Positive developments align to fast-track power sector boost

Nigeria’s power sector which has been struggling since the transfer of ownership to private owners is set for a shake up as a number of positive developments are aligning to help boost output currently stuck below 3,500 megawatts.

The problem of inadequate gas supply has plagued the development of the power sector since the handover of assets from the Power Holding Company of Nigeria (PHCN) to private owners.

To help resolve the gas supply impasse, the Central Bank of Nigeria (CBN) has decided to lead the initiative that will provide a concessionary financial package to ensure steady production and supply of gas to the power sector.

The CBN will start by offsetting the outstanding N25 billion gas related legacy debt owed to gas suppliers by the now defunct PHCN. In addition, the CBN and the Bankers’ Committee will set up an SPV (special purpose vehicle) to support the gas-to-power programme through the provision of attractively priced long-term funding.

Specifically, the bond will be backed by MYTO receipts, with NERC, the power sector regulator, ensuring that a portion of the tariff levied by Discos is allocated towards servicing the bond. Furthermore, the bonds are to be guaranteed by the CBN like the AMCON bonds, and pricing is to be the same as FGN bonds.

The gas suppliers had been reluctant to initiate or step up supply to the new private owners as there is a huge debt hangover right from the beginning of the business relationship between the gas suppliers and the new private power companies, which has remained unresolved.

According to a source, “In the power sector, NELMCO has been the poor cousin of AMCON trying to grapple with the huge legacy debt”.

NELMCO (Nigerian Electricity Liability Management Ltd) was set up to be the liability management vehicle to take over the management and settlement of PHCN’s Power Purchase Agreement obligations and other legacy debts in order to ensure the smooth transition of the power sector into a new liberalised, productive and efficient sector.

NELMCO has about N800 billion of legacy debt on its books. In addition, since November 1, 2013, the interim debt has ballooned to N100 billion, which is an addition of N10 billion per month.

Diezani Alison-Madueke, the minister of petroleum resources, has in addition put together a package of short-term measures to address lingering issues of gas supply to Nigeria’s thermal power plants.

Some of the initiatives announced include the upward review of gas price from $1.50 per million cubic feet (mcf) to $2.50 per mcf, and an additional $0.80 fee as transport costs for new capacity.

Gas prices are also to be reviewed periodically based on US inflation data.

The government hopes that an increase of gas supply from 750 mscf to 1,120 mscf per day will boost production from its current 2,600/3,600 MW levels to 5,000MW by the end of 2014.

As well, in view of the new gas price review, NERC also announced plans together with the Ministry of Petroleum to get each gas producer to sign up to a specific gas supply commitment.

The Federal Government last week Monday resolved to commit $1 billion to the improvement of gas infrastructure in the country in its bid to improve power generation and supply. This fund is to be deducted from the proceeds of the ongoing privatisation of the NIPPs.

In addition, the World Bank Group had announced the commitment of $5 billion (N800 billion) in new technical and financial support to energy projects in six African countries – Nigeria, Ethopia, Ghana, Kenya, Liberia and Tanzania – in partnership with the Power Africa initiative of the US President Barack Obama.

Looking forward, oil and gas analysts say it is expected that there is enough incentive now for existing gas producers to ramp up capacity, and for new investors to build Greenfield production facilities. According to analysts, in the short-term, the winners are three companies listed on the NSE – Forte Oil Plc (which owns a Genco), Transcorp Plc (which owns a Genco and is a potential gas producer from its recently approved oil block) and Seplat Plc (a current gas producer). Other major winners are cement manufacturers and other manufacturing companies whose reliance on gas has increased in recent years. “SMEs, who are the engine of growth but have been held moribund by inadequate power supply will begin to see some relief. The local capital market will also benefit as the power bond will further deepen the market,’’ they said.