A Senior Analyst for Non-bank Financial Institutions Ratings at Agusto &Co, Omowonuola Kunle-Bello, in this interview with Chineme Okafor, speaks on opportunities that exist in Nigeria’s power sector and how application for new Independent Power Plant licences is an indication of the potential that investors see in the industry. Excerpts:
Tell us about Agusto & Co, how do you play in the Nigerian market?
Agusto& Co. is a foremost research house and an expert voice on major economies, industries and businesses operating in Sub-Saharan Africa. We pride ourselves on gathering and contextualising often elusive information and data, which our competent analysts evaluate and articulate in an objective and factual manner. Our database on Sub-Saharan African economies spans more than 25 years and across high-level macroeconomic information to granular individual company metrics.
For over 25 years, we have employed our unique research methodology and wealth of experience in Sub-Saharan Africa to deliver insights on more than 50 industries including Banking, Oil & Gas, Real Estate, Food & Beverage, Construction, Building Materials and Telecommunications. We have also carried out numerous customised research for clients such as the Bank of Industry and the World Bank. Our unique propositions include assigning each industry a risk rating, taking into cognisance the host country’s risk profile, market size and potential of each industry, the key players and the industry financial condition.
As a credit rating and research company, how do you carry out your analysis in areas such as the power sector in Nigeria?
Agusto&Co has a dedicated power analyst that tracks developments and updates in the Industry. In addition to generic data publicly available on regulatory websites such as NERC and Systems Operator (SO), we carry out primary research, speaking to key operators in the Industry. We also conduct site visits and interact with regulators and associations within the industry.
I want to believe you know, and it is a general knowledge that Nigeria’s electricity market is troubled at the moment – poor remittances; weak governance; and deep political meddling, what needs to happen for there to be a positive shift?
The solution to Nigeria’s electricity problems are multi-pronged. Having said that, there are two issues, which we believe if adequately tackled should result in significant long-term benefits in the electricity market. Pricing; electricity operators, particularly those in the grid segment have no control over electricity tariff. Despite multiple adjustments in the MYTO, the current tariff structure still does not reflect the true cost of electricity. This challenge is unique to operators that rely on the national grid for electricity distribution and is a key reason for the relatively weak cash flows of on-grid IPPs, as these operators have to operate within the MYTO tariff structure. This fixed tariff regimen implies that on-grid IPPs are not able to discriminate in pricing or restrict supply to those willing and capable of paying for electricity supply.
For a truly viable electricity market – particularly for grid connected generation and supply, we believe it is imperative that tariffs are sufficient to cover the cost of operations for an efficient producer. Only then, will the industry be able attract much needed capital for expansion and growth.
Gas; the industry’s energy mix is heavily skewed towards gas as all IPPs in Nigeria are currently thermal based. In our view, the reliance on gas is not bad in itself, considering that gas is a relatively cheap source of fuel and Nigeria has one of the largest proven gas reserves in the world.
However, years of underinvestment in the domestic gas market – due to price control, regulatory impediments and pipeline vandalism, has impaired the commercial viability of supplying gas to key sectors such as electric power.
In addition, the weak cash flows and liquidity of generating companies, have resulted in huge debts for gas supply, weakening operators’ credit profiles. Gas constraint is estimated to moderate the industry’s operational capacity by up to 1,200MW, resulting in average revenue losses of N2.4 billion daily. Renewable energy sources, though clean are relatively more expensive and are yet to be fully harnessed. Lowering the loss levels and capacity upgrades; the industry’s loss level is an indication of a highly inefficient system, which serves as a deterrent to any potential investor. The impact of the loss is more apparent when we consider that the cost of delivering electricity to the end-user is the same for an efficient electricity system – with minimal losses, and an inefficient one with huge losses like Nigeria. Industry loss – ATC&C, is estimated to be over 50 per cent, with some Discos recording up to 70 per cent losses.
It is also noteworthy that the Transmission Company of Nigeria (TCN) has an installed capacity of 7,500MW, which falls below the installed generating capacity and estimated peak demand of 12,396MW and 19,056MW respectively. This implies that despite an increase in the generating capacity of the grid connected IPPs, TCN will not be able to evacuate more than 5,500MW – the grid’s operational capability. In our view, the industry requires significant investments across the value chain – generation; transmission; and distribution, for system upgrades, remote monitoring and metering which should collectively lower the loss levels in the industry.
Do these anomalies provide investors the confidence to consider investing in IPPs, what does the market lose from this?
No investor wants to come into a market where the economic fundamentals of the business are unsound. So yes, these challenges will serve as a deterrent to additional private sector investment in the supply of grid connected electricity.
Considering the current numbers of these licenced IPPs that haven’t taken off, should the NERC continue to grant licence to new entrants?
Frankly I do not see how licencing new entrants is a disadvantage. The application for new IPP licences is an indication of the potential that investors see in the industry despite the myriads of challenges industry operators face. Nigeria has a large population and this provides a viable market for electricity generation. Peak demand for electricity in Nigeria is currently estimated at 19,100MW, excluding the potential industrial demand for electricity. However, our current generating capacity is just 3,500MW.
Can you state what the Nigerian economy loses to poor electricity supply?
A useful rule of thumb for measuring adequate power supply is one megawatt per thousand homes, with a population of over 180 million people and an average of six persons per home, this would shoot up demand to over 30,000MW. At a current generating capacity of circa 3,500MW, there’s a potential gap of over 25,000MW. This is indicative of a potentially large market for electricity generation and distribution. So yes, we agree with the supply gap estimates. This also means that Nigeria is currently supplying circa 12 per cent of its potential energy needs.
Although the federal government has frequently claimed the power sector is still attractive to investors, but there seems to be no new investments, for example, in the on-grid power sector so far, why is this so?
Again, the controls on key pricing – gas-to-power and electricity tariffs will continue to serve as deterrent to potential investors into the electricity market. The cap on electricity tariffs imply that operators – Gencos and Discos, have no control over the price charged for electricity delivered and has significantly impaired the financial viability of operators in the industry.
How much of impact do you think the failing of the power sector has on Nigeria’s financial sector or institutions which supported the 2013 privatisation exercise?
As at year-end 2017, total exposures to the power industry was circa N564 billion, representing only four per cent of the banking industry’s loan books. The bulk of these loans were denominated in US dollars at disbursement while the obligors – power companies, earn their revenues in naira creating significant currency risks. In addition, given the naira devaluation, chronic cash flow issues and generally weak financial condition of operators in the industry, which has impaired the ability of these operators to make timely repayments on their obligations, a number of these loans have had to be restructured. In our view, in the absence of significant improvements in the economic viability, and consequently financial condition of these operators, the banking industry may suffer some of the same losses it did in 2015/2016 when lower crude oil prices resulted in high levels of impaired credits from oil and gas loans.
Is the Power Sector Recovery Programme (PSRP) which the government initiated and drew up with the World Bank, what the sector needs to achieve uninterrupted power supply?
I believe the PSRP, as with most policy documents, clearly articulates the challenges the Industry faces. The document is also clear on the steps that would be taken – cost-reflective tariffs; payment assurance facilities; and budget provisioning for MDA electricity debts, to ensure a financially viable electricity market. However, the discipline to follow through with these proposals or initiatives is what needs to be demonstrated.