DisCo debts, unclear regulations hinder Nigeria’s grid power projects
Lenders and industry professionals have raised alarms that the high-risk legacy debts associated with Distribution Companies and the unclear regulatory frameworks present significant barriers to financing and developing new grid-connected power initiatives in Nigeria.
During the Power Conference hosted by the Lagos Chamber of Commerce and Industry, Jumoke Ayo-Famisa, Senior Vice President of Stanbic IBTC Infrastructure Fund, emphasized the cautious approach taken by lenders when evaluating embedded or grid-scale power initiatives.
In discussing new grid-connected power plants, she pointed out the vital necessity for clear agreements concerning off-takers and contract frameworks.
“When approached today about an embedded power project, our first inquiry is always: Who is the off-taker? Which entity are you entering into a contract with?” Ayo-Famisa remarked. “For instance, in Lagos State, we have Eko Electricity and Excel Distribution Company Limited. This information is critical,” she noted.
She highlighted the intricacies involved in different contract types, specifically if the developer is solely accountable for generation or also for the complete value chain, such as distribution and revenue collection.
“Revenue collection is essential because one might question, ‘will the cash be mingled with what is occurring at the primary DISCO level, is it protected, and how does the cash flow hierarchy operate?” she explained.
Ayo-Famisa pointed out that the predominant issue remains the “high leverage found within the legacy DisCos.” She detailed that new project financiers require confidence that their cash flows will not be subjected to the financial uncertainties of these indebted organizations, making clarity regarding contractual relations and cash flow procedures a high priority.
Additionally, she brought attention to the persistent problem of uncertain tariffs.
She stated, “Certain states have explicitly declared that there are no subsidies; others are indicating they are investigating solutions for lower-income populations. Therefore, clarity is needed concerning who manages the tariff, whether it is supported, if they can alter tariffs, and whether they can increase prices when their costs go up or must wait for regulatory approval.
“In contrast to the willing seller-willing buyer model, where parties negotiate and settle on pricing, entering the grid introduces Band A, Band B, and if my power is supplied to, say, Ikeja Electric, or if I have a contract with them, am I mixed with the various issues across their numerous bands?”
Supporting this perspective, Wola Joseph Condotti, Group Managing Director and CEO of West Power & Gas Limited, discussed the dual impacts of decentralization within the power industry.
“Certainly, decentralization brings us closer to the populace since the jurisdiction is now clearly defined. You also understand that your tariff will correspond to the demographics in that area. You cannot apply the Lagos tariff to Zamfara, and this has been the trend previously in the power sector. Thus, decentralization fosters more tailored solutions to tackle challenges on the ground.
"Some challenges I observe are related to capacity. It was a centrally managed system consisting of 11 DISCOs. Out of these, I believe only 3 or 4 of us are still operating, if I may say so. In contrast, electricity generation companies are performing considerably better,” she noted.
Condotti indicated that regulatory overlaps represent an extra obstacle, particularly when the generation or distribution of power traverses state lines.
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