Since 2012 when Nigeria began the privatisation of the 10 power plants, the process could not be completed due to a number of issues prominent of which is technical – lack of firm gas supply, inadequate transmission evacuation infrastructure, and in some cases, some of the NIPPs are not yet completed; example is Gbarain, Egbema, Alaoji and Omoku.
Another critical challenge is the worsening bankability and liquidity crisis in the Nigerian power sector and the inability of the Nigerian Bulk Electricity Trader (NBET) to activate the Power Purchase Agreements (PPAs) necessary for the sale of the NIPPs. Worse still, the absence of bankable industry agreements such as the Put/Call Option Agreement (PCOA) necessary for Preferred Bidders to secure debt financing is also a critical issue.
Industry operators say perhaps the most critical issue for NIPP Investors is the inadequacy of the existing transaction and industry agreements in reflecting these constraints and mitigating the risks for NIPP investors and their lenders. NBET’s inability to meet its payment obligations to GENCOs under a PPA is the main challenge that has now constrained the sale process.
Against this backdrop, the preferred bidders are insisting on paying only 30 percent of the sale value and fund the rest through debt for the next 15 years when the market achieves financial stability. The deferred capacity payment structure mitigates investors’ risks in NIPP Gencos by ensuring that the Investor will not make stranded investments.
Another incentive of this structure is the reduction of wholesale generation tariffs, and thus end user electricity tariffs. Government may reduce electricity tariffs by allowing for under recovery of tariffs by DISCOs and offsetting such under recovery through reduced capacity payments to NIPP GENCOs for power generated. Reduced capacity payments to NIPP GENCOs can be offset against the bid price.
The bids for the NIPPs was based on NBET paying 100 percent of both capacity and energy payments to GENCOs under a bankable PPA. The valuation of the NIPPs by the bidders was also subject to government ensuring that there was gas supply and transmission evacuation facilities. Government also promised to take both gas risks and transmission risks under the PPA to ensure that the bidders in the NIPP were not exposed to these risks.
This is not the case today. Despite a capitalisation of $850m, NBET is only able to pay an average of 26 percent monthly to GENCOs for power they generate. No investor would be able to borrow millions of dollars to buy the power plants under such poor payment profile by NBET. The N701 billion CBN guarantee which is due in 2018, is insufficient for the market and only pays GENCOs up to 80 percent of their invoices to NBET
The preferred bidders would be responsible for ensuring that the NIPPs are well maintained and continue to generate power at their maximum capacity. This will lead to an incremental available power generation capacity of the NIPPs and possible capacity expansion that could see the conversion of the NIPPs which are in Open Cycle mode (OCGT) into Combined Cycle mode (CCGT).
With a paltry 5,000MW power generation capacity, Nigeria needs all the power it can get hence it is important for the National Council on Privatization (NCP) and the NDPHC to conclude the sale of the NIPP Gencos to preferred bidders in the quickest possible time.
Given the state of the NIPP assets and the liquidity crisis in the Nigerian power sector, it is unlikely that the Federal Government would realize financial offers totalling $5.7billion harvested from the NIPP preferred bidders should it decide to cancel the transaction and re-advertise for fresh bids. But more importantly, privatization of NIPP GENCOs is the catalyst for ramping up power generation and growing the gas-to-power value chain.
Since these assets were offered for sale, three years ago, the NIPP GENCOs have suffered depreciation, wear and tear due to operations and the passage of time but it is not clear if the sale mechanism has factored this depreciation and loss of value as well.
ISAAC ANYAOGU
