THE INSIDER: FG set to guarantee $1bn new solar projects — despite choking under ‘take or pay’ deals

Despite getting its fingers burnt and running into debt over existing power deals, the federal government is set to provide more sovereign guarantees to 14 new solar power projects.

Nigeria is currently choking under multi-million dollar “take or pay” power and gas deals which Nigerians are unable to fully benefit from largely because of national grid limitations.

As a result, Nigeria remains tied to a $10 million monthly “take or pay” deal with Accugas Ltd to supply gas to the Calabar Generation Company Ltd, owned by the Niger Delta Power Holding Company Ltd.

Also, the country has to make a minimum monthly payment of $30 million to Azura-Edo Power because of a sovereign guarantee.

Nigeria has defaulted a number of times because of paucity of funds, with Accugas and Azura threatening to activate clauses in the agreements that would have damaged the country’s international credit rating.

Despite these financial burdens, the ministry of finance is set to commit Nigeria to another guarantee of $1 billion for the production of 1GW (1,000MW) by 14 solar projects.

Nigeria currently has the capacity to generate about 12,000MW but the national grid — which transmits power from plants (GenCos) to distribution companies (DisCos) — cannot take more than roughly 5,000MW.

Because of the handicap, the grid has recorded a number of collapses in recent times, plunging the entire country into darkness.

Many power plants have had to underproduce by shutting down turbines.

‘THE GAME CHANGER’

On Wednesday last week, Abubakar Aliyu, the minister of power, played host to government officials and project developers to resolve the “impasse” around the solar project since 2016.

The meeting was chaired by Zainab Ahmed, the minister of finance, budget and national planning.

In attendance were Ahmad Zakari, special adviser to the president on infrastructure, financiers, development partners, and officials of the Nigeria Electricity Regulatory Commission (NERC), Nigeria Bulk Electricity Trading (NBET) and DisCos.

After the meeting, Zakari announced on Twitter what he called the “game changer” of a $1 billion deal to stabilise power.

“As we continue to work on Emergency Measures to stabilize power we can’t forget the medium term. Working with @ZShamsuna (minister of finance) @HMPowerNG (ministry of power) we structured a meeting for $1b investment for 1000MW of Solar stalled since ‘16. We expect some on grid by ‘23,” he tweeted.

“The projects range from 50MW to 100MW across Sokoto, Kano, Jigawa, Nasarawa, Abuja, Bauchi…some of these states will be joining the league of states with on-grid power plants for the first time. These 1GW of Solar projects will be a game changer and a harbinger for more projects.”

As we continue to work on Emergency Measures to stabilize power we can’t forget the medium term. Working with @ZShamsuna @HMPowerNG we structured a meeting for $1b investment for 1000MW of Solar stalled since ‘16. We expect some on grid by ‘23 @ukniaf @AfidaAfrica @africa_finance pic.twitter.com/UcBZ8dmshr

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— Ahmad Rufai Zakari (@arkazaure) March 24, 2022

He said the project will accelerate government’s commitment to achieving 30 per cent of grid power from renewable energy sources by 2030.

CLEAN ENERGY, DIRTY ECONOMICS

This is not the first time this solar project has faced a flurry of questions.

In August 2016, when Babatunde Fashola was minister of power, he announced that power purchase agreements (PPAs) had been signed with 14 solar photovoltaic projects.

Not only were some of the projects unlicensed, the tariff was fixed at 11.5 cents per kilowatt hour (kWh), which was considered extortionate.

At the time, tariffs for similar projects in Africa were between 4 cents and 6 cents.

Kemi Adeosun, then minister of finance, who was not at the signing ceremony, refused to approve the sovereign guarantee.

In a letter dated June 14, 2017 and seen by TheCable, she hinged her refusal on the reasons stated in the ministry’s guidelines to the industry on issuance of sovereign guarantees to the industry.

She said only projects that passed the ministry’s debt sustainability analysis (DSA) would get a guarantee.

The projects must also have emerged through a competitive procurement process, she said, and all the power produced must be deliverable to consumers.

This was to prevent a situation where the power produced would be “stranded”, in this case because of national grid capacity inadequacies.

She also insisted that all the agencies that would approve PPAs must be involved in the process right from the conceptual modelling of the project.

The 14 solar projects were asked to accept a naira-denominated put-call option agreement (PCOA) and to reduce their tariff from 11.5 cents to 7.5 cents.

Only two of the projects accepted the threshold of the ministry of finance, TheCable learnt, as the rest declined, insisting that they would only have a dollar-denominated PCOA.

This was despite the fact that the naira PCOA included a clause that they would be paid any true-ups — or shortfalls — arising from the conversion of naira to dollars.

Following the acceptance by Afrenergia and CT Cosmos, Adeosun approved a naira-denominated PCOA for the two companies at the reduced tariff of 7.5 cents.

THE GRID AND THE GRIDLOCK

Seven of the projects elected to have a guarantee from the World Bank and the African Development Bank, but the banks said they would not provide the support at the quoted 11.5 cents tariff.

After the presentation made by Zakari on Wednesday, some of the stakeholders expressed reservations about what they considered “a very ambitious target” date of June 2022 for the projects to be closed financially, sources told TheCable.

Since 2016, the lack of the sovereign guarantees from the World Bank and the African Development Bank have discouraged financial institutions from accepting to fund the projects.

More people also raised issues with the ability of the national grid to take the 1GW to be produced by the solar projects.

Although reinforcements were scheduled to be done, the paucity of funds and the lack of prioritisation of the projects mean that the Transmission Company of Nigeria (TCN) does not have the capacity to take on the 1GW.

This is made worse by the fact that the TCN is yet to complete the 14-km Oshogbo line that was meant to evacuate Azura power plant years after the plant completed construction and is injecting power onto the grid.

Nigeria continues to pay for the stranded production.

Zakari told the meeting that the ministry of power has already set aside N400 billion for the projects, but the promoters asked how the figure was arrived at — particularly because the PPAs are for 20 years.

The DisCos have also said they cannot recover the 7.5 cents tariff from consumers and will resist any attempt to pass on cost to them.

The federal government is once again at the risk of paying for power that Nigerians will not be able to use.