The Power Industry- Looking Up In spite of Challenges

We had stated in the previous edition of this column that, with oil prices down and an ‘oil price-drop’ induced recession (at least that is what most people believe) in the country, it may be noteworthy to evaluate the status of electric power supply. We had then particularly stated that it is the case that there is a strong correlation between electric power supply in a country and its economic growth. In that edition, we had affirmed that, with investments in the electric power sector, especially by foreign investors, capable of boosting investor confidence and triggering improved liquidity which helps cushion the effects of the current recession, the review specified above, became more critical. Although, the impact is not being felt as speedily as the average Nigerian desires, the current administration has continued to show its commitment to ensuring an appreciable improvement in electric power supply situation. New policies and researches are being undertaken, to ensure that the sector improves despite the challenges around illiquidity, market indiscipline and huge indebtedness. In light of the foregoing, we continue our review of the happenings in the sector that are worth considering. Push for Gas Swap Arrangements/Policy and a Virtual Pipelines System and Policy There has been an alarming increase in vandalism of gas pipelines in the past 5-6 months within the oil rich Niger-Delta region of Nigeria which general serves as the transit region for a large portion of the pipelines.

The group styled “the Niger Delta Avengers” has claimed responsibility for these attacks. The devastating attacks on the oil and gas installations and infrastructure have led to a further drop in power generation as a direct consequence of gas supply constraints. Thus, the federal government is considering a virtual pipeline system, to reduce reliance on the physical gas pipeline system. There are also calls for the consideration of gas swap arrangements to reduce the incidence of failure by certain international oil corporations to fulfil their domestic gas supply obligations particularly where same relate to the power sector such that poor infrastructure (such as the non/weak integration of the Eastern and Western Gas Pipelines System) would no longer be a good excuse not to fulfil these obligations. The push for virtual pipelines has increased in the last three (3) months and those relating to swap arrangements/ policies too, are on the increase and a number of foreign investors are indeed considering the idea of the virtue pipeline system and are looking to come into Nigeria to provide support to industries and productive activities which rely on gas. Specifically, the power sector PERSPECTIVE The Power Industry- Looking Up In spite of Challenges is expected to be a prime beneficiary of this idea if the private sector, together with the support of the government, sees this through. Whilst the private sector seeks to invest in same, government does need to provide an enabling environment through good policies and incentives (fiscal and otherwise), improved road networks and a robust rail system together with proper planning. Government also needs to think through the swap arrangements properly before enforcing same. Working to close out on a number of documentation in other to reach financial close on Solar Projects It is no news that there are a number of solar projects being contemplated in the country and the requisite power purchase agreements have been signed. Specifically, the Nigerian Bulk Electricity Trading Plc. (“NBET”) which is the federal government owned public liability company licensed to bulk purchase electric power had signed fourteen (14) Power Purchase Agreement within the last few months. Due to the fact that there are challenges with pricing, to ensure profitability, despite same, many of these companies have considered costs savings mechanisms such as the construction mechanisms, contracting strategies, invitation of multilateral lending agencies, amongst other approaches which could reduce their costs substantially. Nevertheless, there are other agreements pertinent to reaching a semblance of bankability.

These include documentation that ensure that the power pack module may be connected to the grid, get energized and be able to lawfully evacuate power via the grid. Interestingly, where one takes a look at the tariffs, together with the current provisions of the grid code, ingenuity is required to close out on the requisite documentation to ensure that these projects become bankable projects. The transmission company of Nigeria together with the consultants (including the writer) have been doing a lot to ensure that workable commercial (and I dare say, technical) compromises are made just to ensure that these projects become bankable and can obtain financing to achieve the ultimate end of have electricity in our various homes. The writer believes that success would ultimately be achieved in that regard, such that at the flick of switches in more homes, there would be electricity supply. Without closing out on these agreements, those projects just cannot obtain financing. Largest Number of Transmission Projects It is quite laudable that the federal government of Nigeria, has unveiled its five-year plan to boost power transmission capacity from 5,500Megawatts (Mw) to 10,000Mw in the next three years. The plan targets transmission capacity of 8,200Mw by 2018 and 10,000Mw by 2019. The transmission arm of the power supply value chain has been tagged the weakest link of the chain by operators. The plan will ensure not just expansion, but also promote a more flexible transmission system. The intention is to achieve this, through breaking up the grid into regional networks. Further, the intention is that interconnection between the regional networks will be done to guarantee the required flexibility. The writer is aware that there are about twenty-one transmission projects with working going on around 9 transmission substations in and around the country with support from international consultants such as the those from the Nigeria infrastructure advisory fund and other donor agencies. It is expected that some of these projects would be completed first quarter of the year 2017. The Chicken and the Egg- Supply Improvement First, Versus Immediate Tariff Increment This is really a classic chicken and egg scenario, because, on the one hand, there is the need for the distribution companies, in particular, to improve infrastructure, equipment and technology so that they can reduce losses occasioned by corruption, poor equipment and infrastructure. On the other hand, the requisite reduction of these losses cannot be done without additional funding, deployment of new technology and the improvement of infrastructure and also equipment.

However, no consumer would be willing to pay increased tariffs (or in extreme cases, pay anything), if electric power supply does not improve visibly. Thus, without more funds, the distribution companies who are already over-leveraged cannot improve their services by reducing the losses re- ferred to above. Nonetheless, as stated above, consumers are unwilling to pay more so that the distribution companies have more funds to improve infrastructure and those other items that would improve power supply- A classic chicken and egg scenario. The writer is of the view that, it is better to deal with the sectorial problems such as indiscipline in the market before even contemplating any increase. Specifically, the distribution companies need to reduce losses (especially through creative and cheap means) generally and also ensure that corruption reduces substantially within their rank and file before speaking to any issues around tariff increases. To achieve the foregoing, the distribution companies may actually also have to divest (take a haircut), so that additional funds, in form of equity, could be injected into the sector as banks are unwilling to lend, and for very good reasons. These reasons include already exceeding their obligor and sectorial limits and also having nonperforming loans on their books. The alternatives may be for the government to intervene by infusing huge funds (which I believe the government may not be able to afford at the moment) into the sector which would be specifically targeted at infrastructural development with strict monitoring or well-structured vendor financing such that the initial outlay by the distribution companies would not be enormous.

For more on the power sector, read a copy of the leading text on electric power policy, law and business in Nigeria written by the writer. Conclusion The government may be commended for what has been done in the past few months in the power sector, however, there is still a need to be more radical in harnessing the potentials of same; including conducting an overhaul of private sector involvement and taking a proactive approach to dealing with the militating power sector challenges. Creative means, most of which have already been used in raising funds and improving other countries need to be given due consideration. Ayodele Oni, (ayodele.oni@bloomfield-law.com), a commercial lawyer and Partner in a leading Nigerian law Firm, specializes in international energy investment law & policy. He holds a mini-MBA in Power & Electricity and is also currently advising a number of ministries, department and agencies of the federal government of Nigeria on post-privatization restructuring of the electric power sector