Stakeholders hinge power privatisation on DISCos’ viability
The commercial success of the eleven privatised electricity distribution companies (Discos) is critical to sustaining power sector financing in Nigeria, according to stakeholders at the maiden BusinessDay power roundtable held yesterday in Lagos.
Analysts say getting the Discos to bankability is a major hurdle that must be crossed before capital is attracted to the power sector, the financing needs of which are estimated at $75 billion by 2020.
Bankability refers to a project or proposal that has sufficient collateral, future cash flow, and high probability of success to be acceptable to institutional lenders or banks.
“There is the need by Discos to mitigate collection risk which makes it difficult for them to raise financing,” said Abiodun Oni, head, Power Infrastructure Finance at Stanbic IBTC Bank.
Collection risk is the ability of the Discos to exact payment for electricity supplied by them.
The Discos are at the end of a complex chain of players in the power sector which include the gas suppliers, IPPs/Gencos, the bulk trader, and TCN.
“The bulk trader has to sign vesting contracts with the Discos, because the upstream risks from generation and gas supply will affect their bankability,” said David Ladipo, project director of Azura Energy, an IPP located in Edo.
The bulk trader mediates between the IPPs/Gencos and Discos, assuring the power generators of cash delivery for power supplied, helping to mitigate collection risk.
The successful implementation of the medium-term tariff order (MYTO) and the efficient management and financing of the TCN is also critical to sustaining investor confidence and attracting financing to the power sector.
The success of the TCN contract with Manitoba is key because the government-owned monopoly, which currently has only 5,000 MW of transmission wheeling capacity, would have to grow its network to accommodate an increase in power generating capacity by the Gencos, without which banks would be hesitant to extend financing.
The MYTO, however, is an incentive-based regulation adopted to help Gencos and Discos to cut costs and improve losses and collection, with tariffs set 5 years in advance to bring the required certainty to investors.
“MYTO is calculated on a debt equity ratio of 70:30, and it allows Gencos and Discos a return on debt and equity of pretax profits of 24 percent and 29 percent, respectively,” said Muhammad Wakil, of the NERC.
The TCN would need up to $4.5 billion in new investments by 2015, and may have to raise bonds in the future to finance some of its infrastructure upgrade capex.
“The TCN cannot rely on government funding alone for its infrastructure upgrades, which are long-term projects as opposed to the government’s yearly budget cycle,” Eyo Ekpo, commissioner for Markets, Rates and Competition at the NERC, said.
The year 2013 is also said to be a defining year for Nigeria’s power sector privatisation process as the key requirements for the growth of the sector begin to take shape.
According to Desmarais, while there have been some signs of progress since the launch of the power sector roadmap by President Goodluck Jonathan early last year, 2013 will be the year to leverage that progress and define power in Nigeria.
“After you get some initial success, you will get a tsunami of investor interest, just like it happened in Indonesia. The first steps in 2013 are critical to changing the dynamics of power in Nigeria. 2013 is an inflexion point where you begin to take off.”
Some of the issues that will have to be dealt with in 2013 include the conclusion of the sale of the Gencos and Discos by the BPE, the negotiation of which will begin on January 14, 2013; raising financing for the TCN, IPPs, Gencos and Discos; the successful resolution of the labour disputes with PCHN staff, and the ability of the National Electricity Liability Management Company (NELMCO) to take over legacy PHCN liabilities from successor companies.
The financing needs of the whole sector, which will begin in earnest in 2013, are estimated at $75 billion by 2020. This includes $4.3 billion necessary for the TCN infrastructure upgrades by 2015.
“The TCN is by far the biggest blocking agent to a successful power sector in Nigeria. 4,500 MW is the largest amount of power we can transmit across the grid today, and we are not at a point where we can evacuate power if the Gencos begin to generate more power. If we do not fix TCN, it will be a problem,” said Desmarais.
Some other issues that need to be dealt with in the power sector in 2013 include the backstopping/guarantee of the bulk trader, issues with gas tariff and supply which are responsible for up to 80 percent of Nigeria’s power generation.
Key risk factors in 2013, according to Desmarais, include the need to reduce political and regulatory uncertainty, strengthen institutional leadership through the appointment of a substantive Power Minister, and the still enormous challenge in getting financing for Nigeria’s power sector.
Nigeria, with a population of 160 million people, is estimated to need about 40,000 MW of electricity over the next decade, but currently has less than 6,000 MW of available capacity.
The manufacturing sector is hampered by electricity shortages and economists say growth, forecast at 6-7 percent this year, would be in double digits if a successful execution of the power reform agenda was achieved