NIGERIA: An Introduction to Projects & Energy

Chambers Global 2022: Energy and Projects Overview.

Introduction 

From regulatory and commercial standpoints, the Nigerian energy sector has experienced overarching changes in the past few years. These changes reflect years of industry consultations on energy sector reform, climate change dialogues, and the effect of the COVID-19 pandemic. This article reviews salient developments and highlights the commercial relevance of new legislation on energy investments in Nigeria.

Current Trends 

Liquidity: Liquidity problems still plague the Nigerian Electricity Supply Industry (“NESI”) mainly due to the difficulty of domestic banks to provide long-term capital to finance critical energy projects requiring foreign currency funding. The effect is that Distribution Companies (“DisCos”) and Generating Companies (“GenCos”) cannot meet profit targets nor increase output. This is exacerbated by the absence of cost-reflective tariffs which do not cover costs incurred through the value chain despite recent increases in electricity tariff. To ease liquidity pressure, the World Bank Group approved a USD750 million loan to the Federal Government of Nigeria (“FGN”) and a USD500 million loan to DisCos to improve the reliability of electricity supply; achieve financial and fiscal sustainability; finance large scale metering programs; and enhance accountability.

One of the ways stakeholders in the NESI have attempted to resolve liquidity issues is by converting Dollar loans to Naira, which is the currency in which tariff is commonly paid for energy consumption and negotiating a longer amortization period. Most restructuring deals are aimed at mitigating the impact of devaluation and risks associated with exchange rate fluctuations.

Investments in Renewable Energy and Mini Grid Projects: The push towards renewable energy shows that Nigeria is repositioning its strategy on energy access. There continues to be significant activity in the supply of electricity to rural communities by utilizing renewable energy sources.

With the realization that the traditional, public-sector-led grid system will not meet the demands of the growing population, the FGN set up the Rural Electrification Agency (“REA”) to foster the electrification of rural and unserved communities. In the past few years, REA has pushed its agenda of delivering renewable energy infrastructure by working with the public and private sector in facilitating the roll out of various projects, including the deployment of the solar home systems programme, as part of the FGN’s Economic Sustainability Plan developed in response to the COVID-19 pandemic.

There is, also, an incline in M&A deals by foreign investors and global corporations and investments by the DFI community in local infrastructure projects involving renewable energy.

Distribution and Metering: The FGN launched the National Mass Metering Programme (“NMMP”) in 2020 in a bid to deepen metering penetration, reduce commercial and collection losses and eliminate arbitrary estimated billing practices. This initiative was complemented by the Central Bank of Nigeria’s Framework for Financing National Mass Metering Programme which enables DisCos access loans for the procurement of locally manufactured meters.

New Laws, Regulatory Updates and Energy Transition

Petroleum Industry: Upon Presidential Assent in 2021, the Petroleum Industry Act (“PIA”) became the most important legislation governing the oil and gas value chain. The PIA provides for legal, governance, regulatory and fiscal frameworks guiding operators and the development of host communities. To ensure effective implementation, the President approved a Steering Committee led by the Minister of State for Petroleum Resources to oversee the implementation within a 12-month period.

The PIA introduces new licensing regimes and regulatory bodies. It contains ‘grandfathering’ provisions which preserve some sections of the Petroleum Act until the termination or expiration of all licences granted pursuant to the Petroleum Act.

Climate Change: The PIA does not specify a clear framework for financing transition into other non-fossil energy sources. This is a significant discussion point especially against the backdrop of Nigeria’s commitment to reducing carbon emissions and the enactment of the country’s Climate Change Act, 2021, after COP26. The Climate Change Act provides a holistic framework for mainstreaming climate change actions in Nigeria; enforcing climate preservation compliance by corporate bodies; ensuring carbon budgeting; and creating the National Council on Climate Change.

Achieving sustainable energy use remains a core objective of the FGN. In collaboration with Sustainable Energy for All (“SEforALL”), Nigeria has launched the Integrated Energy Planning Tool to support the country’s energy transition. The new data-driven interactive tool will play a vital role in helping Nigeria achieve its shared energy access by 2030, alongside net zero goals by 2060. The tool is powered by extensive geospatial modelling and layers of data; covers electrification and clean cooking, and will provide intelligence for the FGN, and private sector stakeholders, to deliver the least-cost access to electricity and clean cooking.

Fiscal Issues: The energy sector is adjusting to an understanding of new tax regimes under the PIA and the newly enacted Finance Acts. For example, the introduction of a hydrocarbon tax under the PIA, the increase in Value Added Tax (“VAT”) to 7.5%, and Tertiary Education Tax from 2% to 2.5% would implicitly increase the cost of goods and services and impact taxes payable by businesses in the energy sector. That said, there are notable exemptions to VAT payments under the Value Added Tax (Modification) Order (“VAT Order”) 2021, which exempts certain petroleum products and renewable energy products from VAT, including aviation turbine kerosene, locally produced liquefied petroleum gas and crude petroleum oils, wind-powered generators, solar-powered generators, etc. Gas supplied by gas producing companies to GenCos, electricity generated by GenCos and supplied to the National Grid or the Nigerian Bulk Electricity Trading Company and transmitted by the Transmission Company of Nigeria to DisCos, are all exempted from VAT. Oil and gas companies are, however, required to make certain contributions to various funds, which could potentially increase their cost of doing business.

Regulatory Reforms: The Nigerian Electricity Regulatory Commission (“NERC”) issued the Meter Asset Provider and National Mass Metering Regulation 2021 (“Regulation”) which institutionalised the NMMP. The Regulation sets out guidelines for the provision of meters to customers across the franchising districts of DisCos and mandates DisCos to execute Meter Asset Provision Contracts with Meter Asset Providers to ensure accelerated meter distribution all aimed at reducing Aggregate Technical and Commercial Collection Losses in the NESI.

Another major regulatory hiccup is the suspension, by the NERC, of the Eligible Customer Regime, under the Eligible Customer Regulations with significant negative impact on stakeholder investment. The Regime was aimed at permitting electricity customers to purchase power directly from GenCos, and to bring the capacity of new and stranded generation facilities into the energy pool.

Divestments 

In the past few years, the Nigerian oil and gas sector has witnessed the divestment, by International Oil Companies, of interests in significant exploration and production assets. Many of these assets are being purchased by Indigenous Oil Companies, most of whom have demonstrated technical and financial capabilities to manage these assets upon acquisition.

Conclusion 

While the World Bank Group recently reported that Nigeria’s economic outlook remains uncertain largely due to developmental challenges, overdependence on oil and insufficient infrastructure, this article emphasises that, despite these challenges, Nigeria’s energy market still presents exciting opportunities. The increase in foreign direct investment and commitment of development finance institutions to finance energy projects is also notable.

Renewable energy projects continue to be encouraged for the improvement of power supply and we expect more collaborations to occur to elevate this trajectory.