Issues for investors' considerations affecting solar and thermal power projects in Nigeria

by Dentons


[co-authors: John Chibueze, Eniola Sadare and Peter Aisagbonhi - ACAS Law]

Dentons would like to thank John Chibueze, from ACAS Law in Nigeria, for this month’s contribution to the Africa section of the Dentons South Africa Newsletter. In this article, John discusses solar and thermal power projects in Nigeria.

The Nigerian Electricity Supply Industry (NESI) is currently experiencing critical financial and operational hurdles which significantly affect ongoing and prospective renewable and non-renewable power projects. This paper seeks to highlight certain key (red flag) issues which any prospective investor in the NESI would need to consider in its investment due diligence.


The NESI is currently in the Transitional Electricity Market phase, at which stage the National Bulk Electricity Trader (NBET) is still the bulk buyer of power from generating companies and Independent Power Producers (GenCos), and reseller to power electricity distribution companies (DisCos). This creates a financial value chain linking the gas suppliers (for thermal projects) to GenCos, GenCos to the NBET, NBET to the DisCos and the DisCos to end user consumers. Consequently, any financial disruptions will cascade across the entire value chain. Payment securities were put in place in the value chain (from the NBET to the GenCos and from the DisCos to NBET), but these have proven grossly inadequate to cover the payment obligations in the value chain. Presently, DisCos are extensively exposed to cash deficits and losses due to poor collections from end users and their inability to pass on real costs to end users. This cashflow deficit trickles down to the NBET, GenCos and gas/feedstock suppliers.

The Federal Government of Nigeria (FGN) has in this regard initiated the Power Sector Recovery Program (PSRP), which is a series of bail out and intervention policy steps to be executed over a five-year period, aimed at restoring financial viability and improving services across the NESI value chain. Under the PSRP: (i) the FGN has provided a NGN 701 billion Payment Assurance Guarantee as an intervention fund to the NBET to mitigate its payment obligations; and (ii) the World Bank is in talks with the FGN to support the FGN’s PSRP with as much as US$2.5 billion. The trickle-down effect of these intervention funds to existing or potential power projects is not yet clear, but an investor would need to enquire as to the application of any of these funds to its target project.


Another major issue plaguing the NESI is the non-commercial end user tariffs chargeable by DisCos, which creates losses to the DisCos and entities further down the value chain. The Multi-Year Tariff order (MYTO) was established in 2008 to provide a market-based and reflective end user tariff trajectory. However, the end user tariff has not been cost reflective of the investors’ capital and does not pass through costs to the end user (for reasons discussed below). This issue will be exacerbated where the DisCos offtake solar power which has a higher tariff than the thermal and hydro power currently distributed by the DisCos.

Following a declaration by the Minister of Power, Works and Housing, GenCos in Nigeria would (effective from 15 May 2017) be able to generate and sell power directly to end users who qualify as “eligible customer”. This measure was instituted to evacuate stranded capacity generated by GenCos but are not otherwise totally absorbed by DisCos. This development is immensely beneficial to a GenCo/investor, which can now enter into a bilateral offtake agreement with its preferred end user (who qualifies as an “eligible customer”) and thereby disentangle its project cashflow from the loss-impaired value chain in the NESI.

Political will

One of the commercial incentives for privatisation of the national electricity utility assets was that tariffs would be market based and reflective of investors’ capital. The typical Nigerian power consumer/end user has (up until the privatisation of the sector) always been a beneficiary of subsidised tariffs and has never really been exposed to market based tariffs. As a result, there have been massive nationwide protests against the attempt by the FGN to set cost - reflective end user tariffs. These protests have been supported by trade/labour unions, by the Nigerian legislature and even by judicial orders. The massive unpopularity of tariff adjustments has caused the FGN to backtrack on its agreement with investors (leading to declarations of force majeure by some operators). This seeming lack of political will by the FGN to adjust the tariff has significantly affected investors’ return on investment in the NESI and also negatively affected investor confidence.

Another political issue investors should consider is succession in government. While project terms remain binding on subsequent administrations, a prudent investor would however need to be sensitive to the political disposition of the government of the day to the project. As such, sovereign immunity clauses and sovereign guarantees need to be tactically negotiated for long - term durability of the project terms.


The payments for the asset acquisition in the privatisation of the NESI was largely locally financed by local lenders – these  loans and facilities are all largely non-performing loans at this point given the severe liquidity crisis in the NESI. This has left the local lenders extensively exposed to toxic debt in the NESI. Furthermore, the acquisition financing was disbursed in US Dollars while the acquired assets book cashflow was disbursed in local currency. This has also caused adverse foreign exchange exposure to investors following the gross decline in exchange rates. An investor seeking to establish a power project may find securing local financing an uphill task – funding would need to be sought internationally or from foreign direct investment and multilateral financial institutions.

In addition to the financial bail-outs and interventions being considered under the PSRP, there would need to be a comprehensive foreign exchange policy which takes currency risks in the NESI into special consideration and creates lower access rates to foreign exchange for investors in the NESI. This would not only help in alleviating the current exposure of local lenders to the NESI, but would also incentivise foreign investors and financiers in the NESI.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dentons | Attorney Advertising

Written by:


Dentons on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.