Nigeria gives another six months extension to PPAs of 14 utility solar projects

News

January 21, 2018

*Reportedly holding out for lower tariff, as two projects cut tariff to 7.5c/kWh

For the second time since 2016, Nigeria has extended the deadline for the execution of the power purchase agreements (PPAs) it signed with investors for 14 utility solar power projects to be built in some states of the country.

The new extension according to reliable sources was by another six months, it was reportedly rolled over after the last extension which was granted in July 2017, expired at the weekend.

OGN, learnt the extension has however been communicated to the promoters of the solar IPPs which are expected to add 1,125 megawatts (MW) to the country’s grid, by the Nigerian Bulk Electricity Trading Plc (NBET), an agency of Nigeria’s federal government responsible for bulk procurement of grid power, and which signed the PPAs on behalf of the government with the 14 solar IPPs in July 2016.

It was also learnt that the government through the Ministry of Finance, may have turned back to ask the IPPs to lower the tariff they proposed in their PPAs.

The government, it was gathered is now holding out for solar tariffs that’s lower than the 11.5 cents per kilowatt hour (kWh) the investors included in their PPAs. Two of the IPPs, have reportedly offered to execute their PPAs with a tariff of 7.5 cents per kWh.

Extended twice…but with 2019 general elections in sight, certainty now in doubt

The PPAs were first signed in July, 2016, between the promoters and Nigeria. However, their execution could not go as planned, so their tenure was then renewed in July 2017 to give some more time for its execution.

The first extension was by six months, but it again expired in the early weeks of January 2018, thus prompting the latest renewal and extension.

Sources in the NBET informed OGN that the new six months extension was given with the hope that some of the PPAs – especially those with the African Development Bank (AfDB), would be executed and backed with partial risk guarantees (PRGs). The World Bank, it was gathered, has however remained cautious in signing fresh PRGs, thus suggesting the PPAs assigned to it may see some delays.

Notwithstanding, both development finance institutions are reportedly working on closing out the PPAs to enable the promoters achieve financial close for their projects which could cost circa $2.5 billion, but there are doubts this may happen soon considering the government’s possible change of focus to the country’s general election scheduled to hold in February 2019.

While it has taken the NBET more time to see out the solar IPPs deal, sources claim the investors had remained committed to the country, and showed this with the timely posting of their development securities of $20,000 per megawatt to the NBET through letters of credit.

The securities which the NBET announced their postings in 2016, guaranteed that the IPPs would go ahead to achieve financial closures within agreed timeframes.

Confidential notes OGN exchanged with sources in the sector indicated that top on the worries of promoters and their financiers was the sudden tariff changes allegedly demanded by the finance ministry.

According to them, the finance ministry which favoured a 7.5 cent/kWh tariff, has argued that since the PPAs were signed, costs of solar panels and other ancillary components for the projects had significantly dropped in the market.

Irrespective of this argument, they however stated that a tariff rate of 7.5 cent/kWh would be challenging for some of the projects especially when their location and sunk costs are considered.

“I feel majority of the projects will find it challenging to go on. Besides, lenders will be concerned about the risk of changing tariffs that were initially agreed,” said one of the notes from a source.

Another pointed out that: “It (will) create uncertainty and increase the risk profiles of investment in Nigeria because lenders will obviously put all of that into consideration when taking decisions on investing in Nigeria’s economy.”

“I think that the benefit in the tariff reduction might be nothing compared to the risky nature and perception of investment in Nigeria from the eyes of investors, but again, let’s see how this plays out. If one or two projects get to financial close and start construction, it will make a difference on how the other projects will move on,” the source added in the note.