Nigeria To Lose $2b, Finance Minister Cancels Power Purchase Agreements

Investors in Nigeria’s power sector are threatening to quit Nigeria with over 1000MW projects at stake as the Federal Government backed out of the Power Purchase Agreement (PPA) contracts signed with the project developers. 

Nigeria in July 2016 signed its first solar PPA in July 2016, a deal worth about US $1.76bn with 14 solar projects starting in 2017 and a tariff of $0.115 per kWh (kilowatt hour).

But Finance Minister, Kemi Adeosun is insisting that she would no longer honour the contract. She said that the price of $0.115 per kWh is far too high and she will not honour any agreement unless it is reduced to $0.075, stating that other countries pay lower tariffs and that the government will not be able to recoup the costs in the North of Nigeria.

This is in spite of the fact that the investors have spent over $20mn in developing the non-existent solar sector over the last three years. The Goodluck Jonathan administration as part of moves to diversify Nigeria’s energy mix had invited international investors who helped to develop the sector and their projects as opposed to the competitive auctions route.  

“Minister Adeosun is comparing apples and pears talking about  tarrifs in Nigeria and in other countries. She also ignores the fact that the North pays a multiple for diesel and the difficulties of the DISCOs are of the government’s making and have nothing to do with the solar developers,” one of the stakeholders told us. “If she insists on negotiating the tarrif, the developers will bow out. They will have invested over USD 20m in developing the sector – for nothing.”

The prevailing sentiment of the key players is that getting power to the North is not economically viable but that might be misplaced as Nigeria needs the North to be productive and also the need for Nigeria to have energy security. Power plants that depend on gas face a logistical challenge and are susceptible to frequent issues of vandalism in the Niger Delta, an energy analyst told me. He said: “The grid would be stabilized by injecting power in the north, eliminating grid loss. This manifestly saves NBET money. It pays GENCOs for what the generate and then the DISCOs pay for what they get. The delta (at present at least 11%) is covered by FGN.”  

One of the  14 projects, the first to be implemented under the 20-year PPA is a 75MW solar plant in President Buhari’s home state, Katsina  being developed by Pan Africa Solar, in collaboration with JCM Capital, an Ontario-based developer.

Other projects include – Nigerian Solar Capital Partners’ 100MW project in Bauchi State;  Afrinergia Power 50MW in Nasarawa State; and Motir Dusable 100MW solar farm in Nasarawa State; Nova Solar 5 Farm’s 100MW project in Katsina State; Kvk Power’s 100MW plant in Sokoto State; Middle Band Solar One’s 100MW facility in Kogi State and LR Aaron Power’s 100MW in the FCT;  Nova Scotia Power Development’s 80MW project in Jigawa State; CT Cosmos’s 70MW in Plateau State; En Africa 50MW in Kaduna State; Oriental Renewable Solutions 50MW in Jigawa State; Quaint Abiba Power 50MW in Kaduna State; and Anjeed Innova 100MW in Kaduna State.

The Cost of Investors Backing Out

If the investors back out, the first of many consequences is the loss of about 800MW for the electricity-starved Northern metropolises of Dutse, Kaduna, Kano, Katsina, Bauchi, Gombe, Yola that would help develop the economically disadvantaged North of Nigeria. 

Another setback the country might face is the erosion of its credibility in the eye of development funding institutions, most of which have committed to debt financing the projects based on the PPA price agreed. Defaulting on agreements would send a negative signal to investors on doing business in Nigeria. 

“How can the Federal Government let developers work for a total of five years only to then allow them to go bankrupt?”, a chief executive of one the project developers queried. 

According to one of our sources, the ambassadors of the United States and Germany are sending a letter to the Nigerian government to express their displeasure as investors from both countries are major players in the projects. 

Nigeria could achieve lower tariffs in the next wave of projects as there would be at lower upfront development costs. The challenge is if there would ever be a next wave of projects.