CEM REPORT, ELECTRICITY| The Nigerian government has taken a concrete step towards alleviating the chronic debt issue within the nation’s power sector. Power Minister Adebayo Adelabu announced the approval of a ₦130 billion payment to gas suppliers.
This significant action represents a portion of the over ₦2 trillion debt owed to these critical players in the electricity value chain. The announcement offers a promising outlook for improved gas supply and, consequently, more consistent electricity generation for Nigerians.
Differentiating the Debt: Legacy vs. Current
During the recent Africa Energy Market Place (AEMP) conference held in Abuja, Minister Adelabu provided a clear breakdown of the debt structure, distinguishing between “legacy debt” and “current debt.” The legacy debt, estimated at ₦2 trillion, signifies accumulated dues incurred prior to 2014. The current debt, amounting to ₦130 billion, reflects more recently accrued outstanding payments to gas suppliers.
“The payments are actually in two parts, but we have the legacy debt and we have the current debt. For the current debt, approval has been given for cash payments of about ₦130 billion from the gas and stabilisation fund, which the federal ministry of finance will pay or even already paid, not very sure.
To address the immediate challenge of the current debt, the government will strategically utilize the Gas and Stabilization Fund managed by the Ministry of Finance. This ₦130 billion cash injection aims to incentivize gas companies and encourage them to enter into firm, long-term supply contracts with power generation companies (GenCos).
Nigeria Power Sector Legacy Debt
The legacy debt, a more intricate issue, necessitates a distinct approach. The government proposes a solution leveraging future royalties and income streams generated by the gas sub-sector. This strategy aligns with the gas suppliers’ preferences, offering a sustainable long-term plan for settling the historical dues.
“The payment for the legacy debt is actually going to be made from future royalties and streams of incomes in the gas subsector, which is quite satisfactory to the gas supply companies, which we believe will go a long way to encourage these gas companies into entering into firm supply contracts with the power generating companies.”
Relief for Power Generation Companies (GenCos)
The power sector debt crisis extends beyond gas suppliers. In February 2024, Minister Adelabu revealed a total debt of ₦1.3 trillion owed to GenCos. The government plans a two-pronged approach to address this issue:
Cash Injection and Debt Instruments: Recognizing the government’s current fiscal constraints, a portion of the ₦1.3 trillion debt will be settled through immediate cash payments. However, the exact amount remains under negotiation.
Promissory Notes for Long-Term Settlement: To bridge the financial gap, the government intends to issue promissory notes – essentially, a guarantee of future payment – to the GenCos. This functions as a “comfort measure,” assuring the companies that the remaining debt will be settled within a specified timeframe, typically between 2-5 years.
This financial relief serves the strategic objective of incentivizing GenCos to invest further in generation capacity. With improved infrastructure and increased investment, the government hopes to significantly enhance electricity output, catering to both local and potentially cross-border demand. This could generate additional foreign exchange revenue, bolstering the national economy.
“This will go a long to encourage these power generating companies, to incentivise them to invest more in generation so that we can move our generation output from the level it is now to a higher level because like I said there is opportunity for higher demand, locally and across border and that is a source of foreign exchange earnings,” he said.
Challenges Persist
While the ₦130 billion payment to gas suppliers and the debt relief plan for GenCos represent positive developments, there are still challenges to overcome. The success of the government’s strategy hinges on several crucial factors:
Debt Reconciliation Completion: Adelabu emphasized the critical importance of finalizing the debt reconciliation process between the government and the GenCos. Reaching a mutually agreed-upon figure for the outstanding debt is essential before any funds are disbursed.
Full GenCo Sign-Off: While a majority of GenCos have reportedly signed off on the debt settlement plan, securing the participation of all GenCos is vital for smooth and comprehensive implementation.
Transparency and Accountability: The management and allocation of these funds must be conducted with utmost transparency to ensure public trust and prevent any potential misuse of resources.
Long-Term Sustainability: Addressing the root causes of the debt crisis is paramount. Developing a system for timely payments and ensuring efficient operation within the power sector are crucial for achieving long-term financial stability.
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If You Ask Me
The Nigerian government’s initiative to tackle the power sector debt is a commendable step forward. However, sustained efforts focused on the aforementioned challenges are necessary to ensure its effectiveness and pave the way for a more reliable and efficient electricity supply for the nation.