Renewed funding commitments for Nigeria’s struggling power utilities should help catalyse new capital investments as the sector gradually gets derisked.
The 2013 privatisation of the power sector was constrained by lack of market reflective tariffs in the distribution sector, gas to power challenges exacerbated by vandalism of power assets, circular debt that caused illiquidity in the sector and an unwillingness to grant bank guarantees or open letters of credit (LCs) for the sector due to perceived elevated risks.
However, analysts say recent funding commitments by the Central Bank of Nigeria (CBN) and United Capital from the private sector may help improve investment drive in the sector.
“ What was mainly released is part of money owed to Gas Suppliers and Generating Companies (Gencos). It is expected that this will make them more willing to improve on supply. For distribution companies, (Discos), the money released is also part of funds owed by the market and it is mainly to be used as security to banks, for guarantees issued to the Nigeria Bulk Electricity Trader (NBET),” Funke Osibodu, managing director and CEO of Benin Electricity Distribution, said in response to BusinessDay questions.
On Friday, the CBN disbursed N55.45 billion to 24 industry participants, being the fourth tranche from the N213 billion of Nigerian Electricity Market Stabilisation facility (CBN-NEMSF).
The breakdown of the disbursement shows three (Discos) received N8.67billion, 14 generation companies (Gencos) got N35.83 billion, six gas suppliers collected N10.49 billion and the service providers were given N459.67 million.
The deal also featured the signing of a Power Purchase Agreement (PPA) by the NBET, which will signal activation of industry contracts for power generation under a contract-based market.
Also investment bank United Capital announced N50.5 billion for NBET as a guarantee that can be assessed when payment for power supplied to Discos is delayed.
“We hope by this step that has been taken, investors will view the sector as more bankable and investors both from equity and debt side will begin to make necessary investment in capital expenditure and other things that are required to achieve the generation and transmissions required to be put in place,” said Kolapo Joseph, project finance, investment banking, United Capital.
According to the company, with the funding in place, the Gencos will be more inclined to make investments towards Capex required to increase the generating capacity of each generation company.
“We have been able to correct some of the challenges being faced by generation companies and this we will be able to attract investment into the generation space,” stated Joseph.
Analysts believe that as this investment crystallises, it will be begin to reset funding challenges in the sector.
“There is no doubt that the bridging of the funding gap would enhance the power supply in the country,” observed Agbola Bolade, executive director Cash Craft Asset Management.
To deal with challenges of vandalism of power infrastructure, experts recommend a more diversified gas supply strategy.
“The alternative to Nigeria’s current one track gas strategy is to provide a supporting liquefied natural gas infrastructure. This approach will, however, require the conversion of some of the gas to a liquid form, which can then be transported by road or rail to the power plants. That way, even if pipelines are blown up, power plants across the country will still be able to receive the fuel source they need,” advocates Malcolm Fabiyi, coordinator of the Governance Advancement Initiative for Nigeria and former managing consultant with McKinsey.
According to Fabiyi, the gas would be compressed and cooled to be transported. The infrastructure needed to do this gets cheaper, as it gets bigger due to economies of scale. The most effective approach would be to install these liquefaction facilities, as they are called, in cities like Port Harcourt and Lagos that are proximate to the gas recovery or transport sites,” he stated.
With this approach, he explained, every 1,000 MW of power generated using natural gas; Nigeria will require about 240 million cubic feet of Natural Gas per day.
When gas is converted to liquid form, the volume is reduced by about 600 times.
This means that to generate 1,000 MW, only 0.4 million cubic feet of Liquefied Natural Gas (LNG) per day will need to be transported (i.e., about 3 million gallons per day).
Analysts say that with the gradual derisking of the whole power chain, some of the needed investments in the gas processing space will begin to happen.
Olusola Bello & ISAAC ANYAOGU
