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How Calabar IPP power deal ran into troubled waters

… As Accugas threatens to call up partial risk guarantee

When the Calabar IPP was completed back in 2017, five turbines were installed by General Electric to generate 560MW using 131 cubic meters of gas supply a day. Trouble was, the transmission grid is incapable of receiving that much power from Calabar through its weak lines.

It gets complicated. Only two out of the five turbines are working because the plant generates more power than the grid can take. However, Calabar IPP signed a ‘Take or Pay’ gas supply agreement with Accugas backed by a Partial Risk Guarantee (PRG) the Federal Government signed with IFC, an agency of the World Bank. This implies that if Calabar IPP fails to pay for the gas, the Federal Government gets the bill.

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Now the plant is not taking all the gas it needs, yet it must pay. Since collections from Power Distribution Companies (DisCos) are coming in trickle when a lump payments would suffice, Calabar IPP is not getting money for even the little power it sends to the grid and must settle its gas invoice which comes at over $10million a month.

Accugas which signed the agreement to supply gas to the plant borrowed around $600million from lenders to develop the Uquoo fields where it produces the gas. The company cannot settle obligations to its lenders due towards the end of this year because it is not getting paid for its gas.

This is the perfect blueprint for chaos which is why Accugas has written to the Federal Government warning that it may trigger the PRG provision in its contract.

According to legal experts, invoking the PRG will impact Nigeria’s sovereign credit ratings dampening the country’s ability to borrow from multilateral organisations at competitive rates and could bring about reputational risk for the country.

Some analysts say Nigeria should start reviewing some of the power contracts as they seem unsustainable. “Perhaps it is time to start looking at reviewing some of these contracts as questions are being asked about their sustainability in an industry where things are moving very fast,” says Dolapo Kukoyi, partner at Detail Commercial Solicitors, a Lagos-based law firm.

However, the issues are nuanced. The liquidity crises in Nigeria’s power sector has led to a situation where investors are unwilling to progress deals until they extract Azura-type concessions including a PRG from the Federal Government because the electricity market, bogged down by debts and tariffs that do not guarantee commercial returns, is not viable.

GenCos say they get barely 30 percent of their market invoices and have threatened to declare force majeure. The FG through the Nigerian Bulk Electricity Trader (NBET) is prioritising settlement of market invoices of Azura over other power plants. The Transmission Company of Nigeria (TCN) who operates the country’s transmission grid says it gets less than 25 percent of its market invoice. The grid is so vulnerable that it too little power or too much power triggers a collapse. This year alone, it has collapsed over half a dozen times.

The Azura-Edo IPP secured a $900m debt financing from a consortium of 15 banks from 9 different countries, including most of the European development finance institutions to build a 450MW Open Cycle Gas Turbine in Benin City, Edo State.

It is first Nigerian power project to benefit from both the World Bank’s “Partial Risk Guarantee” structure ($237 million of debt used to build the plant), political risk insurance supplied by the Multilateral Investment Guarantee Agency and the Federal Government which helped Azura deliver on budget and ahead of schedule by 7 months.

Yet, even Azura is not without problems. While the Federal Government has managed to settle the invoices of the Azura IPP, it has often come too close to missing the deadline giving investors cause for concern. According to the terms of the Power Purchase Agreement (PPA), the invoice should be settled 15 business days after the invoice date. The FG has often played it too close to the margin.

The Calabar GSA includes a 90-business day grace period during which the PRG cannot be called upon. Accugas has chosen to write the government reminding it of its obligation after this deadline has passed.

The company said it is holding talks with the government.

Nigeria’s weak transmission grid has led to a situation where barely 40 percent of the power generated by the Calaber IPP can be put on the grid and wheeled successfully to the nation. Since all the turbines in the plant are not running, it is paying for gas it is not even using.

“The smart thing to have done is look for another way to commercialise the gas that is sent to the plant which it cannot use either through CNG to sell to industries or any other means but this was not done, so the bulk of these debts is for power that is not even used,” says Chuks Nwani, energy lawyer at Lagos-based energy consultancy, PowerHouse International.

In a letter to the minister of Finance, published by the Cable newspaper, Ian Brown-Peterside said that Accugas “has no alternative but to submit Notices of Non-Payment under the Calabar GSA in respect of the unpaid invoice amounts”.

“As of the date of this letter, Accugas has invoiced $88.2 million for gas supply from January – September 2019, of which $19.88 million has been paid. Of the remaining $68.31 million balance, $1.7 million relating to foreign exchange losses is being disputed by Calabar, leaving a balance of $66.61 million immediately due and payable. Please see Schedule 1 to this letter (Payment Status of the Calabar GSA).

“As outlined in previous correspondence in relation to this matter, Accugas has significant debt obligations (relating directly to its investment in gas supply infrastructure) to its lenders due before the end of 2019 and the company is main source of funds is revenue due under the Calabar GSA. As such, Accugas has no alternative but to submit Notices of Non-Payment under the Calabar GSA in respect of the unpaid invoice amounts,” Brown-Peterside said.

 

ISAAC ANYAOGU

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