Bulk trading will mitigate Nigerian power project risks
Establishment of the Nigerian Bulk Electricity Trading Company (NBET) as mandated by law, vesting contracts, as well as the stipulation of operational timelines for NBET structure, were identified as key issues that banks in the country will consider before funding power projects in the transition stage of the on-going power sector reform. NBET is expected to address the concern of investors in the power generation sector on the credit worthiness of the distribution companies.
Project finance analysts said that the most complex projects in terms of technology to be deployed and the risk involved in the sphere of infrastructural finance are usually in the power sector, with only railway projects nearing it in complexity. This came to the fore at a one-day technical workshop on Nigerian Power Sector Reform jointly organised by the Bankers Committee and the Bureau of Public Enterprises (BPE), with the theme, “Banks approach to power project financing. It was disclosed that the multi-faceted risks in the power sector, especially in a frontier market such as Nigeria where economic and political risks can lead to termination of Power Purchase Agreements and interruptions to feedstock supply can only be adequately mitigated by the existence of the Nigerian Bulk Electricity Trading Company.
The NBET is expected to enter into negotiations with Nigerian Independent Power Plants (IPPs) to contract new generation capacity for the country, which will be backed by a yet-to-be finalised World Bank Partial Risk Guarantee and a Federal Ministry of Finance Risk Guarantee to compensate against political and other risks and further give confidence to investors. There are lots of risks associated with power sector funding because of its long term nature, making banks wary of lending to the sector, except there is adequate debt and equity protection for the banks and investors alike through the Nigerian Bulk Electricity Trading Company, a bulk trader. The company will take out risks from the transaction, for both the bankers and the distribution companies, thereby stabilising the market against early phase risks until it matures significantly in terms of government policies, commitment and bank financing. Though a transitional entity, the NBET during its lifespan must provide comfort and confidence to investors in the power sector.
There should also be a lot of incentives to make the distribution companies efficient in revenue collection and also the need to stipulate penalties for distribution companies that are unable to deploy efficient electricity metering services in collection of bills, thereby leading to revenue leakages that undermine NBET.
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