Power potential: Investors tap into DisCos’ underserved franchise areas

Investors are seeing a path to profitability investing to help troubled power distribution companies improve their network infrastructure across poorly served communities in their franchise areas.

While some have applied for their own independent licences to carve out spaces in areas already allocated to a DisCos, which is poorly served – often resulting in litigation – energy firm Konexa’s model involves partnering with the DisCos.

Last year, the Nigerian Electricity Regulatory Commission (NERC) approved the sub-concession agreement between Kaduna Electricity Distribution Company (KAEDCO) and Konexa, an integrated energy distribution company.

The deal, reportedly worth $50million, consists of the development and construction of a 2.5MW solar PV plant with the potential to include a storage component.

It also covered the construction of eight solar mini-grids and associated distribution works; roll out of solar home systems, deployment of smart metering infrastructure and an integrated cutting edge information and operations technology platform, grid network upgrades, as well as securing energy supply from nearby existing renewable generation assets in selected parts of Kaduna Electric’s franchise.

Under the arrangement, Konexa invested in upgrading the network infrastructure that will guarantee a 24/7 supply of electricity within the sub-concession area to all customers, from large commercial and industrial off takers to low demand residential customers.

One year later, this partnership has worked so well, the company is ramping it up.

Read also: Still on Electricity Metering: Can we ever end Estimated Billing in Nigeria?

“We are incorporating Supervisory control and data acquisition (SCADA) systems, multiple supply sources to allow for redundancies to kick in and prevent outage and critically we are working on repatriating volumes that have historically been lost from industrial customers back into the distribution network,” said Joel Abrams, Konexa’s director, Investments & Business Development at the BusinessDay Energy Conference on Tuesday.

Abrams also said that in areas where the grid and the distribution network are inadequate, it is serving the customer using off-grid solutions.

The power sector privatisation in 2013 ceded vast franchise areas to DisCos that lacked the financial and technical competence to manage them.

Tariffs that do not guarantee commercial returns, rampant litigation and the absence of a strong, independent regulator affected the fortunes of the sector.

By 2018, the absence of investments to improve distribution networks led third-party investors to begin applying for licenses from NERC to provide power to customers clusters in DisCo franchise areas.

The DisCos balked at the idea. Eko DisCo issued a warning to PIPP LVI Distribution Limited, an private power distribution company to remove all the lines it laid on its network and cease from soliciting further business from its customers.

Similarly, the Enugu DisCo also took the Ariaria Independent Energy Distribution Network Limited (AIEDN) to court for encroaching and trespassing on its distribution licensed coverage area by illegally constructing distribution lines without a license nor the authorization of the DisCo.

NERC issued the AIEDN license the next day, Enugu DisCo published a warning in the newspaper.

However, these cases have largely been resolved as the parties have instead agreed to sit across a table and work out a deal.

The reality is that the franchise areas granted to the 11 DisCos are unwieldy. Nigeria’s commercial capital, Lagos is ceded to Eko and Ikeja Electricity distribution companies and Kaduna DisCo alone has four states as its franchise areas while Enugu who barely services one state well is saddled with the five South east states.

Some of these franchise areas are troubled with legacy debts and infrastructural challenges.

Therefore analysts say any investor with the right model will secure a deal with the DisCos.

“One thing the government did well is the franchising, it added a lot of flexibility into the system so investors can build different models depending on which customer segment they are focusing on – there are willing buyer/willing seller deals and customers that will pay at the NERC approved tariff,” said Obiora Okoye, CEO Blackaion Capital.

Obiora said that the franchising option offers the opportunity to have a cost reflective tariff at the franchisee level which can help an investor make a case for financing.

The investor would need to carry out a viability assessment, understand the customer, ring fence the financing and show it does not depend on subsidy, it should raise capital for investments.

DisCos’ inability to provide a clear line of sight to their cashflow, legacy debts inherited during privatisation and network challenge impair their ability to secure financing.

“Bringing in a third party who can work alongside this DisCo, who are able to service these customers at a potentially lower cost and having to ring fence the cashflow away from the troubling issues in the sector you can secure financing for your projects” said Okoye.

Daniel Muller, head of orgination and structuring at Infracredit said investment in the distribution sub sector is the next frontier of investments and the company is ready to facilitate a path to long-term local currency financing.

Abrams also said that a franchisee who secures long-term naira financing, partner with DisCos in the franchise area will succeed in in bringing fresh capital and find a path to profits

He said Konexa made the DisCo a shareholder, providing a meaningful guarantee of commitment to remove subsidies from the franchise.

“We have a commitment to pay for the energy that comes into our area without subsidy 100 percent” said Abrams.

Konexa has a framework that allows a willing seller/buyer model as well as customers who pay the NERC approved tariff. So the network has customers spend anything from less than a thousand naira a year all the way up to customers spending in excess of 3 Billion a year.

“The general approach is that all customers can be served much like a bank can serve everyone from the leading multinational to the lowest income earner of the banking community,” said Abrams.