Uzoma Erondu: Understanding the business of power Vs. the power of business (Naira&Kobo)

by Uzoma Erondu

With the dire need for a long lasting solution in the power sector in Nigeria, most Nigerians struggle to understand why it takes so long to build a power plant.

Power plants are huge projects, and as such either financed by Governments or through a PPP (Public Private Partnership) wherein private investors take the lead i.e. project finance. In a country that finds its back to the wall financially, it only makes sense that it assists investors drive the process, while Government does what it knows how to do best i.e. regulate. That said, most private investors adopting the project finance model struggle to develop power plants within reasonable time in an environment as ours. Project-financing a plant entails the adaptation of an optimal capital structure, typically 70:30 (i.e. 70% Debt and 30% Equity) or thereabout. This invariably points to the fact that the supply of power in a post de-regulated Nigerian Electricity Supply Industry (NESI), to a large extent will be debt financed and private-sector driven.

There is no gain-saying that there currently exists, a paucity of developmental finance in Nigeria to adequately satisfy the current need for infrastructural development. The Nigerian banking space is fraught with many challenges, from being heavily exposed to the power sector, with a lot of players without the full understanding of what it takes to play in the various segments of the value chain, to a dearth of human capacity. This has necessitated the sourcing of the much-needed finance from the International community.

Financial Institutions being what they are would only put their (other people’s) money in a venture that demonstrates a clear line of sight regarding the project risk and attributable returns. This takes us to the pointer that for Nigeria to achieve its goal of meeting its energy need, it would have to create and support an enabling environment and catalyst that provides the requirements needed by these ‘all-mighty’ Lenders in meeting this objective.

A power plant goes through three phases in its life cycle. i.e. Development, Construction and Operation. The developmental phase depending on the technology, scale, availability of finance, regulatory and geographical environment etc. could span anytime between 1(one) to 9(nine) years, as seen in the recent case in Ghana. This phase begins with the conception of the project idea and ends with a financial close, wherein the necessary permits are obtained, the power purchase agreement is signed, funding arrangements are firmed up, and a notice to proceed (NTP) is issued to the construction company to mobilize its men and material to the project site.

The construction phase comes next, and could also takes between 12 months – 48 months, again depending on the factors listed above. This phase typically culminates in the commissioning period which could last some days/weeks, depending on the availability of other associated infrastructure/assets e.g. the transmission line and in the case of a gas-fired plant, gas.

The operation of the plant would naturally last anytime between 1 year to 30 years, depending on largely, the same factors as above, wherein a temporary power plant could be in operation only for months, (as seen in some cities during the hosting of major sporting events e.g. the Olympics) to being around for more than 30 years e.g. Kainji Dam which was commissioned around 1969. Operation phase usually commences with the Commercial Operations Date (COD) and ends with the decommissioning of the plant

So, while financial institutions would typically fund 70% of the project cost, these funds usually come at the construction phase or at best, the latter part of the development phase. The consequence of this, is that the investor would be required to fund the development phase. The effect of this is the fact that the longer the development period, the more the development cost being borne by the investor who has to be the only one committing funds at such period. The irony of the financing of a project is that though the lenders put their funds last relatively to the equity investors, when operation of the power plant commences, they get their monies first, before others.

It is thus clear from the above, that this government is running short of time on its promise to significantly improve on the power sector, and would need to as much as it can assist in shortening the development and construction periods, so as to get plants that are under development into the operation phase, which is the only phase where power is generated.

While we strive as a country to encourage investors to partake in funding infrastructural projects, we need to understand that for us as a country to get to the Promised Land, Government must first understand the business of Power, but most importantly understand the power of Business.

Uzoma Erondu is a finance professional with a bias for energy and infrastructure. He writes from Lagos.

 

Op–ed pieces and contributions are the opinions of the writers only and do not represent the opinions of Y!/YNaija

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