Lighting up Nigeria: The Investors’ nightmare
In June 2012, the 4 unit Gas powered Egbin Power Plant wore the look of a consignment set aside for a power plant museum. In a state of disrepair and neglect, and lacking in overhaul maintenance for decades, the plant managed to epileptically produce a paltry 400 Megawatts of its installed capacity of 1,320 Megawatts, at its best performance. The workforce’s ordeal was similar, if not worse, than the plant they were supposed to work on.
Fast forward to May 2016. The Power units have been overhauled and upgraded; producing, when gas is sufficiently available at its full production capacity of 1,320 MW.
Since November 2013 when Sahara Power, a subsidiary of Sahara Group bought 70 percent stake in Egbin Thermal power plant, after a comprehensive overhaul which cost the new investors some $388 million, has resumed production, at full capacity barring no disruption to gas supply.
With the 1, 320 MW of electricity, Egbin currently produces one quarter of Nigeria’s total power capacity. Today, new facilities and structures have been put in place by Sahara Power, the new investors in collaboration with their technical partners, Korea Electric Power Corporation (KEPCO). These include the upgrading and modernization of the plant, training institutions, social infrastructures and recreational facilities for the wellbeing of staff.
“Since we acquired the assets our passion has been to embark on constant upgrades in technology and investment in human capital to ensure we light up Nigeria”, said Kola Adesina, chairman, Egbin Power Plc.
But beneath the giant strides so far achieved by the Egbin Power Station, lies a huge challenge. The power station currently suffers shortage of natural gas. The situation is worsened by renewed militancy in the creeks of the Niger Delta region, where oil and gas pipelines are being blown up on regular basis. This is a more compelling reason why the federal government must get its acts right in ensuring that peace returns to the region.
The company is at present grappling with economic woes occasioned by difficulties in accessing foreign exchange. At the time of the acquisition of the assets by the new investors, the exchange rate was N198 to the dollar. Having raised capital from banks, the investors are now faced with the harsh reality of paying back in time of economic down turn. Indeed, the company is in trouble with the current exchange rate regime. As a result of the harsh economic situation, liquidity problem has also set in, making it increasingly difficult for the company to finance its capital intensive operations.
One of the most difficult situations the company is currently facing is the huge legacy debt burden. It is estimated that electricity distribution companies (Discos) are being owed about N100 billion in the last two years. For these companies to live up to expectation, the government must take steps to settle these debts owed by its agencies. The bulk of these huge debts are money DISCOs are to pay the generation companies, the gas companies and others in the value chain of the power sector.
According to Adesina, power generation companies in Nigeria are owed “an estimated N100 billion in accumulated debts for power generated from November 1, 2013 till date”. Of this figure, Egbin is owed N44 billion for power generated from December 2015 to date and another N22 billion in past debts, bringing the total amount to N66 billion.
“These huge debts owed generation companies”, lamented Adesina,”has put them in a cash liquidity crisis that has reduced their ability to pay gas supplies, and hence threatens to completely undermine the Electricity value chain and its ability to continue to serve customers.”
The issue of gas however goes beyond generation companies’ inability to pay for the quantity supplied. Dallas Peavey Jr., Chief Executive Officer of the power station laments the persistent shortage of gas supply despite the huge investment the owners have made to boost the capacity of the power plant. This, he said, has heightened continuing challenges in ending daily blackout in the country since private investors took over the station.
Against the backdrop of the many challenges facing the power sector in Nigeria, government, through the Nigerian Electricity Regulatory Commission (NERC) under the Multi-Year Tariff Order (MYTO) 2015, sought ways of reducing the heavy burden on private sector investors in the sector by reviewing the tariff. Even with initial opposition from the Nigerian public and Organized Labour unions, the new tariff regime still took effect from February 2016.
Babatunde Fashola, Minister for Power, Works and Housing made a concerted effort to explain to Nigerians, the rationale behind the new price regime. “The truth is that tariff is about price and if the raw materials like gas, power plants, spare parts, labour have gone up the price of the finished product cannot be the same,” said Fashola. He stressed that “if the price of the product is not right there is no incentive to produce more of it. This can only result in scarcity and high prices. It is simple economics. Without the right tariff there will be no power because it is now in the control of entrepreneurs.”
That was very instructive but as convincing and logical as Fashola sounded in this regard; the Senate directed that the new price regime should be suspended, apparently in sympathy with the consumers. But then, in the long run, the Senate, the labour and other pressure groups urging consumers not to pay the tariff may not be helping the consumers at the end of the day. If power is underpriced, Investor would not only run at a loss, but may lead to a situation where they will not be able to generate and take power to the consumers- a total power sector collapse, a much dreaded situation that could take the economy to its tethers end.
Yet as serious as the issues of debt and cost reflective tariff are to the sector, these are not the only critical challenges confronting the investors.
Transmission is another. While some observers say there has been some noticeable reduction in system collapse in the transmission network post privatization, other analysts are concerned that the numbers of collapses are still too many to call for worries, citing 2016 where system collapses by mid-year had exceeded the ones experienced in 2015.
The reality on ground today is that the investors in the power sector are agonizing and wondering if they took the right decision in the first place. Prior to take-over, they had looked forward to: realistic tariffs, stable exchange rate and steady supply of forex to fund required investment, a N100 billion subsidy support from the Federal government; a supportive and enthusiastic banking sector and security of gas pipeline for regular supply.
The realities on ground today are however almost the exact opposite of what the investors had looked forward to. Tension in the Niger Delta has drastically reduced gas supply thereby significantly reducing levels of power generation, hitting an all-time low of 1,816 MW on 29th May 2016, huge tariffs losses due to MDA’s indebtedness and non or partial implementation of cost reflective tariff.
Contrary to expectation, there is no federal government subsidy, but CBN intervention fund at a higher and unattractive rate, over exposure of banking sector to loans from power sector and floating forex rate, N198 to the dollar in MYTO vs N298/330 to the dollar, compounded by inflation at 13 percent rather than 8 percent in MYTO.
All these sum up to one disturbing fact: All generation companies have been operating at a loss since privatization.
Unless some drastic measures are taken by the government, the nation may be heading to a major Energy Crisis of grave implications to the economy.
So what’s to be done? Adesina, in a paper he presented at the Lagos Business School advocated for full implementation of cost reflective tariffs, otherwise subsidies be provided to cover shortfall; immediate payment of all MDAs’ debt, full funding of TCN or it should be concessioned to ensure improvement in grid stability and easy access to fund by investors.
Adesina also wants the regulator to be consistent and fair, respect for contracts legally consummated, legislative measures – including initiatives like mobile courts, to discourage power theft.
ADEYINKA GIWA