Completing NIPP GENCO privatisation
The National Integrated Power Project (‘NIPP’) was conceived in 2004 by the Olusegun Obasanjo led Federal Government, as a public sector funded initiative to fast track new generation capacity by building new gas fired thermal generation plants utilizing the abundant natural gas resources in the Niger Delta. Besides the construction of new power generation plants, the NIPP was also to construct electricity transmission, distribution and gas infrastructure required to deliver the additional generation capacity to consumers.
In 2005, the Federal Government incorporated the Niger Delta Power Holding Company Limited (‘NDPHC’) to serve as the legal vehicle to implement the NIPP. The NDPHC is a special purpose, limited liability company, owned by three tiers of government. The board of the NDPHC comprises representatives of the three tiers of government and is traditionally chaired by the Vice President. Funding for the NIPP was from the Excess Crude Account (‘ECA’) also a creation of the Obasanjo government.
Eleven years after its conception, the NIPP has to a very large extent, achieved the objectives that it was conceived. Through the NIPP, funding and construction of ten (10) gas fired thermal generation plants (‘NIPP Gencos’) was started. Today, NIPP Gencos currently contributes more than 35 percent of the total available generation capacity. Potential increase in available generation to 8GW by 2017 will largely come from the NIPP Gencos, augmented by on-going capacity recovery by privatized PHCN Successor Gencos. Close to 50 percent of new transmission infrastructure was built under the NIPP. In addition, the NIPP has assisted the expansion of existing gas infrastructure with the construction of a number of gas metering stations and gas pipelines to deliver natural gas to the NIPP Gencos.
Privatisation of NIPP GENCOS
In line with the power sector reforms, the privatisation of the NIPP Gencos via sale of 80 percent ordinary shares in 10-generation companies owned by the NDPHC commenced in 2013, with the financial bid opening stage concluded in March 2014. Under the terms of the transaction, the Government will retain a 20 percent ownership of the NIPP Gencos. The table shows the 10 NIPP Gencos, their capacity (at ISO) and the financial offer received from Preferred Bidders for each NIPP Genco.
Status of privatisation process
The status of sale of the NIPP Gencos is currently stalemated and unclear, primarily due to the absence of a substantive board for the NDPHC. However, prior to the dissolution of the previous board, there were a number of broad issues that hindered the completion of the transaction namely – gas constraints, power evacuation (transmission) constraints, payment security, and non-bankability of the transaction and industry agreements due to certain deficiencies in some of the key transaction terms.
With improvements in gas supply, natural gas supply to NIPP Gencos has also improved. However, a number of NIPP Gencos are still faced with gas supply constraints due to the insufficiency of available gas to meet full capacity. The only NIPP Gencos that would have full gas are the Calabar NIPP which should have full gas courtesy of Accugas /Seven Energy gas project and the Gbarain NIPP, through the Shell owned Gbarain/ Ubie gas project. Preferred bidders will need to contract for new gas supply sufficient to meet installed capacity of each of the NIPP Gencos. Besides securing full gas, a number of the NIPPs, particularly those on the eastern axis, are still faced with transmission constraints. Both the gas and evacuation constraints will require significant investments and time. No Investor will purchase generation companies with stranded capacity.
However, the biggest showstopper for NIPP investors is the inadequacy of the existing transaction and industry agreements in reflecting these constraints and mitigating the risks for NIPP investors and their lenders. Also, the nature of the privatisation by way of an 80 percent share sale in the NIPP Gencos, as opposed to an asset sale, is a limitation to investors and lenders. The NIPP transaction needs to be restructured into an asset sale transaction to provide investors and their lenders with more comfort to close financing for the acquisition.
Need to conclude NIPP Genco Privatisation
We need to emphasize that it is imperative for the National Council on Privatization (NCP) and the NDPHC to continue with, and conclude the sale of the NIPP Gencos to preferred bidders in the quickest possible time.
Firstly, NIPP Gencos were conceived to be sold to private investors to enable Government recoup its investments. Secondly, NDPHC is a project company and was not set up to operate generation, transmission and distribution assets built under the NIPP. Besides, NDPHC operation of these assets creates another NEPA/PHCN, with likely similar sad outcomes. Lastly, the government could do with the revenues of $5.7billion.
A number of experts have stated that the bid prices were grossly over-valued for some of the NIPP Gencos. In our view, the bid prices are a fair valuation of the NIPP Gencos two years ago. They may not be the fair value today. Given the state of the assets, the situation with the power sector and also the global economic outlook, it is absolutely unlikely that the Federal Government would realize financial offers totaling $5.7billion harvested from the NIPP preferred bidders should it decide to cancel the transaction and re-advertise for fresh bids today.
But more importantly, privatisation of NIPP Gencos is the catalyst for ramping up power generation and growing the gas-to-power value chain.
Proposed new transaction structure
As a result of the constraints identified above, we propose a new NIPP transaction structure, the deferred capacity payment transaction structure to close out the NIPP privatisation. The deferred capacity payment structure is a capacity based payment structure that factors in the gas and evacuation constraints in determining the bid price payable and ensures proper and efficient operation and maintenance of the NIPP Gencos.
Under the Deferred Capacity Payment structure, Preferred Bidders would pay the proportion of the bid price corresponding to the available capacity that can be generated by that NIPP Genco based on available gas supply and evacuation capabilities to the grid. The balance of the payment of the bid price is deferred till more capacity can be made available. The preferred bidder will simultaneously enter into an O&M Agreement with the NDPHC to operate and maintain the plant as if the plant were operating at its full capacity. The portion of the O&M cost by NDPHC, is borne by the Preferred Bidder but offset against the outstanding bid price. As the constraints (gas and /or evacuation) are removed/addressed and more capacity becomes available, the Preferred Bidder then makes additional payment of its bid price, net of accrued O&M costs.
The deferred capacity payment structure mitigates investors’ risks in NIPP Gencos posed by gas and evacuation constraints by ensuring that the Investor will not make stranded investments i.e. NIPP investors are only paying for available capacity that can be put on the grid and for which they would receive capacity and energy payments from NBET, thus not financially exposed. The structure automatically transforms the transaction to a quasi “asset sale” transaction, even though it does not fully address Lenders’ concerns on asset ownership transfer, liquidity risks and termination risks. The Government benefits as well. Firstly, it is able to realize some of the sale value of the NIPP Gencos. Secondly, the O&M agreement with preferred investors ensures that the NIPP Gencos are not mothballed and left to dilapidate due to poor maintenance and lack of capacity utilization. It reduces the NDPHC’s huge operational expenditure in maintaining the plants.
Another incentive of this structure is the reduction of wholesale generation tariffs, and thus end user electricity tariffs. NIPP Gencos will only receive capacity and energy payments for actual capacity generated into the grid without electricity customers paying for capacity not delivered as a result of availability events due to these constraints. Besides, Government may further reduce electricity tariffs by allowing for under recovery of tariffs by Discos and offsetting such under recovery through reduced capacity payments to NIPP Gencos for power generated. Reduced capacity payments to NIPP Gencos can be offset against the bid price.
Provision of bankable industry and transaction agreements
In addition to the above, investors in the NIPP Gencos need to be protected from termination risks under the PPA. Preferred Bidders have consistently insisted that the termination risk of the power purchase agreement (PPA) should be borne by the Federal Government and not NDPHC. NIPPs are considered new entrants, thus should be eligible for same termination risk mitigation provided to Greenfield IPPs. In fact, investors in NIPP Gencos should be treated with priority in this regard!
Furthermore, it needs to be recognized that the financial offers for the NIPP Gencos were made more than twenty-four months ago. Since then, the NIPP Gencos have suffered depreciation, wear and tear due to operations and the passage of time. The sale mechanism must factor this depreciation and loss of value as well. Lastly, the ruling exchange rate at the time of submission of the bids must be used. Since the submission of the bids, the naira has lost over 25 percent of its value, thus affecting valuation of the NIPP Gencos.
What is next for NDPHC?
The NIPP is at a crucial stage of its history and has been pivotal in improving the power sector. Part of the decisions of the new board of the NDPHC as well as the Minister of Power will be to decide on the relevance of the NIPP concept and if relevant, come up with a new strategic direction for the NDPHC and the NIPP concept. In our view, the NIPP concept should be continued to fast track new generation capacity growth, particularly in Northern Nigeria, which has abundant hydro resources. It is interesting that we are asking the Chinese Government to finance the Mambilla Hydroelectric project at a total cost of approximately US$3 billion when the proceeds from the sale of the NIPP Gencos if realized, can be reinvested to build this very important hydro power plant that was conceived since 1982. We understand the NDPHC is already planning a NIPP Genco Phase 2, focused on developing hydro resources in the North (more out of diversifying our energy mix as a Nation than for geo-political balancing of power projects). Thus we recommend that NDPHC should commence the NIPP Phase 2 with the proceeds of the sale of the NIPP Thermal Gencos. It is instructive to note that other than Shell Afam VI and Agip Okpai IPP, no on-grid, Greenfield IPP by private investors has reached financial closure since the start of the power sector reforms. Thus the NDPHC is best positioned to build new generation capacities in the short term, sidestepping the various challenges faced by private developers of Greenfield IPPs and stringent financing conditions imposed by lenders to such greenfield IPPs.
To optimize the project execution and project delivery capabilities of the NDPHC, we recommend that there should be synergy between the NDPHC and the Nigeria Sovereign Investment Authority (NSIA) who are the managers of the Sovereign Wealth Fund (“SWF”) to deliver new generation capacity beyond the 10 NIPP Gencos. The NSIA’s financial expertise will complement NDPHC’s project expertise. NSIA also has a mandate to invest the SWF in infrastructure (inclusive of power generation). Our view is that the SWF should be invested in new generation capacity developed by the NDPHC, as opposed to potential investments in existing generation capacity. An investment in existing generation capacity is simply a transfer of assets from one balance sheet to another. No additional megawatt is produced nor is any new infrastructure built.
Odion Omonfoman is an energy consultant and the CEO of New Hampshire Capital Ltd. E-mail: orionomon@outlook.com
ODION OMONFOMAN