• Risks and assurances on Nigeria’s solar PPA’s

  • 2005 energy reform (EPSRA) and the role of NERC and NBET under the new structure

  • The Payment Assurance Facility’s revolving fund and World Bank’s Multilateral Investment Guarantee Agency (MIGA)

by Chijioke Mama

by Chijioke Mama

On-grid solar will take off on great scale in Nigeria due to the failure of legacy fossil energy sources. 14 Solar Power Purchase Agreements (PPAs) have been signed recently, being the first set of many more to come, and there’s a good chance of a solar power auction to follow.

While the length of the 20 to 25 year tenured PPAs provides some form of investment assurance, it does come with some inherent risks that are more pronounced in emerging markets such as Nigeria.

Regulators are only becoming familiar with the dynamics of solar PPAs and government transitions - within the 20 year period - could sometimes imply major shifts in policies, incentives, engagement terms and government support frameworks that could directly or indirectly affect solar power investments.  While certain clauses in the PPAs are often included to cater for these anticipated challenges, it cannot be said that these PPAs could ever become completely insulated from more drastic changes in the wider macroeconomic environments and regulatory ecosystems. Some of these concerns can fan investors’ reservations. Additionally, the capacity and administrative experience of several regulatory institutions in Nigeria might be questionable when it comes to long term solar power PPAs - which is a new area. 

Consequently, should the on-grid solar power developers in Nigeria be overly concerned about the risks and impacts of potential regulatory flip-flops and the capacity of the relevant government institutions to ensure these PPAs thrive in their decades-long lifespan? The answer is arguably ‘no’ and below follows an explanation on why this isn’t the case.
Dolapo Kukoyi is a partner at Detail Solicitors - a commercial law firm in Nigeria. She has the following comment on NERC’s (Nigerian Electricity Regulatory Commission) regulatory capacity: 

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Successfully facilitating the first set of solar PPAs is not beyond NERC’s legal capacity or regulatory power, as NERC has sufficient powers under the EPSRA (Electric Power Sector Reforms Act) to regulate the electricity sector. And that includes the regulation of the activities of market participants.

In spite of the Nigerian government’s failure in growing energy access and the apparent liquidity challenges within the Nigerian Power sector,  industry experts believe that the unbundling exercise of the state-owned Power Holding Company of Nigeria (PHCN) in 2013 was masterfully done from a technical and administrative perceptive. The emergent governance structure within the Nigerian power sector which followed the reforms is also judged to be almost faultless.  For these reasons, the demonstrably good intent of successive Nigerian governments (despite some lapses) should continue to inspire investors’ confidence and hope. Some of the relevant institutions that were birthed in the power sector reforms that started in 2005 include the NERC and the Nigerian Bulk Electricity Trader (NBET). NBET’s mandate “to put in place an effective transaction environment which minimizes risk and allocates it fairly to the parties best able to manage it” makes it a transaction middleman in the power generation to distribution nexus” 

Fortunately NBET, unlike several government agencies and state owned companies, has a relatively good administrative and funds management reputation. It is a properly structured organization with commendable levels of capitalization, whose transactions are typically guaranteed by the World Bank’s Multilateral Investment Guarantee Agency (MIGA). This was for example seen during the unbundling exercise of PHCN and several proposed power generating projects, such as the Azura Edo Independent Power Project.  NBET also currently has a team of well-groomed professionals with relevant global experience in power sector management.   

A good portion of the liquidity crises involving NBET and its failure to meet its debt obligations with Generating Companies (GenCo’s) is attributable to the failure of the Distribution Companies (DisCo’s) to meet their own debt obligations. While this is deplorable it’s also attributable to a consumer metering crises that has encouraged power theft throughout Nigeria. Though the consumer metering campaign by the DisCo’s has also been slow, the tough terrain and poorly structured system they inherited from the now defunct state-owned PHCN expectedly requires some time to tame. 

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On March 22, 2017, NBET announced a 701 Billion Naira Payment Assurance Facility which according to NBET is “to ramp up electricity generation and distribution in the Nigerian Power Sector”

“The Payment Assurance Facility is a seed money (revolving fund) that NBET must maintain to remain in business and fulfill its contractual obligations. It is NOT in any form a subsidy to the Power Sector, the money must be recouped and maintained for sustainable trading in the electricity market; as a result this facility is domiciled with the Central Bank of Nigeria (CBN) for monthly access based on outstanding obligations as recommended by NBET for metered electricity generated for that period”

Despite seeming assurances in both capacity and political will, the negative influence of election-cycle politics on regulations in Nigeria cannot be wished away and may continue to introduce certain element of risk for solar power operators (and all other businesses in Nigeria as well).  However, the necessity of providing affordable and reliable power to Nigerian households and businesses in Nigeria will continue to make the power sector (and the proper functioning of its associated agencies) an administrative priority for any government. This form of prioritization will help inspire institutional capacity development, transparency, rule of law and rationality in the Government’s long term relationship with several solar power investors. 

Nevertheless, this probable case for goodwill must not be misunderstood for competence.  With the recent 14 solar PPAs being the first set of many more to come, including the probability of a solar power auction; Nigeria’s power institutions need to continue to develop internal capacities in other to retain the confidence of both current and future solar power investors.  Dolapo believes that “a critical task for NERC now is establishing its regulatory authority and increasing investor confidence in its role as an independent regulator.  Over the past year, NERC has been constrained in the exercise of its administrative powers, due to the failure to appoint commissioners for about 13 months until February, 2017; NERC still lacks a substantive Chairman till date”

Learn more about the Nigerian solar market at the conference The Solar Future Nigeria, which will take place on 25 and 26 April in Lagos. This must-attend networking and knowledge sharing event will attract 200+ high level executives, who will discuss the challenges and opportunities that lie in the immediate future for Nigeria’s On-Grid and Distributed Solar Power Market.