stung hands’ into the beehive of Nigeria’s power sector - the National Electricity Supply Industry. This time, the Bank adopted a financing method it called, ‘Non-recourse financing.’

The bank led 15 other financial institutions into a long-term financial commitment backed by a ‘certainty investment’ framework. Mark Schmaman is the deal transactor that represents Rand Merchant Bank of South Africa in the said commitment. He says the structure of this deal takes ‘the basis on which the plant will sell electricity, the basis on which the government will provide support towards the project in respect of the political risks etcetera that the project might face, the permits and the regulation that is put in place by the energy regulator...’ Well, that is pretty much everything in the value chain - all for one project. This contract closes all windows that the Nigerian government might try to use to bail out at any stage of the project. The plant Mark refers to is the Azura power station in Edo state. It is the first major power project undertaken after the industry was privatized.

Azura is a community on the outskirts of Benin city. It is situated close to one of the high voltage (330 kV) power lines that carries electricity around the country. It is not far-off from Nigeria’s main gas pipeline- the Escravos - Lagos pipeline system. So, it is a good location for the construction of a power plant. The size of this one is 1,500 megawatts- the biggest in the country. Its first phase is 450mw and it is to be completed this year.

There are 15 financial institutions from nine different countries with shareholders from diverse lands keeping the Azura power project going. So, if this government or the next should dare default, ‘there would be very difficult conversations had in order to deliver the project,’ Schmaman says.  A financial closure of 900 million dollars was signed for the birth of the Azura child on the 28th of December 2015. No party in the deal is allowed to fail.

As at May 18, 2016, Schmaman said the project was six months into construction ahead of schedule. The financiers insisted the Azura power plant has its own dedicated gas supply. Seplat - an indigenous oil company was commissioned to build a 300-million-dollar gas facility in conjunction with the National Petroleum Development Company (NPDC), a subsidiary of NNPC. A transmission line will also be constructed to connect the power plant to the national grid.

A particular phrase that keeps echoing in the Azura dead is, ‘the basis on which the plant will sell electricity.’ The government has already promised to evacuate all power produced by the Azura plant. Yet, lots of questions keep falling like raindrops from this World Bank brokered the deal: How much will the electricity generated from the power station cost? Will there be a default on the finance agreement and keep the existing cost regime? Will they make Nigerians pay more for power and risk the ire of public sentiments?  We wait feverishly to see the first phase of the Azura project come on stream.

Will the recourse financing template make the Federal Government of Nigeria increase the cost of electricity?

*Written September 2017, updated 23rd March 2018. *