The risk of investing in Nigeria may be worsening. A report in the World Bank Doing Business 2017 report. Nigeria was ranked 169 out of 190 countries, reviewed from her 170th position in the 2016 report. Of the ten (10) indices used, only getting credit and getting electricity recorded upward improvements by 16 and 2 points from 44 and 182 positions in 2016 respectively. However, while getting electricity for business improved by 2 points is creditable, but recent developments in Nigeria’s electricity sector may be threatening this improvement significantly.
On Monday, November 7, during an oversight visit by Nigeria’s House of Representatives Committee on Power to Nigerian Bulk Electricity Trading (NBET), it was announced that the Power Purchase Agreements (PPA) which NBET had secured with 14 power generation firms “may have breached due process”, because the process of securing the agreements appeared to have “no proper guideline” and therefore was “null and void”.
The committee further threatened to subject the agreements to legislative investigation. This presents more questions than answers for the sector, notably; how soon this investigation will commence, how long and what processes will be taken, what penalties will be prescribed to defaulting parties. The impact this investigation will have on the electricity sector, especially on achieving current project timelines, sector generation plans, and how would affect prospective investors in the electricity market response is the issue. These questions present challenges.
The first effects of this announcement could be that these 14 firms would suspend their project implementation until the investigation is concluded. This means that new utility scale electricity additions to the grid would have to wait. It also threatens the actualization of Nigeria’s generation targets and electricity sector reforms. On the short term, investment in the sector will stagnate and prospective investors will be forced to reconsider their investment interests. Depending on the process and recommendations of the investigation, the confidence of investors may be strengthened if there is an indication that the outcome will introduce a new process and guideline for securing PPAs that complies with due process, and transparent procedures.
If however not properly handled, this incident may be the beginning of an end to Nigeria’s electricity sector improvements and reform. Already, in the last 10 months, Nigeria’s general investment environment has witnessed increased currency and exchange rate risk, interest rate risk, inflationary risk, liquidity risk, credit risk, and market risk. In the electricity sector, the market risk is that the revenue generation of Discos have dropped since the start of the year. Also there is currently a legal challenge of the current electricity tariff at the courts, including the political/social/legislative risk that the sector is now faced with.
The Nigerian electricity market is a failed market and the government should be seen to be doing all it can to intervene and correct the failures and not increase the level of risk and uncertainty that investors have to face in making investments.
In response to the committee’s announcement, the Managing Director and Chief Executive Officer of NBET, Marilyn Amobi stated that the management under her new leadership will work to correct identified anomalies. In other statements, she said that, “From my perspective, we have no business talking about 20,000MW for 2020. It is clear we can’t achieve that by 2020. We can’t make that happen. Nigeria is not financially buoyant to embark on [nuclear energy]. We cannot run nuclear in Nigeria, and the question of wind energy, forget it. It’s just a story. We cannot run all that in Nigeria. It’s just a wish list.” These are big and weighty statements, which need some clarifications. Amobi may have drawn her conclusions from the fact that the generation contribution of the 14 firms would not be realized based on the projected original timeline if an investigation is conducted. She also does not see new PPAs being secured speedily by any means that would mobilize to site and deliver 20,000 MW by 2020.
Incidentally, independent power producer (IPPs) application and licensing processes and PPA negotiations for large scale, centralized utility grid projects and transactions takes upwards of 3-6 years to secure and the construction of the power generating plant takes 1-10 years, depending on planned capacity and technology used. This is the big challenge. On the other hand, decentralized renewable energy (DRE) off grid technologies and other solutions can generate 20,000MW by 2020 if the right policy, regulatory framework, and financial mechanisms for the sector development and growth are put in place.
Renewable energy technologies do not require very lengthy, bureaucratic, and expensive licensing and PPA processes as required for large-scale utility plants. Government needs to acknowledge this fact and act on it. While government has already indicated that Nigeria will generate 50% of its energy needs in 2020 from renewable energy, the sector is yet to see or set a clear roadmap of how that will be achieved.
On another hand, Amobi’s position that Nigeria can’t go into nuclear and wind can be understood from a science, technology, and innovation capabilities and management perspective .The financial cost of nuclear technology is huge, with its waste management challenges. Nigeria cannot afford to have a Three Mile Island, Chernobyl, or Fukushima nuclear disaster on her doorstep. It will be the worst human catastrophe; we should first concentrate on effectively running our gas and hydro-plants at full capacity. Depending on the way one chooses to look at it, wind technology is still new and will require significant investments along its delivery chain in Nigeria – if it will ever work as it currently does in countries like the US, UK, Germany, China, Denmark, Japan and South Africa.
This is a challenge to wind power IPPs. In all, the Nigerian government has a huge responsibility to correct the electricity market failure, reduce risk factors from the sector for investment inflow, build science and technology innovation capabilities as well as strengthen institutions that would be able to effectively deliver on its mandate based on due process, transparency, fairness and global set standards.