«Middle Africa Briefing Note | Energy, Oil and Gas 29 November 2013 Next Steps, Outlook for Nigeria’s Power Sector Privatisation Highlights On 1 ...»
Middle Africa Briefing Note | Energy, Oil and Gas 29 November 2013
Next Steps, Outlook for Nigeria’s Power Sector Privatisation
On 1 March 2014, the second phase of Nigeria’s power sector privatization program - the
Transitional Electricity Market (TEM) - is expected to commence, following the handover on 1
November 2013 of privatised power assets to new owners.
Ahead of the second phase, the government has given the new owners of the generation companies (“Gencos”) and distribution companies (“Discos”) four months to test-run their operations, and is working to improve transmission capacity.
The Gencos were sold at an average US$550,000/megawatt (MW), comparatively pricier than similar acquisitions in frontier and emerging markets such as Cameroon and China.
Investors would have been attracted by the annual revenue potential of the 7 Gencos which we estimate at $1.3 billion, but the role of Nigeria’s National Bulk Electricity Trader (NBET) will be a key factor in the success of these companies.
The government has provided over US$750 million in funding support to NBET, which could face financial obligations of up to US$2 billion as new IPPs come online and generation capacity improves. The timing and level of cash payments by Discos could also impact NBET’s operations.
Ultimately, higher tariffs will benefit the Discos, but could affect the pace of collections as the adequate metering of consumers has not yet been completed. Thus, tariff reviews will have to strike a balance between encouraging payments to NBET while enabling operators to earn a return on their investments.
Nigeria’s power sector set to take off On 1 March 2014, the Transitional Electricity Market (TEM), the second phase of Nigeria’s power sector privatisation will commence. Following the handover of the power assets to the new owners on 1 November 2013, the new operators have been given a four-month period to assess critical aspects of their operations and identify possible challenges that could affect their profitability. During this market testing phase, which will end on 28 February 2014, we expect the new companies to renegotiate Power Purchase Agreements (PPAs) with the bulk trader, the Nigerian Bulk Electricity Trader (NBET). Following which the bulk PPAs and vesting contracts, which authorize the Gencos to generate a specified level of power and sell to the Discos, will become operational, and the amended electricity market rules of the NERC will also become effective.
Table 1 - Assets sold under first phase of Nigeria’s power sector privatization Plant Type Capacity (MW) Winner Bids Paid, Capex Estimate, Customer Base
Source: Ecobank Research
SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLAIMERS & DISCLOSURES ON LAST PAGEEcobank Research | email@example.com | Twitter: @EcobankResearch Middle Africa Briefing Note | Energy, Oil and Gas 29 November 2013 On the transmission front, the government in August has signed a memorandum of investment with Chinese firm, Xian Electric Engineering Company Ltd to upgrade the country’s transmission capacity to 20,000 MW. Over the next two years, the Chinese firm will work with the Transmission Company of Nigeria (TCN) and its Canadian managers Manitoba Hydro International (MHI) to execute various projects of up to $500 million to be funded the China Exim Bank. Over $1.6 billion from the sale of 10 new power plants under the National Integrated Power Projects (NIPP) scheme could also be deployed towards transmission network development.
In March 2014, when the TEM takes off, the electricity regulator, Nigerian Electricity Regulatory Commission (NERC) is likely to raise electricity tariffs to offer the new power companies more room to recoup investments and meet financial obligations from loans taken to finance the acquisitions.
As loans comprise 70% of the $2.7 billion paid, the new power companies are likely to require a significant level of liquidity or control over their cash flows to enable them to meet the covenants and repayment terms specified by their loan providers. Combined with the necessary cash injection required to bring back as much as 60% of installed capacity online, the financial needs of the sector over the next few months estimated at more than $1.8 billion, could present an investment opportunity for investors who missed out on the first phase of the privatization process. The development of the sector is also likely to spur the growth of some related industries such as the metering market or supply of gas turbines, transformers and distribution equipment.
Table 2 – How Nigeria’s power asset acquisition costs compare with selected countries
Power generation will attract more investors The first seven Gencos, which have an installed generation capacity of 5,440MW were sold for a total sum of U$1.78 billion, and represent a valuation of $550,000/MW. Given the age of these assets and the operational status of the plants when they were privatized, they would appear to be overvalued. Similar assets divested in Cameroon and China were sold at lower prices. However, considering the revenue potential these assets probably represent a good investment. Based on our estimates, these assets could potentially generate about $1.2 billion in revenue from full year operations assuming at least 90% gas availability for the gas-fired plants and a 75% load factor all round.
The IPP plants being offered under the second phase of the power asset privatization could also yield estimated revenues of $1.1 billion. Compared to acquisition costs, this represents an estimated annual income of $229,190/MW, which could increase in 2014 when tariffs are revised upward.
Chart 1 - Estimated full year revenue of Gencos, $000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 Sources: NERC, Ecobank Research estimates The NBET faces obligations of up to $2 billion However, investors are also likely to pay attention to the Nigerian Bulk Electricity Trader (NBET) which is expected to purchase power from the Gencos and sell to the Discos. Thus, the revenue of the Gencos represents claims on NBET’s cash inflow, which is expected to be comprised largely of collections from the Discos and budgetary support from the government. NBET is likely to face a matching challenge as the level of payment to the Gencos may not match the volume of funds from the Discos in the short term as they work to reduce the revenue losses resulting from technical challenges, inadequate equipment and poor collections – a combination of losses referred to as Aggregate Technical Commercial and Collection (AGC&C) losses. We anticipate that the loss reduction period could last a year and translate into lower than expected cash flows from the Discos to the NBET during that time.
The Discos need time Although investments in the Gencos are expected to lead investments in the power sector over the next few months, the success of the process will hinge on developments in the distribution segment of the sector. This is primarily because over the long term, cash collections by the Discos are expected to provide the source of repayment to the Gencos for power purchased by NBET. Thus, while expected higher tariffs may benefit the operators of generation companies they represent a higher cost for users on the distribution end and could result in slower collections for the Discos.
As a larger portion of the electricity consumption market is yet to be connected with the new prepaid meters, collection efficiency is likely to remain low and periodically undermined by power theft. This could result in slower payments by the distribution companies to the bulk trader. The tariff review would need to strike a balance between incentivizing the distribution companies to make timely payments to the NBET while allowing them enough revenue to earn a return on capital invested to reduce losses.
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