2018 Power Industry Report

Overview

Independent power production in Nigeria was conceived as a means of boosting the nation’s generating capacity through private sector participation. The emergence of IPPs in Nigeria dates back to 1999, when the first private generating company – AES Barge (former Enron) was commissioned in the pre-reform era, supported by a decree that permitted private participation in the electricity sector.

Prior to the divestment of government from state owned enterprises (SOEs) within the electricity value chain in 2013, Nigeria had only a handful of IPPs. However, this changed drastically post privatization, with over 100 IPP licenses issued by the National Electricity Regulation Commission (NERC). Despite this seeming increased private sector participation, less than 20 IPPs currently supply power to the national grid.

The weak contribution from the IPPs could be linked to factors such as the uncertainties regarding payments from the TCN for electricity sold to the national grid, as well as gas supply constraints. Nigeria is estimated to have over 182 trillion cubic feet in natural gas reserves – Nigeria Liquefied Natural Gas Limited, the ninth largest in the world, yet, gas remains one of the biggest challenges affecting electric power supply. This is due in part to regulatory obstacles (artificially low price of gas), which distort the economic viability of domestic gas production as well as gas pipeline vandalism.  In addition, the financial condition of IPPs are weak (particularly on-grid suppliers as these operators have to rely on the distribution companies for collection of electricity tariffs), characterised by insufficient revenues, weak cash flows, high leverage and low liquidity that weaken the credit quality and investment appeal. This is a stark contrast to off-grid IPPs who have more control over pricing and collection on electricity supplied. However, we note that Off-grid electricity generation is done on a relatively smaller scale and operators are unable to benefit from significant economies of scale.

Nonetheless, we recognise that Nigeria boasts of all the potentials of a mass market with an estimated supply gap of over 25,000MW. The establishment of a competitive power market should bring about improved efficiency in the medium to long-term. In particular, we expect more IPPs will become operational as the electricity market stabilises in TEM and moves towards the medium-term market. The medium-term market should limit the control on electricity tariffs as operators will be permitted to enter bi-lateral contracts for the sale of electricity under independent terms.