Lenders and industry experts have expressed concern that the high-risk legacy debts of Distribution Companies and ambiguous regulatory frameworks pose major obstacles to financing and developing new grid-connected power projects in Nigeria.
At the Lagos Chamber of Commerce and Industry Power Conference, Senior Vice President of Stanbic IBTC Infrastructure Fund, Jumoke Ayo-Famisa, highlighted the cautious stance lenders adopt when assessing embedded or grid-scale power projects.
Speaking in the context of new grid-connected power plants, she stressed the crucial need for clear arrangements regarding off-takers and contract structures.
“If someone approaches us today with an embedded power project, the first question is always: Who is the off-taker? Who are you signing the contract with?” Ayo-Famisa said. “In Lagos State, for example, there is Eko Electricity and Excel Distribution Company Limited. Knowing this is important,” she said.
She underscored the nuances in contract types, noting whether the developer is responsible solely for generation or for the entire value chain, including distribution and revenue collection.
“Collection is very important because you would be wondering, ‘is the cash going to be commingled with whatever is happening at the major DISCO level, is it ring-fenced, what is the cash flow waterfall,” she added.
Ayo-Famisa noted that the primary challenge continues to be the “high leverage in the books of the legacy DisCos.” She explained that incoming project financiers need assurance that their cash flows will not be exposed to the financial risks of these indebted entities, making clarity on contractual relationships and cash flow mechanisms a top priority.
She also highlighted the ongoing issue of tariff uncertainty.
She said, “Some states have come out to clearly say that there is no subsidy; some are saying they are exploring solutions for the lower income segments. So, the clarity would be on who is responsible for the tariff, is this sponsored?, Can they change tariffs?, In terms of if their cost rises, they can pass it on, or they have to wait for the regulator.
“Unlike, you know, what you find in the willing seller-willing buyer, where they negotiate and agree on their prices. Now they are going into grid, there is Band A, Band B, if my power goes into, say, Ikeja Electric, or I have a contract with them, “am I commingled with whatever is happening across their multiple bands?”
Echoing this view, the Group Managing Director and CEO of West Power & Gas Limited, Wola Joseph Condotti, highlighted the double-edged effects of decentralization in the power sector.
“Of course, decentralization brings us closer to the people as the jurisdiction is now clear. You also know that your tariff would be reflective of the type of people living in that environment. You cannot take the Lagos tariff to Zamfara, and this is what has been happening before now in the power sector. So, decentralization brings about a more customized solution to issues you find on the ground.
“Some of the issues I see are those that bother on capacity. It was a centrally run system that had 11 DISCOs. Of the 11 DISCOs, I think there are 3 or 4 of us today that are surviving or alive, if I may put it that way. If you go to electricity generation companies, they are doing much better,” she said.
Condotti pointed out that regulatory overlaps pose an additional challenge, particularly when power generation or distribution extends across state boundaries.
She said, “Investors would definitely have a problem. Say if you have a plant in Ogun State supplying power to another state, say Lagos State; you are automatically regulated by NERC. But the truth is that the state regulator of Ogun State and Lagos State wants you to comply with certain regulatory standards.”
Financiers and power sector executives largely agree that tackling legacy DisCo debt, enhancing contractual transparency, and streamlining regulatory frameworks are essential to attracting private investment into Nigeria’s power infrastructure.
