“The art of combining internal and external financial resources”
Compiled by Nicholas McDiarmid, Publishing Editor, ESI Africa

Nigeria is the 7th largest crude oil producer in the world and has the 10th largest reserves of crude oil (34 billion barrels). The country’s credit rating by Fitch and S&P is BB and it has a stable foreign exchange market, with an estimated total private capital inflow of $7bn or 1.1% of total capital flow to developing countries in 2006. Inflation is stable and holding at single digits (7.5%, 2006) with foreign reserves at an all time high of US$43billion (as compared with US$5 billion in 1999). However, reliable power supply remains a challenge. With a population of 140 million and a GDP US$117 billion in 2006, its installed capacity stands at only 6000 MW. The average per capita electricity usage is 100 kWh. To put this into context, Kenya has a population of 34 million, a GDP of US$18.7 billion, an average per capita usage of 5866 kWh and installed capacity of 17000 MW. In even starker contrast is South Africa – with a population of 45 million and GDP of US$235 billion, its installed capacity stands at 40 000 MW.

There is an 80% demand/supply gap in Nigeria, and at present, most businesses self-generate their power. Additionally, the transmission network is overloaded, with a poor voltage profile in most parts of the network. Given the inadequate dispatch and control infrastructure and the fragile grid network, there are frequent system collapses and exceedingly high transmission losses. To quote President Umaru Musa Yar’Adua, addressing the State House of Assembly in June 2007: “I met with stakeholders in the power sector yesterday and I formally informed them of my resolve to declare a state of emergency in the sector.”

Nigeria_map

REFORM AND RESTRUCTURE — CREATING ENABLING LEGISLATION
According to the Nigerian Electric Power Policy (NEPP), the objective of reforms is to: “…create efficient market structures, within clear regulatory frameworks, that encourage more competitive markets for electricity generation and sales…able to attract private investors and ensure sound development of the system.” The strategy has been to unbundle the state owned monopoly into 18 separate entities and privatise the unbundled entities. In order to develop a viable electricity market structure it was necessary to establish a regulatory framework under the Electric Power Sector Reform Act (EPSRA). Reform would ultimately transform the existing market structure from a Single Buyer Model to a Multi-Buyer model with a Multi Year Tariff Order with securitisation arrangements. These trading arrangements will take on the following format: Government guarantees to support Independent Power Producers (IPPs) are unlikely. Sector securitisation arrangement has been developed with the Ministry of Finance (MOF), PHCN and the Bureau of Public Enterprise (BPE). Distribution companies (discos) revenues flow into the Market Operator’s ‘Clearing Account’ (MOCA) and revenues are disbursed as payments to generation companies (gencos) and service providers. IPPs have priority over the MOCA payments.

EVOLVING INDUSTRY STRUCTURE
Sector reform is well underway:

  • PHCN unbundled into 18 successor companies to be privatised by way of core investor sale or concession
  • Establishment of Nigerian Electricity Liability Mgt (NELM)
  • Development of a Multi Year Tariff Order
  • Development of grid code
  • Development of market rules
  • Development of sector securitisation.

THE INVESTMENT CLIMATE
“We are crying for investments in the power sector. It is still a virgin area. People do not recognise we have a gold mine,” said Irene Chigbue, Director General of the Bureau of Public Enterprises while receiving Yair Frommer, Deputy Ambassador of Israel to Nigeria (November 2005)

Investor criteria for market entry are complex and manifold and consist of the following:

  • Macroeconomic stability
  • Articulate legislative structure
  • Political stability & security
  • Electricity market – demand/supply dynamics
  • Regulated cost reflective tariff
  • Reliable fuel supply
  • Transparent sector value chain
  • Credit-worthy customers
  • Funding mechanisms – payment security

CASE STUDY OF AN IPP – GEOMETRIC POWER LIMITED
Chukuka Chukuma, director and head of Investment Banking for Stanbic, Nigeria, refers to the Geometric project in Aba, in the state of Abia, as a good example of the development of an IPP in Nigeria’s newly reformed market.

Professor Bart Nnaji is the Chairman/CEO of Geometric Power Limited (GPL) – the first indigenously owned private sector power company in Nigeria. Nnaji led the group that financed, designed and built a power plant in Abuja, supplying electricity to the Nigerian Electric Power Authority.

Chukuma recounts how, in response to Nigeria’s power crisis, Professor Nnaji, (then a Chaired Professor of Robotics at the University of Pittsburgh, and the Director of the National Science Foundation, Centre for e-design) began putting together the independent power plant. GPL got the support of the presidency after supplying two years of uninterrupted power supply through its Abuja project – unheard of until then. The Aba project is valued at around US$250 million, the majority of which is being secured through a consortium of multilateral institutions including the International Finance Corporation (IFC), the European Investment Bank (EIB), and the Emerging Africa Infrastructure Fund (EAIF).

The project is strategically located in Aba – the ‘Taiwan of Africa’ – in a unique ‘island-mode’ distributed electricity supply model, that gives GPL the sole right and responsibility to generate and distribute electricity in the ring-fenced area. It consists of a 140 MW open-cycle-gas-turbine plant, which is fed by a 30 km pipeline with gas supplied by the Shell Petroleum Development Company.

An investment of over $50 million is being made to rehabilitate the existing distribution lines and extend the network with over 100 km of transmission lines. This should significantly reduce current technical and non-technical losses on the network.

Major potential industry offtakers include Guinness Breweries, Nigeria Breweries, Unilever and Star Paper Mills accounting for 80% of project revenue. The balance is provided to residential and retail customers in the city.

Aba is a large market with a demand of 125 MW, most of which is provided with diesel self-generation. GPL would be able to offer 99% availability, and 55% cost savings from current energy costs. The project is clearly benefiting from the ability and willingness of customers to pay, the provision of off-taker bank guarantees, and enforceable project security.