Nigeria: Lack of Cost-Reflective Tariffs Discouraging Investment in Nigeria's Electricity Sector

19 September 2019

The lack of cost-reflective tariffs is discouraging investments in the ailing Nigerian electricity sector, a firm involved in power generation in the country has said.

Azura Power, which in 2018 delivered Nigeria's first privately-financed power plant in Edo State, has acquired a new power plant in Senegal, investing funds an official of the company says would have been deployed in Nigeria.

The Managing Director of the company, Edu Okeke, confirmed the development to PREMIUM TIMES on Thursday after closing the deal for the Tobene power plant in Senegal. Located in Taiba Ndiaye, 90 kilometres northeast of Dakar, the capital of Senegal, the 115 MW plant started operations in 2016.

"Azura now owns Tobene 100 per cent," disclosed Mr Okeke. Before now, the infrastructure was jointly developed by Melec PowerGen and the International Finance Corporation, which held 90 and 10 per cent stakes, respectively. Tobene has a 20-year power purchase agreement (PPA) with the national utility, Senelec, for the supply of power."

The company will not disclose the amount it invested in the acquisition.

"We won't state the amount invested as that's commercially sensitive," Mr Okeke said.

However, according to the World Bank, IFC supported the development of the plant with nearly 100 million euros.

"Money could have been used in Nigeria"

Azura currently owns the 461MW independent power plant in Ihovbor, near Benin City, southern Nigeria. But that is just the first phase of a 1,500MW facility planned.

Mr Okeke told PREMIUM TIMES that the company's plan was to continue with the second phase immediately after the delivery of the first, which was built in two years between 2016 and 2018.

"We thought the EPC (Engineering, Procurement, and Construction) contractor would just move to the next phase without demobilising," he said. "But because of the Nigerian environment, rather than looking at phase II (in Edo, Nigeria), Azura is now investing in another country (Senegal)."

The funds used for the acquisition in Senegal could have been used in Nigeria for further expansion, he said.

Senegal has less than one thousand megawatts generation capacity for a population of about 15 million people. Nigeria, on the other hand, has 13 thousand-megawatt installed capacity but distributors are only able to deliver about four thousand megawatts to homes and businesses in a country of about 200 million people.

Most of Nigeria's electricity sector was privatised in 2013 but the government still heavily subsidises the sector to cover shortfall resulting from poor revenue collection.

Industry operators complain the tariff is low and not cost-reflective. That, as well as energy theft, means DisCos often collect far lower than the invoices for the energy generated by the GenCos, like Azura.

In the first quarter of this year, the DisCos' collection efficiency rate was 28 per cent, according to the industry regulator, NERC.

This creates a liquidity crisis in the industry, requiring the government to intervene with hundreds of billions of naira to cover the shortfall through the bulk trader, NBET, to avoid the collapse of the system.

The effect is discouraging investment in the sector, from both the current and intending investors, to expand the critically needed infrastructure.

"Investors must cover their costs to make further investments," said Mr Okeke. He decried the lack of cost-reflective tariff, saying government subsidy is not a reliable and sustainable incentive.

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